Assignment 2 Audit

Q. What is test checking? Discuss the methods of selection of sample and precuations taken for test.

Ans : Test Checking is an auditing technique where the auditor examines a sample of transactions or records instead of verifying all transactions. This approach helps in saving time and resources while still ensuring a reasonable assurance about the accuracy and completeness of financial records.

Methods of Selection of Sample :

Random Sampling :

Items are selected randomly from the population, giving each item an equal chance of being chosen. To minimize bias and ensure that the sample represents the entire population. Using a random number generator to pick transactions from a ledger.

Stratified Sampling:

The population is divided into distinct subgroups or "strata" based on shared characteristics (e.g., transaction size, type, or risk level). To focus on more significant or riskier sections of the population while ensuring each subgroup is proportionately represented. Sampling separately from high-value, medium-value, and low-value transactions.

Systematic Sampling:

Items are selected at regular intervals from a list (e.g., every 10th transaction) after a random starting point. To simplify the sampling process while still maintaining randomness. Picking every 5th entry in a ledger starting from a randomly chosen point.

Judgmental Sampling:

The auditor uses their professional judgment to select items they consider to be high-risk or material. To focus on areas more prone to errors or fraud, based on experience and understanding of the business. Selecting transactions over a certain amount or those involving a specific vendor.

Monetary Unit Sampling:

Sampling is based on the monetary value of items, with more attention given to higher-value transactions. To focus on items with the most significant potential impact on financial statements.

Prioritizing the examination of larger transactions or accounts.

Precautions Taken for Test Checking :

Relevance:

Ensure that the sample chosen reflects the characteristics of the entire population being audited. This ensures that conclusions drawn from the sample are valid for the whole population.

Consistency:

The same sampling method should be used consistently throughout the audit. Consistency in the approach allows for comparable results and reduces the risk of bias.

Adequacy:

The sample size should be large enough to provide a reasonable basis for conclusions. Too small a sample might miss critical errors, while a very large sample might not be feasible or cost-effective.

Objectivity: Ensure that the selection of samples is free from bias or personal influence. Bias in sample selection can skew results, leading to incorrect conclusions.

Documentation:

The entire sampling process, criteria, and findings should be well-documented. Proper documentation supports the auditor's conclusions and is crucial for transparency and review by other stakeholders.

Compliance:

Follow the relevant auditing standards, guidelines, and professional practices. Adhering to standards ensures that the test-checking process is accepted and trusted by all parties involved.

Q. What is audit report? Explain its features and importance.

Ans : An Audit Report is a formal document issued by an auditor after examining a company’s financial statements and records. It provides an independent opinion on whether the financial statements present a true and fair view of the company's financial position and are free from material misstatements, whether due to fraud or error.

 Features of an Audit Report:

 1. Title and Addressee:

   - Clearly indicates that it is an audit report and specifies the recipient (usually the shareholders or the board of directors).

 2. Introduction:

   - Provides a brief overview of the audit's purpose and scope, including the financial statements examined (balance sheet, income statement, etc.).

 3. Auditor’s Opinion:

   - The most crucial part of the report, stating whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (e.g., GAAP, IFRS).

   - Types of opinions include Unqualified (Clean), Qualified, Adverse, and Disclaimer of Opinion.

 4. Basis for Opinion:

   - Describes the audit procedures followed, the evidence collected, and the standards used (e.g., International Standards on Auditing).

   - Provides the rationale behind the auditor's opinion.

 5. Responsibilities of Management:

   - Outlines the responsibilities of the company’s management in preparing financial statements and maintaining internal controls.

 6. Auditor’s Responsibilities:

   - Explains the auditor's role in examining the financial statements and forming an opinion.

 7. Signature and Date:

   - The auditor signs the report and includes the date of the report, indicating when the audit was completed.

 8. Auditor’s Address:

   - States the name and location of the audit firm.

 Importance of an Audit Report:

 1. Assurance to Stakeholders:

   - Provides assurance to shareholders, investors, creditors, and other stakeholders that the financial statements are reliable and have been independently verified.

 2. Transparency and Trust:

   - Enhances the credibility and transparency of financial information, building trust among stakeholders.

3. Compliance:

   - Ensures that the company complies with statutory and regulatory requirements related to financial reporting.

 4. Decision-Making:

   - Assists stakeholders in making informed decisions regarding investments, lending, and other financial matters.

 5. Detecting Errors and Fraud:

   - Helps identify any significant errors, fraud, or irregularities in financial statements, contributing to the overall governance and control environment of the organization.

 6. Improving Internal Controls:

   - Provides management with feedback on the effectiveness of internal controls, helping to improve financial reporting processes.

 7. Risk Assessment:

   - Assists in assessing the risk level associated with the company's financial activities and business operations.

Short Notes:

a) Types of Audit Report :

Unqualified (Clean) Report :The most common type, indicating that the financial statements present a true and fair view in all material respects, and conform to the applicable accounting standards. No significant misstatements or non-compliance issues were found.

Qualified Report : Issued when the auditor finds material misstatements or deviations from accounting standards, but they are not pervasive. The report specifies the areas of qualification, explaining the reasons for the auditor’s concerns.

Adverse Report : Given when the auditor believes that the financial statements are materially misstated and do not present a true and fair view of the company’s financial position. Indicates significant non-compliance with accounting standards, which is pervasive and affects the overall presentation.

Disclaimer of Opinion : Issued when the auditor is unable to form an opinion on the financial statements due to insufficient evidence or scope limitations. Suggests that the auditor could not verify the accuracy or completeness of the financial information.

 b) Difference between Audit Report and Audit Certificate:

Basis	Audit Report	Audit Certificate
Definition	A formal document expressing an auditor's opinion on the fairness of the financial statements.	A formal declaration verifying the correctness of specific facts or figures as requested by management or stakeholders.
Nature	Opinion-based; includes subjective judgment and evaluation of evidence.	Fact-based; contains a confirmation of specific factual details without subjective opinion.
Purpose	To provide reasonable assurance about the reliability of financial statements to stakeholders.	To certify the accuracy of specific data or transactions as per the client's requirement.
Scope	Broad; covers all aspects of financial statements, including compliance with standards and regulations.	Limited; focused on specific data, figures, or information.
Issuance Authority	Issued by an external auditor or statutory auditor appointed by the shareholders or management.	Issued by an auditor or any other competent authority as per the client’s request.
Legal Requirement	Generally required by law or regulation for public companies and other regulated entities.	Usually not a legal requirement, unless specified by statutory provisions or specific contracts.
Content	Includes opinion, basis for opinion, responsibilities, and other disclosures.	Contains a simple declaration or certification of facts.