1. Under ISA 200,it is the auditors responsibility to plan and design the audit.

In the first phase of audit planning,describe THREE (3) aspects that auditor have to obtain about the potential client (the company) before signing an engagement letter. (9 marks)

There are three flows in the first phase of audit planning.The three flows are:-

Obtaining background information

Collection information

Information of special interest

. In the public sector environment, additional planning considerations may include: Obtaining an understanding of the legal and regulatory framework applicable to the entity due to the broader objectives of the audit The implications for the audit of the financial statements of knowledge obtained from performance audits and other audit activities relevant to the entity, including the implications of previous recommendations The implications for the audit of the financial statements of knowledge obtained from planning activities related to the relevant department and ministry The expectations of the legislature and other users of the auditors report.

Obtaining background information The three aspect aspects that auditor have to obtain about the potential client (the company) before signing an engagement letter are in the obtaining background information. When the auditor has dicided to accept the audit invitation,yhe next step that he should take,is to understand the company that he is about to audit. This specially applies to new company to be audited.Understanding the company is an important aspect of auditing and it is required under ISA 300. Understanding the company means understanding: The companys management It is important that the auditor gets acquinted with the management by studying its organization structure. Should get some background information about key officers of the company. In the performance of his duties he should carry himself with courtesy as required under By-Law. The companys industry General principles are same for all audits,but there is different accounting requirements for different industries. Example-the risk associated with the banking industry is not exactly the same as the risks related to the extractive industries. The primary reason for the fall of Enron was that the auditors knew little about the companys industry.Enron was in the energy industry. The vision,mission and objective of the company The auditor must know the companys history,its environment,what products or services thecompany sells,how the products are manufactured,where the factories and warehouse are located,what raw materials are used the suppliers of the raw materials,what overheads are involved,where the products are sold who the major suppliers and customers are. Past performance and financial position of the company Achieved by examining the companys past annual reports.The information here,including the auditors report should give him some idea about the company. Various items in the past financial statement may be compared Example-sales of different years may be compared. This kind comparison is called analytical procedures.Such comparison may reveal important information about the company Example-Whether the company is a going concern.

Collection Information Collection discussed above may collected by the auditor various as follows: Discussion with the key officers or employees of the company. Reading the memorandum of association,articles of association and minutes of meeting and annual reports about the company itself.Information about the industry may be obtained from the related journals and trough the internet. Tour various location for example factories,warehouse,offices,plantations and branches. Analytical procedures-Information about the company may be collected by comparing related items in the financial statement.

Information of special Interest Major customers,major shareholders,subsidiaries and other parties that may have influence over the company. The auditor may find the nature of the business. The information collected might reveal the companys legal obligations. From the information collected,the auditor might have some idea about the various aspects of internal control.

2.Define the audit engagement letter and give FOUR (4) reasons why engagement letter must be prepared.(10 marks)

Definition of audit engagement letter The engagement letter is an agrrement between the CA firm and the client for the conduct of the audit and related services. A written agreement to perform services in exchange for compensation. Engagement letters are traditionally used by certain professional service firms, particularly in the fields of finance, accounting, law and consulting to define the specifics of the business relationship. Normally, the letter is sent by the service firm to an officer of the engaging company. Once the officer has signed the engagement letter, the letter serves as a contract. An engagement letter defines the legal relationship (or engagement) between a professional firm (e.g., law, investment banking, consulting, advisory or accountancy firm) and its client(s). This letter states the terms and conditions of the engagement, principally addressing the scope of the engagement and the terms of compensation for the firm.

Four (4) reasons why engagement letter must be prepared. The audit engagement letter serves as a contract between the auditor or the audit firm and the client company to be audited spelling out the type of audit required. The audit engagement letter contain all agreements that are understood between the two parties which should hellpa avoid any future misunderstanding. The audit engagement letter can be ued by the auditor as evidence in any legal action taken against him in the future. The audit engagement letter serves as a basis for audit planning.The letter spells out the type of audit to be carried out. The preparation of engagement letters relating to audit of financial statement.While the principles of the guidanee may also be helpful in relation to other audit related services,such as reporting on interim statement or Cadbury Code compliance statement. It is not intended to cover matters that may be relevant to such engagement.When these and other services such as tax accounting or management adversary services are to be provided,auditors often prepare separate engagement letters so as to distinguish clearly the statutory aaudit from other services. In particular the provision of investment business advice as defined by the financial services is particularly important because auditors are not able to limit their liability in respect of the statutory audit.

3.What is the meaning of audit risk?Explain briefly about: (8 marks)

a) Inherent risk b) Control risk c) Detection rik.

Inherent risk Inherent risk is a measure of auditors assessment of the like hood that there are material misstatement (errors ort fraud) in a segment before considering the effectiveness of internal control. Inherent risk is the susceptibility of the financial statement to material misstatement,assuming no internal controls. The assessment of inherent risk depends on the professional judgment of the auditor and it is done after assessing the business environment of the entity being audited. The probability of loss arising out of circumstances or existing in an environment , in the absence of any action to control or modify the circumstances. Susceptibility of an assertion to material misstatement assuming no related internal controls. Example of inherent risk: Nature of the Clients Business Inherent risk is likely to vary from business to business for accounts such as inventory, accounts and loans receivable, and property, plant, and equipment. The nature of the business should have little effect on cash, notes payable, and mortgages payable. Results of Previous Audits Misstatements found in the previous years audit have a high likelihood of occurring again. Many types of misstatements are systematic in nature, and organizations are slow in making changes to eliminate them. Initial vs. Repeat Engagement Most auditors use a larger inherent risk for initial audits than for repeat engagements in which no material misstatements had been found Related Parties Examples of related party transactions are those between parent and subsidiary companies, and management or owners and the company. Increases inherent risk because there is a greater likelihood of misstatement.

Nonroutine Transactions Transactions that are unusual for the client are more likely to be recorded incorrectly. Examples include fire losses, major property acquisitions, etc. Judgment Required Many account balances require estimates and a great deal of management judgment including: Uncollectible accounts receivable Obsolete inventory Warranty liabilities Make-up of the Population Accounts receivable where most accounts are significantly overdue Transactions with related parties Disbursements made payable to cash Inventory with a slow turnover

Control risk

Is a measure of the auditors assessments of the like hood that misstatement exceeding a tolerable amount in a segmen will not be prevented or detected by the clients internal control. Probability of loss arising from the tendency of internal control systems to lose their effectiveness over time, and thus expose (or fail to prevent exposure of) the assets they were instituted to protect Control Risks is a global risk and strategic consulting firm specialising in political, security and integrity risk. Control Risks aim is to help its clients to understand and manage the risks of operating in complex or hostile environments. Control Risks brings together the expertise of regional political risk analysts, business intelligence and corporate investigations experts and experienced security consultants to offer fully integrated, information led risk management services. Operating from 34 offices[1], the companys primary services include anti-corruption audits, consultancy and training, eDiscovery, political risk analysis and a broad range of security and crisis management support. Risk of misstatements not being detected by system of internal control. There are two basic phases to an auditors evaluation of control risk: Obtain an understanding of internal control. This phase applies to all audits. Test the internal controls for effectiveness. This phase only applies when the auditor chooses to assess control risk at below the maximum.

Detection risk Is a measure of the risk that audit evidence for a segmen will fail to detect misstatement exceeding a tolerable amount should ssuch misstatement exist. There are two key points about planned detection risk: First it is dependent on the three factors in the model.Planned detection risk will charge only if the auditor changes one of the other factors. Second,it determines the amount of substantive evidence that the auditor plans to accumulate,inversely with the size of planned detection risk.If planned detection risk is reduced,the auditor needs to accumulate more evidence to achieve the reduced planned risk. Detection risk is the risk that the auditor will conclude that no material errors are present when in fact there are. Detection risk is one of the three elements that comprise audit risk, the other two being inherent risk and control risk. Is that an auditor is at the risk of not finding out or detecting some irregularities,for example the compensating errors which can be made by the client while making up the accounts such errors may be dificult to find out by an auditor as there will be no evidence as to that error has been actually made so here the auditor is at a detection risk of not finding such errors. Risk of misstatements not being detected by the auditor.

4.Audit report is the report that need to be prepared by the auditor which contains the auditor opinion about the company financial statement,whether the statement follows the need of Company Act 1965 and the general accepted accounting principles so that give a true and fair view about the financial statement.Describe FOUR (4) types of audit reports produce by the.

Unqualified Audit Report The report of CA issue when all auditing conditions have been met,no significant misstatement have been discovered and left uncorrected and it is the auditors opinion that the financial statement are fairly stated in accordance with approved according standard. An opinion is said to be unqualified when the Auditor concludes that the Financial Statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the Financial Statements. An Auditor gives a Clean opinion of Unqualified Opinion when he or she does not have any significant reservation in respect of matters contained in the Financial Statements. The most frequent type of report is referred to as the Unqualified Opinion, and is regarded by many as the equivalent of a clean bill of health to a patient,which has led many to call it the Clean Opinion, but in reality it is not a clean bill of health. This type of report is issued by an auditor when the financial statements presented are free of material misstatements and are represented fairly in accordance with the Generally Accepted Accounting Principles (GAAP), which in other words means that the companys financial condition, position, and operations are fairly presented in the financial statements. It is the best type of report an auditee may receive from an external auditor. An Unqualified Opinion indicates the following -(1) The Financial Statements have been prepared using the Generally Accepted Accounting Principles which have been consistently applied; (2) The Financial Statements comply with relevant statutory requirements and regulations; (3) There is adequate disclosure of all material matters relevant to the proper presentation of the financial information subject to statutory requirements, where applicable; (4) Any changes in the accounting principles or in the method of their application and the effects thereof have been properly determined and disclosed in the Financial Statements.

 An example of a standard unqualified auditors report on financial statements as it is used in most countries, using the name ABC Company as an auditees name: INDEPENDENT AUDITORS REPORT Board of Directors, Stockholders, Owners, and or Management of ABC Company, Inc. 123 Main St. Anytown, Any Country We have audited the accompanying balance sheet of ABC Company, Inc. (the Company) as of December 31, 20XX and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in (the country where the report is issued). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in (the country where the report is issued). AUDITORS SIGNATURE Auditors name and address

Date = Last day of any significant field work This date should not be dated earlier than when the auditor has sufficient audit evidence to support the opinion.

Qualified Audit Report A report of CA issues when auditor believes that the overall financial statement are fairly stated but their either the scope of the audit wa limited or the financial data indicated a failure to follow approved accounting standards. A Qualified Opinion report is issued when the auditor encountered one of two types of situations which do not comply with generally accepted accounting principles, however the rest of the financial statements are fairly presented. This type of opinion is very similar to an unqualified or clean opinion, but the report states that the financial statements are fairly presented with a certain exception which is otherwise misstated. The two types of situations which would cause an auditor to issue this opinion over the Unqualified opinion are: Single deviation from GAAP this type of qualification occurs when one or more areas of the financial statements do not conform with GAAP (e.g. are misstated), but do not affect the rest of the financial statements from being fairly presented when taken as a whole. Examples of this include a company dedicated to a retail business that did not correctly calculate the depreciation expense of its building. Even if this expense is considered material, since the rest of the financial statements do conform with GAAP, then the auditor qualifies the opinion by describing the depreciation misstatement in the report and continues to issue a clean opinion on the rest of the financial statements. Limitation of scope - this type of qualification occurs when the auditor could not audit one or more areas of the financial statements, and although they could not be verified, the rest of the financial statements were audited and they conform GAAP. Examples of this include an auditor not being able to observe and test a companys inventory of goods. If the auditor audited the rest of the financial statements and is reasonably sure that they conform with GAAP, then the auditor simply states that the financial statements are fairly presented, with the exception of the inventory which could not be audited.

Adverse Audit Report A report when the auditor believes the financial statements are so materially misstated or misleading as a wholes that they do not present fairly the entitys financial position or the result of its operations and cash flows in conformity with approved accounting standards. An Adverse Opinion is issued when the auditor determines that the financial statements of an auditee are materially misstated and, when considered as a whole, do not conform with GAAP. It is considered the opposite of an unqualified or clean opinion, essentially stating that the information contained is materially incorrect, unreliable, and inaccurate in order to assess the auditees financial position and results of operations. Investors, lending institutions, and governments very rarely accept an auditees financial statements if the auditor issued an adverse opinion, and usually request the auditee to correct the financial statements and obtain another audit report.

 Generally, an adverse opinion is only given if the financial statements pervasively differ from GAAP. An example of such a situation would be failure of a company to consolidate a material subsidiary. The wording of the adverse report is similar to the qualified report. The scope paragraph is modified accordingly and an explanatory paragraph is added to explain the reason for the adverse opinion after the scope paragraph but before the opinion paragraph. However, the most significant change in the adverse report from the qualified report is in the opinion paragraph, where the auditor clearly states that the financial statements are not in accordance with GAAP, which means that they, as a whole, are unreliable, inaccurate, and do not present a fair view of the auditees position and operations

Disclaimer Audit Report A report issued when the auditor has not been able to become satisfied that the overall financial statement are fairly presented. A Disclaimer of Opinion, commonly referred to simply as a Disclaimer, is issued when the auditor could not form, and consequently refuses to present, an opinion on the financial statements. This type of report is issued when the auditor tried to audit an entity but could not complete the work due to various reasons and does not issue an opinion. The disclaimer of opinion report can be traced back to 1949, when the Statement on Auditing Procedure No. 23: Recommendation Made To Clarify Accountants Representations When Opinion Is Not Expressed was published in order to provide guidance to auditors in presenting a disclaimer.Statements on Auditing Standards (SAS) provide certain situations where a disclaimer of opinion may be appropriate: A lack of independence, or material conflict(s) of interest, exist between the auditor and the auditee (SAS No. 26) There are significant scope limitations, whether intentional or not, which hinder the auditors work in obtaining evidence and performing procedures (SAS No. 58); There is a substantial doubt about the auditees ability to continue as a going concern or, in other words, continue operating (SAS No. 59) There are significant uncertainties within the auditee (SAS No. 79).