Solution to question one

The following is the history and current regulatory environment of auditing

IFAC; The International Federation of Accountants (IFAC) serves to strengthen the

accountancy profession worldwide, to serve public interests and promote adherence to high
quality standards.

IAASB; This a subsidiary of IFAC and sets the International Standards on Auditing (ISAs) of
which are 30 and above. This is to provide alternative in jurisdiction where audit for small
companies are not mandatory. In response to the call for a separate auditing standard for
Small and Medium Enterprises (SMEs), the IAASB recently issued an Audit Practice Alert
regarding the audit of fair value accounting estimates under the current situation in the market
where the level of uncertainty is very high.

ISAs; These apply to the audit of historical financial data. Auditing standards gives minimum
guidance for the auditor that determines the extent of audit steps and procedures that should
be applied to fulfill the audit objective. They are the criteria against which the quality of the
audit results is evaluated.

Solution to question 2

The following are the historical and current regulatory environment of auditing

International standard on review engagements; which establishes standards and

professional responsibilities of the statutory auditor when engaged in an audit of financial
statements and the form of report the statutory auditor prepares in connection with such as
audit it is intended to provide guidance on content.

International Standard on Related Services (ISRS); This includes the auditor’s professional
responsibilities when engaged in the engagement to set standards and perform agreed
procedures relating to financial information, and the format of the report the auditor prepares
in connection with such engagement. It is intended to provide guidance on content of the
report.

IESBA code of ethics for professional accountants; The IESBA Code of Ethics for
Professional Accountants applies to all professional accountants, whether in the public
service, in business, education or public sector.
Public Company Accounting Oversight Board (PCAOB); The Public Company Accounting
Oversight Board (PCAOB) is a non-profit organization that regulates public company
auditors. Specifically, the PCAOB oversees the review of publicly traded companies, brokers,
and dealers that do business with registered with the U.S. Securities and Exchange
Commission (SEC).

The Sarbanes –Oxley Act; The Sarbanes-Oxley Act of 2002 (often abbreviated to SOX) was
designed to protect shareholders and the public from corporate accounting errors and fraud
and to improve accuracy of corporate disclosures. It is a law passed by the united states. The
U.S. Securities and Exchange Commission (SEC) administers the laws that set compliance
deadlines and issue rules about requirements.

Solution to question three

The following are the rules of professional conduct

AAS-1 describes the basic principles governing professional responsibilities of auditors and
should be followed when conducting audits

Confidentiality: Auditors must maintain the confidentiality of information obtained in the

course of their work and should not disclose this information to a third parties without
specific authority or legal or professional obligation to disclose it.

Skill and competence: Audits must be conducted with professional care and reporting by
personnel with appropriate training with adequate training, experience and competence.

Objectivity; a professional auditor must adhere to the principle of objectivity. This principle
requires an auditor not to compromise professional or business judgement because of bias, or
improper influence on others.

Professional conduct; A professional auditor is responsible for professional conduct that

requires auditors to comply with relevant laws and regulations and to avoid conduct that may
discredit the profession with which auditors know or should know.

Competency; Internal auditors apply the knowledge, skills, and experience necessary to
provide internal audit services.

Solution to question four

The following is the critical application of the rules of professional conduct for the
auditors

Work done by others: When the auditor delegates work to an assistant or uses work done by
other auditors or experts, the auditor remains responsible for compiling financial information
and sharing his views on it. At the same time, the auditor has the right to trust other
employees if he has exercised sufficient skills and care and knows no reason to believe that
he should not have believed.

Family and other personal relationships; Problems may arise where a practice or anyone
closely connected with it has a mutual business interest with a client, and an officer or an
employee of a client or where an officer or employee is closely connected with a partner or
staff member.

Beneficial interests in shares and other investments; A practice should ensure that their
auditors do not have partners or employees or anyone related to their partners or employees
as profitable business owners and do not hire auditors if the employee or a close person
regarding being a beneficiary of the investment.

Planning: The auditor must plan his work in order to perform his audit in a timely and
efficient manner. Planning should be based on an understanding of the client’s business. It
should be created during the audit and updated if necessary.

Audit evidence: Auditors should obtain sufficient appropriate audit evidence by following
compliance and critical testing procedures. This will enable him to draw the necessary
conclusion from the basis on which he should present his opinion on the financial statements.

Solution to question five

The following is the importance of legal professional requirements

Maintaining Public Trust; One of the primary responsibilities of auditor is to give

appropriate and accurate financial information to stakeholders. The public and investors rely
on this information to make appropriate decisions about investing in companies. If auditors
do not adhere to ethical principles, it can lead to a loss of public trust in the auditing
profession and damage the reputation of the profession.

Legal Compliance; Auditors are required to comply with legal and regulatory framework
when carrying out auditing. Failure to comply with these necessities can result in legal action
against the auditors and their firm. Adherence to ethical principles helps auditors to ensure
that they comply with legal and regulatory framework of auditors.

Maintaining Professionalism; Adherence to ethical principles is a hallmark of

professionalism in the auditing profession. Professionalism is critical to building and
maintaining trust in the auditor-client relationship. Ethical behavior demonstrates a
commitment to the profession and a willingness to act in the best interest of employer.

Risk Management; Unethical behavior in auditing can lead to significant risks for the
auditors and their firm. Misrepresentation of audit information can lead to legal action,
reputational damage, and financial loss for clients and stakeholders. Adherence to ethical
principles helps auditors to mitigate these risks and protect their clients and stakeholders.

Solution to question six

The following are the identified requirements on the performance of audit

Obtaining the letter of appointment; The auditor must have a proper of appointment from
the appropriate authority and ensure that his appointment is an order. Further if he has been
appointed in place of another auditor, he should enquire from the retiring auditor, the reasons
for the changes

Knowing the nature and scope of his duties; The auditor should obtain definite instructions
from the client about the nature and scope of his work i.e. whether he is to do continuous
audit or final, whether he is to do the accountancy work or audit work or both.

Obtaining of the list of books; The auditor must obtain the books of accounts kept by the
organizations, together with the officers of in charge and their specimen signs. A list should
be duly signed by a responsible official of the company.

Knowledge of accounting system used; The auditor must examine the accounting system
used by its clients, in case of any weak point, he should study it properly and make
conclusions and recommendation to his employer to remove these weak points in the
organization.

Knowledge of internal controls used in the clients’ business; Auditors must get a written
statement of internal control systems used in the client’s organizations, it will help in
determining the extent of his audit work.
Study of the important document; The auditor should study all the documents like
memorandum of association, article of association which have a bearing on the accounts.

Study of the previous year’s financial statement; The auditor should study the previous
year’s financial statements as well as the auditor’s report. This will help to know the state of
affairs of the concerns.

Solution to question seven

The overall audit strategy defines the scope, timing and direction of the audit and helps the
development of more detailed audit plan. The strategy document usually includes a statement
of the key decisions needed to properly plan the audit. The audit strategy is based on the
following considerations:

 The scope of the engagement

 The characteristics of the engagement
 Reporting objectives
 Nature of communications
 The nature, timing, and extent of resources available for the engagement

Solution to question eight

Preliminary survey and planning; The purpose of the preliminary survey is to find out
background information and establish a practical working knowledge of organization’s
objectives and procedures; available files and records; and laws, rules, and regulations.

Notification; An engagement memo must be sent to management of the areas to be audited.

The memo indicates the audit scope and objectives, anticipated timing of the audit fieldwork,
the auditors assigned to the audit, and the target date for completion of audit.

Entrance conference; An entrance conference should be with Internal Audit and

management as well as any other key staffs who will be involved in the audit to facilitate the
beginning of fieldwork and address and questions regarding the review.

Draft audit report for discussion; A draft report will be submitted to management for review
and allow for management to provide a response to any noted observations.

Solution to question nine

Audit risk is defined as the risk of an independent accountant’s unconditional audit
arrangement in case of material misstatements in the financial statement. Risk assessment is a
function of the risk of misinformation and risk analysis.

The following are the different risks involved in the audit process

Inherent risk; it is defined as susceptibility of an assertion about a class of transaction,

account balance, or disclosure to a misstatement that can be material, either individually or
when aggregated with other misstatements, before consideration of any related controls. The
auditor finds out inherent risk using information obtained from performing risk assessment
procedures and considering the characteristics of the accounts and disclosures in the financial
statements

Control risk; it is defined as risk that a misstatement can occur in an assertion about a class
of transaction, account balance or disclosure, and that the misstatement can be material, either
personnel or when aggregated with other misstatements, and will not be prevented or detected
and corrected, on a timely basis, by the organizations internal control. Auditors finds control
risk using evidence obtained from tests of controls (if the auditor plans to rely on those
controls to assess control risk at less than maximum) and from other sources

Detection risk;

Action is taken to reduce the risk analysis below the level of failure to detect the presence of
a defect, which may be significant alone or in combination with other errors. The auditor uses
the assessed risk of material misstatement to determine the appropriate level of detection risk
for a financial statement assertion. The higher the risk of material misstatement, the lower the
level of detection risk needs to be in order to reduce audit risk to an appropriately low level.

Solution to question 10)

The following are the appropriate measures to minimize the risks above

Audit Procedures Responsive to Risks; Auditors must design and perform further audit
procedures whose nature, timing and extent are responsive to the assessed risks of material
misstatement. There must be a clear link between the nature, timing and extent of the
auditor’s audit procedures and the risk assessments.
Nature of Audit Procedures; The nature of the audit procedures is of most importance in
responding to the assessed risks. The nature of audit procedures refers to both their purpose
(tests of controls or substantive procedures) and their type (inspection, observation, inquiry,
confirmation, recalculation, re-performance, or analytical procedures).

Financial Statement Assertions; Financial controls are based on financial statement

assertions. Assertions may determine the purpose of audit procedure. The completeness
assertion in relation to payables suggests tests of controls. Substantive procedures may be the
best way to test the occurrence assertion.

Solution to question 11)

Customized Queries or Scripts; Customized queries or scripts allow the IS auditor to

specifically target desired information for analysis. Customized scripts are highly useful for
environments where other CAATs are not available but usually require specific technical skill
sets to create them.

Audit Expert Systems; Audit expert systems are specialized tools that can be used to analyze
the flow of data, through the processing logic of the application software, and document the
logic, paths, control conditions and processing sequences.

Input Control; Input controls will be necessary to ensure that all data entered is authorized,
complete, accurate and entered only once. Typically, a combination of manual and automated
controls will be required to achieve this. These include validation checks, range checks and
segregation.

Processing Controls; Processing controls will be necessary to ensure that transactions are
processed completely, accurately and in a timely fashion. A variety of controls will be used to
achieve this, for example, reconciling input control totals with subsequent output, validating
the integrity and reasonableness of automatically generated transactions and generating
calculations automatically from the appropriate authorized standing data.

Output Controls; Output controls will be necessary to ensure the completeness, accuracy and
availability of application output, whether it be in a paper form, or as electronic data. On
printed output, controls such as sequence numbers and page numbers will be used to ensure
completeness.

Solution to question 12)

The following is the link between preparation of accounts and the audit conducted

Responsibilities of an Accountant and Auditor; The professional responsibility of the

accountant is comprehensive. It includes recording the day to day transactions, statements,
and records. The responsibilities of an auditor are to check the records and statements of the
company on yearly basis. After preparing the final accounts, the liability of the accountant
gets complete.

Reporting of an accountant and auditor; The purpose of preparing accounts is to

communicate the financial data, and the purpose of the audit is to check the final data
prepared by the management. The report prepared by the accountant goes to the management
team of the company. The report prepared by the auditor goes to the shareholders.

The Nature of work of an Accountant and Auditor; Accountants pay attention to the current
changes in financial transactions. Auditors pay attention to the records, and they use to check
on the sample basis. If the shares of the company are traded, then the audit professionals are
sent from the sovereign body.

Qualification; The qualification of an accountant can be graduation or post-graduation. For

auditors, it is mandatory to have a specific-qualification like Chartered accountancy or
certified public accountants.

Solution to question 13)

Methods: Accounting methods involve identifying the events and transactions that affect the
entity. Once identified, these items are measured, recorded, classified, and summarized in the
accounting records. The result of this process is the preparation and distribution of financial
statements that are in conformity with generally accepted accounting principles. The audit of
financial statements involves obtaining and evaluating the evidence concerning
management’s financial statements to enable the auditor to verify whether the statements do
in fact present fairly the entity’s financial position, the result of operations and cash flows in
conformity with GAAP.

Objectives: The ultimate objective of accounting is the communication of relevant and

reliable financial data that will be useful for decision making. Rather than creating new
information, the primary objective of auditing is to add credibility to the financial statements
prepared by management. Accounting covers all transactions, records, and statements having
financial implications; while auditing generally covers final financial statements and records.
Responsibility: Accounting is a creative process. An entity’s employees are involved in the
accounting process, and ultimate responsibility for financial statement lies with the entity’s
management. Accounting starts typically where book-keeping ends; while auditing always
starts where accounting ends. Accounting is very comprehensive and captures all details
associated with financial transactions, records and statements; whereas auditing usually uses
financial statements and records on example basis.

Solution to question 14

Utility Software; When using utility software, the IS auditor should confirm that no
unplanned interventions have taken place during processing and that the utility software has
been obtained from the appropriate system library. The IS auditor should also take
appropriate steps to protect the integrity of the organization’s system and files since these
utilities can easily damage the system and its files.

Audit Expert Systems; Audit expert systems are specialized tools that can be used to analyze
the flow of data, through the processing logic of the application software, and document the
logic, paths, control conditions and processing sequences. When using audit expert systems,
the IS auditor should be thoroughly knowledgeable of the operations of the system to confirm
that the decision paths followed are appropriate to the given audit environment/situation.

Input Control; Input controls will be necessary to ensure that all data entered is authorized,
complete, accurate and entered only once. Typically, a combination of manual and automated
controls will be required to achieve this. These include validation checks, range checks and
segregation. The system should also provide a suitable mechanism that records sensitive or
critical activities by individual users and enables the production of evidence of processing.

Processing Controls; Processing controls will be necessary to ensure that transactions are
processed completely, accurately and in a timely fashion. A variety of controls will be used to
achieve this, for example, reconciling input control totals with subsequent output, validating
the integrity and reasonableness of automatically generated transactions and generating
calculations automatically from the appropriate authorized standing data.

Output Controls; Output controls will be necessary to ensure the completeness, accuracy and
availability of application output, whether it be in a paper form, or as electronic data. On
printed output, controls such as sequence numbers and page numbers will be used to ensure
completeness.
Solution to question 15

Input Control; Input controls will be necessary to ensure that all data entered is authorized,
complete, accurate and entered only once. Typically, a combination of manual and automated
controls will be required to achieve this. These include validation checks, range checks and
segregation. The system should also provide a suitable mechanism that records sensitive or
critical activities by individual users and enables the production of evidence of processing.

Processing Controls; Processing controls will be necessary to ensure that transactions are
processed completely, accurately and in a timely fashion. A variety of controls will be used to
achieve this, for example, reconciling input control totals with subsequent output, validating
the integrity and reasonableness of automatically generated transactions and generating
calculations automatically from the appropriate authorized standing data.

Output Controls; Output controls will be necessary to ensure the completeness, accuracy and
availability of application output, whether it be in a paper form, or as electronic data. On
printed output, controls such as sequence numbers and page numbers will be used to ensure
completeness.

Procedures; Procedures should be prepared which contain adequate management and

supervisory controls and checks.
References

 Contemporary Auditing: Kamal Gupta, Tata Mc-Graw Hill, New Delhi.

 A Hand-Book of Practical Auditing: B.N. Tandon, S.Chand and Company, New
Delhi.
 Fundamentals of Auditing: Kamal Gupta and Ashok Arora, Tata McGraw Hill, New
Delhi.
 Boyd, E. (1905). History of auditing. A History of Accounting and Accountants, 74.
 Braun, R. L. & Davis, H. E. (2003). Computer‐assisted audit tools and techniques:
analysis and perspectives. Managerial Auditing Journal, 18(9), 725 – 731
 Aina, K. & Adejugbe, B. (2015). A review of corporate governance codes and best
practices in Nigeria. Journal of Law, Policy and Globalization, 38, 78-86
 Financial Reporting Council (FRC) (2008). The audit quality framework. Available at
http://www.frc.org.uk/Our-Work/Publications/FRC-Board/The-AuditQuality-
Framework-%281%29.aspx.
 Francis, J. R., Khurana, I. K. & Pereira, R. (2003). The role of accounting and
auditing in corporate governance and the development of financial markets around the
world.
 IAASB Handbook 2009, Glossary of Terms.
 ISA 315, Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and Its Environment, paragraph 4 (b)