KATIGBAK, ABEGAIL M.

A4B Audit 2

1. What is a financial statement audit? What is its basic purpose?

Financial statement audit refers to the gathering of evidence on the assertions embodied
in the financial statements of an entity and using the evidence to determine whether the
assertions adhere to generally accepted accounting principles (GAAP) or another
comprehensive and authoritative financial reporting framework. This type of audit requires a
Certified Public Accountant (CPA). The purpose of a financial statement audit is the expression
of an opinion as to the fairness by which financial statements are presented.

2. What are the managements assertions addressed by an auditor in financial statement

audit?

Existence or occurrence management asserts that all assets, liabilities and equity reported
in the financial statements actually existed at the reporting date and that reported income is
earned and reported expenses are incurred during the reporting period.

Completeness management asserts that all transactions and accounts that should be
presented in the financial statements are the results of the transactions and other events that
actually occurred during the reporting period.

Rights and obligations management asserts that the entity has property rights to or control
over all recorded assets, and that all liabilities represent obligations at the reporting date.

Measure and allocation management assets that the measurement bases of all assets,
liabilities, equities, income and expenses are recognized during the proper reporting period
based on the appropriate revenue and expense recognition principles.

Presentation and disclosure management asserts that all financial statement components
are presented, classified and described properly and all relevant and required disclosures are
included and that the financial statement elements presented and the related notes represent
the substance and not merely the legal form of the recorded transactions.

3. What are the major phases in financial statement audit? Briefly describe the types of
activities undertaken by the auditor/audit team in each phases?
Pre-engagement carrying out initial audit activities, such as client acceptance and
continuance, and agreement on the terms of engagement.
Audit Planning and Evaluation of Internal Control developing an overall audit
strategy and preparing the detailed audit plan. Documenting and evaluating the
auditors understanding of the internal control structure of the client. Based on the
understanding of internal control, the auditor assesses risk and determines the
appropriate audit approach.
Evidence Gathering this phase must accomplish the objective of documenting the
fact that audit was adequately planned and sufficient, competent evidential matter is
obtained that serves as the basis for the audit opinion reached.
Reporting the auditor should review and assess the conclusions drawn from the
audit evidence obtained as the basis for the expression of an opinion on the financial
statements. The auditors report should contain clear written expression of an opinion
on the financial statements taken as a whole.
 4. What types of evidence does the auditor in financial statement audit gather? Give typical
examples of such evidence.

Audit evidence consists of both accounting data and corroborating information that
supports accounting data. Accounting data includes business documents, journals and ledger
while corroborating information includes cancelled checks, invoices, contracts, promissory notes
and written representations from customers and vendors.

5. What factors are considered in the selection of audit procedures to be performed in an

audit engagement?

The following are the factors considered by auditors in selection of audit procedures to
be performed in an audit engagement:

Audit objectives
Quantity and types of evidence available
Materiality
Assessed level of audit risk

6. Describe the purpose of audit documentation.

There are several purposes of audit documentation. One is to organize and coordinate
all phases of the audit engagement, to provide evidence to demonstrate that the planned audit
procedures were in fact performed and to aid partners in reviewing the work performed by audit
staff members. Another purposes are to record the judgments involved in forming the audit
opinion, aid in planning and conducting future audits of the client and to provide information in
rendering additional services to the audit client.

7. Identify example of matters that must be included in audit documentation in the:

a. Risk assessment phase
In the risk assessment phase, documentation would include description of or copy of
communication relating to
Pre-engagement procedures
Independence and ethics assessments
Terms of engagement
Materiality consideration
Overall audit strategy
Audit team discussions, including possible causes of material
misstatements due to fraud
Risk assessment procedures performed and the results
Assessed risk of material misstatement identified based on the
understanding of the entity and related internal control
Significant risks
Communication with management and those charged with governance
b. Risk response phase
In the risk response phase, typical audit documentation would include the following
items:
An audit plan that addresses
o All material financial statement areas
o The assessed risk of material misstatement at the financial statement
and assertion levels
o The nature, timing, and extent of the further audit procedures
performed that respond to the assessed risks
 o Significant risks identified
Nature and extent of consultation with others
Significance and nature of the evidence obtained at the assertion being
tested
A clear explanation of the results obtained from the test, and how any
exceptions were followed up
Actions taken as a result of auditing procedures
Changes if any, required to the overall audit strategy
Use of significant judgments applied on significant matters in performing
work and evaluating results
Discussions with management on significant matters
Memoranda, analysis, details of assumptions used and how the validity of
the underlying assumption used was established
Cross references to supporting documentation and evidence that the
financial statements agree or reconcile with the underlying accounting
records
c. Reporting phase
In the reporting phase of the engagement, the audit documentation includes the
following:
Completed audit program
Evidence of file reviews
Information that is inconsistent with or contradicts the final conclusions
Summary of financial effect of unadjusted errors identified, and
managements response
Actions taken to address significant matters and the basis for the
conclusions reached
8. What are the two basic types of audit report?

Basically, there are two general types of audit report:

1. Unmodified opinion when the auditor concludes that the financial statements are
presented fairly, in all material respects with the applicable financial reporting
framework.
2. Modified opinion when based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement or when sufficient
appropriate audit evidence could not be obtained to conclude that the financial
statements as a whole are free from material misstatement.

9. Under what circumstances is the expression of a qualified opinion appropriate?

Qualified opinion should be expressed when either sufficient appropriate audit evidence
was obtained, but the auditor concludes that misstatements exist, individually or in the
aggregate, that are material but not pervasive to the financial statements OR the auditor is
unable to obtain sufficient appropriate audit evidence on which to base the opinion and that the
possible effects on the financial statements of undetected misstatements, if any, could be
material but not pervasive.

10. Under what circumstances is the expression of the unmodified opinion appropriate?

When the auditor concludes that the financial statements are presented fairly, in all
material respects with the applicable financial reporting framework, an unmodified opinion would
be appropriate.

11. What factor is considered by the auditor in making a decision as to whether to issue a
qualified opinion or a disclaimer of opinion?
 Qualified opinion must be expressed when he auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion and that the possible effects on the
financial statements of undetected misstatements, if any, could be material but not pervasive.

Disclaimer opinion is expressed when the auditor is unable to obtain sufficient

appropriate audit evidence on which to base the opinion, and concludes that the possible effects
of undetected misstatements, if any, could be both material and pervasive.

12. What does the working trial balance contain?

The working trial balance is a schedule listing the balances of accounts in the general
ledger for the current and previous year, with columns for adjusting entries, reclassification
entries, and the financial statement amounts. It shows the results of all adjustments and
reclassifications made as a results of detailed audit of account balances.