TRIUMPHANT COLLEGE DISTANCE PROGRAME

First semester

Assignments

Subject: Auditing

School: School of Business Level: 6 Year 3

Lecturer Name: Mr Admire

Assignments: 1/2/3

Total Marks:
Assignment 1

1. a) Explain the rights of an auditor of a limited company. [10]

Statutory rights of auditors

 A right of access at all times to the books, accounts and vouchers of the company
 A right to require from the company's officers such information and explanations as they
think necessary for the performance of their duties ad auditors
 A right to attend any general meetings of the company and to receive all notices of and
communications relating to such meetings which any member of the company is entitled
to receive.
 A right to be heard at general meetings which they attend on any part of the business that
concerns them as auditors
 A right to receive a copy of any written resolution proposed
 A right to give notice in writing requiring that a general meeting be held for the purpose
of laying the accounts and reports before the company (of elective resolution dispensing
with laying of accounts in force)

b) Explain the principal contents that an auditor should refer to in a letter of engagement.
[10]

Contents of audit engagement letter

The names of both parties;

The objectives of the engagement;

The scope of the audit;

The accounting responsibility and the audit responsibility;

The duties of both parties; (management and auditor). The deadline for the issuance of the audit
report;

The responsibility arising from the use of the audit report;

The audit fees;

The period for which the audit engagement letter is valid;

The responsibility arising from a violation of the terms of the audit engagement letter;

The date of signing the audit engagement letter; and

Other matters which both parties consider the need to be included in the audit engagement letter.

The form of any reports or other communication of results of the engagement.

The fact that due to the test nature and other limitations of an audit, there is an unavoidable risk
that some material misstatement may remain undiscovered.

The fact that auditors are entitled to unrestricted access to records, documents and other
information requested in connection with the audit.

2. a) Explain the term true and fair. [10]

True and fair is the term used in the audit report of financial statements to express the condition
that financial statements are truly prepared and fairly presented in accordance with the prescribed
accounting standards, which are international financial reporting standards (IFRS). Financial
statements are true and fair when they comply with relevant applicable standard on individual
line items.

b) Explain the importance of a letter of engagement. [10]

Engagement letters define the business contract between a professional firm and its clients. It
outlines the fee structure, responsibilities and obligations of the firm and the client. Without it,
each party can be in legal limbo.

While verbal contracts are legally binding, they are notoriously difficult to enforce. Just agreeing
on something won’t necessarily hold up in court if it comes to that.

They serve a bigger purpose than just business contracts though:

Engagement letters help you set expectations.

Engagement letters also help lay a solid foundation for a working relationship between a practice
and their clients. They ensure transparency and demonstrate professionalism from the get-go.

Engagement letters reduce scope creep.

When you’ve set expectations with your client and clearly laid out what’s included with your
services, you’ll reduce scope creep. You can also specify how you will proceed if the client
needs more work done.

Engagement letters help you reduce risk.

Using engagement letters can help reduce professional liability insurance (or E&O insurance)
premiums and many insurers require it. If insurers require them, then engagement letters must
reduce liability and risk of doing business.
Assignment 2

1. a) Explain the true and fair view. [5]

True or true relates to factual accuracy (bearing in mind materiality). The information provided
conforms to required standards, regulations and law. Fairness relates to the presentation of
information and the view conveyed to the reader. Such information is free from bias. The
financial statements reflect the commercial substance and reality of the underlying balances and
transactions.

View indicates that a professional judgement has been reached.

A degree of imprecision is inevitable because of inherent limitations. For example, the auditor
does not inspect 100% of all transactions.

A true and fair view means that the appropriate financial framework (e.g IFRS0 has been
compiled with. IFRS does allow different accounting policies to be applied (e.g the cost or
revaluation method under IAS 16). Using either alternative provides a true and fair view if it has
been applied in accordance with IFRS.

b) Explain the role of an internal audit department. [5]

Internal auditors play a significant role in helping management fulfill its roles and objectives.

Internal auditors are employees of the corporations that they audit, therefore, they are not
"independent". However, internal auditors do perform work of such a sensitive and significant
nature that they need to have some level of independence from the departments, employees and
managers of the corporation that they are called upon to audit. For example, in most
corporations, the internal audit department does not report to the controller, the Chief Financial
Officer (CFO), or even the Chief Executive Officer (CEO), but rather the chief internal auditor is
required to report directly to the "Audit Committee" which committee is comprised of
outside/independent members of the board of directors, with one of them needing to qualify as a
"financial expert".

Internal auditors serve as internal consultants to company management to help them achieve
good "Internal Control" particularly by improving operations, reporting and compliance.
Sometimes, under specified circumstances, internal auditors can even help the external auditors
(as described below) perform auditing procedures that will provide the basis for the external
auditors report on the financial statements and internal controls over financial reporting.

Internal auditors are not normally tasked with designing and implementing internal controls but
rather with testing the design and implementation to see if they properly achieve good internal
control.

c) Outline the duties of an auditor [5]

 Duty to prepare the report: - An auditor of a company should make a report to the
shareholders on the accounts examined by him and balance sheet and profit and loss
account.
 Comply with Auditing Standards
 Reporting of fraud- Generally, in the course of performing his duties, the auditor may
have certain suspicions with regard to fraud that’s taking place within the company,
certain situations where the financial statements and the figures contained therein don’t
quite add up.
 Adhere to the Code of Ethics and Code of Professional Conduct- The auditor, being a
professional, must adhere to the Code of Ethics and the Code of Professional Conduct.
Part of this involves confidentiality and due care in the performance of his duties.
Another important requisite is professional skepticism. In simple words, the auditor must
have a questioning mind, must be alert to possible mishaps, errors and frauds in the
financial statements.
 Assistance in an investigation- In the case where the company is under the scope of an
investigation, it is the duty of the auditor to provide assistance to the officers as required
for the same.
 Duty to Form an opinion
d) Outline the rights of an auditor [5]

 Right of access to books of account of Vouchers: An auditor of a company has a right of

access to the books of accounts and vouchers of the company whether they are kept at the
head office of the company or elsewhere.
 Right to examine the cost records: An auditor of a company has a right to examine the
cost records along with the quantitative records relating to production, sales, stocks etc.
 Right to obtain information and explanations: An auditor of a company has a right to
obtain from the directors and officers of the company such information and explanation
as he may think necessary for the performance of his duties as an auditor.
 Right to correct any wrong statement: An auditor of a company has a right to correct any
wrong statement made by the Directors relating to the accounts to be laid before the
company in the general meeting.
 Right to comment on the inadequacy of the accounting system in his report: If the system
of maintaining accounts is inadequate, he can advise the directors to amend the system of
accounting.
 Right to visit branches: The auditor of the company can visit the branch and examine the
books and accounts and vouchers at the branch.
 Right to receive notice and other communications of general meeting: - An auditor of a
company has a right to receive notice and other communications relating to any general
meeting, in the same way as a member of the company.
 Right to attend the general meeting of the shareholders an auditor has the right to attend
every general meeting of the shareholders.
 Right to speak at the general meeting: - An auditor of a company has a right to speak at a
general meeting where his certified accounts are discussed.
 Right to sign the audit report: - An auditor has the right to sign the audit report.
 Right to report to the members of the company: - An auditor has a right to report to the
members of the company, if the accounts audited by him show an unsatisfactory state of
affairs.
  Right to report to the members of the company: - An auditor has a right to report to the
members of the company, if the accounts audited by him show an unsatisfactory state of
affairs.
 Right to be indemnified: - An auditor of a company, being an officer of the company, has
a right to be indemnified out of the assets of the company, for any liability incurred by
him in defending himself against any proceedings by the company.
 Right to receive any remuneration for his audit work: - An auditor of a company has a
right to receive remuneration for his audit work provided he has completed the work
which he undertook.
 Auditor’s right of lien: - An auditor has particular lien on the books of accounts audited
by him for nonpayment of audit fees.

2. a) The auditor works for the shareholders. Discuss. [10]

Shareholders appoints auditors. Auditors are believed to monitor the performance of the
management on behalf of shareholders. As auditors act on behalf of shareholder they turn into
agents whereas shareholders are the principal. The auditors may prejudice the interest of the
shareholders accordingly causing agency problems when colluding along with the management
in performance of their tasks whereby their independence is negotiation. The audit is the linchpin
to give shareholders confidence that they can rely on published financial statements to decide
whether and in which companies to invest, and at what price. Auditors are intended to be the
eyes through which both directors and investors look for the truth. Auditors through an audit
contributes both to corporate and, ultimately, to shareholder value.

b) Explain the principal contents of an auditor’s report. [10]

A typical audit report begins with a title, the title of the report mentions it is ‘Independent
Auditors’ report’. Addressee- The addressee is the person/group of persons to whom the report is
addressed to. In the case of the statutory audit report, the addressee is the shareholders of the
Company. Also, addressee refers to the person appointing the auditors. Since the auditors are
appointed by the shareholders of the Company, the report is addressed to them. It the outlines the
Responsibility of the Auditor and the Management of the Company. This section gives the
responsibility of the auditor and the management of the Company. It defines that the
responsibility of the auditor is to perform an unbiased audit of financial statements and give their
unbiased opinion. The Scope of the Audit- This section describes the scope of the audit
conducted by the Auditor by specifically mentioning that the audit was conducted as per the
generally accepted auditing standards in the country.

The Opinion of the Auditor

This is the main section of the Audit report content. The Auditors give their opinion on the
financial reporting by the Company. There are four different types of opinions: Unqualified
Opinion, Qualified Opinion, Adverse Opinion, and Disclaimer of Opinion.

Basis of Opinion- The section gives the basis on which the opinion was based on. It should
mention the facts of the basis in the report.

Signature of Auditor- The partner of the auditor must sign the audit report content at the end.

Place of Signature- This gives the city in which the audit report was signed.

Date of the Audit Report

Date of Signature-This gives the date on which the audit report was signed.

The Emphasis of Matter in Audit Report Format- the Content of Audit report can have an
Emphasis of matter paragraph. The emphasis of matter paragraph can be added in the audit
report if the auditor feels to draw the attention of the readers towards the important matter. The
auditor does not need to alter its opinion in case it has emphasized on some matter. This
paragraph includes the audit conducted by the Auditor and their reliance on the audit performed
by other auditors on some of the subsidiaries of the Company. Sometimes auditors do not
perform any Audit of non-material subsidiaries and they mention the details like revenue, profit,
assets of such subsidiaries, and their reliance on the financial reports furnished by the
management of the Company.

Conclusion

An audit report is issued by the auditors after doing a financial audit of the Company which
contains their opinion about the financial status of the Company. The Audit report is a mandatory
report to be attached to the annual report of the Company It gives an independent view of the
Company’s accounts and highlights misrepresentations (if any) by the Company.

Assignment 3

1. Explain the following terms:

a) Letter of engagement.

An engagement letter is a written agreement that describes the business relationship to be entered
into by a client and a company. The letter details the scope of the agreement, its terms, and costs.
The purpose of an engagement letter is to set expectations on both sides of the agreement. When
a new client is accepted or when an audit engagement continues from year to year, an
engagement letter should be prepared. Acts as a contract between auditor and client. Serves as a
means of reducing the risks of misunderstandings with the clients and as a means of avoiding
legal liability for claims that the auditors did not perform the work promised. This letter also
includes objectives of the engagement, management’s responsibilities, auditors’ responsibilities
and any limitations of the engagement.

b) The true and fair view

True or true relates to factual accuracy (bearing in mind materiality). The information provided
conforms to required standards, regulations and law. Fairness relates to the presentation of
information and the view conveyed to the reader. Such information is free from bias. The
financial statements reflect the commercial substance and reality of the underlying balances and
transactions.

View indicates that a professional judgement has been reached.

A degree of imprecision is inevitable because of inherent limitations. For example, the auditor
does not inspect 100% of all transactions.

A true and fair view means that the appropriate financial framework (e.g. IFRS0 has been
compiled with. IFRS does allow different accounting policies to be applied (e.g. the cost or
revaluation method under IAS 16). Using either alternative provides a true and fair view if it has
been applied in accordance with IFRS.
 b) The dismissal of an auditor
An Auditor is subjected to a dismissal if he or she fail to comply with the code of conducts/ or
fundamental principles. If the auditor get involved in irregularities such as manipulation or
causes disruptive to the profession, the professional body can easily remove the license from the
specific auditor. Auditors are expected to behave in an acceptable manner when they are in
practice, in business or in their community which is prescribed by the principles. If the auditor
fail to apply professional skepticism he or she is subjected to a dismissal following various
warnings.
c) An audit plan [5 each]
An audit plan is the specific guideline to be followed when conducting an audit. It helps the
auditor obtain sufficient appropriate evidence for the circumstances, helps keep audit costs at a
reasonable level, and helps avoid misunderstandings with the client. It includes the nature, timing
and extent of planned risk assessment procedures.

2. a) List and explain the principal data verification checks associated with computer data
entry. [5]

Manual checking- Manual checking of a selected previously processed transactions can be used
to verify results produced in an actual, previous processing cycle.

Control totals- Independent determination of the control totals of the control totals of actual files
by means of audit program permit checking of totals against reported totals produced by the
system.

Test data- system test data can be used to produce control totals or results that are to be checked
against predetermined totals.

b) Explain the importance and usual contents of a letter of engagement. [10]

It outlines the fee structure, responsibilities and obligations of the firm and the client. ... They
serve a bigger purpose than just business contracts though: Engagement letters help you set
expectations. Engagement letters also help lay a solid foundation for a working relationship
between a practice and their clients. Engagement letters help you reduce risk. Engagement letters
reduce scope creep. Engagement letters help you set expectations. Engagement letter include the
avoidance of possible problems between the CPA and the client concerning (1) the scope of the
work, (2) the service to be rendered, and (3) the audit fee.

d) Explain what post balance sheet events are (SSA17 or IAS 10 is the relevant
standard). [5]
Refers to events and transaction that happens or incurred after the financial reporting date for the
company. Events after the Reporting Period contains requirements for when events after the end
of the reporting period should be adjusted in the financial statements. This events are then
classified as adjusting events and non-adjusting events. Adjusting events are those providing
evidence of conditions existing at the end of the reporting period, whereas non-adjusting events
are indicative of conditions arising after the reporting period (the latter being disclosed where
material).

Adjusting Events, adjust the accounts if the event provides evidence of conditions that existed at
the period end. Examples are:
The result of a court case Debtor goes bad 5 days after SFP date
(This is evidence that debtor was bad at SFP date also)
Stock is sold at a loss 2 weeks after SFP date
Property gets impaired 3 weeks after SFP date
(This implies that the property was impaired at the SFP date also)
The discovery of fraud or error in the year.

Non-Adjusting Events - these are disclosed only. These are events (after the SFP date) that
occurred which do not give evidence of conditions at the year end, rather they are indicative of
conditions AFTER the SFP date. Examples are:
Stock is sold at a loss because they were damaged post year-end
(This is evidence that they were fine at the year-end - so no adjustment)
Property impaired due to a fall in market values generally post year end
(This is evidence that the property value was fine at the year-end - so no adjustment required).