Q.

1 a) How is the standard audit report different if the opinion is other than

qualified? Explain.
b) Discuss and contrast the qualified opinion and the unqualified opinion ?

Ans : A) How is the standard audit report different if the opinion is other than

qualified? Explain.
standard audit report

We conducted our audit in accordance with auditing standardsgenerally accepted

in (the country where the report is issued). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.The auditor's report is a disclaimer thereof, issued by either

an internal auditor or an independent external auditor as a result of an internal or

external audit, as an assurance service in order for the user to make decisions based on the

results of the audit.

An auditor's report is considered an essential tool when reporting financial information to

users, particularly in business. Since many third-party users prefer, or even require financial
information to be certified by an independent external auditor, many auditees rely on

auditor reports to certify their information in order to attract investors, obtain loans, and
improve public appearance. Some have even stated that financial information without an

auditor's report is "essentially worthless" for investing purposes.

The auditor's opinion does not judge the financial position of the reporting entity. Nor does
it otherwise interpret financial data. Instead, the opinion simply answers two questions:

Firstly, do the statements conform to Generally Accepted Accounting Principles (GAAP)?

And, secondly, do they fairly represent the entity's financial accounts?

Four Names For the Opinion

Note that formal audit results may be called Auditor's Opinion, Report, or Statement. Or,

they may also appear as Accountant's Opinion, Report, or Statements. These terms all mean
almost the same thing.

The Accountant's Opinion or Auditor's Opinion focuses on the actual opinion, one of four
possible outcomes described below.

The terms Statement or Report imply that the text includes the opinion, but also:
The responsibilities of auditors.

Responsibilities of directors and corporate officers.

The scope of coverage.

A Qualified Opinion report is issued when the auditor encountered one of two types of
situations which do not comply with generally accepted accounting principles, however the
rest of the financial statements are fairly presented. This type of opinion is very similar to an
unqualified or "clean opinion", but the report states that the financial statements are fairly

presented with a certain exception which is otherwise misstated. The two types of situations
which would cause an auditor to issue this opinion over the Unqualified opinion are:

Single deviation from GAAP

Limitation of scope – this type of qualification occurs when the auditor could not audit one

or more areas of the financial statements, and although they could not be verified, the rest
of the financial statements were audited and they conform to GAAP.

First Possible Auditor Opinion

Unqualified Opinion
Firstly, the unqualified opinion is the best possible audit outcome. And, it is also by far the

outcome that auditors report most often. By contrast, the other three outcomes below
appear raRely.

The term "unqualified" means that, in the auditor's opinion…

Financial statements conform to Generally Accepted Accounting Principles (GAAP).

And, statements represent the entity's financial accounts fairly.

Qualified Opinion
Secondly, a qualified opinion means the auditor finds that reports conform to GAAP, except

in just a few areas. For these areas, the auditor cannot assert conformance.
The qualified opinion may result because:

The report misstates or misclassifies accounting entries. For example, an expense that should
appear above the gross profit line appears wrongly below it. This leads to misleading gross

profit figures.
There are limits on audit scope. This can mean, for instance, that auditors did not have
access to certain financial data.
The auditor doubts the veracity of certain financial data.

The auditor is not fully confident that reports:

Comply with GAAP.

Represent the entity's accounts fairly.

In conclusion, auditors report the audit outcome as "qualified" when they are not

comfortable calling it either "unqualified" or "adverse." With qualified opinions, auditors

state specific reasons for the opinion.

Page Top
Contents

Adverse Opinion
Thirdly, an adverse opinion means the auditor finds one or both of the following.

Statements do not fairly represent the entity's accounts.

The audited statements do not comply with GAAP.
Before publishing an adverse opinion, auditors advise the firm's accountants and officers of

such problems. And, auditors then work with them to correct problems, insofar as they can.
They do this hoping to describe the outcome as "unqualified" or "qualified" opinion, instead

of "adverse," if possible.
When auditors do report an adverse opinion, they give specific reasons for the opinion. As a

result, auditors may point out specific accounting errors or departures from GAAP.
In any case, an Adverse opinion has serious consequences for the reporting entity. At a

minimum, the opinion ensures that investors, regulators, lenders, and governments will
reject the reports. In addition, if the audit reveals illegalities, corporate officers may be held

personally accountable.
Page Top
Contents

Disclaimer of Opinion

Fourthly, auditors may issue a disclaimer of opinion. Note especially that this is not
an opinion. Instead, it simply says that auditors chooses not to issue an opinion.

Auditors may issue a disclaimer of opinion when:

They believe they cannot audit impartially. With the disclaimer, therefore,

auditors recuse themselves.

The auditor's scope is limited. This occurs, for instance, when auditors cannot access certain

financial data.
Auditors have other doubts about the reports. For example:

Reports may seem to violate accounting principles such as the matching concept or
the conservatism principle.

Auditors may question the classification of certain revenues and expenses.

Some capitalized items probably should not have been capitalized.
They may question the way the entity applies rules such as the Lower of Cost or Marketrule,

or LIFO and FIFO rules for inventory.

b) Discuss and contrast the qualified opinion and the unqualified opinion ?

qualified opinion

Independent auditor's opinion, (given as part of an audit report) stating: (1) the audit was
restricted in scope otherwise the financial statements present fairly the financial position of

the firm, or (2) the audit was unrestricted and for the entire accounting period but an
unqualified opinion cannot be expressed because (a) the account books and records do not

completely reflect conditions that conform to the provisions of GAAP, (a) there has been a
material change (between accounting periods) in accounting policies or in the methods of
their application, (c) there are significant uncertainties regarding assumptions underlying the
financial statements, (d) the auditor was unable to conduct complete verification of the

accuracy of the accounting records due to certain omissions, (e) the auditor and the
management were unable to reach a compromise agreement regarding method of treatment

or valuation of certain assets, and/or (f) the management was unwilling or unable to correct
certain unacceptable practices or situations.

There are two main reasons an auditor may write a qualified opinion on a
company's audit report:

1.) Deviations from GAAP: The audited company did not accurately follow
the GAAP accountingprinciples on one or more items in their financial report.

2.) Limitation of scope: Not all financial statement information was available to the auditor.
However, the financial information that was audited conformed with GAAP.

For example, let's assume that Company XYZ is a publicly traded company. At year-end,
Company XYZ hires Auditor ABC to conduct an audit of its financial statements, practices,

and controls for the previous fiscal year.

Auditor ABC discovers that Company XYZ has not accounted for inventory correctly, has kept

incomplete records regarding its cash accounts, and did not provide adequate records for
review regarding depreciation. As a result, the auditor would likely give a qualified opinion

for Company XYZ due to both limitation of scope (incomplete records) and deviation from
GAAP (errors in accounting for inventory).

unqualified opinion An unqualified opinion generally indicates the following points:

1. The financial statements of a company have been prepared to use GAAP principle,which is
applied consistently.

2. The financial statements of a company are matched with the statutory rules, requirements
and regulations.

3. There is sufficient disclosure of all material which is relevant to the appropriate

presentation of the financial facts.
4. If there are some changes in the accounting principles or in the application method, then it
has been properly checked and determined in the financial statement of the company.

The financial report usually consists of a title and a header, the main body, the signature and
address of the auditor and the issuance date of the report. According to the US auditing

standard, the title should include “independent” in order to convey the user that the report
was fully unbiased in all respects. Three main paragraphs constitute the main body of the

unqualified report with each of the paragraphs having a standard wording and individual
purpose. However some auditors have made some modifications in the main body but not

the wording so that they can differentiate themselves with other audit firms.
HOW IT WORKS (EXAMPLE):

For example, let’s assume that Company XYZ is a publicly traded company. After the
year-end, Company XYZ hires Auditor ABC to conduct an audit of its financial statements,

practices and controls for the previous fiscal year. Auditor ABC discovers no material errors in
Company XYZ’s accounting practices (for example, the auditor verifies that Company XYZ has

accounted for inventory correctly, has kept good records regarding its cash accounts, and
provided adequate records for review regarding depreciation). As a result, Auditor.
Q.2 Internal control consists of five interrelated components. These are derived from

the way management runs a business, and are integrated with the management
process.

Required:
a) Name and define the components of internal control.

b) How do the components of internal control affect each other?

c) Discuss the interrelationship of components using as an example a retail

clothing store.

A) Internal control system is implemented by the management or those charged with

governance to assure that entity’s objectives regarding reporting, compliance with applicable
laws and effectiveness and efficiency of operations is achieved. However, this becomes
possible because internal control system serve this purpose through its different components

or subsystems working collectively like a clockwork and are known as components of internal
control system.

Internal control system has five components which are as follows

Control Environment

It simply means controlled environment of the entity in which operations of the business are
carried out. It is this control environment that keeps anyone in the entity from committing

any wrong doing. For example, if management is honest and encourages honesty and is
strict towards falsehood than employees would expect harsh consequences and only this will

keep the employees to commit any fraud individually or in collusion with others.
Another thing to understand is that it supplements the other functions (components) of

internal control system.

An auditor is required to obtain understanding whether such environment has been

developed by management through its management philosophy and behaviour in the entity.
Risk assessment process

One of the key roles of internal control system is to prevent or identify and correct
misstatements. However, entity would not wait for misstatement to happen and only it

should be prevent or detected and corrected. Most of the time entity establish its own risk
assessment process to identify the risk of material misstatement to happen before time.

Auditor obtains understanding of how entity’s risk assessment process whether it is working
as per expectations in the light of business risk or not by considering:

expected risks

affects of such risks

likelihood that risk will realize

decisions taken to cater such risks

Information and communication

Information in every aspect of our lives including in business environment has taken a pivotal

role. During audit engagement auditor gains understanding regarding the information and
communication system of the entity that acts as one of the component of internal control

system. However, information system does not only mean the accounting system. It is the

system through which entity or to be precise management establishes and communicates

within and outside entity.

Control activities

Control activities are put in place by the management to make financial information
authentic and reliable. For example, debtors cannot be written off withouth permission

finance director or any other person given authority to write off debts. Similarly, credit sales
cannot be made unless recommendation is sought from credit control department. Such
control activities does not necessarily are in the nature of authorization. Requirement to

enter password to access certain modules of information system is an example of

information system. Similarly a validation check in the database system to make sure that

contact number of supplier can only be in numbers or email address has been entered in a
particular format containing ‘@’ etc. All such checks will ensure that information is accurate.

Monitoring

The last component of an internal control system is monitoring process. It can be considered
as an inbuilt service to the internal control system that assesses the effectiveness of internal

control system. Monitoring process is carried out evaluating the current operations of
internal control system and separate evaluations that includes routine and non-routine

system checks. Such evaluations may consider external information for example customer’s
feedback. In light of such information management or those charged with governance take

necessary steps to keep the internal control system up to the mark so that risk of material
misstatement is dealt appropriately and updates of the system are done as and when

necessary.

How do the components of internal control affect each other

Control Environment (CHOPPER)

The control environment sets the tone of an organization, influencing the control

consciousness of its people. It is the foundation for all other components of internal control,
providing discipline and structure. Control environment factors include the following:

Commitment to competence - Effective control requires a sincere interest on the part of the
employees in performing good work.

Human resource policies & practices - A company can minimize the control difficulties
created by new employees by sound hiring and training policies for employees.
Organizational structure - A company that operates all over the world has different internal

control problems than one operating entirely within a single building.

Participation of those charged with Governance - An audit committee of the board of

directors that actively monitors the internal audit function produces a more attentive
management on such matters.

Philosophy of management & operating style - The belief (or lack of it) in the importance
of internal control by management will affect the seriousness with which is taken by the rest

of the employees. This is especially the case when decision-making in the company is
dominated by a single individual.

Ethical values & Integrity - Honest employees will be less likely to cause internal control
difficulties related to fraud and improve the opportunity for those resulting from errors to be
effectively detected.
Responsibility assignment - The manner in which authority, responsibility and

accountability is assigned to different employees determines the controls that will be

needed. Again, the domination of decision-making by a single individual holds significance,

since such power makes it extremely difficult for internal control to be trusted.
The mnemonic CRIME reminds management that it would be a crime not to consider all of

the internal control elements when designing the system.

Discuss the interrelationship of components using as an example a retail clothing

store.

Cash Control
Cash is the most common item inside your store that is subject to theft or fraud. Internal

control measures for cash typically focus on safekeeping and accountability. Limiting cash
access to one or two persons, counting cash at the start of the day, entering all sales into the

cash register, placing undeposited cash in a vault, depositing cash to a bank daily, tallying
cash balances at the end of the day and checking bank deposit slips are common internal

control procedures used to control cash in retail stores.

Inventory Control

Merchandise inside a clothing store can vanish without a trace and the figures shown in
books may not be the actual quantity existing in the store. Internal control procedures for

inventory are designed to make sure that stock is not pilfered and that records tally with
physical inventory. Anti-theft tags attached to stock, periodic physical inventory counts,

employee monitoring and verifying actual condition of damaged stock are a few examples of
internal control procedures for merchandise inventory.

Purchases and Deliveries

Short deliveries and nondeliveries of stock purchased, delayed deliveries due to unauthorized
bundling of purchases and the alternation of delivery invoice figures are some examples of
vendor and employee fraud committed when purchasing and delivering store stocks. An

effective internal control system must be designed to counter such problems. Checking
delivery receipts against purchase orders, verifying vendor invoices against statements of

account and counting physical inventory are some examples of such procedures.
Accounts Receivable

Accounts receivable fraud can disrupt your cash flow and increase your bad debts. Skimming,
lapping and kiting are a few of many types of accounts receivable fraud. In most cases, an

employee manipulates the records to make it appear that some customers are not paying on
time, when in fact, the customers were paying ahead of due dates. Examples of this type of

internal control procedure are mandatory vacations and switching of job duties to detect
fraud, implementing incentive programs to report fraudulent activity and sending statements

to customers to verify their balances.

Q.3 a) What is the objective of audit planning?

b) List the planning procedures.

 c) Describe the approach to auditing risk given in ISAs 315, 330, and 500.

Ans:

A) What is the objective of audit planning : Introduction

.01 This standard establishes requirements regarding planning an audit.

Objective
.02 The objective of the auditor is to plan the audit so that the audit is conducted

effectively.
Responsibility of the Engagement Partner for Planning

.03 The engagement partner1 is responsible for the engagement and its performance.
Accordingly, the engagement partner is responsible for planning the audit and may seek
assistance from appropriate engagement team members in fulfilling this responsibility.
Engagement team members who assist the engagement partner with audit planning also

should comply with the relevant requirements in this standard.

Planning an Audit

.04 The auditor should properly plan the audit. This standard describes the auditor's
responsibilities for properly planning the audit.2

.05 Planning the audit includes establishing the overall audit strategy for the
engagement and developing an audit plan, which includes, in particular, planned risk

assessment procedures and planned responses to the risks of material misstatement.

Planning is not a discrete phase of an audit but, rather, a continual and iterative process that

might begin shortly after (or in connection with) the completion of the previous audit and
continues until the completion of the current audit.

Preliminary Engagement Activities

.06 The auditor should perform the following activities at the beginning of the audit:

Perform procedures regarding the continuance of the client relationship and the specific
audit engagement,3

Determine compliance with independence and ethics requirements, and

Note: The determination of compliance with independence and ethics requirements is not

limited to preliminary engagement activities and should be reevaluated with changes in

circumstances.

Establish an understanding of the terms of the audit engagement with the audit committee

in accordance with AS 1301, Communications with Audit Committees.

Planning Activities

.07 The nature and extent of planning activities that are necessary depend on the size
and complexity of the company, the auditor's previous experience with the company, and

changes in circumstances that occur during the audit. When developing the audit strategy
and audit plan, as discussed in paragraphs .08-.10, the auditor should evaluate whether the
following matters are important to the company's financial statements and internal control
over financial reporting and, if so, how they will affect the auditor's procedures:

Audit Plan

.10 The auditor should develop and document an audit plan that includes a description
of:

The planned nature, timing, and extent of the risk assessment procedures;11
The planned nature, timing, and extent of tests of controls and substantive

procedures;12 and
Other planned audit procedures required to be performed so that the engagement complies

with PCAOB standards.

Multi-location Engagements

.11 In an audit of the financial statements of a company with operations in multiple

locations or business units,13 the auditor should determine the extent to which audit

procedures should be performed at selected locations or business units to obtain sufficient

appropriate evidence to obtain reasonable assurance about whether the consolidated

financial statements are free of material misstatement. This includes determining the
locations or business units at which to perform audit procedures, as well as the nature,

timing, and extent of the procedures to be performed at those individual locations or

business units. The auditor should assess the risks of material misstatement

b) List the planning procedures.

Requesting Documents

After notifying the organization of the upcoming audit, the auditor typically requests
documents listed on an audit preliminary checklist. These documents may include a copy of

the previous audit report, original bank statements, receipts and ledgers. In addition, the
auditor may request organizational charts, along with copies of board and committee
minutes and copies of bylaws and standing rules.
Preparing an Audit Plan

The auditor looks over the information contained in the documents and plans out how the
audit will be conducted. A risk workshop may be conducted to identify possible problems. An

audit plan is then drafted.

Scheduling an Open Meeting

Senior management and key administrative staff are then invited to an open meeting during
which the scope of the audit is presented by the auditor. A time frame for the audit is

determined, and any timing issues such as scheduled vacations are discussed and handled.
Department heads may be asked to inform staff of possible interviews with the auditor.

Conducting Fieldwork
The auditor takes information gathered from the open meeting and uses it to finalize the

audit plan. Fieldwork is then conducted by speaking to staff members and reviewing
procedures and processes. The auditor tests for compliance with policies and procedures.

Internal controls are evaluated to make sure they're adequate. The auditor may discuss
problems as they arise to give the organization an opportunity to respond.

Drafting a Report
The auditor prepares a report detailing the findings of the audit. Included in the report are

mathematical errors, posting problems, payments authorized but not paid and other
discrepancies; other audit concerns are also listed. The auditor then writes up a commentary

describing the findings of the audit and recommended solutions to any problems.
Setting Up a Closing Meeting

The auditor solicits a response from management that indicates whether it agrees or
disagrees with problems in the report, a description of management's action plan to address

the problem and a projected completion date. At the closing meeting, all parties involved
discuss the report and management responses. If there are any remaining issues, they're

resolved at this point.

sess Client Business Risk
shows how the Strategic Systems approach provides information for evaluating the client's
business risk, and provides a basis for the auditor's assessment of risk of material

misstatement. Additionally, the Sarbanes-Oxley Act requires management to certify that 1) it

has designed disclosure controls and procedures to ensure that material information about

business risks is made known to them, and that 2) management has informed the auditor
and audit committee of any significant deficiencies in internal control, including material

weaknesses.
Perform Preliminary Analytical Procedures

The fourth step in the audit planning process is to perform preliminary analytical procedures.
This step involves comparison of the client's ratios to industry standard ratios, both to see

how the client compares to its industry, as well as to determine if the client's ratios have
changed from previous years. Table 8-1 shows a comparison of Hillsburg Hardware

Company's raios, with industry standards, as well as Hillsburg's ratios for the previous year.
Note that the ratios include several categories--short term debt-paying ability, liquidity

activity ratios, ability to meet long term obligations, and profitability ratios.
In Figure 8-5, the author presents a comprehensive example of how the steps in this chapter

could be applied to the Hillsburg Company example. The steps are listed, along with the
substeps, to the left, with the results stated on the right side of the figure. Also, remember

that in this chapter, only the first four steps are presented, and that the other four steps will
be introduced later.

State the Purposes of Analytical Procedures and Timing of Each

You will remember that analytical procedures are one of the seven types of evidence

discussed in chapter 7. Your text defines analytical procedures as "evaluations of financial

information made by a study of plausible relationships among financial and nonfinancial

data...involving comparisons of recorded amounts to expectations developed by the auditor."

In other words, do the ratios and balances calculated appear to be reasonable?

Analytical procedures are performed at three stages of the audit: 1) in the planning phase, 2)
during the testing phase, and 3) during the completion phase of the audit. The purposes fo
analytical procedures in different phases are illustrated in Figure 8-6.
Select the Most Appropriate Analytical Procedures from Among the Five Types

It is vital that the auditor develop an expectation of what the calculations should look like,
based on information from prior periods, industry trends, and other information. The auditor

will use one or more of the following analytical procedures:

c) Describe the approach to auditing risk given in ISAs 315, 330, and 500.

the purpose of this International Standard on Auditing (ISA) is to establish standards and
provide guidance on determining overall responses and designing and performing further

audit procedures to respond to the assessed risks of material misstatement at the financial
statement and assertion levels in a financial statement audit. The auditor’s understanding of

the entity and its environment, including its internal control, and assessment of the risks of
material misstatement are described in ISA 315, “Understanding the Entity and Its

Environment and Assessing the Risks of Material Misstatement.” Purpose restated in new
para 1 Not necessary in new format 2. The following is an overview of the requirements of

this standard: • Overall responses. This section requires the auditor to determine overall
responses to address risks of material misstatement at the financial statement level and

provides guidance on the nature of those responses. • Audit procedures responsive to risks
of material misstatement at the assertion level. This section requires the auditor to design

and perform further audit procedures, including tests of the operating effectiveness of
controls, when relevant or required, and substantive procedures, whose nature, timing, and

extent are responsive to the assessed risks of material misstatement at the assertion level. In
addition, this section includes matters the auditor considers in determining the nature,

timing, and extent of such audit procedures. • Evaluating the sufficiency and appropriateness
of audit evidence obtained. This section requires the auditor to evaluate whether the risk

assessment remains appropriate and to conclude whether sufficient appropriate audit

evidence has been obtained. • Documentation. This section establishes related
documentation requirements.

Q.4 a) What are the requirements for a representative sampling technique to

qualify as a “statistical” sample?

b) ISA 530 enlists a number of factors that influence sample size. Are these
factors only relevant for statistical samples?

Ans : What is a 'Representative Sample'

A representative sample is a small quantity of something that accurately reflects the larger
entity. An example is when a small number of people accurately reflect the members of an

entire population. In a classroom of 30 students, in which half the students are male and half
are female, a representative sample might include six students: three males and three

females.
A representative sample parallels the key variables and characteristics under examination.

Some examples include sex, age, education level, socioeconomic status or marital status.
Using a larger sample size increases the likelihood that the sample more accurately reflects

what actually exists in the population. Any information collection with biased tendencies is
unable to generate a representative sample.

Reasons to Use a Representative Sample

A representative sample allows the collected results to be generalized to a larger population.

For most marketing or psychology studies, it is impractical in terms of time, finances and
effort to collect data on every person in the target population. This is especially impractical

for large population such as an entire country or race.

Risks of Using Samples

The use of sample groups poses risks, as the sample may not accurately reflect the views of
the general population. One of the largest risks is developing a sample that is not truly

representative. This most likely occurs because the population group is too small. For
example, when comparing data relating to gender, a representative sample must include
individuals of different ages, economic status and geographical locations. Such information
typically requires a diversification of information-collecting sites.

Random Sampling and Purposive Sampling

Random sampling involves choosing respondents from the target population at random, to

minimize bias in a representative sample. While this method is more expensive and requires
more upfront information, the information yielded is typically of higher quality. Purposive

sampling is more widely used, and occurs when the managers target individuals matching
certain criteria for information extraction. Ideal interview candidates receive profiles.

Although this leads to the potential of bias in the representative sample, the information is
easier to collect, and the sampler has more control when creating the representative sample.

True Representative Samples Cannot Exist

When developing a survey, the manager must utilize controls to track and monitor who has

provided input, whether the information is usable, and whether it can be interpreted.
Random sampling ensures every member of the population has equal probability of

selection and inclusion in the sample group. However, sample bias is always present and can
never truly be eliminated. For example, individuals who are too busy to participate will be

under-represented in the representative sample, as they are less likely to provide feedback.
Systematic Sampling

Systematic sampling is a type of probability sampling method in which sample members

from a larger population are selected according to a random starting point and a fixed

periodic interval. This interval, called the sampling interval, is calculated by dividing the
population size by the desired sample size. Despite the sample population being selected in

advance, systematic sampling is still thought of as being random if the periodic interval is
determined beforehand and the starting point is random.

Simple Random Sample

A simple random sample is a subset of a statistical population in which each member of the

subset has an equal probability of being chosen. An example of a simple random sample
would be the names of 25 employees being chosen out of a hat from a company of 250
employees. In this case, the population is all 250 employees, and the sample is random
because each employee has an equal chance of being chosen.

Central Limit Theorem - CLT

The central limit theorem (CLT) is a statistical theory that states that given a sufficiently large
sample size from a population with a finite level of variance, the mean of all samples from the

same population will be approximately equal to the mean of the population. Furthermore, all
of the samples will follow an approximate normal distribution pattern, with all variances

being approximately equal to the variance of the population divided by each sample's size.

Sampling Error
A sampling error is a statistical error that occurs when an analyst does not select

a sample that represents the entire population of data and the results found in the sample do
not represent the results that would be obtained from the entire population. Sampling is an

analysis performed by selecting by specific number of observations from a larger population,

and this work can produce both sampling errors and nonsampling errors.
Population

Population is the entire pool from which a statistical sample is drawn. In statistics, population
may refer to people, objects, events, hospital visits, measurements, etc. A population can,

therefore, be said to be an aggregate observation of subjects grouped together by a

common feature.

Acceptance Sampling
A statistical measure used in quality control. A company cannot test every one of its products

due to either ruining the products, or the volume of products being too large.
Acceptance sampling solves this by testing a sample of product for defects. The process

involves batch size, sample size and the number of defects acceptable in the batch. This
process allows a company to measure the quality of a batch with a specified degree of
statistical certainty without having to test every unit of product. The statistical reliability of a
sample is generally measured by a t-statistic.

Standard Error

A standard error is the standard deviation of the sampling distribution of a statistic. Standard
error is a statistical term that measures the accuracy with which a sample represents a

population. In statistics, a sample mean deviates from the actual mean of a population; this
deviation is the standard error.

Sample Selection Bias

Sample selection bias is a type of bias caused by choosing non-random data for statistical
analysis. The bias exists due to a flaw in the sample selection process, where a subset of the

data is systematically excluded due to a particular attribute. The exclusion of the subset can
influence the statistical significance of the test, or produce distorted results.

b) ISA 530 enlists a number of factors that influence sample size. Are these factors

only relevant for statistical samples?

In statistics, a simple random sample is a subset of individuals (a sample) chosen from a

larger set (a population). Each individual is chosen randomly and entirely by chance, such
that each individual has the same probability of being chosen at any stage during the

sampling process, and each subset of k individuals has the same probability of being chosen
for the sample as any other subset of k individuals.This process and technique is known

as simple random sampling, and should not be confused with systematic random sampling.
A simple random sample is an unbiased surveying technique.

Simple random sampling is a basic type of sampling, since it can be a component of other
more complex sampling methods. The principle of simple random sampling is that every

object has the same probability of being chosen. For example, suppose N college students
want to get a ticket for a basketball game, but there are only X < N tickets for them, so they
decide to have a fair way to see who gets to go. Then, everybody is given a number in the
range from 0 to N-1, and random numbers are generated, either electronically or from a

table of random numbers. Numbers outside the range from 0 to N-1 are ignored, as are any
numbers previously selected. The first X numbers would identify the lucky ticket winners.

Survey sampling

In statistics, survey sampling describes the process of selecting a sample of elements from a
target population to conduct a survey. The term "survey" may refer to many different types

or techniques of observation. In survey sampling it most often involves a questionnaire used

to measure the characteristics and/or attitudes of people. Different ways of contacting

members of a sample once they have been selected is the subject of survey data collection.
The purpose of sampling is to reduce the cost and/or the amount of work that it would take

to survey the entire target population. A survey that measures the entire target population is
called a census.

Survey samples can be broadly divided into two types: probability samples and
non-probability samples. Probability-based samples implement a sampling plan with

specified probabilities (perhaps adapted probabilities specified by an adaptive procedure).

Probability-based sampling allows design-based inference about the target population. The
inferences are based on a known objective probability distribution that was specified in the

study protocol. Inferences from probability-based surveys may still suffer from many types of
bias.

Q.5 During the course of audit an auditor is expected to be vigilant enough to develop
understanding about the propriety of important transactions and to determine

whether or not such transactions have appropriate business rationale. You are required
to describe the situations in which a transaction is indicative of fraud or an attempt to

conceal fraud or fraudulent reporting ?

Ans: Overview of Financial Fraud:

As technology increases and the world becomes more reliant on financial data for global

interaction then there is a greater risk for financial fraud to be present. The 21st century has
seen the collapse of many large companies such as Enron, and World Com, due to errors in

financial reporting and committing overt acts of financial fraud. In 2002, the Sarbanes-Oxley
Act was enacted as a direct response to financial fraud. The Sarbanes- Oxley act is also known

as the SOX act or the Public Company Accounting Reform and Investor Protection Act. This
bill is a direct response to the accounting scandals of the publicly traded companies Enron

and WorldCom which were facilitated by the once prestigious accounting firm known as
Arthur Anderson. This article is meant to explain causes of fraud, the methods used to

commit fraud as well as the consequences that come with committing financial statement

fraud.
Fraud can encompass various different types of acts but is generally defined as the

intentional misleading of a person or deception of a person in order to cause someone to

lose property, money, or some other right. This therefore implies that fraud must be

intentional. So theoretically someone can commit an error on the financial statements

without it being considered fraud or rather without trying to deceive anyone for personal

financial gain.
To Identify Fraud you must have a number of items that are identified first. These items are

listed below:
1.) There must be a victim.

2.) There must be a detailed account of the deceptive or fraudulent act.

3.) There must be able a mechanism to identify and quantify the victim's loss.

4.) There must be a person suspected of committing the crime.

5.) There must be evidence that the suspect acted with the intent to commit the crime.

6.) There must be evidence that the suspect profited in some way by the act(s) that were
committed.
1.) The Overstatement of the Assets- The assets of a business can be overstated by not
logging the accounts receivables or by not reporting the assets with any depreciated or

impaired values, or the items in the inventory that are considered to be obsolete of no value.
2.) The Understatement of Liabilities- The liabilities of a business can be understated by

improperly recording the liabilities as equity or it can be done by moving the liabilities
between short-term and long-term classifications.

3.) The Overstatement of Revenue- The revenues for a business can easily be overstated by
the use of inflated sales. This is generally accomplished by entering in fake sales that never

happened or it can be done in a more deceptive fashion by entering in a sale into the
financial records before the revenue from the sale is actually earned.

4.) The Understatement of Expenses- Expenses can be understated by holding the

expenses the business incurred in one period over to the next accounting period. This can

easily happen by improperly capitalizing an expense over multiple accounting periods rather
than correctly expensing it immediately.

5.) One Time Expense Mischaracterization- The management team of a company may
remove one-time expenses from the accounting records, which thereby gives investors and
other people the false impression regarding the results from operations for the business to

the participants in the capital markets.

6.) The Misrepresentation of Information- The management team or individuals inside the

company can either omit or misrepresent certain types of financial information to present a
healthier overall appearance for the business. Often times many people who are trying to

commit financial fraud will just omit certain items from their reports.
7.) The Improper Use of Reserve Accounts- There are reserve accounts that hold reserves

for things such as the accounts receivables, obsolete inventory accounts, returned sales
accounts, and warranties. These accounts can be notoriously difficult to discern because a

substantial amount of judgment and knowledge of the business is required in order to

determine the proper balances at the end of the accounting period.
8.) The Misapplication of the GAAP Rules- There are many businesses that employee
clever accountants and members of the management team that have familiarized themselves

with all of the rules and regulations for the FASB and GAAP. Just like every system there are
still loopholes, which can be exploited for those people who are looking to intentionally

commit financial statement fraud.

Reasons for Fraud and the Triangle of Fraud:

Financial statement fraud is considered to be a deliberate and wrongful act where the
perpetrator has the intent to deceive. With this intent there is generally some sort of basis for

rational or justification for their actions, along with the right conditions present inside of the
business that would allow the fraud to be committed. This is where the triangle of fraud

comes into use. When analyzing the nature of fraud there are generally three characteristics
that universally apply. These characteristics are: Opportunity, Rationalization, and Motive.

Nature of Items
Size and value. If items that can be stolen are of high value in proportion to their size (such as

diamonds), it is less risky to remove them from the premises. This is a particularly critical item
if it is easy for employees to do so.
Ease of resale. If there is a ready market for the resale of stolen goods (such as for most

types of consumer electronics), this presents an increased temptation to engage in fraud.

Cash. If there is a large amount of bills and coins on hand, or cash in bank accounts, there is a

very high risk of fraud. At a local level, a large balance in a petty cash box presents a
considerable temptation.

Nature of Control Environment

Separation of duties. The risk of fraud declines dramatically if multiple employees are

involved in different phases of a transaction, since fraud requires the collusion of at least two
people. Thus, poorly-defined job descriptions and approval processes present a clear

opportunity for fraud.

Safeguards. When assets are physically protected, they are much less likely to be stolen. This
can involve fencing around the inventory storage area, a locked bin for maintenance supplies
and tools, security guard stations, an employee badge system, and similar solutions.

Documentation. When there is no physical or electronic record of a transaction, employees

can be reasonably assured of not being caught, and so are more inclined to engage in fraud.

This is also the case if there is documentation, but the records can be easily modified.