ABFA3114

Principles of
Auditing
Tutorial Questions
Understanding the question verbs will help you in answering the needs of the questions
Define Give the meaning of

Identify Recognise and select

Explain Make clear with reasons

Describe Give the key features

Distinguish Define two different terms, viewpoints or concepts on the basis of

difference between them.

Analyse Give reasons for the current situation or what has happened

Assess Determine the strengths/weaknesses/importance/significance/etc.

Examine Critically review in detail

Discuss Examine by using argument for and against

Explore Examine or discuss in a wide-ranging manner

Criticise Present the weaknesses of/problem with the actions taken or viewpoint
expressed, supported by evidence

Evaluate Determine the value of in the light of the arguments for and against

Recommend Advise the appropriate actions to pursue in terms the recipient will
understand

Tutorial 1: Introduction To Auditing

Question 1 Not included in KL New Tutorial Questions

Jane invests in business selling machinery operated by her friend, Peter. Jane is the majority
shareholder (shareholder ownership) but she is not involving in the management of the
business. Peter is the managing director and is paid a fixed salary.

At the end of the first year of trading, profits and dividends are lower than expected. Jane
knows that Peter is paid a salary so does not care as much as her that profits are low. Jane
wants further assurance on the financial statements.

Required:
Suggest with reasons what should Jane do if she wants further assurance on the financial
statements.

Jane can appoint an auditor to audit on the financial statement prepared by Peter to obtain
further assurance on the financial statements. This is because the audit can provide Jane with a
knowledgeable and independent review of the financial statements.

Question 2
John has just incorporated a private limited company. He was recently being told that, in
compliance with the Companies Act 2016, his has to get an audit done on his company’s
financial statements. He is now seeking your advice on some of his concerns.

Required:
Explain to John the following:
(a) The purpose and benefits of financial statement audit.

Purposes of audit is to determine whether financial statements has been prepared and presented
in accordance to the applicable financial reporting framework.
Pg4,5

(b) The scope and frequency of the financial statement audit.

Scope of financial statement audit cover 1)statement of profit or loss, 2)statement of financial
position, 3)statement of cash flows, 4)statement of changes in equity and 5)explanatory notes to
financial statements Frequency of financial statement audit is at least once a year.

(c) The differences between financial statement audit and financial accounting.

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Question 3
Audit can be categorised into compliance audit and operational audit.

Required:
(a) Explain briefly each of the above types of audit. Give an example for each type of audit.
Pg 5 1&2

(b) Explain the rationale of making financial statement audit mandatory = compulsory.
Financial statement audit is mandatory due to the separation of ownership and control between
shareholders and management (also referred to principal-agent relationship).

Management is accountable to the shareholders as they are the stewardess of resources

entrusted by the shareholders.

Due to conflict of interest and information asymmetry, it is difficult to maintain a fiduciary

relationship between the shareholders and the management.

An independent audit will increase the shareholder’s confidence on the management’s

accountability in running the business and in the preparation of financial statements.

Question 4
Your company has grown rapidly in recent years. There were few fraud cases detected in
branches and breakdown in the accounting and internal control system. Your director wish to
take steps to rectify these problems and has seek your advice on appointing an internal auditor
to carry out this work as well as reviewing the systems on a continuous basis.

Required:
Please advise your director on the differences and similarities between internal and external
auditor.

Role of internal auditor

-Help management to detect and prevent fraud

-Identify weaknesses in operation/systems & give recommendations for improvement.

-Perform compliance test on control implemented by management

-Perform risk management process to ensure potential business risk are identified and properly
managed
Pg6 table

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Question 5
Financial statements audit only provides reasonable assurance whether the financial statements
are showing a true and fair view.

Required:
(a) Explain the terms "reasonable assurance" and "true and fair view".

(b) Briefly explain why financial statements audit can only provide reasonable assurance on
the true and fairness of the financial statements.

Why only reasonable assurance? = Why not an absolute assurance?

Due to inherent limitation in audit process (it’s nature) 🡪 4 limitations
For each limitation stated need to be able to explain how it cause misstatements that could be
of material to exist.
SAMPLING
-Audit is performed on samples rather than on every single items.
-Thus, there is a risk of material misstatements not detected in the unselected samples

AUDIT EVIDENCES
-Evidences collected are persuasive where it persuade auditor to believe in its truth and not
conclusive. Conclusive evidences are solid and complete by itself.
-Thus, there is a risk of material misstatements not detected as evidences collected are not
conclusive.

PROFESSIONAL JUDGEMENT
Auditor will apply professional knowledge and experiences in making appropriate decision.
Thus, there is a risk of material misstatements not detected due to the risk of flaw judgement
made by auditor.

LIMITATION OF INTERNAL CONTROL

-Internal control are implemented by a company to reduce the risk for material misstatements
to exist.
-Due its limitation such as collusion, human error and control overriding, not all material
misstatements are detected by the internal control.
-Thus, there is a risk of material misstatements not detected.
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