Color Chapter 2 Basic Concepts

To prepare and present financial statements in accordance with the applicable financial reporting framework (AFRF).

Develops and promotes standards for assurance and related services.

In situations like intended sale of shares/business or acquiring a loan.

To obtain reasonable assurance that financial statements are free from material misstatement and to report on them, including communicating findings as required by ISAs.

The difference between public perception of the external auditor's role and the auditor's actual statutory role and responsibilities.

IAASB, IESBA, IPSASB, IAESB.

An attitude that includes a questioning mind, alertness to possible misstatements, and critical assessment of audit evidence.

The difference between what the public expects from auditors and what auditors actually provide.

Unusual growth or decrease of sales.

1. Financial Statements 2. Other Information (e.g. directors’ report)

Only the Financial Statements, including Balance Sheet, P&L Account, Statement of changes in equity, Cash Flow Statement, and Notes to the Accounts.

Significant related party transactions.

An attitude that includes a questioning mind and a critical assessment of audit evidence.

An auditor questioning the validity of revenue recognition when a company reports unusually high sales.

IFAC is the worldwide leader of the audit profession and serves the public interest.

The auditor's opinion on the financial statements.

It helps avoid overlooking unusual circumstances, over-generalizing conclusions, and using inappropriate assumptions.

The Compliance Framework requires strict adherence to its requirements without allowances for additional disclosures or departures for fair presentation.

An increased risk of material misstatement.

Increased risk of material misstatement due to potential financial statement fraud.

It increases the risk of material misstatement.

It increases the risk of material misstatement due to inexperienced staff.

Application of professional skepticism.

A concept that ensures financial statements are presented accurately and honestly.

To directors and regulators as required by International Standards on Auditing (ISAs).

Management’s bonuses based on financial performance.

Guidance issued by IAASB to help auditors implement ISAs and promote good auditing practice, but they do not have the same authority as ISAs.

Auditors must comply with all requirements of ISAs to obtain reasonable assurance, except when a procedure is not relevant or not practicable.

Auditors should apply professional skepticism and corroborate every assertion with persuasive evidence.

'True' means free from errors, and 'Fair' means free from undue bias in preparation or presentation.

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.

International Financial Reporting Standards (IFRS).

A financial reporting framework that requires compliance with its requirements without acknowledging the need for additional disclosures or departures for fair presentation.

Additions to fixed assets or significant capital expenditures.

It may decrease risk if it removes uncertainty, but could also increase risk if prior disclosures were misleading.

Internal controls necessary for the preparation of reliable financial statements.

Structured representation of historical financial information.

Directors are responsible for preparing and presenting financial statements in accordance with AFRF, ensuring effective internal controls, and providing necessary information to the auditor.

It implies that the public often believes auditors provide absolute assurance, which is not the case.

It is their responsibility to understand and eliminate the expectation gap to ensure the scope of the audit is not misunderstood.

Independence, meaning the auditor should perform audit procedures without bias or influence.

Auditors should be independent of financial interests, family and personal relationships, and employment with the client.

Salman can explain that audits provide assurance on the accuracy of financial statements and help identify areas for improvement.

60% of students cheated in a test.

The reason for departure and alternative procedures performed.

It increases the risk of material misstatement due to potential lack of experience and continuity.

It may increase risk as management may be incentivized to present a more favorable financial position.

Professional Skepticism, Expectation Gap, and Management’s Responsibilities.

To obtain reasonable assurance that financial statements are free from material misstatement.

Whether the financial statements give a true and fair view in accordance with the framework or are presented fairly in all material respects.

To develop and promote standards for assurance and related services, and facilitate the adoption of international standards.

It implies that the statements are free from errors and undue bias in preparation or presentation.

No, there is no legal definition for 'true and fair view'.

A set of criteria used to prepare financial statements.

General Purpose (for a wide range of users) and Special Purpose (for specific users).

Fair presentation Framework and Compliance Framework.

To check whether financial statements have been prepared in accordance with the framework and give a true and fair view.

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.

The accountant had stolen $450,000 from the business.

All relevant information, additional information requested, and unrestricted access to persons within the entity.

Planning, performance, and reporting stages of the audit.

Basic Concepts of 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.

To obtain reasonable assurance that financial statements are free from material misstatement.

International Financial Reporting Standards (IFRS).

One misunderstanding is that the auditor prepares financial statements.

International Standards on Assurance Engagements (ISAEs).

International Standards on Related Services (ISRS).

10%.

10%.

80%.

If it is not relevant or not practicable.

It may increase the risk due to potential pressure on management to maintain profitability.

It ensures auditors do not overlook unusual circumstances, over-generalize conclusions, or use inappropriate assumptions.

It helps in deciding the nature, timing, and extent of audit procedures and evaluating the sufficiency and appropriateness of evidence.

Terms frequently used in the audit profession, responsibilities of different parties involved in audit, and regulatory authorities of the auditing profession.

All relevant information, additional information requested by the auditor, and unrestricted access to personnel within the entity.

By facilitating the adoption and implementation of international standards.

International Standards on Auditing (ISAs).

Adherence to ethical standards, professional skepticism, and compliance with auditing standards.

To set international standards and promote best practices in auditing.

Decrease in sales/demand or long-standing inventory.

International Standards on Quality Control; they apply to all types of services.

Inconsistency between management and lawyer's statements.

Increased competition or operating losses.

Inventory held at various locations or with third parties.

They increase the risk of material misstatement.

$80,000.

It may increase risk due to potential misapplication of new accounting principles.

Situations discussed in LO 10 are likely to be tested in exams in case studies.

Guidelines that dictate how financial statements should be prepared and presented.

Statements issued by IAASB to help auditors implement ISAs and promote good auditing practice, but they do not have the same authority as ISAs.

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.

Whether the financial statements are prepared, in all material respects, in accordance with the framework.

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.

The auditor shall not accept the proposed audit engagement.

Persons responsible for operational and managerial duties, such as the CFO and CEO.

Persons responsible for overseeing the strategic direction and accountability, such as directors.

They decrease the risk of material misstatement when withdrawn.

Dispute with a major debtor over defective goods.

An attitude that includes a questioning mind, alertness to conditions indicating possible misstatement, and critical assessment of audit evidence.

Everyone can lie for personal gains.

To assess risks and determine materiality.

Development of high-quality standards, facilitating adoption of standards, promoting the value of accountants, and addressing public interest issues.

To ensure accurate financial reporting and compliance with relevant laws and regulations.

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.

International Standards on Review Engagements (ISREs).

Significant transactions at year end.

Standards that guide auditors in the performance of audits.

By maintaining a questioning mind and critically assessing audit evidence.

A subject is selected for detailed study.

Comply with all requirements of all ISAs.

An auditor critically evaluating the assumptions used in management's estimates for asset valuations.

Tax-basis Framework.

Inappropriate treatment of contingent liabilities and assets.

The relationship may not be stronger than with parents or friends.

One misunderstanding is that the auditor prepares financial statements.

Auditing increases credibility by identifying most misstatements and deficiencies in the internal control system, providing recommendations for improvement.

The materiality level is 3,750,000, calculated as 75,000,000 * 5%.

Professional skepticism is an attitude that includes a questioning mind, alertness to possible misstatements, and critical assessment of audit evidence.

80%.

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.

To corroborate every assertion of management by obtaining persuasive evidence.

It may increase risk due to potential conflicts of interest and related party transactions.

They increase the risk of material misstatement due to potential misstatements on initial application.

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.

It may increase the risk of material misstatement due to lack of independent oversight.

Auditors should apply professional skepticism to corroborate every assertion of management by obtaining persuasive evidence.

To show improved financial performance and position to receive a higher price.

It may increase risk if the internal auditor reports to the CFO, who is influenced by the majority shareholder.

The application of cumulative audit knowledge, experience, and training to reach appropriate conclusions during an audit.