Expected Questions Audit Principles and Practices May/june 2016

EXPECTED QUESTIONS AUDIT PRINCIPLES AND PRACTICES MAY/JUNE 2016

1. Define ‘going concern’ and discuss the auditor’s responsibilities in respect of going concern.

Going concern may be defined as a firm will continue to operate and exist for the foreseeable future without the necessity of liquidation or ceasing trade. It is one of the basic accounting concepts used by auditors and stated in IAS1(Presentation of FS).According to ISA570, the responsibility of auditor in respect of going concern implies that when planning and performing audit procedures, the auditor should consider the appropriateness use of mgt assumption in the preparation of the FS.

The auditors’ responsibility in respect of going concern considers three important aspects:

• Auditor must carry out audit procedures that will identify whether or not an org exists as a going concern
• Auditor must ensure that org’s mgt have been realistic in their use of the going concern assumption when preparing FS.
• Auditor reports to members where they consider going concern assumption used inappropriately. For instance, when FS indicate – org is going concern, but audit procedures indicate this may not be the case

Application of ratios by Auditors using going-concern

• Profitability- Auditors ensure profit is overstated. Mgt(creative acc) ensure business experience this concept i.e going concern of FS at its book value.FS prepared on the basis of fair value.
• Liquidity- Auditors must take into acc the cash cycle- risk leverage where auditors worked on behalf of stakeholders using ratio- debt to equity. Profit maximised by increasing the share price of company- trade off between internal and divend pay ie the more company relies on ext factors the more the internal pay and less dividend pay.

1. Explain the term ‘audit risk’ and the three elements of risk that contribute to total audit risk.  What is the model of audit risk?

The term ‘audit risk’ refers to the risk that auditor gives an inappropriate opinion on the financial statements of the client company. This opinion given by the auditor may be detected by material misstatements in the statements. It is related to materiality as this risk comes to an invalid conclusion when there is either an unqualified audit report with subsequently material errors or qualified audit report with no material errors found in the statement. However, if audit risk is not minimised then audit firms may suffer from monetary damages paid to client as a compensation loss and loss of reputation with the client. Therefore, the assessment of risk according to ISA 300 implies that auditors should be required to evaluate the risk prior to the start of the audit. The risk assessment would consider the risk that affects both business and auditors.