JAWABAN UTS AUDITING I

Part I

1. The audit enhances the quality of financial statements because the user has the assurance
that an independent, qualified professional has examined the financial statements and has
rendered an opinion on their fairness. The independence and expertise of the auditor
serve as a quality control function to overcome the potential bias of management in
presenting the financial statements in a manner that most flatters an assessment of their
performance. The audit is designed to add credibility to the financial statements.

An audit does not necessarily guarantee a fair presentation of a company's financial

2. Inherent limitations are such features of audit that constrains the auditor to obtain
absolute assurance. It is because of these inherent limitations of audit the practitioner
cannot assure the users of financial statements that financial statements are absolutely
free of (material) misstatements. As a result of these limitations auditor is expected
provide reasonable assurance which is high level of assurance i.e. reasonably high but not
touching the levels of absoluteness.

3. Planning is an ongoing process during the audit because the plan is modified if necessary
based on the results of the audit procedures. Planning an audit usually precedes the risk
response phase, and the reporting phase is last stage of the audit.

The risk assessment phase includes gaining an understanding of the client, identifying
significant accounts and transactions, setting planning materiality, identifying the factors
that can go wrong in the audit, gaining an understanding of key internal controls and
developing an audit strategy. Risk assessment is in the first phase of audit.
4. When an auditor discovers or suspects noncompliance with a law or regulation (illegal
act), unless the matters involved are inconsequential, the auditor should :

Consider the effects of the illegal act on the financial statements, including the adequacy
of disclosures. If the auditor concludes that disclosures are inadequate, the auditor should
express a qualified or adverse opinion on the financial statements. If the auditor is
precluded by management or those charged with governance from obtaining sufficient
appropriate evidence to evaluate whether noncompliance that may be material to the
financial statements has occurred or is likely to have occurred, the auditor should express
a qualified opinion or disclaim an opinion on the financial statements on the basis of the
scope limitation.

5. Opinion :
 Unqualified Opinion : an unmodified opinion audit report in which the financial
statements are fairly presented, but the auditor believes it is important, or is
required, to provide additional information or the wording of other paragraphs of
the report require revision.
 Qualified Opinion : a report issued when the auditor believes that the overall
financial statements are fairly stated but that either the scope of the audit was
limited or the financial data indicated a failure to follow GAAP.
 Adversed Opinion : a report issued when the auditor believes the financial
statements are so materially misstated or misleading as a whole that they do not
present fairly the entity’s financial position or the results of its operations and
cash flows in conformity with GAAP.
 Disclaimer of Opinion : a report issued when the auditor is not able to become
satisfied that the overall financial statements are fairly presented or the auditor is
not independent.

6. Fair presentation framework is such a framework that requires compliance with the
provisions of framework but in addition that it acknowledges that:
  in achieving fair presentation management might have to make such additional
disclosures that are not specifically required by the framework; and
 in extremely rare circumstances it might be necessary to depart from the
requirements of the framework to achieve fair presentation of the entity’s
financial position and performance in the financial statements

Compliance framework, as the name suggests, requires compliance with the provisions of
the framework i.e. strict obedience of instructions is required and the ones preparing
financial statements have no choice but to follow the requirements of framework.
Compliance framework does not allow any room or flexibility as given under fair
presentation framework.

Part II

1. A – Independent auditor, financial

2. Case A :
 Condition : Scope of the audit has been restricted
 Materiality level : Highly material
 Types of audit : Disclaimer
 Reason : Because the client refuses to allow the auditor to expand the scope of his
audit, a disclaimer of opinion is appropriate rather than a qualified as to scope and
opinion
 Case B :
 Condition : Substantial doubt about going concern
 Materiality level : Material
 Types of audit : Unqualified ─ explanatory paragraph
 Reason : Because the auditor has substantial doubt about the client’s ability to
continue as a going concern, the auditor should include add an explanatory
paragraph to the unqualified opinion

Case C :
 Condition : None
 Materiality level : Not applicable
 Types of audit : Unqualified
 Reason : The company has made a business decision to follow a different
financing method for to have use of delivery trucks, which is adequately
disclosed. There is no change of accounting principle

Case D :
 Condition : Failure to follow GAAP
 Materiality level : Highly material or material. We need additional information
regarding the auditor's preliminary judgment about materiality
 Types of audit : Adverse (if highly material) or Qualified (if material)
 Reason : The materiality of twenty percent of net earnings before taxes would be
sufficient for many auditors to require an adverse opinion. That materiality
question is a matter of auditor judgment

3. Answer :
a. Auditing standards indicate that reasonable assurance is a high level of assurance.
Accordingly, financial statement users should have a high degree of confidence in the
financial statements. However, reasonable assurance is not an absolute level of
 assurance, and there is at least some risk that the audited financial statements may
include material misstatements.
b. The responsibility of the independent auditor is to express an opinion on the financial
statements he or she has audited. In as much as the financial statements are the
representation of management, responsibility rests with management for the proper
recording of transactions in books of account, for the safeguarding of assets, and for
the substantial accuracy and adequacy of the financial statements.
c. Auditors are responsible for obtaining reasonable assurance that material
misstatements included in the financial statements are detected, whether those
misstatements are due to error or fraud. Professional standards acknowledge that it is
often more difficult to detect fraud than errors because management or employees
perpetrating the fraud attempt to conceal the fraud. That difficulty, however, does not
change the auditor’s responsibility to properly plan and perform the audit. Auditors
are required to specifically assess the risk of material misstatement due to fraud and
should consider that assessment in designing the audit procedures to be performed.

4.
5. a. No violation. Although partners in a CPA firm are not allowed to have close relatives
employed in a position of significant influence by a client, it is acceptable to have a close
relative employed in an audit-sensitive position (with no significant influence), as long as
the partner does not participate in the engagement.

b. No violation. John is not a covered member with respect to the audit client as he has no
responsibility for the engagement and is not in a position to influence the engagement.

c. No violation. The AICPA does not prohibit CPA firms from providing bookkeeping,
tax, and audit services to the same non-public client.

d. Violation. When there is a lawsuit or intent to start a lawsuit between a CPA and an
audit client's management related to audit services, independence is impaired.
e. Violation. Independence is impaired if fees remain unpaid for services provided more
than one year prior to the date of report.