FILE 20201125 124759 auditing part 1 2 3

Question 1: Define the term auditing and its elements in the definition?
Distinguish auditing and accounting ?
Definition of auditing:
“Auditing is a process in which independent and competent auditors collect and
evaluate of evidence about audited information to determine and report on the
degree of correspondence between the information and established criteria”
Elements of the definition of auditing:
- A process: include 3 phases: planning, implementing and completing.
- Independent and competent auditors:
+ Independence in fact: maintains an unbiased attitude, follows the auditing
standards and obeys the law.
+ Independence in appearance: shouldn‟t be influenced by the client‟s
interest and close relationships.
+ Competence: qualification, skills, ethics and factors needed to effectively
manage and confirm the correctness of a company‟s accounting procedures.
- Collect and evaluate of evidence: Evidence is any information or document
which is used by auditor to analyze, measure and draw conclusion based on
it. Evidence must be sufficient and appropriate.
- Audited information (=audit project): audited information can be
financial and non financial information.
+ First, it is financial information which is presented on FSs
+ Second, it is operation information
+ Third, it is compliance information
- Established criteria: Ex: in FSs audit, established standards include:
accounting standards, regulations and law.
- Reporting (=give opinion): it shows auditor‟s opinion about degree of
correspondence between information and established criteria.
Distinguish auditing and accounting:
Basic for
comparision

Meaning

Accounting

Auditing

Accounting means
systematically keeping the
records of the accounts of
an organization and
preparation of financial

Auditing means
inspection of the books
of account and
financial statements of
an organization.

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Governed
By
Work
performed
by

Purpose

Start

Period

statements at the end of the
financial year.
Accounting Standards

Standards on Auditing

Accountant

Auditor

To show the performance, To reveal the fact, that to
profitability and financial
which extent financial
position of an organization. statement of an
organization gives true
and fair view.
Accounting starts where
Auditing starts where
bookkeeping ends.
accouting ends.
Accounting is a continous
Auditing is a periodic
process, i.e. day to day
process.
recording of transactions
are done.

Question 2: Identify differences among internal audit, independent audit and
state audit ?
Internal audit
Under the
business owner
of the unit. If
the unit does
not have the
Board of
Directors, the
Organization
internal audit
structure
belongs to the
Director. If
there is a Board
of Directors,
the internal
audit will be
directly under

Independent
audit
National, regional
and international
professional
auditing firms and
groups

2

State audit
Depending on
each State, the
state audit can
be under the
National
Assembly, the
Court, the
controlling
institute, can
be under the
Government,
or the
president, ...


Auditor

Conditions
to operation

the Chairman
of the Board of
Directors.
Internal
auditors are the
bosses who
appoint and
use.

Are experts or
professional
independent
auditors.

According to
By contract or
the plan
invitation to audit
approved by the
business owner,
the unit, or
according to the
owner's
decisions,
orders or
requests.

No audit fees

Boss

Collecting audit
fees according to
regulations and
markets.
Customer

Has no legal

validity

Has high legal
value

Audit fee

Reporting
Legal value

3

Are the state
auditors or
government
officials on
duty
according to
regulations.
According to
the plan
approved by
the agency to
which the
state audit is
affiliated, or
as determined
by the order,
directive or
request of the

agency with
which it
operates.
No audit fees

Agency to
which it
belongs
Has high legal
value


Question 3: Identify differences among FS audit, performance audit and
compliance audit ?
Performace audit Compliance audit

Purpose

Subject
matter

Standards

Financial
statement
audit

To evaluate the
economy,
effectiveness nd

efficiency of the
organization‟s
operations and
consulting.

To consider and
evaluate the
audited firms
comply the rules
and regulation set
by some higher
authorities and
make
recommendation.

To determine
whether the
overall the
information
being verified
in the financial
statements are
states in
accordance with
specified
criteria.

Subject of
performance audit
can be various and

diversified.

The fact of
compliance the
regulations and
law of competent
state agencies and
audited business.

FSs (such as:
balance sheet,
income
statement, cash
flow statement
and notes) or
interpretation of
financial
statement of
businesses.

The regulations
and law of
competent state
agencies and
audited business.

Accounting
standards, law
regulations and
other related

rules.

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Auditors
Function

Report

3 types of auditors

3 types of auditors 3 types of
auditors

Consultation

Confirmations &
recommendation

Confirmations
& consultation

Managers to
inform about
results and
recommend to
improve a business
performance.

Users as the
business or
business managers
with audited
resulted, not to
serve general
users.

Audit result will
be reported to
the entity who
hires the
auditing firm.

Question 4: What are the causes of information risk in the market economy ?
List some ways to reduce information risk ?
- The causes of information risk in the market economy:
+ The big gap between the users and supplier of information and adjustment
of information which may benefit the supplier.
+ The great volume of information.
+ The increased complexity of information and economic activities.
+ Incorrect treatment of information.
- The three main ways to reduce information risk
+ User verifies the information.
+ User shares the information risk with management or supplier of
information.
+ User uses audited financial statements provided independent auditors.
Question 5: List some functions and roles of auditing in the market economy?
Function of auditing:
+ Firstly, examination and confirmation, or verification function. This

function is established together with the first introduction of auditing and
developed rapidly until now.
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+ Secondly, consultancy functions. The consulting function ranges from
simple suggestions for improving the client‟s businesses more effectively to
advice in their development strategies, and actuarial benefit consulting.
The role of independent audit organization
+ The independent audit organization plays role as an independent party (third
party) presenting examination and confirmation function, and gives an opinion
about the true and fair view of audited information.
+ The user information has reliance basis to give his decision suitably.
+ The result of audit also helps audited entity to see themselves objectively
+ In addition, the audit consultation in the management letter will help top of
management to give the necessary adjustment in business as well as management
task.
The role of state audit:
State Audit organization plays role as management tool of the State, especially in
expenditure State budget. It helps to improve and strengthen management of State
agencies, or organizations in compliance with law and other regulations such as the
business law, the added value tax law, the environment protect law, and accounting
law…
The role of internal audit :
Internal audit organization plays role as manageable tool of top of management in
the enterprise. It serves for governance activity of firm itself, particularly the
elements of assurance, risk, and control.
Question 6: List some services which independent auditor provide.
The main activity of the independent audit organization is to provide audit
services, in addition to also perform some other services for the client unit.

Common services of independent audit organizations are:
- Verification service: is the performance of the audit and giving confirmation
about the reliability of the financial information of the audited entity.
- Accounting services: including keeping books, recording accounting books,
synthesizing financial information, preparing financial statements, organizing the
accounting work and accounting apparatus for customers, ... in case In this case,

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the audit organization does not perform the testing but rather provides the service
on the basis of the documents provided by the customer.
- Consulting service: is the service that auditing organizations usually undertake
related to the expertise, capabilities of auditing organizations and according to the
law of each country. Consulting services include:
+ Tax consulting
+ Consulting on human resources
+ Management consulting
- Financial information checking service based on agreed procedures: audible
financial information can be individual items of financial statements, a part of
financial statements, ...
- Other services: property valuation services, training services, updating knowledge
of finance, accounting, auditing.
Question 7: List the specific objectives of internal auditing
The objectives of an internal audit are to:
- The economic operations presented on the books must have sufficient
grounds for recording (with reasonable grounds)
- The economic operations must be properly approved (approval)
- The arising economic transactions, assets in actual existence must be
recorded in full (completeness)

- The economic transactions and existing assets must be accurately calculated
and recorded according to an appropriate value (evaluation and calculation).
- The economic operations are properly classified (classification)
- Economic operations must be promptly reflected (promptly)
- Economic transactions must be properly recorded in detailed books and
accurately synthesized and presented in the financial statements in
accordance with regulations (cumulative and presentation).
Question 8:The level of assurance provided by an external audit is absolute. Is
this statement true or false? Explain.
False.
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“is absolute” => “is reasonable”. Because of limitations inherent in the auditing
process restrict the ability to guarantee assurance.
Question 9: The independent audit firms only conduct to audit financial
statements. True or false. Explain
False.
The independent audit firms conduct to audit 3 types of audited information: FSs,
performance, compliance, last mostly FSs.
Question 10: What is auditing standards? Explain why it is important for
audits to be conducted in accordance with auditing standards?
- Auditing standards are general guideline and regulations of basic principle,
procedures to aid auditor in fulfilling their professional responsibilities in the
audit.
- It is important of auditing:
+ They primarily are priciples and guide for auditors to best complete his
tasks.
+ They are uses by auditing firms and other entities to measure and eraluate
the task fulfillment of audits.

+ They can be the base for audited firms and related parties to co-operate in
auditing process and issuing audited results.
+ The relationship between national and international auditing standards.
+ The content and legal form of standards on auditing.
Question 11: List the Code of ethics for independent auditing.
- Integrity Members should be straightforward and honest in all professional
and business relationships.
-Objectivity Members should not allow bias, conflicts of interest or undue
influence of others to override professional or business judgements.
-Professional competence and due care
14 Members have a continuing duty to maintain professional knowledge and skill
at the level required to ensure that a client or employer receives competent
professional services based on current developments in practice, legislation and
techniques.
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Members should act diligently and in accordance with applicable technical and
professional standards.
-Confidentiality Members shall respect the confidentiality of information acquired
as a result of professional and business relationships and, should not disclose any
such information to third parties without proper and specific authority, or unless
there is a legal or professional right or duty to disclose.
Confidential information acquired as a result of professional and business
relationships should not be used for the personal advantage of members or third
parties.
-Professional behaviour
Members should comply with relevant laws and regulations and avoid any action
that discredits the profession.
Question 12: List the threats that impair objectivity of the auditor and give

some examples.
- Self-interest The auditors‟ own personal interest, e.g. the auditors may fear
the loss of fees.
- Self-review When carrying out the audit, the auditors, review work that their own
firm has undertaken previously, e.g. preparing accounts or making a valuation.
-Advocacy If the auditors get involved in disputes concerning the client, they may
end up acting for or against the client, which undermines the appearance of
objectivity.
-Familiarity If the auditors are involved with the client for a long time, they may
become unduly sympathetic towards directors and management and thus too
inclined to trust their unsupported word.
-Intimidation The auditors may be intimidated by a dominant or aggressive
atmosphere at the client.
For example : the audit firm owns shares in the client, or is a trustee of a trust that
holds shares in the client.
Question 13: Auditors must compliance the accounting standards when they
perform the audit. Right or Wrong? Explain.
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Right
Because : Auditing standards set standards for the auditor's work in the audit
process to achieve the auditor's overall goals. Auditing Standards specify and guide
the auditor's general responsibilities, as well as the issues the auditor should
consider when performing his responsibilities in the particular circumstances.
Question 14: What is audit report? Explain why auditors’reports are
important to users of FSs.
The auditor's report is a formal opinion, or disclaimer thereof, issued by either an
internal auditor or an independent external auditor as a result of an internal or
external audit, as an assurance service in order for the user to make decisions based

on the results of the audit.
The auditor's report is a written letter from the auditor containing the opinion of
whether a company's financial statements comply with generally accepted
accounting principles (GAAP). The independent and external audit report is
typically published with the company's annual report
auditors‟reports are important to users of FSs because : Auditors' reports are
important to users of financial statements because they inform users of the auditor's
opinion as to whether or not the financial statements are fairly stated or whether no
conclusion can be made with regard to the fairness of their presentation
-The goal of an auditor's report is to document reasonable assurance that a
company's financial statements are free from error. Along with balance sheets,
profit & loss statements, and directors reports, auditor's reports make up part of a
company's statutory accounts.
Question 15: List the content of the financial statement audit report of
independent auditor.
Content of the financial statement audit report of independent auditor:
An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation

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Question 16: How many types of audit report? And How many types of audit
opinion?
 There are four common types of auditor's reports, each one presenting a
different situation encountered during the auditor's work. The four reports
are as follows
 Clean report

 Qualified report
 adverse audit report
 Disclaimer report
 The four types of auditor opinions are:
 Unqualified opinion
 Qualified opinion
 Disclaimer of opinion
 Adverse opinion
Question 17: Describe the conditions to issue 4 types of audit opinion?
- Unqualified Opinion
Often called a clean opinion, an unqualified opinion is an audit report
that is issued when an auditor determines that each of the financial
records provided by the small business is free of any
misrepresentations. In addition, an unqualified opinion indicates that
the financial records have been maintained in accordance with the
standards known as Generally Accepted Accounting Principles
(GAAP). This is the best type of report a business can receive.
- Qualified Opinion
In situations when a company‟s financial records have not been
maintained in accordance with GAAP but no misrepresentations are
identified, an auditor will issue a qualified opinion. The writing of a
qualified opinion is extremely similar to that of an unqualified
opinion. A qualified opinion, however, will include an additional
paragraph that highlights the reason why the audit report is not
unqualified.
- Adverse Opinion
The worst type of financial report that can be issued to a business is an
adverse opinion. This indicates that the firm‟s financial records do not
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conform to GAAP. In addition, the financial records provided by the
business have been grossly misrepresented. Although this may occur
by error, it is often an indication of fraud. When this type of report is
issued, a company must correct its financial statement and have it reaudited, as investors, lenders and other requesting parties will
generally not accept it.
- Disclaimer of Opinion
On some occasions, an auditor is unable to complete an accurate audit
report. This may occur for a variety of reasons, such as an absence of
appropriate financial records. When this happens, the auditor issues a
disclaimer of opinion, stating that an opinion of the firm‟s financial
status could not be determined.

AUDITING PART 2
1. What is management‟s responsibility for the FSs? Distinguish between
management‟s responsibility and auditor‟s responsibility for the FSs.
Management of the company is responsible for preparing the financial
statements, which give a true and fair view of the financial position of the
company and of its results and cash flows for the year in accordance with
GAAP standards, accounting regime for enterprises and legal regulations
relating to financial reporting”
 In preparing these FSs, the company is required to:
1) Select suitable accounting policies and then apply them consistently;
2) Make judgments and estimates that are reasonable and prudent;
3) State whether applicable accounting principles have been followed,
subject to any material departures disclosed and explained in the FSs;
4) Design and implement an effective internal control system for the
purpose of properly preparing and presenting the FSs to minimize errors
and
frauds.

5) Prepare the FSs on the going concern basis.

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2. Define the management assertions. Why do the auditors need to test FSs
assertions?
 Definition of Assertions:
Assertions are the implicit or explicit claims and representations made by the
management responsible for the preparation of financial statements
regarding the appropriateness of the various elements of financial statements
and disclosures.
 Why do the auditors need to test FSs assertions?
The objective of audit testing is to assist the auditor in coming to a
conclusion as to whether the financial statements are free from material
misstatement.
However, the auditor does not simply design tests with the broad
objective to identify material misstatement. This is a difficul conclusion to
reach and can only be based upon a series of detailed tests, each designed
with a specific testing objective relating to certain areas of the financial
statement.

3. What is the relationship between management assertions and audit
objectives. Give an example.
Management assertions is formed on the target synthesis for all criteria
in the main report. The different parts that make up the financial
statements, specific audit objectives are different. However, the general
audit objective is the same for all departments, the indicators constituting
the financial statements and that general audit objective are presented in the
database form of the indicators and constituent parts of the financial

statements.
Particulalr assertions:
Transactions
and Account Balances
Presentation
and
Events
Disclosure
Occurrence
Existence
Occurrence and rights
and obligations
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Completeness
Accuracy

Completeness
Valuation
allocation

Classification

Completeness
and Accuracy and valuation
Classification
understandability

and

Cutoff
Rights and obligation
Examples: Salary costs
Occurrence: Salaries & wages expense has been incurred during the
period in respect of the personnel employed by the entity. Salaries and
wages expense does not include the payroll cost of any unauthorized
personnel.
Completeness: Salaries and wages costs in respect of all personnel have
been fully accounted for.
Accuracy: Salaries and wages cost have been calculated accurately.
Any adjustments such as tax deduction at source have been correctly
reconciled and account for.
Classification: Salaries and wages cost has been fairly allocated:
+ Operating expenses incurred in production activities;
+ General and administrative expenses;
+ Cost of personnel relating to and self – constructed assets other than
inventory
Cutoff: Salaries and wages cost recognized during the period relates to
the current accounting period. Any accrued and prepaid expenses have
been accounted for correctly on the finacial statements.
4. List the types of assertions relating to transactions
 Occurrence: recorded transactions exist
 Completeness: Existing transactions are recorded
 Accuracy: Recorded transactions are stated at the correct amounts
 Classification: Transactions have been classified and presented
fairly in the financial statements
 Cutoff: correct accounting periods
5. List the types of assertions relating to account balances
14






Existence: Amount included exist
Completeness: Existing amounts are included
Valuation: have been valued appropriately
Rights and obligation: Entity has the right to ownership, the
liabilities in the financial statements represent the obligations

6. Present the common accepted audit procedures.
The auditor can obtain audit evidence through the following procedures :
1) Inspection (I)
2) Observation (O)
3) Inquiry= Enquiry (I/E)
4) External confirmation (C)
5) Recalculation (U)
6) Re-performance (U)
7) Analytical procedures
7. What are the overall audit objectives in conducting an audit of FSs?
- To obtain reasonable assurance about whether are financial statements as
a whole are free from material misstatement, whether due to fraud or
error, thereby enabling the auditor to express an opinion on whether the
financial statements are prepared, in all material respects, in accordance
with an applicable financail reporting framework.
- To report on the financial statements and communicate as required by
professional standards and applicable legal and regulatory requirements,

in accordance with the auditor‟s findings.
8. What are the audit objectives in forming an opinion and in expressing that
opinion about the audited FSs?
In forming an opinion on the financial statements and in expressing that
opinion in the auditor‟s report, the objectives of the auditor are to:
- Form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidence obtained.
- Expess clearly that opinion through a written report that also describes
the basic for that opinion.
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-

Expess clearly an appropriately modified opinion on the financial
statements that is necessary when the auditor.
- Concludes, based on the audit evidence obtained, that the financial
statements as a whole are not free from material misstatement.
- Is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatement.
9. What is the definition of fraud and error? What is the difference between
fraud and error?
- An error represents an unintentional misstatement of the financial
statement. It may be material or immaterial.
- Errors are unintentional errors or missteps that affect reporting
- finance
- Fraud refers to an intentional act by one or more individuals among
management, those
- Charged with governance, employees, or third parties, involving the use
of deception to

- Obtain an unjust or illegal advantage.
Fraud
error
- Handling documents subjectively: - Errors in arithmetic calculation or
Distorting, forging, amending vouchers wrong recording;
and documents related to financial
statements;
- Concealing or intentionally omitting
information, documents or economic
operations that falsify financial
statements;

- omission or misinterpretation leads to
falsifying economic items or operations
due to limited knowledge and
education;

- Record of untrue operations;

- Incorrect application of accounting
standards, principles, methods, and
- Deliberately incorrectly applying financial policies due to limited
standards, principles, methods and capacity ...
regimes on accounting and financial
policies;
- Intentionally miscalculating to falsify
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financial statements or for personal

benefit.

10. Explain clearly the management and auditor‟s responsibilities for fraud and
error in the FSs.
 The external auditor is responsible for obtaining reasonable assurance that
the financial statements, taken as a whole, are free from material
misstatement, whether caused by fraud or error. Therefore, the external
auditor has some responsibility for considering the risk of material
misstatement due to fraud.
 The Auditor‟s responsibilities here:
1. Obtain reasonable assurance that the financial statements are free from
material misstatements
2. Maintain professional skepticism throughout the audit
3. Should know that Risk of non-detection of management fraud is greater
than of employee fraud
4. Must be aware Risk of non-detection of fraudulent material misstatement
is higher than the misstatement due to error.
 Management has the Primary responsibility for the prevention and detection
of fraud and not the auditor. Management should take all necessary steps for
fraud prevention and deterrence through implementing policies and controls
11. List the factors affect fraud and error.
- Unusual transactions and events
- Difficult points relate to obtaining sufficient appropriate audit evidence
- Issues related to integrity and capacity of the board of directors
- Abnormal pressures inside or outside the unit exist in the financial
statements
- Factors from the informatics environment are related to the situations
and events mentioned above
12. Define the meaning of materiality. Identify steps to apply materiality in an
audit.

 Materiality relates to both the content of the financial statements and the
level and type of testing to be done. The decision is based on judgements
17


about the size, nature and particular circumstances of misstatements (or
omissions) that could influence users of the financial reports
 Identify steps to apply materiality in an audit.
1. Determine a base and calculate a number
Once a preliminary figure is calculated- then consider qualitative
items:
o
o
o
o
o
o
o

Misstatements due to fraud/ illegal acts
Amounts that may violate contractual covenants
Amounts that may affect earnings trends
Misstatements that may increase management compensation
Amounts that may result in an entity missing its forecast
Industry conditions
Past number of misstatements

2. During the audit, auditors track the misstatements on the SUESummary of Unadjusted Errors
3. Estimate the likely misstatement and compare the total to the
preliminary materiality.

o

o

o
o

If the estimate misstatement is less than materiality- then the
auditor can generally conclude the financial statements are fairly
presented.
If the estimate is greater than materiality then the adjustments
should be recorded by the client- if the client refuses then the
auditor cannot issue a clean audit report
Unadjusted amounts from prior years should be carried forward in
assessing the misstatement
Preliminary materiality may be revised if the auditor feels it is
necessary due to information obtained during the audit

13.What is audit risk and identify its elements in an audit of FSs.
Audit risk is defined as „the risk that the auditor expresses an inappropriate
audit opinion when the financial statements are materially misstated. Audit
risk is a function of the risks of material misstatement and detection risk‟.
Hence, audit risk is made up of two components – risks of material
misstatement and detection risk.

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

Risk of material misstatement is defined as „the risk that the financial
statements are materially misstated prior to audit. This consists of two
components... inherent risk ... control risk.‟



Inherent risk is „the susceptibility of an assertion about a class of
transaction, account balance or disclosure to a misstatement that could be
material, either individually or when aggregated with other
misstatements, before consideration of any related controls.‟



Control risk is „the risk that a misstatement that could occur in an
assertion about a class of transaction, account balance or disclosure and
that could be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a
timely basis by the entity‟s internal control.‟



Detection risk is defined as „the risk that the procedures performed by
the auditor to reduce audit risk to an acceptably low level will not detect
a misstatement that exists and that could be material, either individually
or when aggregated with other misstatements.

14. What is IR, CR & DR? What is the difference among IR, CR and DR?
- Inherent risk (IR) is the susceptibility of an account balance or class of
transactions to material misstatement, assuming there are no related
controls.

- Control risk (CR) is the risk that the system of internal controls will fail
to prevent or detect material
-

Define

Detection risk (DR) is the risk that the audit procedures will fail to detect
material misstatements that were not caught by the internal controls.
IR
-The suspicion of a
certain account balance
in a certain item or
business where error can
occur assuming that
there is no relevant
internal control step.

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CR
-probability of loss
due to breakdown
of the internal
control measures
taken to minimize
the risk

DR
is the risk that
the

audit
procedures will
fail to detect
material
misstatements
that were not
caught by the


Characteristics - Threats will come true
without control.
-The control risk of risk
is the risk that an
organization's internal
control mechanisms will
not be able to minimize
cases of fraud and error

-The
auditor
creates no control
risk and does not
control them. They
are only able to
assess the entity's
control system and
thereby present the
expected level of
control risk.

internal controls
-It
is
the
responsibility of
the auditor and
the auditor to
perform
procedures for
obtaining audit
evidence
in
order to manage
and
control
detection risks.
-related to the
responsibility of
the Auditor and
the
auditing
company

15. State some factors that affect IR, CR and DR.
Factors affecting account inherent risk include:

Dollar size of the account.

Liquidity.


Volume of transactions.

Complexity of the transactions.

New accounting pronouncements.

Subjective estimates.
Factors affecting account Control risk
 New and complex nature of transaction types
 The volume and intensity of the transaction (more or less, strong or
weak).
 The quantity and quality of the human resources controlling system in
the enterprise.
 The validity, reasonableness and efficiency of control procedures and
control procedures in the business.
 The science, appropriateness and efficiency of the internal control
system such as: arranging to assign the right people to the right job,
arranging to use the facilities and equipment in an optimal way.
controller ...
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



The environment in which the company operates (its “control
environment”).
The existence (or lack thereof) and effectiveness of control
procedures.

Monitoring activities (audit committee, internal audit function, etc.).

Factors affecting account Detection risk:
 Composition of the engagement team, e.g. competence/skillfulness
of the auditors. ...
 Types of audit procedures, e.g. degree of substantive procedures
compared to tests of controls. ...
 Rigorousness of audit procedures, e.g. sample sizes. ...
 Quality control, e.g. audit firm's system of quality control.
16. Define the audit risk model and explain each term in the audit model.
Audit risk model is a tool used by auditors to understand the relationship
between various risks arising from an audit engagement enabling them to
manage the overall audit risk.
AR= IR x CR x DR

Auditing Part 3 (from Chapter 6 to chapter 11)
1. Define internal control. What is the purpose of setting up the entity’s
internal control system?

Definition: Internal control is the
process designed, implemented and
maintained by those charged with
governance, management and other
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personnel to provide reasonable
assurance about the achievement of
the entity‟s objectives with
regard to:

• Reliability of financial reporting;
• Efficiency/effectiveness of
operations;
• Compliance with applicable laws
and regulations.
2. What is management’s responsibility for internal control?
Management is responsible for establishing and maintaining the entity’s
internal
control.
+ In case of achieving information objective, management is responsible for
the
preparation of financial statements in accordance with applicable
accounting
framework such as generally accepted accounting standards, laws and
regulations
relating to financial statements. This means internal control has gained

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reasonable
assurance about reliability of financial reporting.
+ In other cases of achieving operational and compliant objectives,
management
has duty on building and exercising resources and activities basing on
control
requirements and procedures in order to get their targets. However,
management
designs and operates internal control after considering both the costs and
benefits

of the controls.
3. There are 2 statement as follow:
(1) Fraud and errors could impact materially on the financial statements.
(2) Control risk is an unavoidable risk. These statements are true or false?
Explain.
Control risk is an unavoidable risk is true
Control risk is unavoidable because: the responsibility to build and operate an
effective internal control system belongs to the enterprise. The internal
control system always has inherent limitations. These limitations always occur
whether the system is working properly or not, due to:
The requirement for much less and much less control costs results in internal
control systems, or the concept of loss can occur.
- The relative backwardness of the Internal Control System compared to the
actual requirements of the time.
- Control procedures often focus on familiar transactions that often occur.
New businesses and deals are usually more risky.

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Collusion between collectives and individuals with collectives and individuals
inside and outside the business.
- Ignorance.
- The comprehension of the assigned task or job is not yet clear, subjective,
and disregarded.
The above reasons make the internal control system always have inherent
limitations, or control risk is unavoidable at businesses.

4. Why do the external auditor need to understand the client’s internal control
when implement the financial statements audit?

The reasons why the external auditor understand the internal control
The auditor must understand the entity’s internal control to consider
how internal control design and operate to determine the audit works. In the
context of audit of financial statements, “an understanding of internal
control assist the auditor in identifying types of potential misstatements and
factors that affect the risks of material misstatements, and in designing the
nature, timing, and extent of futher audit procedure”.
In the performance audit, in order to assess the risk of fraud, the
auditor should obtain an understanding of relevant internal control to
examine whether there are signs of irregularities that hamper performance,
the entity’s action to address any recommendations to reduce fraud.
In the performance audit, the auditor understand the internal control to
identify types of control which the auditor focused on and assesses the risk
that they may not prevent or detect material control are in harmony with
control environment so as to ensure compliance with the authorities in all
material respects.

5. Identify the components of internal control
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 The control enviroment
o Demonstrates commitment to interfrity and ethical values
o Exercises oversight responsibility
o Establishes structure, authority and responsibility
o Demonstrates commitment to competence
o Enforces accountability
 Risk assessment
o Identify business risks relevant to financial reporting objectives
o Estimating the significance of the risk

o Assessing the likelihood of their occurrence
o Deciding on actions to address those risks.
 Control activitites
o Authorization
o Performance review
o Information processing
o Physical controls
o Segregation of duties.
 Information and communication
The information system relevant to financial reporting is a component
of IC that includes financial reporting system, and consists of the
procedures and records established to initiate, record, process and report
entity transactions (as well as events and conditions) and to maintain
accountability for the related assets, liabilities and equity.
 Monitoring of controls
Monitoring of controls is a process to assess the effectiveness of internal
control performance over time.
It includes:
- assessing the design and operation of controls on a timely basis and;
- taking necessary corrective actions modified for changes in conditions.
6. List the internal control principles and give the example for each principle.
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