Immersing in audit

 Deficiency in internal control exists when: ·         Control is in place, but it is unable to prevent or detect and correct misstatements in the financial statements. ·         A control is missing . Significant deficiency in internal control is a deficiency or several deficiencies that in auditor professional judgment, is of sufficient importance to attract attention of those charged with governance or management. If the auditor has identified deficiencies in internal control, the auditor determines whether they constitute significant deficiencies . Significant deficiencies in internal control should be communicated in writing to those charged with governance on a timely basis.   Besides of significant deficiencies in internal control the auditor also is required to communicates other deficiencies in internal contro l identified during the audit that, in the auditor’s professional judgment, are of sufficient importance for management attention.   Indicators of significant

  An auditor obtains an understanding of internal control relevant to the audit when identifying and assessing the risks of material misstatement. In making those risk assessments the auditor may identify deficiencies in internal control. Also, deficiencies in internal control may be detected by an auditor at any other stage of the audit. ISA 265 deals with the auditor’s responsibility to communicate appropriately to those charged with governance and management deficiencies in internal control1 that the auditor has identified in an audit of financial statements

  Fraudulent financial reporting means intentional misstatements, including omissions of amounts or disclosures in financial statements with the aim to deceive financial statement users Fraud risk factor are events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Auditors may face with fraud risk factors in different rage of situations. Fraud risk factors usually are classified based on the three conditions generally present when material misstatements due to fraud take place:   incentives/pressures, opportunities, and attitudes/rationalizations .   The following are examples of fraud risk factors when material misstatements due to fraud take place Incentives/pressures It relates to situations when financial stability or profitability is threatened by economic, industry, or company operating conditions:    New accounting, statutory, or regulatory requirements.     High degree of competition or market saturatio

Those charged with governance are the persons or organizations with responsibility for controlling the strategic direction of the company and obligations related to the accountability of the company. They also oversee the financial reporting process. The board of directors of a private or public sector company or owner-managers of private company relate to   those charged with governance of company. Managemen t are the persons with executive responsibility for the conduct of the company’s operations.

  The communication of auditors with those charged with governance is very important in audit process and    helps in communicating the responsibilities of the auditor in relation to the financial statement audit, obtaining from those charged with governance information and communicating significant findings. ISA 260   deals with the auditor’s responsibility to communicate with those charged with governance in an audit of financial statements.   It defines objectives and requirements of auditor communications with those charged with governance .

  Laws and regulations may influence company`s financial statements in various ways: (a)     Prescribe applicable financial reporting and tax framework (b)    Establish the legal rights and obligations of company (c)     May require specific disclosure in financial statements of company (d)    Impose fines and penalties on company in case of non-compliance (e)     Revoke the operating license of a company It is the management of company under the oversight of those charged with governance is responsible to ensure that the company’s operations are conducted in accordance with laws and regulations. Management may apply the following policies and procedures to detect and prevent non- compliance with laws and regulations : ·         Monitoring legal requirements and ensuring that operating procedures are designed to meet these requirements ·         Establishing and operating appropriate systems of internal control. ·         Developing, introducing, and following a code of

  The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the company and management. An auditor conducting an audit in accordance with ISAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error . ISA 240   deals with the auditor’s responsibilities relating to fraud in an audit of financial statements.

  Laws ang regulations influence companies’ activities and financial reporting. Non-compliance with laws and regulations may result in fines, litigation or other consequences for the entity that may have a material effect on the financial statements. Management under the supervision of those charged with governance is responsible to ensure that the company’s operations are conducted in accordance with the provisions of laws and regulations, including those laws and regulations that determine the reported amounts and disclosures in a company’s financial statements.

 L aws ang regulations have an effect on companies’ activities and financial reporting. Non-compliance with laws and regulations may result in fines, litigation or other consequences for the entity that may have a material effect on the financial statements . ISA 250 deals with the auditor’s responsibility to consider laws and regulations in an audit of financial statements. It defines objectives, definitions, and requirements in relation to consideration of laws and regulations in an audit of financial statements.

Fraud is intentional act made by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unfair or illegal benefit. Management may intentionally misstate financial statements if their performance is assessed and they are paid bonuses depending for example on growth of company revenue, profit, expenses reduction and so on. When management intentionally distorts financial statements with the goal to get some benefits the term "management override of   internal control” is used. Management can override internal controls in following ways: ·         Booking journal entries in general ledger to increase revenue and profits. ·         Making significant transactions outside the normal course of business. ·         Manipulated accounting estimates (provisions, reserves, depreciation) Although the level of risk of management override of controls will vary from company to company, the risk is neverthe

  Misstatements in the financial statements can arise due to fraud or error. Error is unintentional misstatement in financial statements, including the omission of an amount or a disclosure. Fraud is intentional act made by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unfair or illegal benefit.

  Auditors are responsible to prepare audit documentation for an audit of financial statements. Audit documentation is necessary to support audit opinion on financial statements and confirmation of audit was planned and performed in accordance with accepted auditing standards   and applicable legal and regulatory requirements . Simply speaking audit documentation consists of the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.   The term “working papers” is often used for audit documentation. Each audit assignment is accompanied by audit documentation. Audit documentation provides information about:   The nature, timing and extent of the audit procedures performed. This includes the identifying characteristics of the specific items or matters tested, who performed the audit work and the date such work was completed, who reviewed the audit work performed and the date of such reviews. The results of the audit procedures perfo

  Auditors are responsible to prepare audit documentation for an audit of financial statements. Audit documentation is necessary to support audit opinion on financial statements and confirmation of audit was planned and performed in accordance with ISAs and applicable legal and regulatory requirements .  ISA 230 defines objectives and requirements for audit documentation

  The main objective of the auditor is to obtain reasonable assurance that the financial statements are free from material misstatement and are prepared, in all material respects, in accordance with an applicable financial reporting framework. To achieve this objective the audit work should be done in accordance with corresponding rules and standards at proper quality level.

  An auditor deals with specific responsibilities regarding quality control procedures for an audit of financial statements. Quality control systems, policies and procedures are established by the audit firm prior to the audit. These policies and procedures are compulsory to abide by all audit engagement teams and engagement quality control reviewer. ISA 220 defines the objective and requirements for an audit of financial statements quality control.

  Audit firms are responsible for setting up its system of quality control for audits and reviews of financial statements, and other assurance and related services engagements. International Standard on Quality Control (ISQC) deals with the objective, definitions, and requirements for quality control for audit firms.

  Auditors should agree the terms of audit engagement with management or those charged with governance before the audit take place. ISA 210 deals with those aspects of engagement acceptance that are within the control of the auditor.

  An audit engagement letter is a document in the form of letter or other form of written agreement which is generated before the auditor is to accept or continue an audit engagement. An audit engagement letter is needed to establish whether the preconditions for an audit are met and confirm that there is a common understanding between the auditor and management of the terms of the audit engagement. Preconditions for an audit means the use by management of an acceptable financial reporting framework in the preparation of the financial statements. Mostly an audit engagement letter includes following terms of audit engagement: ·         The objective and scope of the audit of the financial statements. ·         The responsibilities of the auditor. ·         The responsibilities of management. ·       Identification of the applicable financial reporting framework for the preparation of the financial statements; and ·         O ther information, such as fee arrangements, bil

  Audit risk is the risk of giving a wrong opinion by an independent auditor on client`s financial statements. In other words audit risk is a risk that financial statements are materially misstated   and audit tests failed to identified these mistakes.

  Various countries have different rules and standards for conducting an independent audit. ISAs have been developed to establish uniform, standardized approach for conducting  the audits of historical financial statements. ISA 200 defines the main objectives of the independent auditor and explains what it means to conduct an audit in accordance with the International Standards on Auditing.