Tutorial 1

Question 1.1

Studying of auditing is different from studying other accounting topics because:

Most other accounting courses focus on learning the rules, techniques, and computations required to prepare and analyze financial information.

Auditing focuses on learning the analytical and logical skill necessary to evaluate the relevance and reliability of the systems & processes responsible for recording and summarizing that information, as well as of the information itself.

Auditing is more conceptual in nature than other accounting course. Auditing helps you understand how to gather & access evidence so you can evaluate assertion made by others.


Question 1.3

The growth of the modern corporation led to the prevalence of absentee owners (shareholders) & the use of professional managers to run the corporation on a day-to-day basis. In this setting, the managers served as agents for the shareholders (principals) & fulfilled a stewardship function by managing the corporation's assets.

The relationship between an owner & manager often results in information asymmetry between the 2 parties. Information asymmetry means that the manager generally has more information about the 'true' financial position & results of operations of the entity than does the absentee owner. There is a natural conflict of interest between the manager & the absentee owner because their goals may not coincide. If both parties seek to maximize their self-interest, the manager will not always act in the best interest of the owner.


Question 1.5

Consider the most important assertions the company is making about the account, & then decide what evidence need to substantiate the truthfulness of each important assertion. To ensure the cash exists, we might look at the bank statements, @ send a letter to the bank requesting confirmation of the balance. To ensure the cash has not been pledged @ restricted, we might review the minutes of key management meetings to look for discussions on this issue. After finished auditing the important assertions relating to the accounts contained in the company's financial statements are to report the findings to the company's shareholders.


Question 1.9

For most organizations, the sheer volume of transactions makes it virtually impossible for the auditor to verify every transaction. Thus, the auditor has to rely on sampling & the laws of probability to identify material misstatement in an accounting population.


Question 1.10

The major phases of an audit are:
1. Preliminary engagement activities
2. Understanding the entity
3. Assess risks & establish materiality
4. Set audit strategy & develop audit plan
5. Test of control & audit business processes
6. Complete the audit
7. evaluate results & issue the report


Question 1.27

The relationships between 3 different stages are:
Internal controls are implemented to ensure appropriate capturing & recording of individual transactions, which are then collected into ending account balance.

The auditor can collect evidence in each of 3 different stages in an entity's accounting system to help determine whether the financial statement present a true & fair view.
- The internal control put in place by the entity to ensure proper handling
..of transactions (e.g. evaluate & test the controls)
- The transaction that affect each account balance (e.g. examine a sample
..of the transactions that occurred during the period)
- The ending account balance themselves (e.g examine a sample of the
..item that makes up an ending account balance at year-end)


Question 2.4

The function of the International Audit & Assurance Standard Board (IAASB) are:
- to develop & issue standards & statements on auditing, assurance &
..related services, & the quality control standards for use around the
..world.



Question 2.6

Directors' responsibilities are:
- to ensure the fairness of the company's financial statement.

Auditor's responsibility is:
- to detecting errors & fraud in the financial statement.
- to express an opinion on the financial statement.
- to plan & perform the audit to obtain reasonable assurance about
..whether the financial statements are free of material misstatement,
..whether caused by an error or fraud.
- to obtain reasonable, but not absolute, assurance that material
..misstatements are detected.
- to obtain a general understanding of the legal and regulatory framework
..applicable to the entity & its industry.
- to provide reasonable assurance with respect to fraud & unlawful act
..undoubtedly shapes the auditor's environment.


Question 2.8

Example of:
1. Compliance audit
....An auditor may be engaged to determine whether a company has complied with certain provisions under securities @ corporate law.

2. Operational audit
....The successful production of a product in accordance with the desired specifications & efficiency is when the product meeting the requirements is produced at the minimum cost.

3. Forensic audit
....In a business fraud investigation, a forensic audit might involve reconstruction of incomplete records, tracing missing funds @ identifying & recovering stolen properties & assets.


Question 2.34

a) The principles of corporate governance that are set out in the Code are:

Outlining structures & processes that a company can adopt in achieving a high standard of governance framework.

b) The recommended best practices set out in the code relating to relationship between the board & shareholders of the company are: