Answer key - Principles of Auditing

Course:
Accountancy (AC1218)

Answers:
1. Auditor’s report are
important to users of financial
statements because it gives
reasonable assurance to the
fairness, truthfulness and
unbiased information obtain
in the financial statements.
Auditors also enhance the
degree of confidence of
intended users in the financial
statements that will help them
in decision making.
2. The purpose served by
the Philippine Standard on
Auditing is to establish the
independent auditor’s overall
responsibilities and sets out
overall objectives when
conducting an audit of financial
statements.
3. Risk in the audit process
gives a huge factor to consider
in auditing in order to
assess what kind of strategy and
methodology to be used in
conducting an audit.
There are stages of risk-
based audit process which
are Risk Assessment, Risk
response and Reporting. On the
first phase, it involves
examining the client in its
engagement risk if it has
the integrity in presenting
their financial statements
before accepting the contract.
On the next phase, designing
and implementing
overall responses to assessed
risk of material misstatements
to reduce audit risk.
And in the last phase,
evaluating the audit evidence
and forming an opinion based
on audit findings. These are
the audit process that
includes risk as a factor to
consider in auditing.
4. If I were Gracie Cruz I will
not assign auditors in
considering the same alma
mater
with the client where they
graduated, as requested. It
sounds bias and I think
skills, expertise and
independently of an auditor
should be the basis in assigning
whoever deserves it.
5. Auditors become associated
in the financial statements once
they are engage and
accepted the contract to audit
information obtain in the
financial statements.
6. There are many factors to
consider if the financial
statements are presented fairly
in accordance with applicable
financial reporting standards
such as the nature of
the business, the complexity of
the transactions, existence of
large non-routine
transactions, the control risk of
Internal Management, the
flexibility and expertise
of the internal management and
their integrity in making
financial statements and
many more.
7. Because the5auditor
should5be5independent5from
the client company, so that
the5audit5opinion will not be
influenced by any relationship
between them. The
auditors are expected to give an
unbiased and honest
professional opinion on the
financial statements to the
shareholders.
8. a.) Audit risk refers to
the uncertainties outcome
that an auditor may give an
unqualified opinion on financial
statements that are materially
misstated.
b.) Inherent risk refers to the
initial susceptibility of a
transaction or accounting
adjustment to be recorded in
error or not to be recorded in
the absence of internal
controls
c.)Control risk is the5risk5of a
material misstatement in the
financial statements
arising due to absence or failure
in the operation of
relevant5controls5of the entity.
Organizations must have
adequate internal5controls5in
place to prevent and detect
instances of fraud and error.
d.)Detection risk is
the5risk5that the5auditor5will
not5detect5a misstatement
that
exists in an assertion that
could be material, either
individually or when
aggregated with other
misstatements.
9. a.) Audit risk model5is a
tool used by auditors to
understand the relationship
between various5risks5arising
from an5audit5engagement
enabling them to manage
the overall5audit risk.
b.) Audit risk model is used first
by determining Inherent Risk,
Control Risk and
Detection Risk then compute it
using the formula AR=IR x CR
x DR
10. Detection risk and the
evidence accumulated are
correlated to one another
because
detection risk might be higher
because evidence collected are
not sufficient to detect
errors and frauds.
11. a.)
b.) Ranking of five situations
based on the audit evidence that
will be needed. Wherein
the higher the detection risk the
more audit evidence must be
needed.
RANK SITUATION
13
21
34
45
52
19.
a. correct
b. correct
You are
Answers:
1. Auditor’s report are important to users of financial statements because
it gives reasonable assurance to the fairness, truthfulness and
unbiased information obtain in the financial statements. Auditors also
enhance the degree of confidence of intended users in the financial
statements that will help them in decision making.
 2. The purpose served by the Philippine Standard on Auditing is to
establish the independent auditor’s overall responsibilities and sets out
overall objectives when conducting an audit of financial statements.
3. Risk in the audit process gives a huge factor to consider in auditing in
order to assess what kind of strategy and methodology to be used in
conducting an audit. There are stages of risk-based audit process
which are Risk Assessment, Risk response and Reporting. On the first
phase, it involves examining the client in its engagement risk if it has
the integrity in presenting their financial statements before accepting
the contract. On the next phase, designing and implementing overall
responses to assessed risk of material misstatements to reduce audit
risk. And in the last phase, evaluating the audit evidence and forming
an opinion based on audit findings. These are the audit process that
includes risk as a factor to consider in auditing.
4. If I were Gracie Cruz I will not assign auditors in considering the same
alma mater with the client where they graduated, as requested. It
sounds bias and I think skills, expertise and independently of an
auditor should be the basis in assigning whoever deserves it.
5. Auditors become associated in the financial statements once they are
engage and accepted the contract to audit information obtain in the
financial statements.
6. There are many factors to consider if the financial statements are
presented fairly in accordance with applicable financial reporting
standards such as the nature of the business, the complexity of the
transactions, existence of large non-routine transactions, the control
risk of Internal Management, the flexibility and expertise of the
internal management and their integrity in making financial
statements and many more.
7. Because the auditor should be independent from the client company,
so that the audit opinion will not be influenced by any relationship
between them. The auditors are expected to give an unbiased and
honest professional opinion on the financial statements to the
shareholders.
8. a.) Audit risk refers to the uncertainties outcome that an auditor may
give an unqualified opinion on financial statements that are materially
misstated. b.) Inherent risk refers to the initial susceptibility of a
transaction or accounting adjustment to be recorded in error or not to
be recorded in the absence of internal controls c.)Control risk is the
risk of a material misstatement in the financial statements arising due
to absence or failure in the operation of relevant controls of the entity.
Organizations must have adequate internal controls in place to prevent
and detect instances of fraud and error.
d.)Detection risk is the risk that the auditor will not detect a misstatement
that exists in an assertion that could be material, either individually or when
aggregated with other misstatements. 9. a.) Audit risk model is a tool used
by auditors to understand the relationship between various risks arising from
an audit engagement enabling them to manage the overall audit risk. b.)
Audit risk model is used first by determining Inherent Risk, Control Risk and
Detection Risk then compute it using the formula AR=IR x CR x DR
10. Detection risk and the evidence accumulated are correlated to
one another because detection risk might be higher because evidence
collected are not sufficient to detect errors and frauds.
11. a.)
b.) Ranking of five situations based on the audit evidence that will be
needed. Wherein the higher the detection risk the more audit evidence must
be needed.