Professional Scepticism

[Annie]

Hi Acid,

What is professional scepticism and when it should be exercised by the auditor.


Did you understand the risk based, procedural and other approaches. Need to study more.

Obtaining initial understanding of the enity and knowledge of its business environment is like little we will have to mug up and then we can ellaborate it.



Annie

[Acid]

Hi Annie ,

I hope you had a jolly weekend

I am finding all this yet very interesting but indeed too much to learn for the exams.

By Professional scepticism I understood that any misstatements which are significant to readers may exist in financial statement and auditors would plan their work on this basis , that is what we call professional sceptisim. It requiures an attitude that includes a questioning mind and a critical assessment of evidence.

It's like you just dont take what others say but you have to look deep down just like Inspector Gadget.

In risk based approach the auditors plan major work are where they can conclude it to be an area of high risk.

Procedural approach is when an auditors check the organizations policies and adapted procudures. It may happen that due to poor or ineffective policies the possibilitiy of fraud is high.

The understatement/overstatement approach is that auditors recognise the things which my jokes in the fun n laughter section suggest i.e. the possibility of accountant showing an healthy balancesheet on the clouds while infact it doesnt reflect true financial position of the business.

This is what I was able to figure out from the chapters and the relevant areas.

What's next?

[Annie]

Hi Acid,

Thanks, I had a good weekend.

You are doing great. Your answers are absolutely right.

We can summarise C2 in the following way:

Factors for understanding entity & knowledge of its business environment.
External factors - industry conditions & regulatory environment
Nature of entity - ownership & governance, operations etc
Objectives & strategies & significant business risk of entity - assess risks on financial statements
Measurement & review of entity's FS - analysis of performance of entity
Information systems - transfer of information from transaction processing system to general ledger & internally generated information
Internal control

Obtaining an understanding of entity based on risk assessment procedures

Enquirey of management & others within entity - those charged with governance, internal audit personnels, employees, legal counsellors, marketing or sales personnel

Analytical procedurs - include comparison of ratios that help auditors to identify unusual items

Observation & inspection : auditor personally observes procedures when actually performed

Inspection : Auditor examines records & documents.

Do you have any audit experience.

If suppose you go to a bar and you are supposed to audit its accounts. What will you do to obtain an understanding of its accounts. The Bar has a counter and the billing is computerised. There are bar attendants who take orders from the customers and give the order chits to the cashier at the counter who then aks the wiaters to serve the order and make a bill. Payments are received by credit card and cash. The Bar has a inventory room where the stock is maintained. There is an chief accountant and accounts assistant looking after the purchase, sales and other expenses of the bar. There is a manager to supervise their work.

Your answer should be referring to chapter C1

Acid test my knowledge too.

Regards
Annie

[Acid]

Hi

I must say that by the question you posed ( The bar audit one ) It seems that you have complete and through understanding of this chpater. Because the question is very professional and to answer it requires through understanding of concepts. It just drove my head . I will think about it and get back with the answer shortly.

In Audit there are soo many things and all I find inter related !


Acid

[Vanessa]

Hi Acid,

Thanks, I had a good weekend.

You are doing great. Your answers are absolutely right.

We can summarise C2 in the following way:

Factors for understanding entity & knowledge of its business environment.
External factors - industry conditions & regulatory environment
Nature of entity - ownership & governance, operations etc
Objectives & strategies & significant business risk of entity - assess risks on financial statements
Measurement & review of entity's FS - analysis of performance of entity
Information systems - transfer of information from transaction processing system to general ledger & internally generated information
Internal control

Obtaining an understanding of entity based on risk assessment procedures

Enquirey of management & others within entity - those charged with governance, internal audit personnels, employees, legal counsellors, marketing or sales personnel

Analytical procedurs - include comparison of ratios that help auditors to identify unusual items

Observation & inspection : auditor personally observes procedures when actually performed

Inspection : Auditor examines records & documents.

Do you have any audit experience.

If suppose you go to a bar and you are supposed to audit its accounts. What will you do to obtain an understanding of its accounts. The Bar has a counter and the billing is computerised. There are bar attendants who take orders from the customers and give the order chits to the cashier at the counter who then aks the wiaters to serve the order and make a bill. Payments are received by credit card and cash. The Bar has a inventory room where the stock is maintained. There is an chief accountant and accounts assistant looking after the purchase, sales and other expenses of the bar. There is a manager to supervise their work.

Your answer should be referring to chapter C1

Acid test my knowledge too.

Regards
Annie

Hi Annie,

You have given a good example about understanding the accounts of the bar.
Can you give me an example each for all the factors required to understand the business of the bar?

Regards
Vanessa

[Annie]

Hi Vanessa,

Now you are testing me O.k.

The factors for understanding an entity and gaining knowledge of its business environment (where the entity is a bar)

1. External Factors: Here the bar will have a competition if there are lot of bars in the area where it is operating and no competition if it is one of the fewest. If it has to be very competitive then it should have good internal controls, good prices etc to attract more customers. If the bar is the most popular one in the area and has got a huge turnover that means the auditor has to do a extensive audit. The credit limit the suppliers of the bar provide and the credit limit that the bar gives to its customers are important. What kind of relations it has with its suppliers and customers. Is the bar updated with the latest technological developments like is its accounts computerised or it follows the manual way of accounting and book keeping.

Does the bar has a license to sell liquor, does it pay all its taxes and duties regularly. Is there any possible regulatory bill which may affect the business of the bar or enhance its business

2. Nature of entity: The bars owner is the one who does not manage the operations. The manager manages the operations of the bar so ownership is separate from managemnet. Therefore there should be enough and effective controls and corporate governance. Since the owner is not handling the cash counter or the managemnet of the business. The onus lies on the auditor to check that there is no fraudulent activity going on.

3. Objectives and strategies and significant business risk of entity: The auditor of the bar will have to check the business environemnt and how much risk the bar has and assess the risk like if the bar activity is probable to get banned due to regulations then the going concern of the bar will be at risk.

4. Measurment and review of entity's FS: The auditor of the bar would take the financial statements of the previous and current years and compare the figures under each account head and analyse the difference if there some suspicious variations like if the sales of a particular liquor has shown a stable sales and suddenly has gone down then the auditor has to investigate into the matter.

5. Information systems: The auditor has to check that the order chits collected by the bar attendants are all prenumbered and allthe order chits are billed and these are shown as sales in the sales register and then taken to the financial statements. Revenue against each bill is received and taken in the financial statments as revenue.

6. Internal control : The auditor has to see that the activity of each personnel is checked by the other. Like the bar attendants are giving the orders to the cashier and then the cashier instructs the waiter to serve along with the bill and the customer pays the bill to the cashier where he receives a reciept for the same. There fore no one person handles the whole transaction there are three people handled, plus this is again checked by the accountants while making the entries and the manager is supervising the activities of the bar.

I hope I have explained it enough for the activities of a bar.

Annie

[Acid]

Annie , How did you built up such great understanding of the subject? Do you have any prior audit experience?

[Annie]

Hi Acid,

Yes, you guessed it right. I have a previous audit experience so I can actually follow the study text easily.

That is why I understand that you are finding it difficult. But if you start imagining yourself as an auditor and just try to analyse the process in any department like for example let us start with a very small sweet vendor. YOu tell me if you are the auditor of a sweet vendor shop what do you think would be his activities and how he would be conducting them and recording them.

This is not very hard. Go to a sweet vendor, sit there for some time and you will find out what all he does and then just relate that to a bigger organisation on a bigger scale and you would get there. Just some logical thinking.

How far haver you reached in F8. I haven't heard from you for long.

Regards
Annie

[Acid]

Hi Annie,

Apologies for delayed response.

I think If I am an auditor of a Sweet vendor then I would be interested to see the following :

- The type of sweets sold i.e. Bounty or just some small fruit chew.
- The number of employees working , thier roles and division of work
- The storage conditions of the sweets i.e. some type of sweets need to be kept at certain temperature as this will be important for me to determine the inventory level and the risk of sweets getting damp. ( wastage)
-If the sweet seller have sweets kept on open shelf for people to taste it before buying then I will have to see the controls in place which ensure that people are not just tasting to satisfy thier taste buds but really are interested to buy something . This can be a risk as it involves cost and can also lead to fradulent activities as stolen sweets by the staff can become an excuse of customer tasting the sweets.

- As a sweet vendor its more probably that they will accept payment via cash so i would have to look at internal controls related to cash security.


This is all that comes to my end at this level .


Your feedback??

[krishna3898]

Hi Acid,
I think you miss,following,
1)Turnover,
2)physical stock verification,
3)purchases per month/year compare with previous.
4)number person handle the cash counter,
5)stock holding against the sales and any huge difference of stock, with reson,
I hope, is it correct,
(happy weekend)
Regards.
krishna3898