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1 The auditor must have
adequate technical training
and proficiency to perform the

1 It was inappropriate for Hashim to hire

the two students to conduct the audit.
The audit must be conducted by
persons with proper education and
experience in the field of auditing.
Although a junior assistant has not
completed his formal education, he
may help in the conduct of the audit as
long as there is proper supervision and

2 The auditor must maintain

independence in mental
attitude in all matters relating
to the audit.

2 To satisfy the second general

standard, Hashim must be without
bias with respect to the client under
audit. Hashim has an obligation for
fairness to the owners, management,
and creditors who may rely on the
report. Because of the financial
interest in whether the bank loan is
granted to Ramli, Hashim is
independent in neither fact nor
appearance with respect to the
assignment undertaken.

3 The auditor must exercise due

professional care in the
performance of the audit and
the preparation of the report.

3 This standard requires Hashim to

perform the audit with due care,
which imposes on Hashim and
everyone in Hashim' organization a
responsibility to observe the
standards of field work and reporting.
Exercise of due care requires critical
review at every level of supervision of
the work done and the judgments
exercised by those assisting in the
audit. Hashim did not review the work
or the judgments of the assistants
and clearly failed to adhere to this





1 The auditor must adequately
plan the work and must
properly supervise any

1 This standard recognizes that early

appointment of the auditor has
advantages for the auditor and the
client. Hashim accepted the
engagement without considering the
availability of competent staff. In
addition, Hashim failed to supervise
the assistants. The work performed
was not adequately planned.

2 The auditor must obtain a

sufficient understanding of the
entity and its environment,
including its internal control, to
assess the risk of material
misstatement of the financial
statements whether due to
error or fraud, and to design
the nature, timing, and extent
of further audit procedures.

2 Hashim did not obtain an

understanding of the entity or its
internal control, nor did the assistants
obtain such an understanding. There
appears to have been no audit at all.
The work performed was more an
accounting service than it was an
auditing service.

3 The auditor must obtain

sufficient appropriate audit
evidence by performing audit
procedures to afford a
reasonable basis for an
opinion regarding the financial
statements under audit.

3 Hashim acquired no evidence that

would support the financial statements.
Hashim merely checked the
mathematical accuracy of the records
and summarized the accounts.
Standard audit procedures and
techniques were not performed.

1 The auditor must state in the
auditors report whether the
financial statements are
presented in accordance with
generally accepted accounting
principles (GAAP).

1 Hashim' report made no reference to

generally accepted accounting
principles. Because Holmes did not
conduct a proper audit, the report
should state that no opinion can be
expressed as to the fair presentation of
the financial statements in accordance
with generally accepted accounting




2 The auditor must identify in

the auditors report those
circumstances in which such
principles have not been
consistently observed in the
current period in relation to
the preceding period.

2 Hashim' improper audit would not

enable him to determine whether
generally accepted accounting
principles were consistently applied.
Hashim' report should make no
reference to the consistent
application of accounting principles.

3 When the auditor determines

that informative disclosures
are not reasonably adequate,
the auditor must so state in
the auditors report.

3 Management is primarily responsible

for adequate disclosures in the
financial statements, but when the
statements do not contain adequate
disclosures the auditor should make
such disclosures in the auditor's
report. In this case both the
statements and the auditor's report
lack adequate disclosures.

4 The auditor must either

express an opinion regarding
the financial statements,
taken as a whole, or state
that an opinion cannot be
expressed, in the auditors
report. When the auditor
cannot express an overall
opinion, the auditor should
state the reasons therefor in
the auditors report. In all
cases where an auditor's
name is associated with
financial statements, the
auditor should clearly
indicate the character of the
auditor's work, if any, and the
degree of responsibility the
auditor is taking, in the
auditors report.

4 Although the Hashim report contains

an expression of opinion, such
opinion is not based on the results of
a proper audit. Hashim should
disclaim an opinion because he failed
to conduct an audit in accordance
with generally accepted auditing

A. Auditing standards indicate that reasonable assurance is a high level of
assurance. Accordingly, financial statement users should have a high degree
of confidence in the financial statements. However, reasonable assurance is
not an absolute level of assurance, and there is at least some risk that the
audited financial statements may include material misstatements.
B. The responsibility of the independent auditor is to express an opinion on the
financial statements he or she has audited. Inasmuch as the financial
statements are the representation of management, responsibility rests with
management for the proper recording of transactions in books of account, for
the safeguarding of assets, and for the substantial accuracy and adequacy of
the financial statements.
In developing the basis for his or her opinion, the auditor is responsible for
conducting an audit that conforms to auditing standards. These standards
constitute the measure of the adequacy of the audit. Those standards require
the auditor to obtain sufficient appropriate evidence about material
management assertions in the financial statements.
The informed judgment of a qualified professional accountant is required of an
independent auditor. The auditor must exercise this judgment in selecting the
procedures he or she uses in the audit and in arriving at an opinion
In presenting himself or herself to the public as an independent auditor, the
auditor is responsible for having the abilities expected of a qualified person in
that profession. Such qualifications do not include those of an appraiser,
valuer, expert in materials, expert in styles, insurer, or lawyer. The auditor is
entitled to rely upon the judgment of experts in these other areas of
knowledge and skill.
C. Auditors are responsible for obtaining reasonable assurance that material
misstatements included in the financial statements are detected, whether
those misstatements are due to error or fraud. Professional standards
acknowledge that it is often more difficult to detect fraud than errors because
management or employees perpetrating the fraud attempt to conceal the
fraud. That difficulty, however, does not change the auditors responsibility
to properly plan and perform the audit. Auditors are required to specifically
assess the risk of material misstatement due to fraud and should consider
that assessment in designing the audit procedures to be performed.
There has been increased emphasis on auditors responsibility to evaluate
factors that may indicate an increased likelihood that fraud may be occurring.
For example, assume that management is dominated by a president who
makes most of the major operating and business decisions himself. He
has a reputation in the business community for making optimistic
projections about future earnings and then putting considerable pressure on
operating and accounting staff to make sure those projections are met. He
has also been associated with other companies in the past that have gone

bankrupt. These factors, considered together, may cause the auditor to

conclude that the likelihood of fraud is fairly high. In such a circumstance, the
auditor should put increased emphasis on searching for material
misstatements due to fraud.
The auditor may also uncover circumstances during the audit that may
cause suspicions of fraudulent financial reporting. For example, the auditor
may find that management has lied about the age of certain inventory items.
When such circumstances are uncovered, the auditor must evaluate their
implications and consider the need to modify audit evidence.
Adequate internal control should be the principal means of thwarting and
detecting misappropriation of assets. To rely entirely on an independent audit
for the detection of misappropriation of assets would require expanding the
auditor's work to the extent that the cost might be prohibitive.
The auditor normally assesses the likelihood of material misappropriation of
assets as a part of understanding the entitys internal control and assessing
control risk. Audit evidence should be expanded when the auditor finds an
absence of adequate controls or failure to follow prescribed procedures,
if he or she believes a material fraud could result.
Because the auditors responsibility is limited to material misstatements,
we believe that the auditors responsibility is appropriate. However, some
students may take the position that the auditors responsibility to detect fraud
is too great because of the potential for collusion and deception by
The independent auditor is not an insurer or guarantor. The auditors implicit
obligation is that the audit be performed with due professional skill and care in
accordance with auditing standards. A subsequent discovery of fraud, existent
during the period covered by the independent audit, does not of itself indicate
negligence on the auditors part.