1.

Discuss the following concepts in the conduct of audit: Materiality, Reasonable

Assurance, Professional scepticism, and Professional judgment.

The main purpose of the conduct of an audit by the independent auditor is to provide a reasonable
opinion based on the evidence-gathering procedures and other rational measures affirming that the
financial statements prepared by the management of an entity are prepared, in all material respects, in
accordance with the identified financial reporting framework intended to increase the reliance of the
intended users in the financial statements. Before achieving the very purpose of the conduct of an audit,
several concepts may need to apply by the auditor. These concepts needed in the conduct of an audit
are; (1) materiality, (2) reasonable assurance, (3) professional skepticism, and (4) professional judgment.

The materiality concept is applied by the auditor in both planning and performing the audit, and
evaluating the effects relating to the misstatements and omissions identified in the financial statements.
The auditor may generally consider the misstatements and omissions identified in the financial
statements material if they could individually or aggregately influence the economic decisions of the
intended users taken in the financial statements. Judgment may also be needed in applying materiality
concept in the conduct of an audit to the circumstances dealing with the size or nature of the
misstatements and omissions. The responsibility of an auditor in dealing with the detection of
circumstances in the financial statements that are material in nature covers only as a whole.

The reasonable assurance can be made in the auditor’s opinion taken from the assessment and
evaluation of the financial statements if the preparations of it are in accordance with the applicable
financial framework or as a whole, free from material misstatements and omissions caused from fraud
or errors. But before declaring that the financial statements could have reasonable assurance, the
auditor should have to obtain sufficient appropriate audit evidences and other measures to have basis
for making reasonable opinions in the financial statements. But the reasonable assurance made by the
auditor is not indicating an absolute level of assurance since there are some audit evidences that require
judgment to draw conclusions on it.

The professional skepticism is defined as an attitude of having logical doubt or critical assessment in the
audit evidences prepared by the entity indicating possible circumstances may arise from fraud or errors.
This attitude needs to be possessed by the auditor and exercised properly throughout the audit
procedures for reasonable assurance attainment. Aside from that, professional judgment of an auditor is
also needed in the conduct of audit to obtain reasonable assurance. It needs to be exercised also
because there are certain circumstances that no estimation and measurement using the applicable
methods can be applied but only professional judgment. Besides, the judgment expressed by the auditor
should be based on the relevant and reasonable information. The two concepts above are somewhat
alike in objectives; to obtain reasonable assurance. These concepts need to possess by the auditor in
conducting an audit because it helps the auditor to identify and assess risks and threats of the
circumstances due to fraud or errors and to obtain sufficient appropriate audit evident for the support
of making reasonable opinion on the financial statements.
Thus, the concepts mentioned above are essential before, during and after the audit engagement.
Besides, these ensure that the conclusions within the auditor’s report are credible and can be relied on
making economic decisions by the users of the information.

2. Discuss the pre-conditions to audit.

The preconditions for an audit are needed by the auditor to establish that the management used an
acceptable financial reporting framework in preparing financial statements and mutual agreement with
the management and those charged with governance for the audit to be conducted. The presence of the
preconditions for an audit can be obtained by determining whether the financial reporting framework to
be used in the preparation of financial statements is acceptable and by obtaining the agreement of
management and those charged with governance that they acknowledge and understand their
responsibilities.

In determining whether the financial reporting framework to be used in preparing financial statements
is acceptable includes the nature of the entity whether it is a profit-oriented or not, the purpose of the
financial statements whether they are prepared to meet the common needs of the users, the nature of
the financial statements whether they are complete set or single, and whether law or regulation
prescribes the applicable financial reporting framework. There are applicable financial reporting
framework set by the authorized body for any nature of businesses. Besides, it also provides procedures
on how the preparation of the financial statements should be properly done. On the part of the purpose
of the financial statements, there are some instances that the financial statements prepared by the
management cannot be met the needs of the specific users but may be to others. To address therewith,
the financial statements should adhere the applicable financial reporting framework designed to meet
the needs of the intended users or referred as the general purpose financial statements. Aside from that
the determination of nature of the financial statements is essential since the management wants to
prepare a complete set of financial statements or single financial statement. The authorized body sets
financial reporting standards on how to prepare financial statements that are complete or not. The
applicable financial reporting framework may be from the law or regulation in the preparation of the
general purpose financial statements. But in the absence of law or regulations, the financial reporting
framework set by the authorized body is presumed to be used in preparing the general purpose financial
statements.

When the management agrees, acknowledges, or understands its responsibility, the second part is
achieved by the auditor for the conduct of an audit. The management is responsible for (1) the
preparation of the financial statements in accordance with the applicable financial reporting framework,
(2) internal controls, and (3) other information needed for the conduct of an audit. The preparation of
the financial statements is not part of the responsibility of the auditor but the management. If so, a self-
review interest may arise in conducting the audit. Besides, the financial reporting framework used by
the management in preparing financial statements includes the requirements associating with fair
presentation. The internal controls that management maintains are relevant in the preparation of the
financial statements whether the internal controls are effective or not. Additionally, the internal control
established provides an entity a reasonable assurance about achieving the entity’s financial reporting
objectives. Lastly, the management should also provide the auditor with access to all information
relevant to the preparation of the financial statements, additional information necessary for further
audit procedures, and unrestricted access to those charged with governance to obtain audit evidence.

However, the absence of the preconditions for an audit may the auditor discuss the matter to the
management why the necessary requirements for preconditions for an audit are not observed and
unless required by law or regulation to do so, not accept the proposed audit engagement. But when the
law or regulation requires the auditor to undertake the audit engagement, he/she shall evaluate the
effect of the misleading nature of the financial statements on the auditor’s report and include the
appropriate reference relating to this matter.

Therefore, the preconditions for an audit are important since it gives the auditor a choice whether the
audit engagement from the client could be accepted or not. In addition, it helps the auditor in obtaining
sufficient appropriate audit evidence assisting in expressing reasonable conclusions. Aside from that, the
audit procedures to be conducted by the auditor will become effective and efficient.

3. Explain the importance of the following: Review, Consultation, and Engagement

quality control review.

The person involved in review, consultation, and engagement quality control review is the engagement
partner. The engagement partner is the partner in the firm who has the responsibility for the audit
engagement and further audit performance. Besides, he/she is also responsible for the issuance of the
auditor’s report on behalf of the firm stating the reasonable opinions on the financial statements of the
entity and has appropriate authority in conducting an audit services from a professional, legal or
regulatory body. The above duties mentioned of the engagement partner are very important in
subsequent issuance of the auditor’s report providing reasonable assurance designed to increase the
reliance of the intended users on the financial statements.

For review, the engagement partner shall take this responsibility in accordance with firm’s review
policies and procedures. In addition, he/she shall, through review of the available documentation
necessary in the audit procedures and discussion with the engagement team, be contented with the
sufficient appropriate audit evidence obtained during the audit procedures for the support to the
conclusions made and for the subsequent issuance of the auditor’s report. In properly adhering with the
review policies and procedures set by the firm, every member of the engagement team is ended with
consensus of the conclusions individually made. As a result, a high reasonable assurance is made that
could increase the degree of confidence of the intended users on the financial statements.

For consultation, the engagement partner shall take this responsibility pertaining to the complex and
argumentative matters. Moreover, satisfaction is intended for engagement partner that the members of
the engagement team undertake appropriate consultation during the audit engagement procedures.
The engagement team agrees with the nature and scope of such consultations from party consulted.
The engagement partner shall also ascertain that the conclusions from the consultation have been
implemented. The importance of the consultation being performed by the engagement partner is that
the circumstances arise during the audit procedures like complexity of the presentation of the financial
statements, to address the identified circumstances and apply necessary actions for adherence of the
financial statements with the applicable financial reporting framework.

For engagement quality control review of the audits of financial statements of listed entities, the
engagement partner shall take responsibility for the determination of the engagement quality control
reviewer appointed. Likewise, he/she is responsible for discussing the significant matters arising during
the conduct of an audit and also identified by the engagement quality control reviewer. The
engagement partner shall not also date the issuance of the auditor’s report until the engagement quality
control review is completed and undergone. The engagement quality control review undergone with the
engagement quality control reviewer with the association of the engagement partner is indispensable in
providing a high reasonable assurance on the financial statements that could be very useful to the
economic decision making of the intended users.

In conclusion, these activities could be essential in enhancing the final product of the firm or the
auditor’s report. Besides, it promotes consistency in legal and ethical aspects by doing and following the
firm’s quality control procedures and policies.

4. Discuss the benefits and advantages of planning an audit engagement.

An audit planning comprises of overall audit strategy made at the start of the audit process and
undergone with the audit engagement team to reduce the audit risk at an acceptable level possibly
arising during the audit engagement. Besides, involvement of every member of the audit engagement
team in making audit planning will make the planning process effective and efficient since they are going
to suggest reasonable and convenient way outlining the audit procedures logically based from their
experiences and insights. The nature and extent of the audit planning activities made by the audit
engagement team will differ accordingly to the complexity and size of the entity, the experience of the
auditors involved in the engagement with the entity, and circumstances arising during the audit
engagement.

Planning is all about developing of series of strategy that are used in engaging audit plan. Thus, it is
associated with several advantages and benefits to the success and achievement of overall objectives of
an auditor. The following are advantages and benefits of planning an audit engagement; (1) assisting the
auditors to identify and devote proper attention to the important areas of an audit – if complexity of
internal controls is maintained by the entity, a need for appropriate attention is established to address
this matter, (2) supporting the auditors to identify and also resolve relevant and potential problems in a
timely basis – by having an audit planning in audit engagement, the auditors may properly identify
potential problems and immediately resolve it by such adhering the audit plan, (3) helping the auditors
manage and organize the engagement in order to carry it out effectively and efficiently – since audit
planning involves logical steps and convenient procedures to follow resulting to effectively and
efficiently perform necessary duties and responsibilities, (4) properly designating the assignment to
those members engaged in audit with the right capability and competency to respond any anticipated
risk arising during the audit engagement – based on the first benefit, the audit planning helps in
identifying the complex and important areas that need to have an appropriate attention, thus the
engagement team shall choose those have capabilities and competency to work on it, (5) encouraging
the supervision of different engagement team partners and helping to review again their work, and (6)
assisting to coordinate with other members for the work to be done involving with such experts and
specialists.

These advantages and benefits of preparing an audit planning in audit engagement may take some time
and seem to be counterproductive at the beginning of the audit but the main objective on it is to create
more efficient and effective audits that would provide a high reasonable assurance designed to increase
the reliance of the intended users on the financial statements.

5. Discuss each element of a system of internal control.

The internal controls established and maintained by the entity are relevant in the conduct of an audit
since they relate to the financial reporting to be prepared by the management. However, the auditor
needs to know and understand the internal controls of the entity to identify whether the internal
controls are relevant to an audit. Besides, the auditor shall also evaluate the design of those internal
controls implemented if it is adhered with the provisions of applicable laws and regulations. Internal
controls can be tested whether they effectively implement or not through an evaluation or assessment
of components or elements of system of internal controls. The following are the elements or
components of system of internal controls; (1) control environment, (2) the entity’s risk assessment
process, (3) the information system, (4) control activities, and (5) monitoring of controls.

In control environment, the auditor shall need to understand of it. Likewise, he/she shall also assess the
management, with the supervision of those charged with governance, maintains the ethical culture and
behaviour. The control environment is a collection of principles, procedures and frameworks that
provide the basis for internal control within the enterprise. The board of directors and senior
management set the tone at the top regarding the importance of internal control, including the
expected standards of conduct. Thus, when the control environment effectively maintains and
implements, it will positively affect the internal controls of the entity resulting in proper disclosure of
reasonable information relating to the financial reporting.

Entity’s risk assessment process is established for identification of business risks relevant to the financial
reporting, anticipation of possibly occurring significant risk, assessment of the possibility of their
occurrence, and decision about actions to be done to address the significant risks. These functions of the
risk assessment process of an entity shall be known and understood by the auditor. When the auditor
identifies risk of material misstatements during the audit procedures but didn’t of the entity’s risk
assessment process, he/she shall understand why the process didn’t find it or failed in identifying on it
or if the process is appropriate for the entity. If the entity did not establish any risk assessment process,
the auditor shall make a discussion to the management regarding to the identified business risk that is
relevant to the financial reporting and how to address this significant matter.

The information system related to business processes that are relevant to financial reporting and
communication shall need to be known and understood by the auditor. This element helps the auditor
to obtain understanding of how entity links roles and responsibilities relating to the financial reporting.
Besides, it involves links between management and those charged with governance and external parties
like regulatory authorities. The information system related to the business processes includes several
areas; the classes of transactions in the entity’s operations that are significant in financial reporting, the
procedures for both manual and computer systems in which the business transactions are initiated,
recorded, process, corrected if necessary, transferred to the general ledger and reported in the financial
statements, related accounting records, supporting documents and specific accounts in the financial
statements, how information system works and how it captures the events and conditions, financial
reporting process used to prepare the financial statements including the accounting policies and
disclosures, and controls surrounding journal entries including non-standard journal entries used to
record non-recurring, unusual transactions or adjustments.

Control activities relevant to the audit are needed to review as necessary in order to assess the risks of
material misstatement at the assertion level and design further audit procedures responding to the
assessed risks. These activities are policies and procedures developed by management to ensure that
risks found during the risk evaluation process are mitigated or minimized to an appropriate level. Simply
put, the checks and balances are part of the company's activities. Controls can be preventive or
detective and may be manual and/or automated. Segregation of duties, which prohibits one person
from controlling all phases of the transaction, is essential to the establishment of strong internal
controls and the identification of the person(s) responsible for the control process. The auditor does not
need to include other control activities of the entity related to each significant class of transactions,
account balances, and disclosure in the financial statements or to every assertion relevant to them.
Those only relevant to the audit and significant to the financial reporting shall need to take appropriate
attention. In understanding the control activities of the entity, the auditor intends to know how the
entity addresses the risk arising from IT.

The auditor needs for an understanding the major activities that the entity uses monitoring of controls
over the financial reporting relating to those control activities to the audit and how entity executes
corrective actions to its controls. Besides, he/she shall also obtain an understanding of the sources of
the information used in the entity’s monitoring activities and basis upon which management considers
the information to be sufficiently reliable for the purpose. Monitoring involves a broad variety of tasks
regularly carried out by managers in the management of their departments that can provide guidance
on the operation of other elements of the internal control system. Management of smaller companies
conducts such procedures on a daily basis but does not always take credit for their contribution to the
efficacy of internal control.
Thus, the components or elements of a system of internal control are needed to be considered by the
auditor but only those relevant to an audit. Besides, the responsibility of an auditor in making
assessment of the internal controls does not extend to what proper actions need the entity to improve it
or identification of the material weaknesses of each internal control.

6. Compare and contrast overall materiality, materiality for each account balances and
disclosures, and performance materiality.

The general purpose of an independent auditor in conducting of an audit is to gain reasonable assurance
as to whether the financial statements as a whole are free from material misstatements due to fraud or
mistake, thus enabling to express a reasonable opinion that financial statements are prepared, in
material respects, in accordance with identified financial reporting framework and resulting to increase
the reliance of the intended users on the financial statements in making economic decisions. The auditor
needs to obtain sufficient appropriate audit evidence in order to reduce the audit risk into acceptably
low level. Audit risk arises when the auditor expresses an inappropriate audit opinion regarding to the
financial statements that are materially misstated. Thus, the management shall properly prepare the
financial statements in accordance with the applicable financial reporting framework disclosing also the
relevant information related to the financial reporting for prevention from audit risk. Therewith, an
auditor shall have possessed a unique attribute like professional judgment in determining whether the
misstatements or omissions in the financial statements are material as a whole or not. Besides, if
applicable, materiality could also be applied to the levels of particular classes of transactions, account
balances or disclosures. Particularly, if the aggregate uncorrected and undetected misstatement in the
financial statements exceeds the materiality of misstatements in the financial statements as a whole, an
increase in audit risk may happen. The same also with the materiality level of particular classes of
transactions, balances or disclosures. This problem can be addressed through performance materiality.
It is the amount set by the auditor below the normal materiality to reduce the probability of exceeding
the aggregate uncorrected and undetected misstatements from the materiality level of financial
statements as a whole.

The three materiality terms, overall materiality, materiality level of particular transactions or account
balances or disclosures, and performance materiality have only one similarity and that is using
benchmarks with the use of professional judgment. The auditor shall consider misstatements or
omissions in the financial statements as a material if they are within the materiality threshold or known
as benchmarks. These materiality thresholds or known as benchmarks are set by the auditor whether
the misstatements identified during the audit are material or not by using professional judgment.

However, there are many differences lying in overall materiality, materiality level of particular
transactions or account balances or disclosures, and performance materiality. In overall materiality,
there are factors that may affect the determination of the relevant benchmark and these are the
elements of the financial statements, if there are items on which the attention of the consumers of the
financial statements of the specific entity appears to be directed, the essence of the entity, the
arrangement of the entity's ownership and the manner in which it is funded, and the relative volatility.
Besides, a percentage is often used to a chosen benchmark in determining the materiality of
misstatements in the financial statements as a whole. While the materiality level of particular
transactions or account balances or disclosures, the factors that could influence users' economic
decisions are whether law, regulation or the relevant financial reporting system affect users'
expectations about the calculation or disclosure of such items, whether key disclosures in relation to the
sector in which the entity operates, and whether attention is centered on a particular aspect of the
entity's business. Lastly, performance materiality shall be determined by the auditor in order to reduce
to an appropriate low level the likelihood that the aggregate of incorrect and undetectable errors will
exceed the level of financial reporting as a whole, as well as specific transactions, balances of accounts
or disclosures.

The misstatements identified during the audit engagement can only be classified as material through
only professional judgment of an auditor. Thus, the auditor shall possess such relevant and profound
knowledge regarding to what he/she has been audited and also need an experience on it.