Advantages Of Audit.doc

ASSIGNMENT No. 1 Advanced Auditing (8533) Com Spring, 2013 Q. 1 a) b) Ans:

What are the advantages of an audit to an organization? List down the principal contents of an audit engagement letter.

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Advantages Of Audit Auditing has become a compulsory task in the business organization. All the organizations like business, social, industries and trading organizations make audit of books of accounts. Now-a-days, owner of business and its management are separate. So, to detect and prevent frauds, auditing has become essential. Its advantages are as follows: 1. Audit Helps To Detect And Prevent Errors And Frauds An auditor's main duty is to detect errors and frauds, preventing such errors and frauds and taking care to avoid such frauds. Thus, even though all organizations do not have compulsion to audit, they make audit of all the books of accounts. 2. Audit Helps To Maintain Account Regularly An auditor raises questions if accounts are not maintained properly. So, audit gives moral pressure on maintaining accounts regularly. 3. Audit Helps To Get Compensation If there is any loss in the property of business, insurance company provides compensation on the basis of audited statement of valuation made my the auditor. So, it helps to get compensation. 4. Audit Helps To Obtain Loan Specially financial institutions provide loan on the basis of audited statements. A business organization may obtain loan considering the audited statement of last five years. So, an organization should make audit compulsory to obtain loan. 5. Audit Facilitates The Sale Of Business Valuation of assets is made by the auditor. On the basis of valuation of assets and liabilities, businessman can sell his business. It helps to determine the price of business. 6. Audit Helps To Assess Tax Tax authorities assess taxes on the basis of profit calculated by the auditor. In the same way sales tax authority calculates sales tax on the basis of sales shown in the audited statement. 7. Audit Facilitates To Compare An auditor instructs an accountant in the same way which helps to compare books of accounts of current year with the accounting of the previous year. So, comparing the accounts of current with previous years helps to detect errors and frauds. 8. Audit Helps To Adjust Account Of Deceased Partner 1

Valuation of all the assets and liabilities of the business is made by the auditor while auditing books of account. Such valuation helps to clear the amount of deceased partner. 9. Audit Helps To Present A Proof If any case is filed against the auditor regarding negligence, auditor can present audited report as a proof to settle such case. So, it helps to present proof to settle such cases. 10. Audit Provides Information About Profit Or Loss A businessman wants to know profit or loss of his business after a certain period of time. So, the owner of the business can get information about profit or loss after auditing the books of accounts. 11. Audit Helps To Prepare Future Plan All the audited statements remain true and correct. Such true and correct account helps to prepare for the future plans. 12. Audit Helps To Increase Goodwill Auditing shows the profitability and financial position of an organization which creates faith of public over the business. Thus, auditing helps to increase goodwill of an organization. 13. Audit Helps To Amalgamate The Company Sometimes, same nature of organization may be amalgamated. Auditing makes valuation of assets and liabilities which helps to amalgamate the company. Purchaser of the company can accept such business organization on the basis of valuation made by the auditor. b)

List down the principal contents of an audit engagement letter.

Chapter 1 General provisions Article 1 This standard is prepared in accordance with the General Independent Auditing Standard to establish standards for the preparation of audit engagement letters and to define their contents. Article 2 The term "audit engagement letter" in this standard refers to a written contract entered into by the accounting firm and the client. Its purpose is to confirm the relationship between the client engaging the auditor and the accounting firm accepting the audit engagement and to define matters such as the objectives of the engagement, the scope of the audit, the responsibilities and duties of each party etc. The audit engagement letter has statutory binding force. Article 3 The term "the client" in this standard refers to the entity or individual who engages the accounting firm and signs the audit engagement letter with the accounting firm. Article 4 Certified Public Accountants ("CPAs") may refer to this standard in performing accounting advisory or accounting service engagements. Chapter 2 General principles Article 5 When accepting an audit engagement, the accounting firm should consider its own competence and ability to maintain independence. The accounting firm should sign an audit engagement letter with the client in accordance with the requirements of this standard. Article 6 Before signing an audit engagement letter, the accounting firm should appoint its CPA to investigate the entity's background and make a preliminary assessment of the audit risk. The CPA and the client should discuss matters regarding the engagement and should reach a consensus. Article 7 The CPA should understand the following background matters in relation to the entity: 2

(1) the nature of the business, size and organisational structure; (2) the operating conditions and operating risk; (3) the audit results in previous years; (4) the structure and Organisation of the financial accounting function; and (5) other matters relevant to the audit engagement letter. Article 8 The audit engagement letter should be signed by the legal representatives, or their authorised representatives, of both the accounting firm and the client. The letter should also be stamped with both the client's chop and the accounting firm's chop. Article 9 If either the accounting firm or the client needs to modify or supplement the audit engagement letter, they should, by appropriate means, obtain consent from the other party first. Article 10 The CPA should file the audit engagement letter in the audit file. Chapter 3 The contents of an audit engagement letter Article 11 The audit engagement letter should include the following basic contents: (1) the names of both parties; (2) the objectives of the engagement; (3) the scope of the audit; (4) the accounting responsibility and the audit responsibility; (5) the duties of both parties; (6) the deadline for the issuance of the audit report; (7) the responsibility arising from the use of the audit report; (8) the audit fees; (9) the period for which the audit engagement letter is valid; (10) the responsibility arising from a violation in the terms of the audit engagement letter; (11) the date of signing the audit engagement letter; and (12) other matters which both parties consider need to be included in the audit engagement letter. Article 12 The audit engagement letter should clearly define the accounting responsibility and the audit responsibility. It is the entity's accounting responsibility to establish a sound internal control system, to safeguard the assets and to ensure the truthfulness, legitimacy and completeness of the accounting information. It is the CPA's audit responsibility to issue an audit report in accordance with the requirements of the Independent Auditing Standards and to ensure the truthfulness and legitimacy of the audit report. The audit responsibility cannot substitute, alleviate or eliminate the accounting responsibility. 3

Article 13 The audit engagement letter should clearly define the duties of both parties. (1) The major duties that should be fulfilled by the client include: (i) the provision of all information required by the CPA on a timely basis; (ii) the provision of the necessary working environment and cooperation with the CPA during the audit; and (iii) the full and timely settlement of the audit fees in accordance with the agreed terms. (2) The major duties that should be fulfilled by the accounting firm include: (i) the completion of the audit and the issuance of the audit report in accordance with the time schedule as agreed; and (ii) keeping business information acquired in the course of the audit confidential. Article 14 The audit engagement letter should clearly define the basis on which the audit fees are computed and the payment methods and schedule. Article 15 The audit engagement letter should clearly state that it is the client's responsibility to ensure the proper use of the audit report. Any consequences arising from the improper use of the audit report are not the responsibility of the CPA or his accounting firm. Chapter 4 Supplementary provisions Article 16 The Chinese Institute of Certified Public Accountants is responsible for the interpretation of this standard. Article 17 This standard takes effect from 1 January 1996. 　 　 　 　 Specific Independent Auditing Standard No. 2 Audit Engagement Letters Chapter 1 General provisions Article 1 This standard is prepared in accordance with the General Independent Auditing Standard to establish standards for the preparation of audit engagement letters and to define their contents. Article 2 The term "audit engagement letter" in this standard refers to a written contract entered into by the accounting firm and the client. Its purpose is to confirm the relationship between the client engaging the auditor and the accounting firm accepting the audit engagement and to define matters such as the objectives of the engagement, the scope of the audit, the responsibilities and duties of each party etc. The audit engagement letter has statutory binding force. 4

Article 3 The term "the client" in this standard refers to the entity or individual who engages the accounting firm and signs the audit engagement letter with the accounting firm. Article 4 Certified Public Accountants ("CPAs") may refer to this standard in performing accounting advisory or accounting service engagements. Chapter 2 General principles Article 5 When accepting an audit engagement, the accounting firm should consider its own competence and ability to maintain independence. The accounting firm should sign an audit engagement letter with the client in accordance with the requirements of this standard. Article 6 Before signing an audit engagement letter, the accounting firm should appoint its CPA to investigate the entity's background and make a preliminary assessment of the audit risk. The CPA and the client should discuss matters regarding the engagement and should reach a consensus. Article 7 The CPA should understand the following background matters in relation to the entity: (1) the nature of the business, size and organisational structure; (2) the operating conditions and operating risk; (3) the audit results in previous years; (4) the structure and Organisation of the financial accounting function; and (5) other matters relevant to the audit engagement letter. Article 8 The audit engagement letter should be signed by the legal representatives, or their authorised representatives, of both the accounting firm and the client. The letter should also be stamped with both the client's chop and the accounting firm's chop. Article 9 If either the accounting firm or the client needs to modify or supplement the audit engagement letter, they should, by appropriate means, obtain consent from the other party first. Article 10 The CPA should file the audit engagement letter in the audit file. Chapter 3 The contents of an audit engagement letter Article 11 The audit engagement letter should include the following basic contents: (1) the names of both parties; (2) the objectives of the engagement; (3) the scope of the audit; (4) the accounting responsibility and the audit responsibility; (5) the duties of both parties; (6) the deadline for the issuance of the audit report; 5

(7) the responsibility arising from the use of the audit report; (8) the audit fees; (9) the period for which the audit engagement letter is valid; (10) the responsibility arising from a violation in the terms of the audit engagement letter; (11) the date of signing the audit engagement letter; and (12) other matters which both parties consider need to be included in the audit engagement letter. Article 12 The audit engagement letter should clearly define the accounting responsibility and the audit responsibility. It is the entity's accounting responsibility to establish a sound internal control system, to safeguard the assets and to ensure the truthfulness, legitimacy and completeness of the accounting information. It is the CPA's audit responsibility to issue an audit report in accordance with the requirements of the Independent Auditing Standards and to ensure the truthfulness and legitimacy of the audit report. The audit responsibility cannot substitute, alleviate or eliminate the accounting responsibility. Article 13 The audit engagement letter should clearly define the duties of both parties. (1) The major duties that should be fulfilled by the client include: (i) the provision of all information required by the CPA on a timely basis; (ii) the provision of the necessary working environment and cooperation with the CPA during the audit; and (iii) the full and timely settlement of the audit fees in accordance with the agreed terms. (2) The major duties that should be fulfilled by the accounting firm include: (i) the completion of the audit and the issuance of the audit report in accordance with the time schedule as agreed; and (ii) keeping business information acquired in the course of the audit confidential. Article 14 The audit engagement letter should clearly define the basis on which the audit fees are computed and the payment methods and schedule. Article 15 The audit engagement letter should clearly state that it is the client's responsibility to ensure the proper use of the audit report. Any consequences arising from the improper use of the audit report are not the responsibility of the CPA or his accounting firm. Chapter 4 Supplementary provisions Article 16 The Chinese Institute of Certified Public Accountants is responsible for the interpretation of this standard. Article 17 This standard takes effect from 1 January 1996.

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Q. 2 What do you understand by the term “Audit working Papers”? Discuss the importance of quality of working papers for an audit firm. Which are some of the methods used by audit firms to ensure high quality of working papers? (15) Q. 3 Write notes in detail on the followings: a) Teeming and lading b) Window dressing

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Ans: Most businesses require employees to have access to at least some of the business' cash or bank accounts. Several controls may be ineffective, allowing an employee to misappropriate actual cash assets. Once the cash has been taken or transferred to the fraudsters account, the discrepancies should become obvious in the bank reconciliations. To get around this fraudsters often allocate the missing debits to the trade debtors' accounts. This latter part is the teeming and lading. There are many ways through which this can be accomplished. An example is passing an entry in the accounting system as follows: - Debit - DEBTOR CUSTOMER A - $10,000 - Credit - CASH - ($10,000) The employee has the cash; meanwhile the missing debits are allocated to a genuine trade customer. This can be done via a direct journal posting or by effecting indirect inputs into the accounting system. An example is refunding a cash sale and then re-recording it as a credit sale has the same affect. Q. 4 Discuss the advantages and disadvantages of written audit program containing the details of the work to be performed. (10) Q. 5 The auditor performs risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control. Briefly discuss all such procedures. (10) Q. 6 a) What do you understand by the term ‘Audit Evidence’? And explain the procedures for obtaining audit evidence. b) Distinguish between positive and negative confirmation (15) Q. 7 What are ‘analytical Review Procedures? How these procedures help an auditor at planning, execution and completion stages of the audit? (10) Q. 8 In which circumstances an auditor expresses the following: a) An unqualified report b) A qualified report

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