Session 1

[Acid]

Question :The purpose of an external audit and its role are not well understood. You have been asked to write some material for inclusion in your firm's training materials dealing with these issues in the audit of large companies.

You are required :

(a) Draft an explanation dealing with the purpose of an external audit and its role in the audit of large companies , for inclusion in your firms training.
[10]

(b) The external audit process for the audit of large entities generally involves two or more recognisable stages. One stage involves understanding the business and risk assessment , determining the response to assessed risk , testing of controls and a limited amount of substantive procedures. This stage is sometimes known as the interim audit. Another stage involves further test of control and substantive procedures and audit finalisation procedures. This stage is sometimes known as the final audit.

Describe and explain the main audit procedures and processes that take place during the interim and final audit of the large entity.

[10]
( Taken from December 04 exam paper )

Note : You should include in your answer about internal control , substantive testing and audit procedures , as the question seems to be asking about it .

Warning : Do not try to copy out the answer or force yourself to present all the information from the book . Just write what you comes to your mind i.e. The mind picture.

[Vivienne]

yes Acid,

Just itching for the first set of questions. your advise is good its always nice to think outside the box.and also the considering of chapters is a welcome move so that we cover the entire syllabus by the time exam time comes.

[Acid]

Answer

Audit is an exercise whereby a practitioner (auditor) , checks the subject matter which is the responsibility of
another party and give an opinion on it .

The purpose of external audit is ensure that the companys financial statments give give a true and fair view of the
companys financial position and are free from many material misstatements ( eg financial statements do not include
any frauds which are concealed by the directors) .

The external auditor who is a qualified person , usually a member of any professional body eg ACCA , ICAEW , ICAP
etc. who evaluates the finanical statements prepared by the company and check if they comply with local and
international legislations and present a true and fair picture. It is not the responsibility of the external
auditor to prepare the financial statements but to check them like a corporate police.

The external auditor should be an independant person to the organization and shouldnt have any interest in the
organization.
The external audit is also a requirement by statue in many countries with exception to many small countries.

As Directors run the company and shareholders own it , Shareholders need an assurance that their investment is in
safe hands and by no chance directors are defrauding him and also taking good stewardship of the owners assets. To
check the performance of directors , Shareholders need to see Financial statements which are prepared by directors.
This is where we face a problem. The directors report their own performance to the shareholders so they will not be
happy to show thier weaknesses to the shareholders eg. They wouldnt want the shareholders to know that on the
meeting to hawaii they had used companies credit card to pay for all the beach trips and shoppings etc.
For this reason , Auditors need an independant person who comes in the form of Auditor to check the accuracy and
truth of the financial satements.

External audit is also in the interest of the general public who invest in companies to know how thier investment
is going on , how much return would the investment provide and that they are not being frauded and delude by the
management.

IAS ( INTERNATIONAL AUDITING STANDARDS ) define the purpose of IAS as : The auditor should obtain sufficient audit
evidence on which to base the audit opinion.
It should be kept in mind that the audit doesnt ensure that the financial statements are completely true and fair
and are free from any kind of fraud and material mistatement , due to inheret limitations of the audit. They give
ONLY REASONABLE ASSURANCE! and not Absolute!


(B) The interim audit ususally involves :
- Risk assessment
- Testing of internal control systems
-Analytical and substantive testing procedures


Risk assessment is concerned with analysing the risk assessment which means getting information via gathering information about the entity , inquiries and determining the method how to deal with risks . At this stage we determine the materiality levels.

Risk assessment also involves checking the effectiveness of internal control systems and also if the internal control policies are effectively implemented and followed through out the organization.

Final audit procedures involves the review of financial statements and to ensure that the information underlying the financial statements is consistent and is according to the auditors knowledge of business.

Substantive procedures which include analytical procedures are designed to ensure that the figures presented in the financial statements are complete,accurate and true in all aspects

Auditors may also take representations from the management and can check various transactions by third parties .

Finally but not the end , Auditor report to the mangament about the effectivness of companies internal control systems and give recommendations .


That's it . If any of you need to know , or dont understand anything from my answer then he can ask me for it.

Keep your answers coming!

Acid

[Vivienne]

the purpose of an audit

the objective of an audit is to report on the truth and fairness of the financial statements of a given organisation.Large entities are required by law to have their financial statements audited at least every year.financial statements have to be audited bbecause they are a basis for making decisionsregarding an entity.every entity has stakeholcers who are interested in its affairs like employees,trade creditors ,the bank and the general public.the external auditors fulfil the needto ensure that those financial statements are objective and free from manipulation.external auditors are required to form an opinion as to the truth and fairness of the financial statements.


the role of external auditors

external auditors play an impotant role.firstly they produce an audit report after they audit the statements and adress it to the shareholders.they also have to report on the truth and fairness of the financial statemnts

b) interim audit

it is important that auditors obtain sufficient information to enable them to identify and understand those issues that may impact on the financial statements.this is accordind to ISA 315.it also helps the auditor in determining risks and materiality.understanding the entity may be done by observing operations at the entity and inspecting documenta and assets.

determining the response to assesed risk

once the risks have been identified ,they are included in the plan and a stratergy is made of hoe to deal with those areas and appropriate time is allocated to them.

tests of control

tests of control seek to provide evidence that internal control activities are being properly applied.the auditor then proceeds to undertake these tests.at the interim stage the internal control systems are recorded,evaluated and tested.

substantive procedures

1) check the additions and crosscast them
2)check the postings in the general ledger and compare them with the control account


final audit

at this stage further tests of control are made.it involves extensive testing of transactions and balances.

substantive procedures

1)analytical procedures

at this stage analytical procedures are done.the auditor will carry out an overral review of the information in the financial statements and compare it with available data.sometime analytical procedures alone can produce the required level of assurance.


the end


may the feedback be sent to me as a private meassage

[Kelly]

Please forgive my vague answer, I have not yet got to full grips with this paper, I only just started to read my text book today.

External Audit

Purpose - To enable the auditor to express an opinion on whether the financial statements of an entity have been prepared in accordance with internal controls, and rules and regulations applicable by the financial reporting framework.
To give a "true and fair view" of the financial of an entity.

The sole objective of an audit is to report to the entity's shareholders and other stakeholders (i.e. banks) as an external audit is independent and impartial. External audits for large companies are required by statute / law regulating the country in which the entity conducts its business.

Interim Audit
Tests internal control and procedures.
control tests - carried out on material items; tracing source documents (invoices) back to purchase orders, back to physical stock. Ensuring all returns are accounted for in the correct period - completes document inspection.

Testing the quality of evidence - inspection of assets for confirmation of existence and valuation.
Any evidence gathered from external sources is more relevant (i.e. bank statements provided by the bank and agreeing back to reconciliation.

Substantive procedures

Recalculation - checking arithmetic, to ensure no errors or fraud has occured.
Re-performance - independently checking procedures and controls.

Any feedback would be kindly accepted.

[desmond kelshall]

Hi, when were we supposed to have responded to this question and what is method?

[Acid]

Hi, when were we supposed to have responded to this question and what is method?

Hi

You can read the study approach above. You can still respond to the answer. We will put up questions daily so that we can answer and then discuss together . You are most welcome to contribute .

Acid

[rajni]

Hi Acid,

your answer has been marked. please follow the link

http://getthroughguides.co.uk/forum/attachment.php?attachmentid=53&stc=1&d=1205393278

[Vivienne]

wow this is lovely . at last we have got to see the answers.this will be a gauge as to whether we are heading in the right direction or not.

meanwhile am just waiting to receive my markings too.

[rajni]

hi vivienne,

your answer will be posted soon

[Acid]

hi vivienne,

your answer will be posted soon


WONDERFUL! This is fantastic ! I got feedback on any of my work after 1.5 YEARS!!

[rajni]

Hi Kelly

Your answer has been marked. please follow the link.

http://www.getthroughguides.co.uk/forum/attachment.php?attachmentid=57&stc=1&d=1205409342

[Acid]

The quality of Kellys scanned images is great and readable !

Okay kelly gets 3 out of 10 !

Cheers

Acid

[Vivienne]

yes guys

first session answers i got 4 out of 10.so kelly my dear lets pull up our socks we are heading in the right direction.well done acid for getting above 7.at least this is a good performance indicator we now know where we stand. thanks to the gtg team for marking our work.we remain awaiting the markings for the other sessions but at least you have started now.remember a journey of a thousand miles starts with a single step.

[Kelly]

Oh my Lord, how embarrassing!! As I mentioned when I wrote this answer I had only just picked up the books..... But you guys are right I must get cracking on.. Thanks for your support. I'll review this answer and repost.

Kelly