Module 1: OVERVIEW OF THE AUDIT PROCESS

POSTTEST

1. Explain why auditors' reports are important to users of financial statements.

Auditor’ opinion enhances the credibility of the financial statements. The objective of an auditor is to express an
opinion whether the financial statements are prepared, in all material respects, in accordance with an identified
financial reporting framework. Audit reports are valuable and are significant for users of financial information because
they communicate the auditor’s findings. They inform the users as to whether or not the financial statements are fairly
stated or whether no conclusion can be made with regard to the fairness of their presentation.

2. In addition to an understanding of the business and the industry, what are the requirements for an effective audit?
 Understanding of the Accounting and Internal Control System
 Assessment of Risk and Materiality
 Application of Analytical Procedures
 Coordination, Direction, Supervision and Review
 Other matters such as assessment of the going concern

3. Differentiate between the scope and opinion paragraphs of the standard audit report.
The scope paragraph describes the nature of the audit that it was conducted with generally accepted auditing
standards and provides reasonable assurance that the financial statements are free of material misstatement. While
the opinion paragraph tells what the auditor found, and whether or not the financial statements conform to generally
accepted accounting principles in all material respects.

4. What is an "engagement letter?” Why is its use recommended prior to the rendering of professional services by
CPAs?
The engagement letter is a firm’s contract with the client. It is the starting point and oftentimes the ending point for the
relationship. Audit process begins with the preliminary arrangements with the client. It may refer to a written letter by
which the auditor formally notifies the client that they will engage in the service. It is recommended prior to the
rendering of professional service because in this stage the auditor clarifies his understanding of the auditor’s purpose
and scope.

5. What function is served by the audit program?

It documents the procedures an auditor will follow to validate that an organization is in conformance with compliance
regulations. The program which includes both substantive test and test of controls will enable the auditor to express
an opinion on the financial statements taken as a whole.

6. Who participates in the pre-audit conference, and what topics should be covered?
The participants in the pre-audit conference are the partners, manager, senior and audit staff which composes the
audit team.
Topics to be covered are the following:
 Nature of the client’s activities
 General nature of the client’s system of internal control
 Unique accounting practices
 Duties of individual audit team members
 Known areas of high audit risk

7. What distinguishes the interim audit phase from the final audit phase?
Interim audit phase focuses on both the design and operation of aspects of the internal control structure while final
audit phase involves substantive test of details of balances and analytic procedures. In the final audit phase focuses
on detailed testing.

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8. Why must the auditor test the information system prior to testing transactions and balances?
The accuracy of transactions and balances is a function of the reliability of the information system. An effective
control environment, accounting system, and control activities (the information system), together with a system of
monitoring such that controls adapt to a changing environment, serves to produce accurate financial data. Weak
controls are more likely to produce inaccurate financial data. By first testing the information system, the auditor is
able to increase or decrease the nature, timing, and extent of transaction and balance testing according to his/her
assessment of control risk.

9. What purpose is served by the ten generally accepted auditing standards?

The ten generally accepted auditing standards, along with the related statements on auditing standards, provide a
framework by defining the requisite quality to be achieved in performing an audit.

10. Define attestation. In what way(s) is auditing a form of attestation?

Attestation is the act of showing or evidence showing that something is true. Auditing also is an act of evidence
showing that the assertions of the entity’s management are true. Auditing is a systematic process by which the
auditor obtains and evaluates evidence regarding assertions about economic actions and events. It also finds out the
degree of correspondence between these assertions and established criteria.

11. Discuss the role of risk in the audit process and how its existence is communicated to the user in the audit report.
Audit risk is fundamental to the audit process because auditors cannot and do not attempt to check all transactions. It
is also use to minimize the chance of giving an inappropriate audit opinion. The existence of audit risk is recognized
in the description of the responsibilities and functions of the independent auditor upon the engagement.

12. Prior to naming Cruz and Company as its auditors, Del Pelayo of Verbatim, Inc., met with Gracie Cruz and
inquired about the auditors who would work on Verbatim's audit. Pelayo wants Cruz to assign only persons who
graduated from his alma mater.
Required: How should Gracie Cruz respond?
Gracie Cruz should state that there are certain guidelines that will be followed in coming up with the audit team. She
would respond courteously that in determining the number of people who will be assigned to an engagement, the
auditor normally considers the audit's size and complexity, the availability and experience of personnel, the necessity
for special expertise, the opportunity to train personnel and the continuity and rotation of personnel. She should also
assure the client of professional judgement on the auditing process.
Standards do not preclude clients from making suggestions about audit staff. Clients frequently make requests to
have persons on the audit who have experience in the industry. However, if a client requests that minority persons
not be assigned to an audit, the auditor must carefully consider the ethical implications of that request.

13. Describe the conditions under which an auditor is associated with financial statements.
Auditing standards require auditors associated with financial statements to issue a report on them. An auditor is
associated with financial statements when he or she (a) “has consented to the use of his/her name in a report,
document, or written communication containing the statement,” or (b) has prepared or assisted in preparing the
financial statements. An auditor who prepares or assist in preparing financial statements is associated even if his or
her name is not included with the statements. Typing the financial statements on plain paper rather than on the
auditor’s letterhead therefore cannot be used to avoid association and the requirement to issue a report.

14. What factors should an auditor consider in determining whether financial statements are presented fairly in
conformity with GAAP?
The auditor’s opinion as to whether financial statements are presented in conformity with generally accepted
accounting principles should be based on the auditor’s judgement as to whether:
 The accounting principles selected and applied have general acceptance.

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  The accounting principles are appropriate in the circumstances.
 The financial statements, including the related notes, are informative of matters that may affect their use,
understanding and interpretation.
 The information presented in the financial statements is classified and summarized in a reasonable manner,
that is, neither too detailed nor too condensed.
 The financial statements reflect the underlying transactions and events in a manner that presents the
financial position, results of operations and cash flows stated within a range of acceptable limits, that is,
limits that are reasonable and practicable to attain in financial statements.

15. Why must the auditor identify the effect(s) of deviations from GAAP on the financial statements?
Because effective internal control over financial reporting cannot provide absolute assurance of achieving the
company’s control objectives, an individual control does not necessarily have to operate without any deviation to be
considered effective. As a result, clients often choose to adjust the financial statements for the deviations.

16. Why must the auditor refrain from explaining why she or he is not independent?
An auditor may not offer reasons for the lack on independence since such explanations might mitigate the lack of
independence in the view of the reader.

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