Q2.

CPAs perform three primary types of audits, are

1. Operational audit

2. Compliance audit

3. Financial statement audit

An operational audit is the examination of an operating unit or a complete

organization to evaluate its performance, as measured by management's objectives. The
stages of an operational audit might be summarized as definition of purpose,
familiarization, preliminary survey, program development, fieldwork, reporting the
findings, and follow-up.

Compliance auditing involves testing and reporting on whether an organization has

complied with there quirements of various laws, regulations, and agreements.The
objective of a compliance audit engagement is the issuance of a report on the subject
matter oran assertion by management regarding the organization's compliance with
specified requirements, or regarding the organization's internal control over compliance
with laws or regulations.

The objectives of compliance auditing of federal financial assistance programs are (a) to
determine whether there have been violations of laws and regulations that may have a
material effect on the organization's financial statements and major federal financial
assistance programs, and (b) to provide a basis for additional reports on compliance and
internal controls. Compliance auditing is involved in(a) audits of financial statements in
accordance with generally accepted auditing standards, (b) audits conducted in
accordance with Government Auditing Standards, and (c) audits conducted in accordance
with the federal Single Audit Act of 1984.
Audits of governmental organizations in accordance with generally accepted auditing
standards must reflect the fact that such organizations are subject to a variety of laws and
regulations that may have a direct and material effect on the amounts in the organization's
financial statements.
In audits in accordance with Government Auditing Standards, the auditors issue a report
on the financial statements and also report on compliance with laws and regulations and
on internal control.

Financial statement audit :- A financial statement audit is conducted to determine whether the
financial statements (the information being verified) are stated in accordance with specified criteria.
Normally, the criteria are U.S. or international accounting standards, although auditors may conduct
audits of financial statements prepared using the cash basis or some other basis of accounting
appropriate for the organization. In determining whether financial statements are fairly stated in
accordance with accounting standards, the auditor gathers evidence to determine whether the

statements contain material errors or other misstatements. The primary focus of this
book is on fnancial statement audits.As businesses increase in complexity, it is no longer suffcient for
auditors to focus only on accounting transactions. An integrated approach to auditing considers both
the risk of misstatements and operating controls intended to prevent misstatements. The auditor must
also have a thorough understanding of the entity and its environment.

Q3. Auditing Standards

The general, eld work, and reporting standards (the 10 standards) approved and adopted by the
membership of the AICPA, as amended by the AICPA Auditing Standards Board (ASB), are as follows:

General Standards

1. The auditor must have adequate technical training and prociency to perform the audit.

2. The auditor must maintain independence in mental attitude in all matters relating to the audit.

3. The auditor must exercise due professional care in the performance of the audit and the preparation
of the report

Standards of Field Work

1. The auditor must adequately plan the work and must properly supervise any assistants.

2. The auditor must obtain a sufcient understanding of the entity and its environment, including its
internal control, to assess the risk of material misstatement of the nancial statements whether due to
error or fraud, and to design the nature, timing, and extent of further audit procedures.

3. The auditor must obtain sufcient appropriate1 audit evidence by performing audit procedures to
afford a reasonable basis for an opinion regarding the nancial statements under audit.

Standards of Reporting

1. The auditor must state in the auditor's report whether the nancial statements are presented in
accordance with generally accepted accounting principles.

2. The auditor must identify in the auditor's report those circumstances in which such principles have
not been consistently observed in the current period in relation to the preceding period.

3. When the auditor determines that informative disclosures are not reasonably adequate, the auditor
must so state in the auditor's report.

4. The auditor must either express an opinion regarding the nancial statements, taken as a whole, or
state that an opinion cannot be expressed, in the auditor's report. When the auditor cannot express an
overall opinion, the auditor should state the reasons there for in the auditor's report. In all cases where
an auditor's name is associated with nancial statements, the auditor should clearly indicate the
character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the
auditor's report.
Q 4. An unqualified report with an explanatory paragraph or modified wording is the same as a standard
unqualified report except that the auditor believes it is necessary to provide additional information
about the audit or the financial statements. For a qualified report, either there is a scope limitation
(condition 1) or a failure to follow generally accepted accounting principles (condition 2). Under either
condition, the auditor concludes that the overall financial statements are fairly presented.

Two examples of an unqualified report with an explanatory paragraph or modified wording are:

1. The entity changed from one generally accepted accounting principle to another generally
accepted accounting principle
2. A shared report involving the use of other auditors.

An unqualified report may be issued under the following five circumstances:

1. All statementsbalance sheet, income statement, statement of retained earnings, and

statement of cash flowsare included in the financial statements.
2. The three general standards have been followed in all respects on the engagement.
3. Sufficient evidence has been accumulated and the auditor has conducted the engagement in a
manner that enables him or her to conclude that the three standards of field work have been
met.
4. The financial statements are presented in accordance with generally accepted accounting
principles. This also means that adequate disclosures have been included in the footnotes and
other parts of the financial statements.
5. There are no circumstances requiring the addition of an explanatory paragraph or modification
of the wording of the report.

Q5.

An unqualified opinion is an independent auditor's judgment that a company's financial records and
statements are fairly and appropriately presented, and in accordance with Generally Accepted
Accounting Principles (GAAP). An unqualified opinion is the most common type of auditor's report.

A qualified opinion report can result from a limitation on the scope of the audit or failure to follow
generally accepted accounting principles. A qualified opinion report can be used only when the auditor
concludes that the overall financial statements are fairly stated. A disclaimer or an adverse report must
be used if the auditor believes that the condition being reported on is highly material. Therefore, the
qualified opinion is considered the least severe type of departure from an unqualified report.

A qualified report can take the form of a qualification of both the scope and the opinion or of the
opinion alone. A scope and opinion qualification can be issued only when the auditor has been unable to
accumulate all of the evidence required by auditing standards. Therefore, this type of qualification is
used when the auditors scope has been restricted by the client or when circumstances exist that
prevent the auditor from conducting a complete audit. The use of a qualification of the opinion alone is
restricted to situations in which the financial statements are not stated in accordance with GAAP.
When an auditor issues a qualified report, he or she must use the term except for in the opinion
paragraph. The implication is that the auditor is satisfied that the overall financial statements are
correctly stated except for a specific aspect of them. It is unacceptable to use the phrase except for
with any other type of audit opinion

An adverse opinion is used only when the auditor believes that the overall financial statements are so
materially misstated or misleading that they do not present fairly the financial position or results of
operations and cash flows in conformity with GAAP.

The adverse opinion report can arise only when the auditor has knowledge, after an adequate
investigation, of the absence of conformity. This is uncommon and thus the adverse opinion is rarely
used.

A disclaimer of opinion is issued when the auditor has been unable to satisfy himself or herself that
the overall financial statements are fairly presented. The necessity for disclaiming an opinion may arise
because of a severe limitation on the scope of the audit or a non independent relationship under the
Code of Professional Conduct between the auditor and the client. Either of these situations prevents the
auditor from expressing an opinion on the financial statements as a whole. The auditor also has the
option to issue a disclaimer of opinion for a going concern problem.

The disclaimer is distinguished from an adverse opinion in that it can arise only from a lack of
knowledge by the auditor, whereas to express an adverse opinion, the auditor must have knowledge
that the financial statements are not fairly stated. Both disclaimers and adverse opinions are used only
when the condition is highly material.

Q8. The two determinants of the persuasiveness of evidence are appropriateness and sufficiency.
Appropriateness of evidence is a measure of the quality of evidence, meaning its relevance and
reliability in meeting audit objectives for classes of transactions, account balances, and related
disclosures. If evidence is considered highly appropriate, it is a great help in persuading the auditor that
financial statements are fairly stated Relevance of Evidence Evidence must pertain to or be relevant to
the audit objective that the auditor is testing before it can be appropriate.

The quantity of evidence obtained determines its sufficiency. Sufficiency of evidences measured
primarily by the sample size the auditor selects. For a given audit procedure, the evidence obtained
from a sample of 100 is ordinarily more sufficient than from a sample of 50.

Q9 1. Know Your Employees

Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud.
Observing and listening to employees can help you identify potential fraud risk. It is important for
management to be involved with their employees and take time to get to know them. Often, an attitude
change can clue you in to a risk. This can also reveal internal issues that need to be addressed. For
example, if an employee feels a lack of appreciation from the business owner or anger at their boss, this
could lead him or her to commit fraud as a way of revenge. Any attitude change should cause you to pay
close attention to that employee. This may not only minimize a loss from fraud, but can make the
organization a better, more efficient place with happier employees. Listening to employees may also
reveal other clues. Consider an employee who has worked for your company for 15 years that is now
working 65 hours a week instead of 40 because two co-workers were laid off. A discussion with the
employee reveals that in addition to his new, heavier workload, his brother lost his job and his family
has moved into the employees house. This could be a signal of a potential fraud risk. Very often and
unfortunately, its the employee you least expect that commits the crime. It is imperative to know your
employees and engage them in conversation.

2. Make Employees Aware/Set Up Reporting System

Awareness affects all employees. Everyone within the organization should be aware of the fraud risk
policy including types of fraud and the consequences associated with them. Those who are planning to
commit fraud will know that management is watching and will hopefully be deterred by this. Honest
employees who are not tempted to commit fraud will also be made aware of possible signs of fraud or
theft. These employees are assets in the fight against fraud. According to the ACFE 2014 Report, most
occupational fraud (over 40%) is detected because of a tip. While most tips come from employees of the
organization, other important sources of tips are customers, vendors, competitors and acquaintances of
the fraudster. Since many employees are hesitant to report incidents to their employers, consider
setting up an anonymous reporting system. Employees can report fraudulent activity through a website
keeping their identity safe or by using a tip hotline.

3. Implement Internal Controls

Internal controls are the plans and/or programs implemented to safeguard your companys assets,
ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of
duties is an important component of internal control that can reduce the risk of fraud from occurring.
For example, a retail store has one cash register employee, one salesperson, and one manager. The cash
and check register receipts should be tallied by one employee while another prepares the deposit slip
and the third brings the deposit to the bank. This can help reveal any discrepancies in the collections.

Documentation is another internal control that can help reduce fraud. Consider the example above; if
sales receipts and preparation of the bank deposit are documented in the books, the business owner
can look at the documentation daily or weekly to verify that the receipts were deposited into the bank.
In addition, make sure all checks, purchase orders and invoices are numbered consecutively. Use for
deposit only stamps on all incoming checks, require two signatures on checks above a specified dollar
amount and avoid using a signature stamp. Also, be alert to new vendors as billing-scheme embezzlers
setup and make payments to fictitious vendors, usually mailed to a P.O. Box.

Internal control programs should be monitored and revised on a consistent basis to ensure they are
effective and current with technological and other advances. If you do not have an internal control
process or fraud prevention program in place, then you should hire a professional with experience in
this area. An expert will analyze the companys policies and procedures, recommend appropriate
programs and assist with implementation.

4. Monitor Vacation Balances

You might be impressed by the employees who havent missed a day of work in years. While these may
sound like loyal employees, it could be a sign that these employees have something to hide and are
worried that someone will detect their fraud if they were out of the office for a period of time. It is also
a good idea to rotate employees to various jobs within a company. This may also reveal fraudulent
activity as it allows a second employee to review the activities of the first.

5. Hire Experts

Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in
Financial Forensics (CFF) can help you in establishing antifraud policies and procedures. These
professionals can provide a wide range of services from complete internal control audits and forensic
analysis to general and basic consultations.

6. Live the Corporate Culture

A positive work environment can prevent employee fraud and theft. There should be a clear
organizational structure, written policies and procedures and fair employment practices. An open-door
policy can also provide a great fraud prevention system as it gives employees open lines of
communication with management. Business owners and senior management should lead by example
and hold every employee accountable for their actions, regardless of position.

Q10 Types of Audit Evidence

1. Physical Examination

It is the inspection or count by the auditor of a tangible asset. This type of evidence is most
often associated with inventory and cash. verifying that an asset actually exists (existence
objective) verifying existing assets are recorded (completeness objective).
 2. Confirmation
The receipt of a direct written response from a third party verifying the accuracy of
information that was requested by the auditor. They are a highly regarded and often-used type
of evidence and Most costly .
3. Documentation
It is the auditors inspection of the clients documents and records. It may be Internal
documents and External documents
Internal document has been prepared and used within the client s organization and is retained
without ever going to an outside party. Internal documents include duplicate sales invoices,
employees time reports, and inventory receiving reports

External document has been handled by someone outside the client s organization who is a party to
the transaction being documented, but which are either currently held by the client or readily
accessible vendors invoices, cancelled notes payable, and insurance policies

External one is more reliable than Internal documents

Internal documents created and processed under effective internal control is more
reliable than conditions of weak internal control
Original documents are considered more reliable than photocopies or
facsimiles.

When auditors use documentation to support recorded transactions or amounts, the process is often
called vouching.

4. Analytical Procedures

use comparisons and relationships to assess whether account balances or other data appear reasonable
compared to the auditor s expectations.

Understand the clients industry and business (highlighted any changes)

Assess the entitys ability to continue as a going concern (assess the likelihood of failure)
Indicate the presence of possible misstatements in the financial statements (Significant
unexpected differences Unusual fluctuations)
Reduce detailed audit tests

Analytical procedure reveals no unusual fluctuations, this implies the possibility of a material
misstatement is mi minimized perform fewer detailed tests

5. Inquiries of the Client

It is the obtaining of written or oral information from the client in response to questions from
the auditor. Usually cannot be regarded as conclusive
6. Recalculation
It involves rechecking a sample of calculations made by the client.
Q11 Fraudulent financial reporting is the intentional misrepresentation of a firms financial statements
with the aim to give investors a mistaken impression about the firms operating performance and
profitability

Fraudulent financial reporting takes place in the context of earnings management. The management
changes the accounting policies, or the way estimates are calculated with the intention to improve the
firms results.

Fraudulent financial reporting occurs due to:

personal incentive
pressures from the market
lack of ethics
deliberate compliance with the projections of financial analysts
attempts to affect the price of stock

Eg. Inflated sales, passing fictitious journal entries particularly near the balance sheet date, or non
recording of certain expenses to inflate profit etc.

Misappropriation of asset happens when people who are entrusted to manage the assets of an
organisation steal from it or misuse the asset for personal use. Asset misappropriation involves third
parties or employees in an organisation who abuse their position to steal from it through fraudulent
activity. It can also be known as insider fraud.

Eg. Sales clerk not accounting for cash sales and pocketing the cash; taking home office stationary
such as pens, paper clips; accounts payable clerk issuing payments to a fictitious organization under
the control of such clerk or mutual tie in agreements etc.