p.5
Responsibilities of Management and TCWG
What is the management's responsibility regarding financial statements?
To prepare and present financial statements in accordance with the applicable financial reporting framework (AFRF).
p.8
Regulatory Environment of Auditing
What does the International Auditing and Assurance Standards Board (IAASB) do?
Develops and promotes standards for assurance and related services.
p.15
Application of Professional Skepticism in Auditing
When should an auditor apply professional skepticism?
In situations like intended sale of shares/business or acquiring a loan.
p.13
Responsibilities of Management and TCWG
What is the auditor's responsibility regarding financial statements?
To obtain reasonable assurance that financial statements are free from material misstatement and to report on them, including communicating findings as required by ISAs.
p.13
Expectation Gap in Auditing
What does the term 'expectation gap' refer to?
The difference between public perception of the external auditor's role and the auditor's actual statutory role and responsibilities.
p.8
Regulatory Environment of Auditing
Name the four boards included in IFAC.
IAASB, IESBA, IPSASB, IAESB.
p.14
Application of Professional Skepticism in Auditing
What is the concept of Professional Skepticism in auditing?
An attitude that includes a questioning mind, alertness to possible misstatements, and critical assessment of audit evidence.
p.1
Expectation Gap in Auditing
What is the expectation gap in auditing?
The difference between what the public expects from auditors and what auditors actually provide.
p.10
Application of Professional Skepticism in Auditing
What unusual sales activity could indicate a misstatement?
Unusual growth or decrease of sales.
p.12
Financial Statements Overview
What are the two main parts of an annual report?
1. Financial Statements 2. Other Information (e.g. directors’ report)
p.12
Financial Statements Overview
What does the audit report cover?
Only the Financial Statements, including Balance Sheet, P&L Account, Statement of changes in equity, Cash Flow Statement, and Notes to the Accounts.
p.10
Application of Professional Skepticism in Auditing
What should auditors be cautious about when it comes to related party transactions?
Significant related party transactions.
p.11
Application of Professional Skepticism in Auditing
What is 'Professional Skepticism' in auditing?
An attitude that includes a questioning mind and a critical assessment of audit evidence.
p.11
Application of Professional Skepticism in Auditing
Give an example of Professional Skepticism related to financial statements.
An auditor questioning the validity of revenue recognition when a company reports unusually high sales.
p.8
Regulatory Environment of Auditing
What is the role of the International Federation of Accountants (IFAC)?
IFAC is the worldwide leader of the audit profession and serves the public interest.
p.5
Auditor's Overall Objectives
What must the auditor report on regarding financial statements?
The auditor's opinion on the financial statements.
p.14
Application of Professional Skepticism in Auditing
How does Professional Skepticism help auditors?
It helps avoid overlooking unusual circumstances, over-generalizing conclusions, and using inappropriate assumptions.
p.4
Financial Reporting Frameworks
What distinguishes the Compliance Framework from the Fair Presentation Framework?
The Compliance Framework requires strict adherence to its requirements without allowances for additional disclosures or departures for fair presentation.
p.15
Expectation Gap in Auditing
What does unusual growth/profitability indicate?
An increased risk of material misstatement.
p.15
Essentials for Proper Conduct of Audit
What is the risk associated with management domination by a single person?
Increased risk of material misstatement due to potential financial statement fraud.
p.15
Responsibilities of Management and TCWG
How does a deficiency in internal control affect risk?
It increases the risk of material misstatement.
p.15
Essentials for Proper Conduct of Audit
What is the impact of turnover in key personnel on audit risk?
It increases the risk of material misstatement due to inexperienced staff.
p.2
Application of Professional Skepticism in Auditing
What is a common topic tested in case studies from this chapter?
Application of professional skepticism.
p.1
True and Fair View Concept
What does 'True and Fair View' refer to in auditing?
A concept that ensures financial statements are presented accurately and honestly.
p.5
Auditor's Overall Objectives
To whom must the auditor communicate their findings?
To directors and regulators as required by International Standards on Auditing (ISAs).
p.10
Application of Professional Skepticism in Auditing
What is a situation that may indicate a possibility of misstatement related to management's financial performance?
Management’s bonuses based on financial performance.
p.14
Regulatory Environment of Auditing
What are International Auditing Practice Statements (IAPS)?
Guidance issued by IAASB to help auditors implement ISAs and promote good auditing practice, but they do not have the same authority as ISAs.
p.14
Financial Reporting Frameworks
What is required of auditors in Pakistan regarding ISAs?
Auditors must comply with all requirements of ISAs to obtain reasonable assurance, except when a procedure is not relevant or not practicable.
p.14
Application of Professional Skepticism in Auditing
What attitude should auditors maintain towards management's assertions?
Auditors should apply professional skepticism and corroborate every assertion with persuasive evidence.
p.12
True and Fair View Concept
What does 'True and Fair View' mean in financial statements?
'True' means free from errors, and 'Fair' means free from undue bias in preparation or presentation.
p.12
Financial Reporting Frameworks
What is the Fair Presentation Framework?
A financial reporting framework that requires compliance with its requirements and acknowledges that additional disclosures or departures from requirements may be necessary for fair presentation.
p.12
Financial Reporting Frameworks
What is an example of a Fair Presentation Framework?
International Financial Reporting Standards (IFRS).
p.12
Financial Reporting Frameworks
What is the Compliance Framework?
A financial reporting framework that requires compliance with its requirements without acknowledging the need for additional disclosures or departures for fair presentation.
p.10
Application of Professional Skepticism in Auditing
What should auditors consider regarding fixed assets?
Additions to fixed assets or significant capital expenditures.
p.11
Auditor's Overall Objectives
What is the risk associated with the withdrawal of litigation against ASML?
It may decrease risk if it removes uncertainty, but could also increase risk if prior disclosures were misleading.
p.5
Responsibilities of Management and TCWG
What internal controls must management design and implement?
Internal controls necessary for the preparation of reliable financial statements.
p.3
Financial Statements Overview
What is the definition of financial statements?
Structured representation of historical financial information.
p.13
Responsibilities of Management and TCWG
What are the responsibilities of directors regarding financial statements?
Directors are responsible for preparing and presenting financial statements in accordance with AFRF, ensuring effective internal controls, and providing necessary information to the auditor.
p.6
Expectation Gap in Auditing
What does the expectation gap imply about the level of assurance provided by auditors?
It implies that the public often believes auditors provide absolute assurance, which is not the case.
p.6
Responsibilities of Management and TCWG
What is a key responsibility of stakeholders regarding the expectation gap?
It is their responsibility to understand and eliminate the expectation gap to ensure the scope of the audit is not misunderstood.
p.6
Essentials for Proper Conduct of Audit
What is one essential for the proper conduct of an audit?
Independence, meaning the auditor should perform audit procedures without bias or influence.
p.6
Essentials for Proper Conduct of Audit
What should auditors be independent of?
Auditors should be independent of financial interests, family and personal relationships, and employment with the client.
p.6
Expectation Gap in Auditing
How can Salman convince his manager about the value of an audit?
Salman can explain that audits provide assurance on the accuracy of financial statements and help identify areas for improvement.
p.16
Expectation Gap in Auditing
What was reported about students in a survey regarding cheating?
60% of students cheated in a test.
p.9
International Standards on Auditing (ISAs)
What must an auditor document if a procedure is not practicable?
The reason for departure and alternative procedures performed.
p.11
Auditor's Overall Objectives
What is the impact of high turnover in the accounting department on audit risk?
It increases the risk of material misstatement due to potential lack of experience and continuity.
p.11
Auditor's Overall Objectives
What is the risk implication of a planned public offering for ASML?
It may increase risk as management may be incentivized to present a more favorable financial position.
p.2
Expectation Gap in Auditing
Which topics are favored by examiners for reproduction questions?
Professional Skepticism, Expectation Gap, and Management’s Responsibilities.
p.5
Auditor's Overall Objectives
What is the overall objective of the auditor?
To obtain reasonable assurance that financial statements are free from material misstatement.
p.4
Auditor's Overall Objectives
What opinion does an auditor express under the Fair Presentation Framework?
Whether the financial statements give a true and fair view in accordance with the framework or are presented fairly in all material respects.
p.14
Regulatory Environment of Auditing
What is the role of IAASB within IFAC?
To develop and promote standards for assurance and related services, and facilitate the adoption of international standards.
p.3
True and Fair View Concept
What does the term 'true and fair view' imply in financial statements?
It implies that the statements are free from errors and undue bias in preparation or presentation.
p.3
True and Fair View Concept
Is there a legal definition for 'true and fair view'?
No, there is no legal definition for 'true and fair view'.
p.3
Financial Reporting Frameworks
What is a financial reporting framework?
A set of criteria used to prepare financial statements.
p.3
Financial Reporting Frameworks
What are the two main types of financial reporting frameworks?
General Purpose (for a wide range of users) and Special Purpose (for specific users).
p.3
Financial Reporting Frameworks
What are the two types of frameworks related to presentation?
Fair presentation Framework and Compliance Framework.
p.3
Responsibilities of Management and TCWG
What is the auditor's responsibility regarding financial statements?
To check whether financial statements have been prepared in accordance with the framework and give a true and fair view.
p.6
Expectation Gap in Auditing
How can Salman explain that missing a Rs. 5,000,000 fraud does not indicate an ineffective audit?
He can clarify that while missing a larger fraud is concerning, it does not necessarily mean the audit was ineffective, as auditors cannot guarantee the detection of all fraud.
p.16
Essentials for Proper Conduct of Audit
What did the small business owner discover about his accountant?
The accountant had stolen $450,000 from the business.
p.12
Responsibilities of Management and TCWG
What must management provide to the auditor?
All relevant information, additional information requested, and unrestricted access to persons within the entity.
p.7
Essentials for Proper Conduct of Audit
In which areas is professional judgment applied during an audit?
Planning, performance, and reporting stages of the audit.
p.1
Essentials for Proper Conduct of Audit
What is the primary focus of Chapter 2 in the auditing study notes?
Basic Concepts of Auditing.
p.4
Financial Reporting Frameworks
What is the Fair Presentation Framework in auditing?
A financial reporting framework that requires compliance with its requirements and may necessitate additional disclosures or departures from specific requirements to achieve fair presentation.
p.1
Auditor's Overall Objectives
What are the overall objectives of an auditor?
To obtain reasonable assurance that financial statements are free from material misstatement.
p.4
Financial Reporting Frameworks
What is an example of a Fair Presentation Framework?
International Financial Reporting Standards (IFRS).
p.6
Expectation Gap in Auditing
What is one common misunderstanding about the auditor's responsibilities?
One misunderstanding is that the auditor prepares financial statements.
p.9
International Standards on Auditing (ISAs)
What standards apply to other assurance engagements?
International Standards on Assurance Engagements (ISAEs).
p.9
International Standards on Auditing (ISAs)
Which standards are related services conducted in accordance with?
International Standards on Related Services (ISRS).
p.9
International Standards on Auditing (ISAs)
Under what conditions can an auditor not perform a required procedure?
If it is not relevant or not practicable.
p.11
Auditor's Overall Objectives
How does ASML's profitability after four years affect the risk of material misstatement?
It may increase the risk due to potential pressure on management to maintain profitability.
p.7
Application of Professional Skepticism in Auditing
What are some advantages of professional skepticism?
It ensures auditors do not overlook unusual circumstances, over-generalize conclusions, or use inappropriate assumptions.
p.7
Application of Professional Skepticism in Auditing
How does professional skepticism affect the evaluation of audit evidence?
It helps in deciding the nature, timing, and extent of audit procedures and evaluating the sufficiency and appropriateness of evidence.
p.2
Responsibilities of Management and TCWG
What does Chapter 2 of the auditing study notes discuss?
Terms frequently used in the audit profession, responsibilities of different parties involved in audit, and regulatory authorities of the auditing profession.
p.5
Responsibilities of Management and TCWG
What information must management provide to the auditor?
All relevant information, additional information requested by the auditor, and unrestricted access to personnel within the entity.
p.8
Regulatory Environment of Auditing
How does IAASB enhance the quality of assurance practice?
By facilitating the adoption and implementation of international standards.
p.9
International Standards on Auditing (ISAs)
What standards are audits conducted in accordance with?
International Standards on Auditing (ISAs).
p.1
Essentials for Proper Conduct of Audit
What are the essentials for the proper conduct of an audit?
Adherence to ethical standards, professional skepticism, and compliance with auditing standards.
p.1
Regulatory Environment of Auditing
What is the role of IFAC and IAASB in auditing?
To set international standards and promote best practices in auditing.
p.10
Application of Professional Skepticism in Auditing
What is a key indicator of potential misstatement regarding inventory?
Decrease in sales/demand or long-standing inventory.
p.9
International Standards on Auditing (ISAs)
What do ISQCs stand for and what is their application?
International Standards on Quality Control; they apply to all types of services.
p.10
Application of Professional Skepticism in Auditing
What evidence inconsistency should auditors look for?
Inconsistency between management and lawyer's statements.
p.10
Application of Professional Skepticism in Auditing
What financial issue could indicate going concern problems?
Increased competition or operating losses.
p.10
Application of Professional Skepticism in Auditing
What is a risk associated with inventory valuation?
Inventory held at various locations or with third parties.
p.15
Essentials for Proper Conduct of Audit
What is the risk associated with complex transactions and significant related party transactions?
They increase the risk of material misstatement.
p.11
Auditor's Overall Objectives
How does changing the financial statement preparation method affect audit risk?
It may increase risk due to potential misapplication of new accounting principles.
p.2
Essentials for Proper Conduct of Audit
What is the significance of LO 10 in the context of this chapter?
Situations discussed in LO 10 are likely to be tested in exams in case studies.
p.1
Financial Reporting Frameworks
What are Financial Reporting Frameworks?
Guidelines that dictate how financial statements should be prepared and presented.
p.8
Regulatory Environment of Auditing
What are International Auditing Practice Statements (IAPS)?
Statements issued by IAASB to help auditors implement ISAs and promote good auditing practice, but they do not have the same authority as ISAs.
p.3
Financial Statements Overview
What are the components of a complete set of financial statements?
1. Statement of financial position (Balance Sheet), 2. Statement of profit or loss and Other Comprehensive income, 3. Statement of changes in equity, 4. Cash Flow Statement, 5. Notes to the financial statements.
p.4
Auditor's Overall Objectives
What opinion does an auditor express under the Compliance Framework?
Whether the financial statements are prepared, in all material respects, in accordance with the framework.
p.4
Financial Reporting Frameworks
What is the Applicable Financial Reporting Framework (AFRF)?
The financial reporting framework adopted by management and Those Charged With Governance (TCWG) for preparing financial statements, considering legal requirements and the nature of the entity.
p.4
Responsibilities of Management and TCWG
What should an auditor do if the AFRF is not acceptable?
The auditor shall not accept the proposed audit engagement.
p.4
Responsibilities of Management and TCWG
Who does 'Management' refer to in the context of AFRF?
Persons responsible for operational and managerial duties, such as the CFO and CEO.
p.4
Responsibilities of Management and TCWG
Who does 'TCWG' refer to?
Persons responsible for overseeing the strategic direction and accountability, such as directors.
p.15
Expectation Gap in Auditing
What effect do pending litigation and contingent liabilities have on risk?
They decrease the risk of material misstatement when withdrawn.
p.10
Application of Professional Skepticism in Auditing
What could indicate a need for provision regarding debtors?
Dispute with a major debtor over defective goods.
p.7
Application of Professional Skepticism in Auditing
What is professional skepticism in auditing?
An attitude that includes a questioning mind, alertness to conditions indicating possible misstatement, and critical assessment of audit evidence.
p.16
Expectation Gap in Auditing
What does the case of the small business owner illustrate about trust?
Everyone can lie for personal gains.
p.7
Essentials for Proper Conduct of Audit
What is the role of professional skepticism in the planning phase of an audit?
To assess risks and determine materiality.
p.8
Regulatory Environment of Auditing
What are the main functions of IFAC?
Development of high-quality standards, facilitating adoption of standards, promoting the value of accountants, and addressing public interest issues.
p.1
Responsibilities of Management and TCWG
What are the responsibilities of Management and TCWG in an audit?
To ensure accurate financial reporting and compliance with relevant laws and regulations.
p.6
Expectation Gap in Auditing
What is the expectation gap in auditing?
The expectation gap refers to the difference between public perception of the auditor's role and responsibilities and the auditor's actual statutory role and responsibilities.
p.9
International Standards on Auditing (ISAs)
What standards are reviews conducted in accordance with?
International Standards on Review Engagements (ISREs).
p.10
Application of Professional Skepticism in Auditing
What type of transactions at year-end could raise concerns for auditors?
Significant transactions at year end.
p.1
International Standards on Auditing (ISAs)
What are International Standards on Auditing (ISAs)?
Standards that guide auditors in the performance of audits.
p.1
Application of Professional Skepticism in Auditing
How is professional skepticism applied in auditing?
By maintaining a questioning mind and critically assessing audit evidence.
p.9
International Standards on Auditing (ISAs)
What is the first step in the process of developing a new ISA?
A subject is selected for detailed study.
p.9
International Standards on Auditing (ISAs)
What must auditors do to obtain reasonable assurance in Pakistan?
Comply with all requirements of all ISAs.
p.11
Application of Professional Skepticism in Auditing
Provide another example of Professional Skepticism in auditing.
An auditor critically evaluating the assumptions used in management's estimates for asset valuations.
p.10
Application of Professional Skepticism in Auditing
What is a potential risk related to contingent liabilities?
Inappropriate treatment of contingent liabilities and assets.
p.16
Expectation Gap in Auditing
What is the implication of the relationship between clients and auditors?
The relationship may not be stronger than with parents or friends.
p.13
Expectation Gap in Auditing
Give an example of a common misunderstanding related to the expectation gap.
One misunderstanding is that the auditor prepares financial statements.
p.13
Essentials for Proper Conduct of Audit
How does auditing increase the credibility of financial statements?
Auditing increases credibility by identifying most misstatements and deficiencies in the internal control system, providing recommendations for improvement.
p.13
Financial Statements Overview
What is the materiality level mentioned in the notes?
The materiality level is 3,750,000, calculated as 75,000,000 * 5%.
p.13
Application of Professional Skepticism in Auditing
What is professional skepticism in auditing?
Professional skepticism is an attitude that includes a questioning mind, alertness to possible misstatements, and critical assessment of audit evidence.
p.12
Responsibilities of Management and TCWG
What are the responsibilities of management regarding financial statements?
1. Preparation and presentation in accordance with AFRF. 2. Design, implementation, and operating effectiveness of internal controls. 3. Providing the auditor with all relevant information and unrestricted access.
p.7
Application of Professional Skepticism in Auditing
Why should auditors apply professional skepticism even if management has shown honesty in the past?
To corroborate every assertion of management by obtaining persuasive evidence.
p.11
Auditor's Overall Objectives
How does leasing equipment from a parent company affect audit risk?
It may increase risk due to potential conflicts of interest and related party transactions.
p.15
Regulatory Environment of Auditing
How do changes in accounting/regulatory requirements affect audit risk?
They increase the risk of material misstatement due to potential misstatements on initial application.
p.6
Expectation Gap in Auditing
How can Salman explain that missing a Rs. 5,000 fraud does not indicate an ineffective audit?
He can explain that auditors use sampling techniques and do not check every transaction, so missing a small fraud does not reflect overall audit effectiveness.
p.11
Auditor's Overall Objectives
What is the risk implication of ASML's board being controlled by the majority shareholder?
It may increase the risk of material misstatement due to lack of independent oversight.
p.13
Application of Professional Skepticism in Auditing
Why should auditors apply professional skepticism even with honest management?
Auditors should apply professional skepticism to corroborate every assertion of management by obtaining persuasive evidence.
p.15
Expectation Gap in Auditing
Why is there a risk of material misstatement in business segments likely to be sold?
To show improved financial performance and position to receive a higher price.
p.11
Auditor's Overall Objectives
How does the internal auditor's reporting structure affect risk?
It may increase risk if the internal auditor reports to the CFO, who is influenced by the majority shareholder.
p.7
Essentials for Proper Conduct of Audit
What is professional judgment in auditing?
The application of cumulative audit knowledge, experience, and training to reach appropriate conclusions during an audit.
