Question One (1)(a)
Based on ISA 200 what are the general principles governing an audit of financialstatements? (8marks)
- Auditor is independent of management i.e. he is not under the control or influence of management
Integrity and Objectivity
fair dealing and truthfulness with respect to audit clients
Professional competence and due care
performing audit and other attestation services with due care, competence and diligence and maintaining professional knowledge and skill
- Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself.
acting in a manner consistent with the good reputation of the profession and refraining from any conduct that might discredit it.
Prohibited ethical conflict
avoiding a situation which may involve potential conflicts affecting directly or indirectly auditor independence and its performance.
Basic requirement for compliance with ethical standard
the audit firm should establish policies and procedures for the use of its staff, and communicate these to those who are in a position to influence the conduct and outcome of the audit.
Discuss ethics, professional skepticism, audit scope, business risk and audit risk (12marks)
Professional scepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
Audit Scope -
refers to the audit procedures that, in the auditor’s judgement
and based on the Auditing Standards, are deemed appropriate in the circumstances to achieve the objective of the audit
The possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs,competition, overall economic climate and government regulations. A company with a higher business risk should choose a capital structure that has a lower debt ratio to ensure that it can meet its financial obligations at all times.