Module Audit 1 Genap 2021 - 2022

FOREWORD
Financial Audit 1 is a very crucial subject since it is the first step in introducing students
into a deeper and broader level of auditing and other assurance services and at the same
time determines the performance in the next step, Financial Audit 2.
A tool for students to be more competent in comprehending and applying the

knowledge taught in Financial Audit 1 theory classes is Accounting Lab. This course
helps students to become more actively involved by independent problem solving.
This module has been compiled in a way that these purposes might be achieved. It
contains the key elements of each chapter, followed by specific comprehensive
exercises to be solved and discussed each meeting with a lab assistant.
After accomplishing this course, we hope that students are able to determine the nature
and amount of evidence the auditor should gather after considering the unique
circumstance of each engagement.
May God bless all of you and grant you wisdom throughout the journey.
“The fear of the LORD is the beginning of knowledge, but fools despise
wisdom and instruction.” (Proverbs 1:7)
Sincerely,
Assistant Lab. Team
Financial Auditing 1 | 9th Edition | 1

CONTENTS
FOREWORD 1
INTRODUCTION 3
OUTLINE OF THE INSTRUCTION PROGRAM (SAP) 5
MODULE 1 – ETHICS AND THE AUDIT PROFESSION 6
MODULE 2 – AUDIT STANDARDS AND FRAMEWORK 9
MODULE 3 – AUDIT REPORTS 10
MODULE 4 – AUDIT OBJECTIVES AND MANAGEMENT ASSERTIONS 19
MODULE 5 – AUDIT EVIDENCE 25
MODULE 6 – MAIN AUDIT PLAN (ISA 300, 315, 320) 27
MODULE 7 – INTERNAL CONTROL AND CONTROL RISK 31
MODULE 8 – AUDIT TEST AND AUDIT PROGRAM 35

INTRODUCTION
A. Description
Laboratory course is related to the main course (Theory), which cannot be separated. The
purpose of a laboratory course is to help the student understand the concept of the subject
by exercising problems and cases. All laboratory courses are of 0 credit but the duration of
the class is 100 minutes, which equivalent to 2 credits.
B. General Purpose Instruction
After this class and doing all of its materials, students are expected to be able
to do identification/ explaining/ calculating/ analyzing concepts about:
1. Ethics and The Audit Profession
2. The Audit Standards and Framework
3. Audit Reports
4. Audit Objectives and Management Assertions
5. Nature and Type of Audit Evidence
6. Main Audit Plan
7. Considering Internal Control and Control Risk
8. Audit Tests and Audit Program
C. Lecture Activities
The students are directed to involve actively in the class learning process.
1. To facilitate the learning process, the students must read the chapter on the reference
book that related to the class material. Students are also be able to read the brief theory
that provide in each module.
2. The questions that provide in this module are only the materials that partially have been
taught in the theory subject.
3. Students must do the questions on the module individually based on the instruction of
the laboratory assistant, do quizzes that will be held, follow the laboratory mid-exam
and final exam based on the given schedule.
D. Class Rules
1. Attendance
At least attend 5 sessions from 6 sessions or equal to 85% attendance.
2. Lateness
>15 Minutes regarded as absent for every class meeting.
3. Permission Exception
1. Formal permission from university or faculty.
2. Hospitalized (maximum 2 weeks).
3. Sudden pass away of core family member (with supported documents).

E. Grading Composition
The final grade is the sum of the student’s theory and lab score with a composition of 85%
theory class and 15% lab course.
Below are the components of the lab course grading:
Mid-Test : 35% Absence : 10%

Final-Test : 35% KAT : 10%
Quiz : 10%
F. Grading Scale
Score Grade
90 - 100 A
85 – 89.99 A-
80 – 84.99 B+
75 – 79.99 B
70 – 74.99 B-
65 – 69.99 C+
60 – 64.99 C
55 – 59.99 C-
0 – 54.99 F

OUTLINE OF THE INSTRUCTION PROGRAM (SAP)
Week Module Material Type Video Title Reference

1 Introduction Tatap
Muka
2 1 Ethics and Video Code of Ethics: Arens: Chapter 4, 5

the Audit part A Hayes: Chapter 3
Profession
3 2 Audit Video Audit Standards Arens: Chapter 2
Standards Hayes: Chapter 1, 4
and
Framework
4 3 Audit Reports Tatap Arens: Chapter 3
Muka Hayes: Chapter 12
SPAP 2015
5 4 Audit Tatap Arens: Chapter 6
Objectives Muka Hayes: Chapter 1
and
Management
Assertions
6 5 Audit Evidence Video Audit Evidence Arens: Chapter 7
Hayes: Chapter 8, 10
7 5 Audit Evidence Tatap Arens: Chapter 7
and Review Muka Hayes: Chapter 8, 10
MID EXAM
8 6 Main audit plan Video Audit Arens: Chapter 8, 9
(ISA 300, 315, planning Hayes: Chapter 6
320) and
Procedures
9 6 Main audit plan Tatap Arens: Chapter 8, 9
(ISA 300, 315, Muka Hayes: Chapter 6
320)
10 7 Internal Video Internal Control Arens: Chapter 10,
Control and 11, 12
Control Risk Hayes: Chapter 7
11 7 Internal Tatap Arens: Chapter 10,
Control and Muka 11, 12
Control Risk Hayes: Chapter 7
12 8 Audit Tests and Video Audit Test and Arens: Chapter 13
Audit Program Program Hayes: Chapter 9
13 8 Audit Tests and Tatap Arens: Chapter 13
Audit Program Muka Hayes: Chapter 9
14 Review Tatap
Muka
FINAL EXAM

MODULE 1
ETHICS AND THE AUDIT PROFESSION
Problem 1-1
Auditing standards (video)

For each engagement described below, indicate whether the engagement is likely to be conducted under
international auditing standards, U.S. generally accepted auditing standards, or PCAOB auditing
standards.
a. An audit of an Italian private company with public debt in Italy
b. An audit of U.S. public company
c. An audit of a U.S. private company with no public equity or debt

d. An audit of U.S. not-for-profit organization.
e. An audit of a Spanish public company that is listed in the United States and whose financial
statements will be filed with the SEC.
f. An audit of a U.S public company that is a subsidiary of a Hong Kong company that will be used
for reporting by the parent company in Hong Kong.
g. An audit of U.S. private company to be used for loan from a publicly-traded bank.
h. An audit of a U.S. private company that has publicly-traded debt.
Problem 1-2
Code of ethics (video)

For each of the following situations involving relations between auditors and the companies they audit
indicate whether it violates IESBA’s Code of Ethics for Professional Accountants and the rationale for
the applicable guideline (Part A)
1. Krystal, CPA, discloses confidential information in a peer review of the firm’s quality control
procedures.
2. Jessica, CPA, says in an interview in the local paper that Ethan Rine, CPA, misleads his clients
about the quality of his audit work.
3. Ariana, CPA, prepares and submits a tax return to the Internal RevenueService, which he
believes, omits income his client receives from trading goods on eBay.com.
4. Marc Jacob, CPA, performs investment advisory services from an audit client and receives an
annual fee based on a percentage of the value of the client’s investment portfolio at the end of

each year.
5. Robert, CA, is auditing a company in Morocco that has offered to send him and his wife on a
holiday in Maldives for one week.
6. Tara Raichand Company wishes to defer charging certain research and development
expenditures to current income on the basis that the expenditures are virtually certain to benefit
future operations. For this reason, Sydney Tan, CPA and the company’s auditor agrees with the
proposed accounting treatment.
7. Bruno Wisley, CPA, as an auditor, he has sufficient audit evidence or data of Orlando
Corporation. Gambino used the client’s data for completing his thesis without the knowledge of
the company.
8. Senna Twainz, CPA of Carolino Bio Health ignore the fact that the company audited violates
the
applied law of country’s taxation.
9. Austin and Houston, CPAs, have McAlister Global Service as audit client. McAlister ask Austin
and Houston to create and install a new computerized payroll. Because Austin and Houston do
not have the appropriate level of expertise, they referred McAlister to Comp Co., a local software
consulting company. Austin and Houston have an arrangement by which Comp Co. pays her
10% of any fee received from her referrals. Austin and Houston have disclosed this to her client.
10. William Keppler,CPA, is auditing a big plantation company. He does not have enough
knowledge about plantation and has never audit a plantation company before.
Problem 1-3
Auditor behavior (video)

The following independent scenarios describe auditor behavior on an audit engagement:
1. Michael is the lead audit partner on the audit engagement of a publicly traded company. Michael
followed auditing standards on the audit engagement and issued an unmodified opinion. It was
subsequently discovered that the financial statements contained a material misstatement that had
been undetected by the management of the company and by the audit team.
2. On a recent audit engagement, the client firm neglected to inform the audit firm that a significant
percentage of inventory was stored at an outside warehouse. As a result, the auditors did not
observe the physical inventory count for that inventory, which represented 20% of the client’s
inventory balance. The auditors were able to satisfy themselves that the inventory existed

through alternative procedures and issued an unmodified opinion on the financial statements as
a whole.
3. Marc Marquez, CPA, is a sole proprietor. He recently accepted a new audit client who was
applying for a bank loan and needed to present audited financial statements to the bank. Maria
was not able to complete the audit engagement by herself, so she hired several college students
to assist her. The students completed the audit procedures without much guidance, and Maria
issued an unmodified opinion on the client’s financial statements.
4. Jennie is the lead engagement partner on a publicly traded company. The company’s CEO
recently approached Jennie and informed her that they had identified a material misstatement in
the prior year’s financial statements, which had been audited by Jennie’s firm and submitted to
the SEC. The CEO suggested they correct the misstatement by recording a journal entry in the
current year for half of the amount of the misstatement, and in the following year for the
remaining half. Jennie agreed to this plan to avoid a public announcement of a restatement and
a potential lawsuit, since the amount of the journal entries recorded in the current and subsequent
years would be considered immaterial to the financial statements
5. The audit engagement partner, Marc Johnson, recently received a subpoena for work-papers
related to an audit engagement on which his audit firm has been named as a defendant. Marc
asked the staff auditor to remove and discard two memos from the work-paper files documenting
communication between the engagement partner and the CFO regarding the goodwill
impairment analysis.
Required:
For each of the scenarios listed above, discuss whether the auditor’s behavior would be considered non-
negligence, ordinary negligence, gross negligence, constructive fraud, fraud, or criminal behavior.

MODULE 2
AUDIT STANDARDS AND FRAMEWORK
Problem 2-1
Audit standards (video)
1. Name IAASB 2 engagement frameworks and practice standards that apply to the audit services
frameworks.
2. What are non-assurance services? List the major categories.
3. Garia Manos, an ex-Deloitte partner in Chicago, has been charged in a federal complaint with one
count of conspiracy to commit securities fraud through insider trading. The complaint alleges that
Garia Provide confidential information about Deloitte clients to Bota Hill, a close friend, over a
period of several years and that Lane used this information to make highly profitable securities
trades that generated more than $1 million in illegal proceeds.In some cases, Gariacalled Botatwo
to three days before press releases of Deloitte clients were issued and read him the details that would
soon be made public. He also tipped him off to mergers and even strategized with Botaon how to
conceal his trading so that the two would not be caught.From late 2015 and continuing until March
2017, Garia secretly passed ‘highly sensitive and confidential information’ to Both Regarding
forthcoming earnings announcements by certain Deloitte clients, including Herbalife, Skechers, and
Deckers Outdoor Corp., before that financial information was disclosed to the public. In exchange,
Botagave Gariatens of thousands of dollars in cash, typically instructing Gariato meet him on a side
street near Bota’sbusiness in order to give him bags containing $100 bills wrapped in $10,000
bundles. Deloitte said it plans to reassess its internal safeguards.
Required:
a. If Deloitte contracted another Big Four firm to reassess its internal safeguards, what type of auditor
service would this be? What IAASB framework would the outside auditors use?
b. If the audit services to reassess internal safeguards by another Big Four firm is an assurance service:
(1) Who would be the practitioner, responsible party and intended user?
(2) What would be the subject matter and subject matter information?
(3) What criteria should be used?

(4) What would constitute sufficient appropriate evidence?

c. What quality control procedure could Deloitte put in place to assure that the risk of insider
information coming from partners would be reduced to a reasonable low level?

MODULE 3
AUDIT REPORTS
Problem 3-1
Audit report
A. Unqualified opinion
Contoh report real PT INDOFOOD SUKSES MAKMUR TBK

B. Unqualified opinion with emphasis of matter
Contoh report real PT GARUDA INDONESIA (PERSERO) TBK

C. Qualified Opinion
Contoh report real. PT ZEBRA NUSANTARA TBK

D. Disclaimer
Contoh report real. PT TIGA PILAR SEJAHTERA FOOD TBK

Siapakah yang memberi penugasan? (atas nama Pemegang Saham, dsb)

E. Adverse
Contoh report real. PT HOTEL MANDARINE REGENCY TBK DAN ENTITA

Problem 3-1
Audit report
Seluruh problem mengacu pada contoh “real problem” diatas:
a. Unqualified opinion:
i. Siapa yang menandatangani opini diatas?
ii. Standar apa yang digunakan untuk meng-audit opini di atas?
iii. Prinsip akuntansi apa yang digunakan (PSAK untuk LK di Indonesia) pada opini diatas?
iv. Apa opini yang dinyatakan?
v. Dinyatakan “Unqualified” atau “Wajar” berdasarkan dari?
vi. Apakah pernyataan “Unqualified” menyatakan kebenaran laporan keuangan yang di audit
100% benar?
b. Unqualified opinion with emphasis of matter:

iii. Prinsip akuntansi apa yang digunakan (PSAK untuk LK di Indonesia) pada opini diatas?
iv. Apa opini yang dinyatakan?
v. Pada paragraph mana dinyatakan “Unqualified with emphasis of matter”
vi. Mengapa dinyatakan “Unqualified with emphasis of matter” dan bukan “Qualified” saja?
Buktikan dengan perbandingan.
c. Qualified Opinion:
iii. Prinsip apa akuntansi yang digunakan (PSAK untuk LK di Indonesia) pada opini diatas?
iv. Apa opini yang dinyatakan? Alasannya?
v. Pada paragraph mana dinyatakan “Qualified”?
vi. Jika pada laporan audit dinyatakan opini “Qualified”, hal apa saja yang mempersulit
perusahaan di masa yang akan datang?

d. Disclaimer Opinion:
v. Pada paragraph mana dinyatakan “Disclaimer”?
vi. Jika pada laporan audit dinyatakan opini “Disclaimer”, hal apa saja yang mempersulit
perusahaan di masa yang akan datang?
e. Adverse Opinion:
v. Pada paragraph mana dinyatakan “Adverse”?
vi. Jika pada laporan audit dinyatakan opini “Adverse”, akankah perusahaan dihapus atau
delisting dari pasar modal?

MODULE 4
AUDIT OBJECTIVES AND MANAGEMENT
Table 1- Example of audit cycle
Cycle Journals Included in General Ledger Accounts Included in the Cycle

the Cycle Balance Sheet Income Statement
Sales and collection - Sales Journal - Cash in bank - Sales
- Cash - Trade accounts receivable - Sales return and
Receipts - Other accounts receivable allowances
Journal - Allowance for - Bad debt expense
- General Journal uncollectible accounts
Acquisitio - Acquisition Journal - Cash in Bank - Advertising

n and - Cash disbursement - Inventories - Travel and
payment Journal - Prepaid expenses entertainment
- General Journal - Land - Sales meeting and
- Buildings training
- Computer and other - Sales and promotional
Equipment expenses
- Furniture and fixtures - Miscellaneous Sales
expenses
- Accumulated
depreciation - Stationary And
supplies
- Trade accounts payable
- Postage
- Other accrued payables
- Telecommunication
- Accrued income tax
- Deferred tax - Computer
maintenance and
supplies
- Depreciation
- Rent
- Legal fees and
retainers
-Auditing and related
services
- Insurance
- Office repairs and
maintenance expense
- Miscellaneous Office
expense
- Miscellaneous general
expense
- Gain on sale of assets
Income taxes
Payroll and Personnel - Payroll Journal - Cash in bank - Salaries and

- General Journal - Accrued payroll commissions
- Accrued payroll taxes - Sales payroll taxes
- Executive and office
salaries
- Administrative payroll
taxes
Inventory and - Acquisition journal - Inventories - Cost of goods sold

warehousing - Sales journal
- General journal
Capital Acquisition and - Acquisition journal - Cash in bank - Interest expense
repayment - Cash disbursement - Notes payable
journal - Long-term notes
- General journal payable
- Accrued interest
- Capital stock
- Capital in excess of par
value
- Retained earnings
- Dividends
- Dividends payable
Management Assertions
Management makes assertions that can be grouped into three groups:
1. Assertions about classes of transactions and events for the period under audit
2. Assertions about account balances at the period end
3. Assertions about presentation and disclosure

Transaction-related audit objectives are closely related to management’s assertions about
classes of transaction. There are 6 transaction-related audit objectives
o Occurrence – Recorded Transaction Exist This objective deals with whether recorded
transactions have actually occurred.
o Completeness – Existing Transaction Are Recorded This objective deals with whether
all transactions that should be included in the journals have actually been included.
o Accuracy – Recorded Transactions Are Stated at the Correct Amounts This objective
addresses the accuracy of information for accounting transactions and is one part of the
accuracy assertion for classes of transactions.
o Posting and Summarization – Recorded Transactions Are Properly Included in the
Master Files and Are Correctly Summarized This objective deals with the accuracy of
the transfer of information from recorded transactions in journals to subsidiary records and
the general ledger.
o Classification – Transactions Included in the Client’s Journals Are Properly Classified
This objective addresses whether transactions are included in the appropriate accounts.
o Timing – Transactions Are Recorded on the Correct Dates The timing objective for
transactions is the auditor’s counterpart to management’s cutoff assertion.

Balance-Related Audit Objectives are similar to the transaction-related audit objectives. They
also follow from management assertions and they provide a framework to help the auditor to
accumulate sufficient appropriate evidence related to account balances. There are 8 balance-
related audit objectives:
o Existence – Amounts Included Exist This objective deals with whether the amounts
included in the financial statements should actually be included.
o Completeness – Existing Amounts are Included This objective deals with whether all
amounts that should be included have actually been included.
o Accuracy – Amounts Included Are Stated at the Correct Amounts The accuracy
objective refers to amounts being included at the correct amount.
o Classification – Amounts Included in the Client’s Listing are Properly Classified
Classification involves determining whether items included on a client’s listing are included
in the correct general ledger accounts.
o Cutoff – Transactions Near the Balance Sheet Date Are Recorded in the Proper Period
In testing for cutoff of account balances, the auditor’s objective is to determine whether
transactions are recorded and included in account balances in the proper period.
o Detail Tie-In – Details in the Account Balance Agree with Related Master File
Amounts, Foot to the Total in the Account Balance, and Agree with the Total in the
General Ledger Account balances on financial statements are supported by details in
master files and schedules prepared by clients.
o Realizable Value – Assets Are Included at the Amounts Estimated to be Realized This
objective concerns whether an account balance has been reduced for declines from historical
cost to net realizable value or when accounting standards require fair market value
accounting treatment.
o Rights and Obligation In addition to existing, most assets must be owned before it is
accepted to include them in the financial statements. Similarly, liabilities must belong to the
entities

Problem 4-1
Audit objectives
The following are various management assertions (a. through m.) related to sales and accounts
receivable
Management assertion
a. Recorded sales transactions have occurred.
b. There are no liens or other restrictions on accounts receivable.
c. All sales transactions have been recorded.
d. Receivables are appropriately classified as to trade and other receivables in the financial
statements and are clearly described.
e. Sales transactions have been recorded in the proper period.
f. Accounts receivable are recorded at the correct amounts.
g. Sales transactions have been recorded in the appropriate accounts.
h. All required disclosures about sales and receivables have been made.
i. All accounts receivables are at the correct amounts.
j. Disclosures related to receivables are at the correct amounts.
k. Sales transactions have been recorded at the correct amounts.
l. Recorded accounts receivables exist.
m. Disclosures related to sales and receivables relate to the entity.
Required:
a. Explain the differences among management assertions about classes of transactions and events,
management assertions about account balances, and management assertions about presentation
and disclosure.
b. For each assertion, indicate whether it is an assertion about classes of transactions and events
an assertion about account balances, or an assertion about presentation and disclosure.
c. Indicate the name of the assertion made by the management.

Problem 4-2
Audit procedures
Following are seven audit activities.

a. Examine invoices supporting recorded fixed asset additions.
b. Review industry databases to assess the risk of material misstatement in the financial
statements.
c. Summarize misstatements identified during testing to assess whether the overall financial
statements are fairly stated.
d. Test computerized controls over credit approval for sales transactions.
e. Send letters to customers confirming outstanding accounts receivables balances.
f. Perform analytical procedures comparing the client with similar companies in the industry to
gain an understanding of the client’s business and strategies.
g. Compare information on purchases invoices recorded in the acquisition journal with
information on receiving reports.
Required:
For each activity listed above, indicate in which phase of the audit the procedure was likely
performed.
1. Plan and design an audit approach based on risk assessment procedures (Phase I)
2. Perform test of controls and substantive tests of transactions (Phase II)
3. Perform analytical procedures and test of details of balances (Phase III)
4. Complete the audit and issue an audit report (Phase IV)
Problem 4-3
Reasonable assurance
Auditors provide “reasonable assurance” that the financial statements are “fairly stated, in all
material respects.” Questions are often raised as to the responsibility of the auditor to detect
material misstatements, including misappropriation of assets and fraudulent financial reporting.
Required:
1. Discuss the concept of “reasonable assurance” and the degree of confidence that financial
statement users should have in the financial statements.
2. What are the responsibilities of the independent auditor in the audit of financial statements?

Discuss fully, but this part does not include fraud in the discussion.
3. What are the responsibilities of the independent auditor for the detection of fraud involving
misappropriation of assets and fraudulent financial reporting? Discuss fully, including your
assessment of whether the auditor’s responsibility for the detection of fraud is appropriate.

MODULE 5
AUDIT EVIDENCE
Problem 5-1
Analytical procedures (video)
Analytical procedures consist of evaluations of financial information made by a study of plausible
relationships among both financial and nonfinancial data. They range from simple comparisons to
the use of complex models involving many relationships and elements of data. They involve
comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations
developed by the auditors.
Required:
Describe the broad purposes of analytical procedures.
When are analytical procedures required during an audit? Explain why auditors use analytical
procedures extensively in all parts of the audit.
Describe the factors that inﬂuence the extent to which an auditor will use the results of
analytical procedures to reduce detailed tests in meeting audit objectives.
Problem 5-2
Audit confirmation (video)
What characteristics should an audit confirmation possess if an auditor is to consider it as sufficient
appropriate audit evidence? And discuss the differences between positive and negative confirmation.
Problem 5-3
Audit evidence (video)
The following are 20 examples of audit procedures:
1. Watch client employees count inventory to determine whether company procedures are being
followed.
2. Count inventory items and record the amount in the audit files.
3. Trace postings from the sales journal to the general ledger accounts.
4. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross
margin relative to the preceding year.
5. Vouch sales invoice to customer orders and shipping documents.

6. Re-compute the unit sales price times the number of units for a sample of duplicate sales
invoices and compare the totals with the calculations.
7. Obtain information about the client's internal controls by asking questions of client personnel.
8. Trace column totals from the cash disbursements journal to the general ledger.
9. Confirm customer balances.
10. Examine a piece of equipment to make sure a recent purchase of equipment was actually
received and is in operation.
11. Review the total of repairs and maintenance for each month to determine whether any month's
total was unusually large.
12. Compare vendor names and amounts on purchase invoices with entries in the purchases
journal.
13. Foot entries in the sales journal to determine whether they were correctly totaled by the client.
14. Make a surprise count of petty cash to verify that the amount of the petty cash fund is intact.
15. Obtain a written statement from the client's bank stating the client's year-end balance on
deposit.
16. Read the minutes of the board of directors meetings and inquire of management to determine
whether any receivables are pledged or factored.
17. Observe the client while he is counting cash on hand.
18. Recalculate the invoice amount and compare the dollar amounts per the invoice to the amount
recorded in the acquisitions journal.
19. Question operating personnel about the possibility of obsolete slow-moving inventory.
20. Send letters directly to third parties who hold the client’s inventory and respond they
directly respond to us.
Required:
Classify each of the preceding items according to the eight types of audit evidence: (1) inquiry, (2)
observation, (3) inspection, (4) recalculation, (5) re-performance, (6) confirmation, (7) analytical
procedures.

Problem 5-4
Pembahasan di Kelas
Required:
Jelaskan perubahan apa yang terjadi jika melihat dari rasio table diatas?
Problem 5-5
Persuasiveness of evidence
1. Explain what is the meaning of sufficiency of evidence?
2. Explain what is the meaning of appropriateness? Give an example.

MODULE 6
MAIN AUDIT CONCEPTS AND PLANNING THE AUDIT (ISA 300, 315, 320)
Problem 6-1
Materiality (video)
a. How is materiality defined in the ISAs (specifically ISA 320)?
b. What four factors are generally considered in determining materiality? Briefly discuss them.
c. What guidelines or ‘rules of thumb’ related to a financial statement base such as net
income, total revenues, etc. are commonly used in practice?
Problem 6-2
Materiality (video)
Via internet, you have obtained the financial statements of an international manufacturer of portable
telephones. The financial statements can be summarizes as follows (in millions of US-dollar):
Profit before taxes and minority interests: $ 4,933

Current assets: $ 23,174
Current liabilities: $ 19,657
Total assets: $ 54,602
Total Sales: $ 36,810
Required:
a. Use professional judgement in deciding on the initial judgement about materiality for the basis
of net income, current assets, current liabilities and total assets. State materiality in both
percentages of the basis and monetary amounts.
b. The company is listed on the Euronext Amsterdam Stock Exchange. During last year’ annual
shareholders meeting there was a lot of resistance against the bonuses that were paid out to the
executive directors. As a result, a new remuneration package was agreed for the CEO and CFO,
including a limitation of the bonuses. The bonus for the CEO and CFO were limited to a
maximum of $ 500K. Using the materiality you have determined in sub question A, do you
believe you can use this materiality to audit and evaluate any misstatements in the bonuses paid
out to the CEO and CFO. For example, if both the CEO and CFO were paid a bonus of $ 515K
and only $ 500K is reported, do you believe this misstatement is material?
c. After completing the audit you determine the actual estimate of misstatements in earnings

exceeds your preliminary judgement. What should you do?

Problem 6-3
Materiality
Dag Nilsson, Auktoriserad Revisor (AR), considers the audit risk at the financial statement
level in the planning of the audit of the financial statements of Lycksele Lappmark Bank (LLB) in
Storuman, Sweden, for the year ended December 31, 20X5. Audit risk at the financial statement
level is influenced by the risk of material misstatements, which may be indicated by a combination
of factors related to management, the industry and the entity. In assessing such factors, Nilsson has
gathered the following information concerning LLB’s environment.
LLB is a nationally insured bank and has been consistently more profitable than the industry
average by making mortgages on properties in a prosperous rural area, which has experienced
considerable growth in recent years. LLB packages its mortgages and sells them to large mortgage
investment trusts. Despite recent volatility of interest rates, LLB has been able to continue selling
its mortgages as a source of new lendable funds.
LLB’s board of directors is controlled by Kjell Stensaker, the majority stockholder, who is
also the chief executive officer (CEO). Management at the bank’s branch offices has authority for
directing and controlling LLB’s operations and is compensated based on branch profitability. The
internal auditor reports directly to Hakon Helvik, a minority stockholder, who is chairman of the
board’s audit committee.
The accounting department has experienced little turnover in personnel during the five years
Nilsson has audited LLB. LLB’s formula consistently underestimates the allowance for loan losses,
but its controller has always been receptive to Nilsson’s suggestions to increase the allowance
during each engagement.
During 20X5, LLB opened a branch office in Ostersund, 300 km from its principal place of
business. Although this branch is not yet profitable due to competition from several well established
regional banks, management believes that the branch will be profitable by 20X7.
Also during 20X5 LLB increased the efficiency of its accounting operations by installing a
new computer system.
Required:
Based only on the information above, describe the factors that most likely would have an effect on
the risk of material misstatement. Indicate whether each factor increases or decreases the risk. Use
the format illustrated below:

Environmental Factor Effect on Risk of Material
Misstatement

Problem 6-4
Multiple choice questions
1. Which of the following is not one of the three main reasons why the auditor should properly
plan engagements?
a. To enable proper on-the-job training of employees.

b. To enable the auditor to obtain sufficient appropriate evidence.
c. To avoid misunderstandings with the client.
d. To help keep audit costs reasonable.
2. A measure of how willing the auditor is to accept that the financial statements may be materially
misstated after the audit is completed and an unqualified opinion has been issued is the:
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.
3. A measure of the auditor’s assessment of the likelihood that there are material
misstatements in an account before considering the effectiveness of the client’s internal
control is called:
a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.
4. Most auditors assess inherent risk as high for related parties and related-party transactions
because:
a. of the unique classification of related-party transactions required on the balance sheet.

b. of the lack of independence between the parties.
c. of the unique classification of related-party transactions required on the income statement.
d. it is required by generally accepted accounting principles.

5. Which of the following is not correct regarding the communications between successor and
predecessor auditors?
a. The burden of initiating the communication rests with the predecessor auditor.
b. The burden of initiating the communication rests with the successor auditor.
c. The predecessor auditor must receive their former client’s permission prior to divulging
information to the successor auditor.

d. The predecessor auditor may choose to provide a limited response to a successor auditor.
6. Which of the following is not a potential effect of an auditor’s decision that a lower
acceptable audit risk is appropriate?

a. More evidence is accumulated.
b. Less evidence is accumulated.
c. Special care is required in assigning experienced staff.
d. Review of audit documentation is performed by personnel not assigned to the engagement.
7. It is easier and more common to implement increased evidence accumulation for inherent
risk than for acceptable audit risk because:
a. inherent risk can usually be isolated to specific accounts.
b. inherent risk applies to the entire audit.
c. acceptable audit risk and sample sizes are set statistically.
d. acceptable audit risk does not impact on the amount of evidence which must be
accumulated.
8. Which of the following statements is true regarding communications between predecessor
and successor auditors?

a. The burden of initiating the communication rests with the predecessor.
b. The predecessor’s response can be limited to stating that no information will be provided.
c. The predecessor should communicate with the successor only if the client is public.
d. There must be communication between the predecessor and successor if the successor is to
accept the engagement.

9. One means of informing the client that the auditor is not responsible for the discovery of all
acts of fraud is the:
a. engagement letter.
b. representation letter.
c. responsibility letter.
d. client letter.
10. Initial audit planning involves four matters. Which of the following is not one of these?
a. Develop an overall audit strategy.

b. Request that bank balances be confirmed.
c. Schedule engagement staff and audit specialists.
d. Identify the client’s reason for the audit.

MODULE 7
INTERNAL CONTROL AND CONTROL RISK
Problem 7-1
Internal control (video)
Following are descriptions of ten internal controls.
a) Company separates cashier with data entry for cash receipt and sales.
b) Senior management obtains data about external events that might affect the entity and evaluates
the impact of that information on its existing accounting processes.
c) For effectiveness of internal control, management active deal with periodic assessment the
quality of internal audit which internal audit with performed by independent staff both the
operating and accounting department.
d) The board of the company creates an audit committee that is in charge with oversight
responsibility for financial reporting.
e) Before a cash disbursement can be processed, all payee information must be verified by
matching the payee to the company’s approved vendor listing.
f) The system automatically reconciles the detailed accounts receivable subsidiary ledger to the
accounts receivable general ledger account on daily basis.
g) The audit committee’s independence from management and of financial reporting issue to
determinants of its ability to effectively evaluate internal control and financial prepared by
management.
h) The company has an organizational chart that establishes the formal lines of reporting and
authorization protocols.
i) The sales accounting system should be designed to ensure that all shipment of goods are correctly
recorded as sales and are reflected in the financial statement in proper period
j) The compensation committee reviews compensation plans for senior executives to determine if
those plans create unintended pressures that might lead to distorted financial statements.
Required:
Indicate which of the five COSO internal control components is best represented by each internal
control:
a. Control environment
b. Risk assessment
c. Control activities

d. Information and communication
e. Monitoring
Problem 7-2
Internal control (video)
Internal control is geared to the achievement of objectives in one or more separate overlapping
categories.
Required:
A. Define these four categories of objectives.
B. For each objective give an example of internal control goals for three industries: retail,
manufacturing and services.
Problem 7-3
Risk associated
Worked, Ltd, is a Japanese electronics games and amusements company specializing in
pachinko games. Pachinko parlours are a big industry in Japan, whose 18,000 pachinko parlours in
1996 accounted for a quarter of the country’s civil sector and are thought to produce Japanese Yen
30 trillion per year in revenue – more than Japan’s auto industry. Customers who play pachinko buy
a supply of pinballs costing around 4 Yen and cash in the balls they win back for prizes equivalent to
2.5 Yen each. Although it is illegal to give cash to winners, the customers may go to nearby shops
and sell their prizes for cash. Recently a new form of pachinko has been developed that gives very
large prizes to winners, but decreases the chances of winning. Although the number of players has
decreased over the last four years, the gross sales have doubled. Location of the stores is not crucial,
so Worked, Ltd. can locate in low-rent areas.
Government authorities have recently given much attention to pachinko gaming. Operations
featuring the game have been associated with the yakuza, the Japanese criminal organisation. Some
people in Japan are concerned that pachinko is really addictive gambling. There are complaints to
authorities over children being left to play on busy streets or locked up in parked automobiles while
their parents go to play pachinko.
Required:
Following the five-step procedure outlined in the chapter, identify the risks associated with
Worked’s business.

Problem 7-4
Internal control
An example of a lack of internal controls with a disastrous result was the bond trading loss in
the New York Office of Empire Bank in 1995. Over 11 years 30,000 unauthorized trades were made
resulting in a $1.1 billion loss (an average of $400,000 in losses for every trading day). Empire
allowed Toshihide Iguchi, a bond trader, to authorize sales, have custody of the bond assets and record
these transactions.
As a novice trader Iguchi misjudged the bond market, racking up a $200,000 loss. To raise cash
to pay Empire’s brokers, Iguchi would order Bankers Trust New York to sell bonds held in Empire’s
account. The statements from Banker’s Trust came to Iguchi who forged duplicates, complete with
bond numbers and maturity dates, to make it look as if Banker’s Trust still held the bonds he had
sold. When he confessed to his misdeeds, Empire thought their bond account was $4.6 billion when
in fact only $3.5 billion was left.
Inadequate review of internal controls was also to blame. Empire’s internal auditors had
reviewed the New York branch several times since the fraud began, but Banker’s Trust was never
contacted for confirmation of Empire’s bank statements. If they had, Iguchi’s fraud would have been
exposed. Empire’s external auditor never audited the New York branch
Required:
A. What type of control procedures were ignored at Empire?
B. For each internal control procedure missing, what damage was caused?
C. What kind of controls could have been instituted what would have prevented the problems at
Empire?
D. For each of the five internal control procedures discussed above, applying each to a bank trading
operation, identify a specific error that is likely to be prevented if the procedure exists and is
effective!

Problem 7-5
Multiple choice questions (homework)
1. Which of the following is responsible for establishing a private company’s internal

control?
a. Management.
b. Auditors.
c. Management and auditors.
d. Committee of Sponsoring Organizations.
2. Which of the following is not one of the three primary objectives of effective
internal control?
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk.
3. Internal controls can never be considered as absolutely effective because:

a. their effectiveness is limited by the competency and dependability of employees.
b. not all organizations have internal audit departments.
c. controls are designed to prevent and detect only material misstatements.
d. internal controls prevent separation of duties.
4. Even with the most effectively designed internal control, the auditor must obtain audit
evidence, beyond testing the controls, for every:
a. transaction.
b. financial statement account.
c. material financial statement account.
d. financial statement account that will be relied upon by third parties.

5. The essence of an effectively controlled organization lies in the:
a. effectiveness of its independent auditor.
b. effectiveness of its internal auditor.
c. attitude of its employees.
d. attitude of its management
6. Which of the following is not one of the levels of an absence of internal controls?
a. Major deficiency.
b. Material weakness.
c. Significant deficiency.
d. Control deficiency.
7. Which of the following is the correct definition of “control deficiency?”
a. A control deficiency exists if the design or operation of controls does not permit company
personnel to prevent or detect misstatements on a timely basis.
b. A control deficiency exists if one or more deficiencies exist that adversely affect a company’s
ability to prepare external financial statements reliably.
c. A control deficiency exists if the design or operation of controls results in a more than
remote likelihood that controls will not prevent or detect misstatements.

d. A control deficiency exists if the design or operation of controls results in a more than
probable likelihood that controls will prevent or detect misstatements.
8. A(n) deficiency exists if a necessary control is missing or not properly formulated.

a. control
b. significant
c. design
d. operating
9. Two key concepts that underlie management’s design and implementation of internal control
are:
a. cost and materiality
b. absolute assurance and costs
c. inherent limitations and reasonable assurance

d. collusion and materiality
10. A major control available in a small company, which might not be feasible in a big company,
is:
a. a wider segregation of duties.
b. a voucher system.
c. fewer transactions to process.
d. the owner-manager’s personal interest and close relationship with personnel.

MODULE 8
AUDIT PROGRAM AND AUDIT TESTS
Problem 8-1
Audit program and test (video)
1. What might overall responses to address the assessed risks of material misstatement at the financial
statement level include?
2. What factors influence the auditor’s judgement as to what constitutes sufficient appropriate audit
evidence?
3. Explain what types of control tests an auditor should do in each of the following circumstances and
why:
1. The control failures and the absence of effective alternative control cause the auditor to
identify a specific risk.
2. The auditor tests controls that contribute to the reliability of accounting systems and
concludes they are effective.
3. The auditor concludes that there are no effective alternative controls that address the
transactions and potential errors to which failed controls relate.
4. There are control failures, but in identifying and testing alternative controls the auditor
finds them to be effective and therefore concludes that the accounting systems are reliable.
Problem 8-2
Audit test
Substantive tests include (1) tests of detail of transactions, (2) tests of detail balances; and (3)
analytical procedures. Listed below are several specific audit procedures. Identify the type of
substantive test – 1, 2, or 3.
a. Compare recorded travel expense with the budget.
b. Vouch entries in the cheque register to paid cheques.
c. Re-compute accrued interest payable.
d. Calculate inventory turnover ratios by product and compare with prior periods.
e. Reconcile the year-end back account.
f. Discuss uncollectible accounts with the credit manager.
g. Count office supplies on hand at year-end.

h. Vouch entries in the sales journal to sales invoices.
i. Comparison of recorded amount of major disbursements with appropriate invoices.
j. Comparison of recorded amount of major disbursements with budgeted amounts.
k. Comparison of returned confirmation forms with individual accounts.
l. Confirm accounts receivable balance directly with debtors.
m. Multiply the inventory turnover rate by average inventory and compare the result with the cost goods
sold.

Problem 8-3
Multiple choice questions
1. A listing of all the things which the auditor will do to gather sufficient, competent
evidence is the:
a. audit strategy.
b. audit program.
c. audit procedure.
d. audit risk model.
2. Collectively, procedures performed to obtain an understanding of the entity and its

environment, including internal controls, represent the auditor’s:
a. audit strategy.
b. tests of controls.
c. risk assessment procedures.
d. tests of transactions.
3. In which stage(s) of an audit are analytical procedures not performed?

a. In the planning stage.
b. In the test of controls stage.
c. In the completion stage.
d. In conjunction with tests of transactions and tests of details of balances.
4. Which of the following is not useful for obtaining an understanding of internal controls?
a. Make inquiries of the client’s personnel.
b. Examine documents and records.
c. Read industry trade magazines.
d. Observe client activities and operations.
5. A system walkthrough is used to:

a. test balances.
b. test details of transactions.

c. gain an understanding of internal controls.
d. determine acceptance of the client.
6. A procedure designed to test for monetary misstatements directly affecting the correctness
of financial statement balances is a:
a. test of controls.
b. substantive test.
c. test of attributes.
d. monetary-unit sampling test.
7. The primary emphasis in most tests of details of balances is on the:

a. balance sheet accounts.
b. revenue accounts.
c. cash flow statement accounts.
d. expense accounts.
8. Tests of transactions are used to determine whether have been satisfied.

a. compliance test requirements.
b. balance coverage requirements.
c. transaction-related audit objectives.
d. existence assertions.
9. Which of the following statements is not true?

a. Analytical procedures emphasize the overall reasonableness of transactions and
balances.
b. Tests of controls are concerned with evaluating whether controls are sufficiently
effective to justify reducing control risk and thereby reducing analytical review
procedures.
c. Substantive tests of transactions emphasize the verification of transactions recorded in
the journals and then posted in the general ledger.
d. Tests of details of balances emphasize the ending balances in the general ledger.

10. Which of the following audit tests is usually the least costly to perform?
a. Analytical procedures.
b. Tests of controls.
c. Tests of balances.
d. Substantive tests of transactions.

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FOREWORD

A tool for students to be more competent in comprehending and applying the

Financial Auditing 1 | 9th Edition | 1

Financial Auditing 1 | 9th Edition | 2

B. General Purpose Instruction

Financial Auditing 1 | 9th Edition | 3

Mid-Test : 35% Absence : 10%

Financial Auditing 1 | 9th Edition | 4

Week Module Material Type Video Title Reference

2 1 Ethics and Video Code of Ethics: Arens: Chapter 4, 5

Financial Auditing 1 | 9th Edition | 5

Auditing standards (video)

b. An audit of U.S. public company

c. An audit of a U.S. private company with no public equity or debt

h. An audit of a U.S. private company that has publicly-traded debt.

Code of ethics (video)

Financial Auditing 1 | 9th Edition | 6

Auditor behavior (video)

Financial Auditing 1 | 9th Edition | 7

Financial Auditing 1 | 9th Edition | 8

AUDIT STANDARDS AND FRAMEWORK

(3) What criteria should be used?

Financial Auditing 1 | 9th Edition | 9

Financial Auditing 1 | 9th Edition | 10

Financial Auditing 1 | 9th Edition | 11

Financial Auditing 1 | 9th Edition | 12

Financial Auditing 1 | 9th Edition | 13

Financial Auditing 1 | 9th Edition | 15

Financial Auditing 1 | 9th Edition | 16

Financial Auditing 1 | 9th Edition | 17

b. Unqualified opinion with emphasis of matter:

Financial Auditing 1 | 9th Edition | 18

Financial Auditing 1 | 9th Edition | 19

Table 1- Example of audit cycle

Cycle Journals Included in General Ledger Accounts Included in the Cycle

Acquisitio - Acquisition Journal - Cash in Bank - Advertising

Payroll and Personnel - Payroll Journal - Cash in bank - Salaries and

Financial Auditing 1 | 9th Edition | 20

Inventory and - Acquisition journal - Inventories - Cost of goods sold

Financial Auditing 1 | 9th Edition | 21

Financial Auditing 1 | 9th Edition | 22

Financial Auditing 1 | 9th Edition | 23

Financial Auditing 1 | 9th Edition | 24

Following are seven audit activities.

2. Perform test of controls and substantive tests of transactions (Phase II)

3. Perform analytical procedures and test of details of balances (Phase III)

4. Complete the audit and issue an audit report (Phase IV)

Financial Auditing 1 | 9th Edition | 25

Financial Auditing 1 | 9th Edition | 26

Describe the broad purposes of analytical procedures.

Financial Auditing 1 | 9th Edition | 27

Financial Auditing 1 | 9th Edition | 28

Financial Auditing 1 | 9th Edition | 29

Profit before taxes and minority interests: $ 4,933

Financial Auditing 1 | 9th Edition | 30

Financial Auditing 1 | 9th Edition | 31

Financial Auditing 1 | 9th Edition | 32

Financial Auditing 1 | 9th Edition | 33

a. To enable proper on-the-job training of employees.