Audit Principles and Techniques – Secretarial Audit Compliance Management and Due Diligence Important Questions

Question 1.
What do you mean by ‘materiality’ in auditing? As an auditor of a company, how will you comply with materiality concept in auditing?
Answer:
1. Materiality can be defined as the magnitude of an omission or mis-statement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

2. SA 320 “Materiality in Planning and Performing an Audit”, establishes standards on the concept of materiality and the relationship with audit risk while conducting an audit. Hence, the auditor requires more reliable evidence in support of material items.

3. SA 320 defines material items as relatively important and relevant items, ie., items the knowledge of which would influence the decision of the user of financial statements.

4. The auditor has to ensure that material items are properly and distinctly disclosed in the financial statements.

5. It is very important for the auditor who has constantly to judge whether a particular item is material or not. There is an inverse relationship between materiality and the degree of audit risk. The higher the materiality level, the lower the audit risk and vice versa.

Question 2.
What is materiality concept in auditing? Explain.
Answer:
Material means important and essential. The disclosure of important matters helps the users in taking business decisions.
1. The concept of materiality should be considered by the auditor while determining the nature, timing and extent of audit procedures and evaluating the effect of the misstatements.

2. The Auditor has to report the errors which he judges to be material, the audit work can be planned in the knowledge that it need to detect errors that are material.

3. The concept of materiality is used both at the planning stage of the audit, when deciding what and how much work need to be done and in evaluating the result of the audit, which is generally known as planning materiality and reporting materiality.

4. The concept of the materiality draw the whole process of the audit, the user of the audit report does not require the absolute accuracy to make informed decision, accordingly a matter is considered material if its omission or misstatement would reasonably influence the decision of an intended user of the audit report.

5. In accessing materiality, the prime consideration is the total value of the error. However, the values is not the sole consideration, the nature of the error or the context in which the transaction occurs are sometimes more important and the auditor must always consider these factors, as well as the value, when deciding whether an error is material.

6. Materiality consists of both quantitative and qualitative factors. Materiality is often considered in terms of monetary value but the inherent nature or characteristics of an item or group of items may also render a matter material. Materiality is a matter of professional judgment and depends on the auditor’s interpretation of the users’ needs. A matter can be judged material if knowledge of it is likely to influence the decisions of the intended users.

7. In formulating audit opinion or report, the auditor should inter alia give due regard to the materiality of the matter keeping in view the amount, nature and context. Materiality is determined for:

Planning purposes.
Purposes of evaluating the evidence obtained and the effect of identified instances of misstatement or non-compliance.
Purposes of reporting the results of the audit work.

Question 3.
What are the points for consideration in audit planning in relation to audit engagement?
Answer:
Audit planning requires a high degree of discipline on the part of the auditor. In order to make the planning more meaningful, the auditor should take into consideration the following matters in relation to the audit engagement:

Preliminary Work to be done in addition to the real audit work.
Changes in legislation, accounting or any auditing standards or guide-lines.
Analytical review of available management accounts and other management information that relate to the accounts.
Changes in the business or management.
Changes in the accounting system.
Deadlines established for the submission of audit report.
Use of Rotational Testing and Verification.

Question 4.
What precautions should be taken while adopting test checking?
Answer:
While adopting the test check, the auditor must take the following precautions:

Entries selected for test checking must be representative of all trans-actions.
Selection of the items should be at random.
Client’s staff should not come to know of the entries selected for test checking.
Period selected for test checking should differ from book to book and year to year.
Test checking should not be adopted where the law requires thorough audit.
Entries of the first and last month of the year must be checked thoroughly.
Test should be so devised that a sizeable portion of the work done by each employee is checked.
Control accounts or impersonal ledger should not be subject to test checking.
Bank statement and entries for cash withdrawal and cash deposits should be checked in full.

Question 5.
List out five factors that influence the reliability of audit evidence as per SA 500.
Answer:
As per SA 500 on audit evidence, following are the factors that influence reliability of audit evidence:

Audit evidence obtained from independent source outside the entity is more reliable.
Audit evidence that is generated internally is more reliable when the related internal controls are effective.
Audit evidence obtained directly by auditor is more reliable than evidence obtained indirectly or by inference.
Audit evidence is more reliable when it exits in documentary form.
Audit evidence of original document is more reliable than photo or scanned copies.

Question 6.
Why is there a need of external experts opinion on various technical matters to auditors?
Answer:
1. An auditor may take external expert’s opinion on various technical matters which forms the audit evidence. The auditor has to place reliance on the opinion expressed by the external expert considering his reliability, competency, consistency with data & information and independence.

2. In case of an external expert it shall be ensured that the interests and relationship of the external expert does not constitute a threat to that expert’s objectivity.

3. The auditor shall evaluate adequacy of expert’s work having regard to the following:

Relevance and reasonableness of expert’s findings/conclusions and consistency thereof with other audit evidence.
Relevance and reasonableness of assumptions and methods used in the expert’s work.
Relevance, reasonableness, accuracy and completeness of source data (if any) used in the expert’s work provided, such data are significant for the Expert’s Work.
Agreement with the expert on the nature and extent of further work by the expert in case expert’s work is found to be inadequate for audit purpose.
Performance of additional, appropriate audit procedures in case expert’s work is found to be inadequate for audit purpose.

Question 7.
What is Audit Trail and why there is a need of creation of Audit Trails?
Answer:
1. Audit Trail is a repository of administrative and operational documentation relating to audit process. It is established and maintained to aid in audit planning and to centralize available documentation and information not included in the individual audit files.

2. The auditor should prepare and maintain working papers, the form and content of which should be designed to meet the circumstances of a particular engagement. The information contained in working papers constitutes the principal record of the work that the auditor has done and the conclusions that he has reached concerning significant matters.

3. Working papers serve mainly to –

Provide the principal support for the auditor’s report, including his representation regarding observance of the standards of field work, which is implicit in the reference in his report to generally, accepted auditing standards.
Aid the auditor in the conduct and supervision of the audit.

4. Working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the engagement. Examples of working papers are audit programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents, and schedules or commentaries prepared or obtained by the auditor. Working papers also may be in the form of data stored on tapes, films, or other media.

Working papers ordinarily should include documentation showing that –

The work has been adequately planned and supervised, indicating observance of the first standard of field work.
A sufficient understanding of internal control has been obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.
The audit evidence obtained, the auditing procedures applied, and the testing performed have provided sufficient competent evidential matter to afford a reasonable basis for an opinion, indicating observance of the third standard of field work.

5. Working papers are the property of the auditor. The auditor’s rights of ownership, however, are subject to ethical limitations relating to the confidential relationship with clients. Certain of the auditor’s working papers may sometimes serve as a useful reference source for his client, but the working papers should not be regarded as a part of, or a substitute for, the client’s accounting or other records.

6. The auditor should adopt reasonable procedures for safe custody of his working papers and should retain them for a period sufficient to meet the needs of his practice and to satisfy any pertinent legal requirements of records retention.

7. Audit working papers provide evidence of audit coverage and documentation of audit trails, they should be properly filed and stored. In addition there should be a standardized format for working papers, adequate cross-referencing to identify the audit working papers created as well as a system for filing and retrieving working papers.

Question 8.
Differentiate between Audit Plan and Audit Programme.
Answer:
Difference between Audit plan and Audit Programme :

Audit Plan

Audit Programme

Audit Plan lays down the audit strategies to be followed for conducting an audit such as identifying the areas where special audit consideration and skills maybe necessary, obtain the knowledge of business etc.

Plans should be made to cover the following among other things :
1. Acquiring knowledge of accounting systems, policies and internal control procedures.
2. Establishing the expected degree of reliance to be placed on the internal control.
3. Determining the nature, timing and extent of the audit procedures to be performed.
4. Co-ordinating the work to be done.

Audit Programme is an outline of how the audit is to be done, who is to do what work and within what time

It lays down the following audit procedure to be followed:
1. Evaluation process.
2. Ascertaining accuracy.
3. Verification of Document.
4. Scrutiny of supporting Documents.
5. Checking of overall disclosure and presentation of all items in the audit completion.
6. Preparation and submission of audit report.

Question 9.
Why is there a need of external experts’ opinion on various technical matters to auditors?
Answer:
An auditor may take external expert’s opinion on various technical H matters which forms the audit evidence. The auditor has to place reliance g on the opinion expressed by the external expert considering his reliability, competency, consistency with data & information and independence. § In case of an external expert it shall be ensured that the interests and relationship of the external expert does not constitute a threat to that expert’s objectivity. The auditor shall evaluate adequacy of expert’s work having regard to the following :

Relevance and reasonableness of expert’s findings/conclusions and consistency thereof with other audit evidence.
Relevance and reasonableness of assumptions and methods used in the expert’s work.
Relevance, reasonableness, accuracy and completeness of source data (if any) used in the expert’s work provided such data are significant for the expert’s work.
Agreement with the expert on the nature and extent of further work by the expert in case expert’s work is found to be inadequate for audit purpose.
Performance of additional, appropriate audit procedures in case expert’s work is found to be inadequate for audit purpose.

Question 10.
What is materiality concept in auditing? Explain.
Answer:
1. The concept of the materiality draw the whole process of the audit, the user of the audit report does not require the absolute accuracy to make informed decision, accordingly a matter is considered material if its omission or misstatement would reasonably influence the decision of an intended user of the audit report.

2. The concept of materiality should be considered by the auditor while determining the nature, timing and extent of audit procedures and evaluating the effect of the misstatements. Materiality consists of both quantitative and qualitative factors.

Question 11.
What is Audit Trail and why there is a need of creation of Audit Trails?
Answer:
1. Audit Trail is a repository of administrative and operational docu-mentation relating to audit process. It is established and maintained to aid in audit planning and to centralize available documentation and information not included in the individual audit files.

2. The information contained in working papers constitutes the principal record of the work that the auditor has done and the conclusions that he has reached concerning significant matters.

3. Working papers serve mainly to :
a. Provide the principal support for the auditor’s report, including his representation regarding observance of the standards of field work which is implicit in the reference in his report to generally, accepted auditing standards.

b. Aid the auditor in the conduct and supervision of the audit. Working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the engagement. Examples of working papers are audit programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents, and schedules or commentaries prepared or obtained by the auditor. Working papers also may be in the form of data stored on tapes, films or other media.

Question 12.
Describe the auditing principles which should be observed by any auditor while performing any audit.
Answer:
The auditing principles define governing an audit and include the professional responsibilities which should be observed by the auditor while carrying out any audit assignments. The auditing principles should be observed by any auditor while performing any audit are:
1. Integrity objectivity and independence: An auditor should be honest, sincere, impartial and free from bias. He should be a man of high g integrity and objectivity.

2. Confidentiality: The auditor should respect confidentiality of information acquired during the course of his work and. should not disclose * the information without the prior permission of the client, unless there is a legal duty to disclose.

3. Skill and competence: The auditor must acquire adequate training and experience. He should be competent, skilful and keep himself abreast of the latest developments including various pronouncements.

4. Work performed by others: If the auditor delegates some work to others and uses work performed by others including that of an expert, he continues to be responsible for forming and expressing his opinion on the financial information.

5. Planning: The auditor should plan his work to enable him to conduct the audit in an effective, efficient and timely manner. He should ac-quire knowledge of client’s accounting system, the extent of reliance that could be placed on internal control and coordinate the work to be performed.

6. Documentation: The auditor should document matters which are important in providing evidence to ensure that the audit was carried out in accordance with the basic principles.

7. Audit evidence: The auditor should obtain sufficient appropriate evidences through the performance of compliance and other substantive procedures to enable him to draw reasonable conclusions to form an opinion on the financial information.

8. Accounting System and Internal Control: The management is responsible for maintaining an adequate accounting system incorporating various internal controls appropriate to the size and nature of business. The auditor should assure himself that the company’s internal control system is adequate and all the information which should be recorded has been recorded.

9. Audit conclusions and reporting: On the basis of the audit evidence, the auditor should review and assess the audit conclusions.

Question 13.
Write down the various factors which should be considered by the auditor while forming an audit plan.
Answer:
The Audit planning helps to develop an audit approach which will ensure that sufficient appropriate evidence is gathered to support the audit opinion in the most cost effective manner. Factors which should be considered by the auditor while forming an audit plan:

The Audit should be planned in such manner, which ensures the high quality of audit in economic, efficient, and effective way and in a timely manner.
The Audit plan should be documented and should be kept with the audit working papers.
The Inter related steps and events should be clubbed together.
The elements of an audit plan may be similar for different auditee entities. However, the actual contents may differ from auditee to auditee enterprise, and on nature, type & objective of the audit or authentication assignment.
The audit plan should be reviewed by the experienced auditor, normally not engaged on the assignment. Their experience may be useful to modify the audit plan to meet the audit objectives more vigorously.
The audit plan should be flexible enough to accommodate modifications which may be necessary and should be carried out with the approval of team leader.
Auditing involves the collection and analysis of facts and data sufficient to reach reliable and valid conclusions about the subject of the audit.
The Auditing staff should be made familiar of the quality control policies and procedures of the firm. The hierarchy, responsibility & authority for decision making needs to be clearly defined and understood by the audit staff.
The Audit plan includes the nature, timing and extent of audit procedures to be performed by audit teams. Sometimes audit plan requires modification based on revised consideration of assessed risks.

Question 14.
Describe the component of audit risk with examples.
Or
Auditing risk means that an auditor accepts/presumes some level of uncertainty in performing the audit work, which means that the auditor accepts the risk that the auditor opinion given by the auditor might be wrong. Comment
Answer:
Auditing risk means that an auditor accepts/presumes some level of uncertainty in performing the audit work, which means that the auditor accepts the risk that the audit opinion given by the auditor might be wrong. Only a very small degree of audit risk would be acceptable as otherwise the audit process may lose its purpose.

The audit risk has three components:
1. Inherent Risk: Inherent risk is the susceptibility of a class of trans¬action to misstatement that could be material, individually or when aggregated with misstatements in other transaction, .assuming that there were no related internal controls.

For example: Genuineness of the related party transactions.

2. Control Risk: Control Risk is the risk that a misstatement that could occur in an class of transactions and that could be material individually or when aggregated with misstatement on other transaction, will not be prevented or detected and corrected on a timely basis by the internal control systems.

For example: Delay in the filing of forms.

3. Detection Risk: Detection Risk is the risk that an auditor’s substantive audit procedures will not detect a misstatement that exist in class of transactions that could be material, individually or when aggregated with misstatement on other transaction.

For example: While certification of e-form, the auditor has overlooked the compliance of the Secretarial Standards.

4. The auditor should maintain the high level of the assurance/confidence while expressing the audit opinion, and this is the most important steps in the audit planning to ensure that the audit team will gather competent, relevant and reasonable audit evidence at minimum cost.

Question 15.
Enumerate the process of the audit planning.
Answer:
The process of audit planning should include the following elements:

The purpose and objectives.
Legal framework under which the audit is being conducted.
Significant areas and issues involved.
Process and technique to be adopted.
Check points activities.
Allocation of work contents amongst the staff.
Time schedules for completion of various tasks/phases.
Determining time lines for submission of draft report, discussion thereon with the auditee and submission of final report.
Areas to be classified on “Risk” criteria to allocate suitable resources.
Determining the extent of detailed examination and coverage in terms of volume.
Evaluation of internal controls and professional work carried out by other agencies/experts and placing reliance thereon.
Materiality considerations and determining the threshold therefore.
Structure, contents of the report.

Question 16.
What are the benefits of the Audit Checklists?
Answer:
The benefits of the audit checklists are as under:

Promote planning for the audit.
Ensure a consistent audit approach.
Act as a sampling plan and time manager.
Serve as a memory aid.
Provide a repository for notes collected during the audit process (audit field notes)
Audit checklists provide assistance to the audit process.
Auditors need to be trained in the use of a particular checklist and be shown how to use it to obtain maximum information by using good questioning techniques.
Checklists assist an auditor to perform better during the audit process.
Checklists help to ensure that the audit is conducted in a systematic and comprehensive manner and adequate evidence is obtained.
Checklists provide the structure and continuity to the audit and ensure that the audit scope is being followed.
Checklists provide a means of communication and a place to record data for use for future reference.
A completed checklist provides objective evidence that the audit was performed.
A checklist provides a record.
Checklists can be used as an information base for planning future audits.
Checklists can be provided to the auditee ahead of the onsite audit.

Question 17.
“Before going for the audit planning, it is necessary for an auditor to have thorough understanding of the auditee entity and its operations, which helps in designing an efficient and effective audit approach so that the audit resources are focused on the areas of greatest risk and audit methods which meet audit objectives at minimum cost are adopted in obtaining competent, relevant and reasonable evidence to support the audit judgment and conclusions.” Comment
Or
Write Short Note on Collection of Information of Auditee.
Answer:
Before going for the audit planning, it is necessary for an auditor to have thorough understanding of the auditee entity and its operations, which helps in designing an efficient and effective audit approach so that the audit resources are focused on the areas of greatest risk and audit methods which meet audit objectives at minimum cost are adopted in obtaining competent, relevant and reasonable evidence to support the audit judgment and conclusions. The audit team should:

1. Familiarize itself with:

The operations and organisation of the auditee entity.
The financial statement.
The regulatory framework.
The general legal framework governing the entity operations.

2. Understand the accounting processes and the degree of the technology involvement.

3. Access the overall control environment and in particular the control to prevent irregularity, illegality and fraud.

4 Perform preliminary analytical procedures.

5. Analyze the financial statement into account areas.

Question 18.
“Auditor draws conclusions about the large volume of data (population) by selecting a sample out of such data. The sample size determines the quantum of risk that the auditor is ready to accept.” Inflight of the given statement explain the concept of Audit Sampling.
Or
Write Short Note on “Audit Sampling”.
Answer:
1. Auditor draws conclusions about the large volume of data (population) by selecting a sample out of such data. The sample size determines the quantum of risk that the auditor is ready to accept. There are no set rules for defining the sample size. Sample size depends upon the experience and professional judgment of the auditor and is also based on “Audit risk” factor.

2. The Application of audit procedures to less than 10096 of the population of documents/items relevant for audit such that all sampling units have a chance for selection (for applying audit procedure thereon) so as to provide the auditor a reasonable basis on which conclusion about the entire population can be drawn is known as “Audit Sampling”.

3. The Sample design, size & selection of items for testing should meet the following:

Purpose of the audit procedure and population characteristics shall be considered for designing an audit sample.
Sample size shall be so chosen as to reduce sampling risk to an acceptable low value.
Random sampling, whenever practicable, shall be considered so that each sampling unit shall have reasonable chance of selection.
For sampling, use of stratification and value-weighted selection will increase audit efficiency.

Question 19.
What is “External confirmation”? Enumerate the cases when the auditor shall evaluate whether results of external confirmation provide relevant and reliable audit evidence or whether further audit evidence is necessary.
Answer:
1. “External confirmation” means Audit evidence obtained as a direct written response to the auditor from a third party (confirming party) on paper or electronic media or in any other form.

2. External confirmation enumerates steps as follows:

Determine information to be confirmed/requested.
Select appropriate confirming party.
Design/format confirmation request.
Send the request with follow up.

3. The auditor shall evaluate whether results of external confirmation provide relevant and reliable audit evidence or whether further audit evidence is necessary in following cases:

Where the auditor doubts the reliability of response further audit evidence should be obtained to resolve doubt.
In case of non-response, alternative audit procedure shall be performed to obtain reliable and relevant audit evidence.
Positive confirmation response request should be sought only when alternative audit procedures will not obtain audit evidence required. If the auditor does not receive such confirmation its implication on audit and auditor’s opinion shall be evaluated.
The auditor shall not use response to any negative confirmation request as the sole substantive audit procedure to address assessed risk of a material misstatement.

Audit Principles and Techniques – Secretarial Audit Compliance Management and Due Diligence Important Questions

Audit Principles and Techniques – Secretarial Audit Compliance Management and Due Diligence Important Questions

Secretarial Audit Compliance Management and Due Diligence ICSI Study Material