MATTU UNIVERSITY:, BEDELE CAMPUS

Department of Cooperative accounting and auditing

Theme :cooperative auditing and assurance service

Course:Auditing Principle and practice
C/hr:3

Prepared by:Hunde Emiru (MBA)

Date：2025
 An overview of auditing
Evolution,Origin and Meaning of audits
EVOLUTION
The word “Auditing” has been derived from the Latin word “Audire”, which
means “to hear”. Such an expression conveys the foundation of auditing in
ancient days. However, in the post-ancient period, auditing has gone through
dramatic changes. According to Dicksee, traditional auditing can be
understood as an examination of accounting records undertaken with a view to
establishing whether they completely reflect the transaction correctly for the
related purpose. But this is not the end of the story.
Besides, the auditor also expresses his opinion on the financial character of the
statements of accounts prepared from the accounting records, so as to examine whether
they portray the true and fair view of financial statements. The term audit is used in this
sense ever since the days when public accounts were accepted and approved on the
basis of leaving the accounts read. It was Fra Luca Bartolomeo de Pacioli (popularly
known as Luca Pacioli), father of accounting who introduced double entry
bookkeeping. He defined and described the duties and responsibilities of an auditor.
Since then, there have been far-reaching changes in the scope and definition of
audit. Further, the industrial revolution in England compelled the necessity of auditing.
When the First Companies Act of 1913 came into force, it became obligatory on the
part of every company registered under it, to have the accounts audited at least in
every year.

CONCEPT OF AUDITING
Concept of Auditing dates back to ancient Egyptian, Roman and Greek Civilizations, where
commercial transactions were systematically checked and counter checked by financial
administrators. In India, Pre-Vedic literature makes references to the existence of well
developed system of accountancy. In ancient times, auditing was coupled with the levy of
tax. Whenever taxes were levied on commercial transactions, auditing became inevitable.
When a person was appointed to administer finance, the amount received and payments
made by him were checked by another official either periodically or at the time of expiry
of his term of office. The objectives, techniques and approaches of today’s audit are
entirely different from that of the past. One can say that the change in the technology,
expansion of business organization, diversification of activities have influenced and altered
the auditing scope and techniques.
Present-day Auditing has come a long way from traditional auditing. Traditional auditing
involved vouching of all transactions, verification of posting to ledgers, detailed verification
of documents, subsidiary books and the principal books of entries. This was possible because
the business entities were small, the transactions were not many, the activities were localized
and traditional method of bookkeeping was followed.
In the contemporary world, business organizations have expanded and diversified their
activities. The transactions have become numerous. The fast developing communication
technology has shrunk the earth into a global village. Transactions are made through
internet across the world. Rates are fixed over telephone. Receipts and payments are made
online. Use of paperwork has been reduced greatly. In these circumstances, it is impossible
to apply the traditional methods of auditing.

A : ACCOUNTABILITY
U : UNDERSTANDABILITY
D : DILIGENCE
I : INSPECTION
T : TRANSPARENCY

WHAT IS AN AUDIT?
An audit is the examination of the financial report of an organization - as presented in the
annual report – by someone independent of the organization. The financial report includes a
balance sheet, an income statement, a statement of changes in equity, a cash flow
statement, and notes comprising a summary of significant accounting policies and other
explanatory notes.
The purpose of an audit is to form a view on whether the information presented in the
financial report, taken as a whole, reflects the financial position of the organization at a given
date, for example:
Are details of what is owned and what the organization owes properly recorded in the
balance sheet?
Are profits or losses properly assessed?
When examining the financial report, auditors must follow auditing standards which are
set by a government body. Once auditors have completed their work, they write an audit
report, explaining what they have done and giving an opinion drawn from their work. With
some exceptions, all organizations subject to the Corporations Act must have an audit each
year. Other organizations may require or request an audit depending on their structure and
ownership or for a special purpose.
What Don’t Auditors Do?
Audit other information provided to the members of the organization, for example, the
directors’ report.
Check every figure in the financial report – audits are based on selective testing only.
Judge the appropriateness of the organization's business activities or strategies or decisions
made by the directors.
Look at every transaction carried out by the organization.
Test the adequacy of all of the organization's internal controls.
Comment to shareholders on the quality of directors and management, the quality of
corporate governance or the quality of the organization’s risk management procedures and
controls.
What Can’t Auditors Do?
Predict the future – The audit relates to a specific past accounting period. It does not judge
what may happen in the future, and so cannot provide assurance that the organization will
continue in business indefinitely.
Be there all the time – The audit is carried out during a defined time frame, and auditors are
not at the organization all the time. The prime purpose of the audit is to form an opinion on the
information in the financial report taken as a whole, and not to identify all possible
irregularities. This means that although auditors are on the look-out for signs of potential
material fraud and it is not possible to be certain that frauds will be identified.
How is the Audit Conducted?
The organization’s management prepares the financial report. It must be prepared in accordance
with legal requirements and financial reporting standards.
The organization’s directors approve the financial report.
Auditors start their examination by gaining an understanding of the organization’s activities,
and considering the economic and industry issues that might have affected the business during
the reporting period.
For each major activity listed in the financial report, auditors identify and assess any risks
which could have a significant impact on the financial position or financial performance, and
also some of the measures (called internal controls) that the organization has put in place to
mitigate those risks.
Based on the risks and controls identified, auditors consider what management has done
to ensure the financial report is accurate, and examine supporting evidence.
Auditors then make a judgment as to whether the financial report taken as a whole
presents a true and fair view of the financial results and position of the organization, its cash
flows, is in compliance with financial reporting standards and, if applicable, the
Corporations Act.
Finally, auditors prepare an audit report setting out their opinion, for the organization’s
shareholders or members.
What Do Auditors Do, Specifically?
Auditors discuss the scope of the audit work with the organization – the directors or
management may request that additional procedures be performed. Auditors maintain
independence from management and directors so that tests and judgments are made
objectively. Auditors determine the type and extent of the audit procedures they will perform,
depending on the risks and controls they have identified. The procedures may include:
Asking a range of questions – from formal written questions, to informal oral questions – of a
range of individuals at the organization.
Examining financial and accounting records, other documents, and tangible items such as
plant and equipment.
Making judgments on significant estimates or assumptions that management made when they
prepared the financial report.
Obtaining written confirmations of certain matters, for e.g., asking a debtor to confirm the
amount of their debt with the organization Testing some of the organization’s internal
controls.
Watching certain processes or procedures being performed.
MEANING OF AUDITING
An examination and verification of a company’s financial and accounting records and
supporting documents by a professional, such as a certified chartered Accountant.
Auditing is the systematic and scientific examination of the books of accounts and records of
a business. It enables the auditors to judge that the Balance Sheet and the Profit and Loss
Account are properly drawn up so it exhibits a true and fair view of the financial state of affairs
of the business and profit or loss for the financial period.
DEFINITIONS OF AUDITING BY DIFFERENT SCHOLARS

Auditing is concerned with the verification of accounting data, with determining

the accuracy and reliability of accounting statements and reports.R.R. Moutz

Auditing is an intelligent and a critical scrutiny of the books of accounts of a

business with the documents and vouchers from which they are written up, for

the purpose of ascertaining whether the working results for a particular period,

as shown by the profit and loss account, also the exact financial condition of

the business, as reflected in the balance sheet are truly determined and

presented by those responsible for their compilation.J.R. Batliboi “An audit

denotes the examination of balance sheet and profit and loss account

prepared by others together with the books of accounts and vouchers relating

thereto in

such a manner that the auditor may be able to satisfy himself and honestly report

that, in his opinion, such balance sheet is properly drawn up so as to exhibit a

true and correct view of the state of affairs of the particular concern according

to the information and explanations given to him and as shown by the books”.

F.R.M. De Paula

Auditing is a systematic examination of books and records of a business of other

organization in order to ascertain or verify and to report upon the facts

regarding the financial operations and the results thereof. Montgomery

An audit is an exploratory, critical review by a public accountant of the

underlying internal controls and accounting records of a business enterprise or

other economic unit, precedent to the expression by him of an opinion of the

propriety of its financial [Link] L. Kohler

Auditing may be defined as “inspecting, comparing, checking, reviewing, vouching,

ascertaining, scrutinizing, examining and verifying the books of accounts of a

business concern with a view to have a correct and true idea of its financial state

of affairs.” M.L. Shandilya

According to the Institute Of Chartered Accountants Of India, “General

Guidelines In Internal Auditing Defines Auditing As The Independent examination

of financial information of any entity, whether profit oriented or not, and

irrespective of its size or legal form, when such examination is conducted with a

view to expressing an opinion thereon.” “In brief, auditing involves testing the

reliability, competency and adequacy of evidence in support of monetary

transactions. It has its principal roots in accounting with it’s reviews, on which it

leans heavily for idea and methods.

S.K. SATAPATHY & B.M. JENA — “Auditing signifies the spiraling

functions of auditors who certify the true and fair view of financial

statements by delving through the process of checking, vouching and

verification with its operational efficiency, economy and effectiveness.”

AAS-1 defines the audit and also set out the basic principles, which govern the

auditor’s responsibilities in carrying out the audit.

As per AAS-1, “An audit is the independent examination of financial information

of an entity whether profit oriented or not and irrespective of size or legal form

when such examination is conducted with a view to express opinion thereon”.

Auditing is a systematic process of objectively obtaining and evaluating

evidence regarding assertions about economic actions and events to ascertain the

degree of correspondence between those assertions and established criteria and

communicating the results to interested users. Auditing is the analysis of the

financial accounts/records, by a qualified accountant, and procedures of a firm

or organization. This is essential in order to gain a fair perspective on the

company’s financial statements. With auditing, potential investors and

creditors can look at the financial statements to decide whether to invest in a

business or not. Auditing is important as it also protects the public from scams

and corrupt business procedures.

Purpose of auditing
owners, management, third parties like investors, creditors and employees, and the government
are;
Greater reliability of financial statements and over all check on integrity of management
Improvement in efficiency with consequential audit increase in profitability Improvement in
management control and check integrity of employees
Relatively easier to deal with third parties like banks, financial institution, creditors, and
insurance companies due to credibility of audited financial statements
Greater reliability of tax returns, Greater confidence of owners in management’s integrity and
assurance about compliance with specified legal requirements
More efficient use of resources through identification of inefficiencies leading to the remedial
action.
Greater reliability of financial statements as providing a data base for taking investments,
credit, and other decisions.
Greater reliability of financial and cost information as basis for policy decisions like reduction/
increase in subsidies, tax rates, and for price fixation

Types of Audits and Auditors

There are three types of audits. These are discussed below.
Financial Statement Audit: is conducted to determine whether or not financial statements are
presented in accordance with GAAP. The most common financial statements that should be
audited by the auditors are Balance sheet, Profit and loss statement, and cash flow statement .
Operational Audit: is a review of any part of an organization‘s operation procedures and
method for the purpose of evaluating effectiveness and efficiency. This type of audit examines:
The economy of administrative activities in accordance with sound administrative principles
and practices, as well as management policies;
The efficiency of utilization of human, financial, and other resources including examination of
information systems, performance measures and monitoring arrangements, and procedures
followed by audited entities for remedying identified deficiencies; and
The effectiveness of performance in relation to achievement of the objectives of the audited
entity and audit of the actual impact of activities compared with the intended impact.
Compliance Audit: the purpose of compliance audit is to determine whether the client is
following rules, procedures, regulations, and policies set down by the management. Such type
of audit includes the process prescribed by a company controller, reviewing wage, bonus, and
dividend rates, and examining contractual agreements.
Types of auditor
Independent (External) auditors: these are the auditors‘ of private audit firm. The audit firm
will sign audit contract in order to examine evidence and provide audit report to the concerned
party. Thus, the independent auditors received a fee from the audited organization and they are
primarily responsible to third parties (shareholders).

Internal auditors: are permanent employees of the client and get a monthly salary. They are
primarily responsible to the management or the board of directors. Internal auditors lack
independent in appearance (are not free from financial and family relationship) from the client
since they are the employees of the audited organization, but they should satisfy independence
in (Objective). To be objective:
They should not be a member of any committee in the organization
They should provide their report not to the department heads rather to the manager.
Government auditors: are the employees of the government not the audited organization.
They are the auditors‘ of Federal government and/or Regional government and primarily
responsible the legislative or executive body. Such type auditors will assign to audit selective
government organization.
Auditing profession
Profession
Profession is the job that needs special training or skills specially one that needs higher level of
education.
Professionals – are a group of people who possess a unique skill which benefit the society;
with intention of earning livelihood through it.
Any recognized profession has characteristics to be shared with other professions.
The most important of these characteristics Profession
Responsibility to serve the public
Complex body of knowledge
Standards of qualifications for admission to the profession
Need for public confidence (recognition)
The Objectives of the Profession
The Code recognizes that the objectives of the accountancy profession are:
To work to the highest standards of professionalism,
To attain the highest levels of performance and generally
To meet the public interest, honor public trust, and demonstrate commitment to professionalism
Definitions: Ethics
Moral philosophy Systematizing, defending, and recommending concepts of right and wrong
behavior
Rules or standards governing the conduct of a person or the members of a profession

Ethical principle include

Competence
Maintain professional competence.
Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
Prepare complete and clear reports and recommendations
Confidentiality
Refrain from disclosing confidential information.
Inform subordinates as to how to handle confidential information.
Refrain from using confidential information for unethical or illegal advantage.
Integrity
Avoid conflicts of interest.
Refrain from activity that would prejudice their ability to carry out their duties ethically.
Recognize and communicate professional limitations that would preclude responsible
judgment.
Refrain from engaging in or supporting any activity that would discredit the profession
Objectivity
Communicate information fairly and objectively.
Disclose fully all relevant information that could reasonably be expected to influence user's
understanding of the reports, comments, and recommendations presented.

Unethical Conduct
Abuse of accounting information
Acceptance of bribes or gifts
Conflict of interest
Disclosure of confidential information
Generally Accepted Auditing Standards(GAS)
Standards are means of measuring the quality and performance of auditors. In order to provide
and maintain uniformly high quality audit work there is a need to have generally accepted
auditing standards. There are ten GAAS recognized by AICPA which are divided in to three
categories.
General standards
Standards of field work
Standards of report
[Link] Standards
The general standard stresses the important personal qualities and professional qualifications
the auditor should [Link] standard should include:-
[Link] technical training and proficiency
This standard is normally integrated as require the auditor to have
.Formal education in auditing and accounting
.Adequate practical experience of the work being performed
.Continuing profession education
.Computer proficiency and etc.
.Independence in mental attitude:- In all matters relating the assignment an independent in
mental attitude is to be maintained by the auditor.
[Link] professional care:-simply means that an auditor is professionally responsible for
fulfilling his/her duties diligently and carefully.
[Link] of Field Work: -The field work standards concerned with evidence accumulation
and other activities during the actual conduct of audit in the field. This includes:-
a._Adequate planning and supervision:-This deals with ascertaining that the engagement is
sufficiently planed and supervised.
b._Understanding the clients’ internal control:-a sufficient understanding of internal control
is to be obtained to plan the audit and to determine the nature and extent of test to be
performed.
c._Sufficient and competent evidence:- this standard concerns the decision as to how much
and what type of evidence to accumulate for a given set of circumstances to provide reasonable
basis for opinion
[Link] of report:- Require the auditor to prepare a report on the financial statement taken
as a whole, including informative (Providing information; especially, providing useful or
interesting)disclosures. The reporting standard require that:-
The report shall state whether the financial statement are prepared in accordance with GAAP
The report shall identify circumstances in which the principles have not been consistently
observed in the current period in relation to the preceding period
Informative disclosure in financial statements are to be regarded as reasonably adequate unless
and otherwise stated in the report
The report shall either contain an expression of opinion regarding the financial statement
takenas a whole or an assertion to the effect that an opinion cannot be stated. In all case where
an auditor name is associated with financial statement, the report should contain a clear cut
indication of the character of the auditors work if any and the degree of responsibilities the
auditor is taking.
Basic Principles of Auditor
Basic principles, which govern the auditor's professional responsibilities and which should be
complied with whenever an audit is carried out. These are:-
[Link],the auditor should be straightforward, honest and sincere in his approach to his
professional work.
[Link], He must be fair and must not allow prejudice or bias to override his objectivity.
[Link]: He should maintain an impartial attitude and appear to be free of any interest
which might be regarded. .
[Link]:
The auditor should respect the confidentiality of information acquired in the course of his work
and should not disclose any such information to a third party without specific authority or
unless there is legal or professional duty to disclose. It is remarked that an auditor should keep
his ears and eyes open but his mouth shut.
[Link] and competence:
The audit should be performed and the report prepared with due professional care by persons
who have adequate training, experience and competence.
[Link]:
The auditor should document matters, which are important in providing evidence that the audit
was carried out in accordance with the basic principles.
[Link]:
The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner. Plans should be based on knowledge of client's business. They should be further
developed and revised, if required, during the course of audit.
[Link] evidence:
The auditor should obtain sufficient appropriate audit evidence through the performance of
compliance and substantive test procedure. It will enable him to draw reasonable conclusions
there from on which he has to base his opinion on the financial information.
[Link] conclusions and reporting:
The auditor should review and assess the conclusions drawn from the audit evidence obtained
and from his knowledge of business ofthe entity as the basis for the expression of his opinion
on the financial information. .
 client acceptance and audit plan
.Reasons for Audit Planning
Audit planning is the process of determining an overall strategy for the conduct and scope of
the engagement. An audit plan is the specific guideline to be followed when conducting an
audit.
It addresses the specifics of what, where, who, when and how:
What are the audit objectives?
Where will the audit be done? (i.e. scope)
When will the audit occur? (how long?)
Who are the auditors?
How will the audit be done?
reasons for planning the audit work.
to obtain sufficient and competent evidence
To keep reasonable audit cost.
To avoid misunderstanding with the client
To complete the audit work based on the schedule
To assign assistant, if any.

Audit Planning Procedures

Pre-plan
Obtained back ground information
Obtain information about client‘s legal documents
Develop overall audit programs
Schedule the audit work
Assigning professional staff to engagement.
Pre-plan: before planning the audit work, auditors should do two things:
Client acceptance (accept or reject the audit contract)
Obtain an understanding with the client
Auditors should avoid clients who lack integrity.
That is auditors should evaluate public image, financial stability, relationship with the previous
auditors of a new client. To do this, the auditor should read the past financial statements of the
client, contract with past and present business associates like banks and attorneys, by discussing
with the potential client the need for the audit, and by contacting the potential client‘s former
auditors with the consent of the organization. If there are no serious doubts raised about the
integrity of the client, then the auditor will sign to close a deal. The audit contract is called an
Engagement Letter.
The audit engagement letter includes the following expressed duties:
The nature of the work to be performed
The dead line of the audit contract
The amount of the audit fee
Limitations of the auditor with respect to detection of errors, irregularities, and illegal acts.
Obtaining background information(collecting )
Auditors should have feedback about the client‘s unique accounting requirements, the
possibility of risk, and the controlling system on its assets. Different forms of enterprises
require different
accounting requirements. For instance, if the client is Construction Company, percentage of
contract completion is applied or required to recognize revenue. On the other hand if the client
is government organization, government accounting is used. Thus, the auditor should identify
the client‘s accounting requirement and follow appropriate audit procedures at times when
he/she performs the audit work. The possibility of risk also varied from client to client. That
means the chance of occurring errors, irregularities, illegal acts, and misuse of cash or other
resources may vary from one organization to the other. In order to adjust or aware themselves
about their future activities, auditors should get feedback about the problems of the client.

Finally, the auditor should tour (observe) the client‘s personnel and assets controlling
technique. For example, if the auditor sees the store keeper sleeps at his/her desk with the store
door open, or the casher talking on the phone while he/she is counting money, there will be the
sign to weakness in the client‘s internal control system. Or if the auditor sees broken or obsolete
equipment, that might be the signal that plant assets are possible overvalued.
Obtaining information about the client’s legal documents

There are three documents of the client that should be observed by the auditors.
The three legal documents are discussed below.
[Link] charters and by laws
[Link] of meetings
[Link]

[Link] charters and by laws: the corporate charter is granted by the government in
which the company is incorporated. It includes name, address, date of establishment, types of
business activities, voting right, dividend allocation systems, etc. By laws include rules and
regulations adopted by the organization in order to accomplish different activities of the
organization.
[Link] of meetings: are the official records to the meetings of the management and higher
body of the organization. These minutes of meeting include the management decision such as
compensation of officers, bonus rates, dividend rates, etc.
[Link]: clients may enter in to different contracts to others like pension plans, contracts
with suppliers, government contracts with completion and delivery of manufacturing products,
lease, [Link] general, if the auditor have information about the three legal documents of the
client before starting his/her main task, he/she will be aware and inform about such information
while examining and evaluating the difference evidences of the client and finally he/she is
adequate to give suggestion and recommendation in his/her final report.
Develop overall audit report
An audit program is the detailed list of the audit procedures to be pertained by the auditor in
examining the financial statements. Before starting the work, the auditor should ordinarily
establish a preliminary program for a review this audit program should be documented in a
manner that will permit the auditor to record completion of the audit work and identify work
that remains to be done. As the work progresses, the auditor should evaluate the adequacy of
the program based on information gathered during the audit. The audit program may be
modified if the auditor believes that the planned procedures are not sufficient. The objectives of
preparing audit program are:
To assist in planning the audits so that efficient and effective procedures are applied in
accordance with the audit strategy
To provide clear instruction to staff as to the nature, extent, and timing of the audit work.
To provide a record of the work done and the conclusions drawn, as a basis for effective quality
control and to meet audit evidence requirements.
An audit program has two major sections.
The system section: this section of the audit program focuses on the procedures used to evaluate
the effectiveness of the internal control structure and it is organized around major transactions
cycles of the internal control structure.
The substantive test section: this section deals with the procedures for substantive testing of
financial statement amounts and the adequacy of financial statement disclosures. Besides this
section of the audit program is organized in terms of major financial statement items.
Scheduling the audit work
Auditors should plan or forecast the beginning and ending of the audit work. In order to
complete based on the established time in advance. One of the completeness of the auditors is
measured whether they complete their work based on the stated time in the contract.
Assigning professional staff to engagement
The final phase of planning of the audit work is assigning of professional staff to engage the
audit work. As we have been discussed earlier, the audit work should be done by those having
sufficient skill. Assistance should also assign, if necessary. Once the auditor is clear about the
objectives and internal control system of the client, he/she has to collect and evaluate relevant
evidence for his/her audit work through different techniques.
These various ways of evidence accumulation techniques are discussed below.
Physical inspection: the auditor may physically inspect the actual existence of certain assets.
For instance, the auditor may count cash box, observe the physical handling of inventories
though it is not necessary that handling of inventories means ownership because goods may be
handled on behalf of the others.
Examination of documents: the auditor may collect relevant data by examining related
documents. Thus, the auditor who wishes to verify the payment of cash for any reason may
examine or test checks stubs, for purchase of merchandise on account he/she may verify
purchase invoice, for receipts of cash from any source the auditor may check receipt stubs, and
so on. Examination of documents can be performed through:
Vouching: examining documents started with the recorded transactions (journals, ledger, F/S)
back to source documents, called test of occurrence.
Tracing: determining whether source documents have been properly recorded in the accounting
record, called of completeness.
Scanning: verifying documents through quick or selective reading of the recorded documents
of the client.
Mechanical accuracy: are checks of work performed by others such as verifying client
computations of the balance of accounts. For example, re calculating the balance of A/P, A/R,
cash, etc.
Questionnaires (Inquiry): the auditor also can collect relevant information through preparing
questionnaires. The auditor may obtain primary data (from those related persons
e.g. employees) or secondary data (from unrelated persons e.g. outsiders) about certain
information.
Confirmation letter: the auditor may obtain evidences through confirmation from the third
parties such as banks, debtors, and creditors about the balance of some accounts. There are two
confirmation letters- positive and negative.
Positive confirmation letter: is prepared when the client asks his/her or its business associates
such as banks, creditors, or debtors to give response to the auditor whether or not the balance of
the concerned account is similar. For instance, the client may ask the
creditor about the similarity or difference in the balance of Accounts Receivable and a response
to the auditor for the auditor‘s address.
Negative confirmation letter: is prepared when the audited organization asks its business
associates to give a response to the auditor only if there is difference in the balance of accounts.
Analytical review: the auditor can compute significant ratios, carryout a trend analysis or
compare and contrast different accounting data in order to gather necessary evidence for his/her
audit task. The comparison may be between current and past data, current and anticipated
(budgeted) data, company information and industry average, or current information with current
information.
Generally, auditors perform auditing based on the following steps:
Engagement - When a new client hires an auditor, the auditor first examines the client
company. The auditor studies the company's ethical background and history. Successful
auditors are always associated with ethics and professionalism. It is foolish for an auditor to
work for a client that has ethical issues in the past. Auditors also ensure that they are totally
independent from the client before accepting them. If the auditing firm has a partner that was
once a manager in the company, for example, if the audit firm and the company are related,
there might be serious independence issues. Once the auditor decides to accept the client, he
drafts an agreement stating the terms of the audit and other details, such as remuneration.
Understanding the company - Auditors study the industry and business environment of the
company. Auditors must understand how the business works, the procedures of the company,
and so on.
Assess risks the auditor assesses the risks of the company, and decides on what is considered
material or immaterial.
Develop audit plan the auditor finally plans which areas of the business he will focus on and
how much time will be spent for the audit.
Collect evidence and test internal control systems - The auditor starts collecting evidence to
verify the financial records, using a wide range of tools. It might involve interviews,
observations, tests, calculations, confirming with a professional expert on some area, and so on.
Auditors also review and conduct the company's internal control system. A good and proper
internal control system probably means that proper financial records will be produced.
Conclusion and issuance of the auditor's report - The auditor issues his / her conclusion in the
auditor's report based on the findings objectively.
Audit Evidence Meaning
The Audit Evidence is the information that the company’s auditor collects from the company. It
is part of auditing work to review and verify the company’s different financial
transactions, internal control, and other requirements to express his opinion on the objective
and unbiased view of the company’s financial statements during the period under consideration.
Types of Audit Evidence
#1 – Physical Examination
Physical examination is where the audit inspects the asset and counts them whenever required.
This evidence is collected wherever possible based on the nature of the audit.
#2 – Documentation
Under the documentation, the auditor collects written documents like purchase invoices, sales
invoices, policy documents of the company, etc., which can be internal or external. This
evidence is more reliable as there is some proof in writing based on which the auditor is
forming his opinion.
#3 – Analytical Procedures
Auditor uses the analytical procedure to derive the required data or know the correctness of
different information. It includes the usage of the comparisons, calculations, and the
relationships between the various data by the auditor.
#4 – Confirmations
The auditors often require the balance confirmations from the third party to ensure that the
clients do not manipulate the balances reflected in the financial statements. This receipt of the
written response directly from the third party to verify the accuracy and authenticity of different
information required by the auditor.
#5 – Observations
Observation is where the auditor of the company observes the various activities of the clients
and their employees before making any conclusion.
#6 – Inquiries
Inquiries are the different questions asked by the company’s auditor to the company’s
management or concerned employee in the areas where the auditor has doubts. The auditor
obtains the answers to these questions.
Advantages of Audit Evidence
It helps ensure the auditor’s accuracy and authenticity of the information furnished to him by
his client.
It forms the basis on which the auditor of the company expresses his opinion on the company’s
financial statements during the period under consideration, i.e., whether the company’s
financial statements present the right and fair picture or not.
Essentials of good audit evidence
Sufficient: Sufficiency is the measure of quantity. Audit evidence is sufficient when they are
available in adequate quantity. An auditor applies different audit procedures to obtain sufficient
audit evidence like test checking.
Reliable: Evidence obtained by the auditor is persuasive rather than conclusive. We cannot
consider such evidence 100% reliable for forming an opinion. Reliability of audit evidence
depends on its source and nature of such evidence.
Source: Audit evidence obtained within the enterprise is known as the internal source.
Evidence obtained from an outside enterprise like confirmation from the third party is known as
the external source. We consider the external source to be more reliable.
Nature: Can be documentary (like bills, vouchers), visual (like the physical verification of
fixed assets), or oral (confirmation from employees)
Relevant: Whether the audit evidence obtained by the auditor is relevant or not depends on the
purpose of audit procedures.
There are some thumb rules which helps in identifying the appropriateness of evidence
Written (documentary) evidence is better than testimonial evidence.
Evidence from external sources is more reliable.
Original documents are preferable over their photocopies.
The auditor should have a good understanding of internal control of the organization as it
enables him to obtain relevant evidence.
Evidence obtained by auditor through direct observation, inspection, physical verification, and
computations are better than the evidence obtained indirectly.
Audit Evidence: Definition, Types, Procedures, and Quality
What Is Audit Evidence?
Audit evidence refers to information or data use or collects by auditors as part of their audit
works so that they could conclude their opinion on whether or not financial statements are
prepared in all material respect and accordance with the applicable financial reporting
frameworks.
Before auditors could conclude the financial statements as a whole or any part, they need to
make sure that the evidence they obtain is sufficient enough with appropriate quality to
conclude.
Sufficient and appropriate audit evidence is important for the auditor to form audit opinions.

Audit Risks that auditors might face also depend on audit sufficient and appropriate evidence.
Audit evidence is obtained by the auditor throughout all of the audit stages, including the
planning stage, execution stage, and conclusion stages. And to gather this evidence, the auditors
use many different technologies and procedures suitable for them.
This article will discuss various topics related to audit evidence, including the types of
evidence, the procedures used by auditors to gather the evidence, and its quality.
Types Of Audit Evidence:
Auditors use audit evidence in many different forms and sources. Those audit evidence could
be data or information, physical or nonphysical. For an example of audit evidence:
Financial statements
Accounting information
Bank accounts
Management Accounts
Fixed Assets Register
Payrolls Listing
Banks Statements
Bank confirmation
Invoices
Receipts
And others documents use by businesses to support financial transactions or events in the
financial statements.
Audit evidence could also form in video, email, audio, and verbal.
Procedures To Obtain Audit Evidence:
There are many procedures that auditors use to obtain audit evidence to support their
conclusion.
Such procedures include audit inquiry, audit observation, audit inspection, analytical
procedure, audit recalculation, audit confirmation, and re-performance.
Audit inquiry: Auditor inquires management on certain business transactions or events for the
purpose of obtaining an understanding or to confirm some related assertion.
Audit observation: Auditor observes the way how certain controls related to financial
reporting perform.
Audit Inspection: Auditor inspect on certain documents or evidence that related to financial
transaction or event.
Analytical Procedure: Analytical procedure is normally used by the auditor to assess the
transactions or amounts in the financial statements through other financial and non-financial
data.
Recalculation: The auditor sometimes recalculates some depreciation expenses that prepare by
management.
Re performance: The auditor sometimes re-performs bank reconciliation that prepares by the
client.
Quality Of Audit Evidence:
The quality of audit evidence is essential to ensure that the auditor’s conclusion is correct.
If the information is not strong or low quality, the audit risks of making incorrect audit opinions
are high.
The quality of audit evidence is dependent mainly on the form and source of the evidence. Here
is the detail:
External Source: The evidence that obtains directly from external parties like customers,
suppliers, or banks are more reliable than obtaining from clients. For example, accounts
receivable confirmations that obtain from client’s customers are more reliable than the records
that prepare by clients.
Prepare by Auditor: The evidence that prepares by auditors themselves are more reliable than
the one that prepares by or obtains from the client. For example, the bank reconciliation that
prepares by the auditor is more reliable than the bank reconciliation prepared by the accountant.
Prepare by client: The level of reliability of evidence that obtains from clients are depending
on the reliability of client internal control.
Written form: The audit evidence that forms in writing is more reliable than the one that forms
in verbal. For example, management confirmation in the form of email is more reliable than the
confirmation by verbal.
Original Form: Original invoices that use to support the payments transactions are more
reliable than the copy invoices.
Since the quality of audit evidence is important, the standard or local authority that controls
audit firms required the audit firm to have the proper audit manual, policy, and procedures in
place so that the firm could maintain the quality of audit and the quality of audit evidence.

The Use Of Assertions In Obtaining Audit Evidence:

Auditors should prepare audit procedures to confirms and verify the financial statements’
assertion as part of their materiality assessment in the financial statements.
And auditors could tailor the procedures to obtain the audit evidence to support their
verification and confirmation of financial statements’ assertion.
Here is the list of financial statements’ assertions that auditors could use to obtain the
evidence:
Classes of Transactions and Events’ Assertion:
Sometimes it is called the income statement’s assertions. These are the assertions used by
management to confirm the accuracy and completeness of the financial transactions and events
in the income statement.
These assertions including:
Occurrence: This assertion is used for assuring that the financial transactions that recording the
financial statements, especially in the income statement, are occurred in the entity.
Completeness: all transactions and events that should be recorded in the period have recorded.
Accuracy: amounts and other data relating to recorded transactions and events have been
recorded appropriately
Cut-off: transactions and events have been recorded in the correct accounting period
Classification: transactions and events have been recorded in the proper accounts.
1) Account balances:
Account balance assertion or balance sheet items’ assertion. These assertions are used by
management to confirm the existence and completeness of accounts in balance items.
These balance sheet’s assertions are:
Existence: assets, liabilities, and equity interests exist
Right and Obligation: the entity holds or controls the rights to assets, and liabilities are the
obligations of the entity
Completeness: all assets, liabilities, and equity interests that should have been recorded have
been recorded
Valuation and Allocation:
2) Presentation and disclosure:
Occurrence and rights and obligations: disclosed events, transactions, and other matters have
occurred and pertain to the entity.
Completeness: all disclosures that should have been included in the financial statements have
been included.
Classification and understandability: financial information is appropriately presented and
described, and disclosures are clearly expressed.
Accuracy and valuation: This assertion concerning the accuracy of the information disclosed in
or noted to the financial statements.
It also concerns the valuation of the disclosed accounts balance. There should be procedures for
obtaining this evidence.
This assertion concerning the accuracy of the information disclosed in or noted to the financial
statements. It also concerns the valuation of the disclosed accounts balance. There should be
procedures for obtaining this evidence.
Internal Controls: Definition, Types, and
Importance
What Are Internal Controls?
Internal controls are accounting and auditing processes used in a company's finance department
that ensure the integrity of financial reporting and regulatory compliance.
Internal controls help companies to comply with laws and regulations, and prevent fraud. They
also can help improve operational efficiency by ensuring that budgets are adhered to, policies
are followed, capital shortages are identified, and accurate reports are generated for leadership.
KEY TAKEAWAYS
Internal controls are the mechanisms, rules, and procedures implemented by a company to
ensure the integrity of financial and accounting information, promote accountability and
prevent fraud.
Internal controls aid companies in complying with laws and regulations, and preventing
employees from stealing assets or committing fraud.
They also can help improve operational efficiency by improving the accuracy and timeliness of
financial reporting.
Internal audits play a critical role in a company’s internal controls and corporate governance.
Importance of Internal Controls
Internal audits evaluate a company’s internal controls, including its corporate governance and
accounting processes. These internal controls can ensure compliance with laws and regulations
as well as accurate and timely financial reporting and data collection. They help to maintain
operational efficiency by identifying problems and correcting lapses before they are discovered
in an external audit.
Components of Internal Controls
A company's internal controls system should include the following components:
Control environment: A control environment establishes for all employees the importance of
integrity. A board of directors and management create this environment and lead by example.
Management must put into place the internal systems and personnel to facilitate the goals of
internal controls.
Risk Assessment: A company must regularly assess and identify the potential for, or existence
of, risk or loss. Based on the findings of such assessments, added focus and levels of control
might be implemented to ensure the containment of risk or to watch for risk in related areas.
Monitor: A company must monitor its system of internal controls for ongoing viability. By
doing so, it can ensure, whether through system updates, adding employees, or necessary
employee training, the continued ability of internal controls to function as needed.
Information/Communication: Solid information and consistent communication are important on
two fronts. First, clarity of purpose and roles can set the stage for successful internal controls.
Second, facilitating the understanding of and commitment to steps to take can help employees
do their job most effectively.
Control Activities: These pertain to the processes, policies, and other courses of action that
maintain the integrity of internal controls and regulatory compliance. They involve preventative
and detective activities.
Preventative vs. Detective Controls
Internal controls are typically comprised of control activities such as authorization,
documentation, reconciliation, security, and the separation of duties. They are broadly divided
into preventative and detective activities.
TYPES OF INTERNAL CONTROLS
There are two basic categories of internal controls – preventive and detective.
PREVENTIVE CONTROLS
Preventive controls aim to decrease the chance of errors and fraud before they occur, and often
revolve around the concept of separation of duties. From a quality standpoint, preventive
controls are essential because they are proactive and focused on quality.
Examples of preventive controls include:
Separation of duties
Pre-approval of actions and transactions (such as a Travel Authorization)
Access controls (such as passwords and Gatorlink authentication)
Physical control over assets (i.e. locks on doors or a safe for cash/checks)
Employee screening and training (such as the PRO3 Series to increase employee knowledge)
DETECTIVE CONTROLS
Detective controls are designed to find errors or problems after the transaction has occurred.
Detective controls are essential because they provide evidence that preventive controls are
operating as intended, as well as offer an after-the-fact chance to detect irregularities.

Examples of detective controls include:

Monthly reconciliations of departmental transactions
Review organizational performance (such as a budget-to-actual comparison to look for any
unexpected differences)
Physical inventories (such as a cash or inventory count)
Audit report
The auditing of the accounts of a company is usually done by an independent external auditor.
An audit report is a letter from the auditor of a company that is the end result of the audit
process. It states the auditor’s opinion on whether the company’s financial statements such as
the balance sheet are in compliance with the generally accepted accounting principles (GAAP)
and if they are free from material misstatement.
The audit report is generally accompanied by the company’s annual report. The audit report is
required by banks, financial institutions, investors, creditors, and regulators. When the auditor
issues a clean report, it means that the company’s financial statements have been found to be
fully compliant with accounting standards. An unqualified report will tell you that the financial
statement could have some errors.
Audit reports are very important to a company. Investors rely on the audit report to assess the
financial health of the company and they base many important decisions on the audit report.
Regulatory bodies also read the audit report as it tells them how accurate the financial
information reported is. When an audit report is adverse it can seriously affect the company’s
status and reputation. It is essential to have good accounting practices so that the audit of
accounts goes well.
Tally makes it easy for the organization to accurately record all their transactions in compliance
with GAAP. If you are worried about how to prepare a balance sheet with no errors, Tally is
your answer. It also makes it more straightforward for auditors to access all the information that
they need in a very simple and transparent manner. Tally also makes it easy for the internal
accounting personnel to ensure that their accounts are in order even before the external audit
commences by generating balance sheet and trial balance etc.
Accounting solutions to help you manage your business just the way you want.
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Types of audit report
An auditor releases an audit report that states the auditor’s opinion on the financial statements
of the company. There are four common types of auditors reports:
Clean or unqualified report
This is the best type of report that a company can receive from an auditor. A clean report is one
that states that the financial statements of the company fully comply with GAAP and are free of
any material misstatement. It indicates that the auditors are satisfied with the company’s
financial reporting and that they comply with the governing principles and laws applicable.
Most audits result in clean or unqualified audit reports.
Qualified opinion
There are two situations in which a qualified report would be issued by the auditor.
If there are material misstatements in the financial statements but they are not pervasive
If there is insufficient evidence to base the audit opinion on but the possible effects of any
material misstatements are not pervasive
The problem areas where there has been some calculation mistake will usually be specified by
the auditors in the reports. This enables the company to fix the errors. When you use Tally
software for your accounting, you stay in compliance with regulations and there is no scope for
a calculation error in computing the reports.
Adverse opinion
An adverse opinion on an audit report is the worst possible report that you can get. An adverse
opinion means that the misstatements in the financial statements are both material and
pervasive. An adverse opinion can damage a company’s reputation and even have legal
ramifications unless the issues are corrected. There are chances that the errors could have crept
in by mistake, but they could also be the result of fraud. If there is an adverse opinion on
account of illegal activities in the company, the corporate officers may face criminal charges.
Investors and regulators will also reject the company’s financial statements as a result of the
adverse opinion in the audit report. If there are errors that were corrected, the company will
have to have their financial statements re-audited satisfied before the statements are accepted.
Disclaimer of opinion
An auditor would issue a disclaimer of opinion if:
The auditor was unable to get enough audit evidence to base an opinion on
They did not get satisfactory answers to their questions
The possible effects of the undetected misstatements could be material and pervasive
This may happen if the auditor was denied access to certain financial information or if the
auditor is unable to be impartial. A disclaimer of opinion means that the financial status of the
company could not be ascertained.

Format or content of an audit report

Section/Heading Description

Title Independent Auditor’s Report. The title of the audit report should be simple and include the word “independent”.
indicates that the audit was performed by an external, independent, and unbiased third party.

Addressee The report will clearly state to whom it is addressed. Example: To The Shareholders Of Company Name or The
Directors

Introduction This would be a statement that states the name of the company that is being audited, the dates of the financial per
the audit covers, which is usually the fiscal year.

Responsibilities of directors
This section clearly states the responsibilities of the directors of the company being audited, and the responsibiliti
and auditors the auditor. It states that the management and directors of the company accept the duty of providing the auditor w
the financial documentation required for the audit. It also states that the documentation provided is true and accur
the best of the director’s knowledge. It is stated that the auditor’s role is to audit the financial statements given by
company. It also states that the auditor must form his opinion based on the information provided.

Opinion This section clearly states the auditor’s opinion.

Basis of opinion The section states that the audit was conducted in compliance with the standards and describes the audit process a
resources. This section may be longer than the rest.

Other reporting responsibility

If there are any other reporting responsibilities such as legal or regulatory requirements they are mentioned here.

Signature of the auditor

Signed by the auditor

Date And place The date and city where the report was signed by the auditor.

Sample format Of audit report

Given below is an example of a clean audit report.
Independent Auditors' Report

To the Board of Directors and The Shareholders,

Company ABC,
Address.
Report On The Financial Statements
We XYX have audited the accompanying balance sheets of ABC Company as of December 31, 20X2, 20
and 20X0, and the related statements of income, earnings, and cash flows for the years then ended, and th
related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for …
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducte
our audits in accordance with ...
Opinion
In our opinion, the financial statements referred to previously present justly, in all material respects, the tr
financial position of ABC Company as of December 31, 20X2, 20X1 and 20X0, and the results of its
operations and its cash flows for the years then ended in conformity with the accounting principles that ar
generally accepted in the United States of America.
(Signature)
(Date)

Additional explanation Audit Report

Once an external auditor finishes the auditing of a company, he begins a report where he
consolidates all the findings, observations, and how he thinks the company’s financial
statements are reported; this report is called an audit report.
An audit report is a written opinion of the reliability of the business’s financial statements and
is provided by the chartered accountants auditing the company.
The audit report format is fixed as per the generally accepted auditing standards. But certain
changes are allowed to be made as per the auditor’s requirement, which depends upon the audit
work circumstances.

Audit Report Opinion Types

#1 – Clean Opinion
An auditor gives an unqualified opinion, also known as an unqualified opinion, if, according
to him, the financial statements are true and fair, and there is no material misstatement in them.
#2 – Qualified Opinion
This type of audit report opinion is given by the auditor if, in the financial statements, there is
no material misrepresentation. Still, financial statement preparation is not following generally
accepted accounting principles (GAAP).
#3 – Adverse Opinion
The worst type is the adverse opinion that an auditor can give. It reflects that the financial
statements of an entity are materially misstated, misrepresented, and do not reflect its correct
financial performance.
#4 – Disclaimer of Opinion
If the auditor fails to frame an opinion about the company’s financial statements, then he gives
a disclaimer of opinion. The disclaimer can be the lack of audit evidence or the restriction by
the client to examine all the records etc.
All the investors and lenders require a clean report before investing in the business. The auditor
issues the audit report to the entity’s financial statement users. The public companies must
attach the audit report with the financial statements before filing it with the Securities and
Exchange Commission.
Contents
The audit report includes the following contents.
#1 – Title: The title should be an ‘Independent Auditor’s Report.’
#2 – Addressee: It should be mentioned to whom the auditor’s report is given. For example, the
case of a company auditor’s report is addressed to the company members.
#3 – Management Responsibility: After Addressee, the management responsibility towards the
financial statement is to be written, which includes the responsibility of management towards
the preparation and presentation of financial statements.
#4 – Auditor’s Responsibility: After management responsibility, the auditor’s responsibility is
to be written, including the responsibility to issue an unbiased opinion on the financial
statements.
#5 – Opinion: Then, the auditor must write his own audit report opinion on the truth and
fairness of the financial statements specifying the basis of such opinion.
#6 – Basis of Opinion: State the basis of the fact;
#7 – Other Reporting Responsibility: After all the above points, if there is any other reporting
responsibility, then the same is required to be mentioned, such as Report on Other Legal and
Regulatory Requirements.
#8 – Signature: Then the signature is to be done by the engagement partner of the audit firm.
They provide the required input. Below is the name of the engagement partner and the audit
firm.
#9 – Place and Date: Finally, the place of signature and the date of signing are to be mentioned.
Example
Suppose there is a company named XYZ in the U.S. As per the law prevailing in the U.S., XYZ
is required to appoint an outside auditor who has to review its financial statements to ensure the
accuracy of the financial statements.
After reviewing the company’s financial statements, the auditor will issue the auditor report
reflecting the auditor’s opinion about the accuracy of the financial statements and their
conformity to GAAP.
Advantages of the Audit Report
The management is different from the auditor, so the auditor is independent of his decision. So
the auditor’s report can provide knowledge about the integrity and honesty of the management,
i.e., whether the company’s management is true toward the company’s shareholders.
It assures the financial statements as it is issued by the professional having an unbiased opinion
as he is not a part of the company’s management. This report helps the users of the financial
statements to get assured of the truth and fairness of the financial statement.
It helps the stakeholders to get knowledge about the operational and financial position of the
company. It helps the stakeholders to know the prospects of the company as an auditor is
required to report in its audit report if there are some issues with the company which can affect
its going concern. The problem affecting going concern can be the financial or non-financial
problems that the company faces.
Important Points
The auditor’s opinion mostly covers the financial statements prepared for 12 months or one
financial year. This report is then used by the stakeholders, management, investors, the board
of directors, the government body, lenders, and other parties interested in the business.
The investors use it to assess the entity’s financial performance on the basis that only they will
decide whether to invest in that company or not.
It is used by the Government agency to assess the accuracy and completeness of tax
declarations and to check that there is no tax evasion.
It is used by the Shareholders and the board of directors to assess the transparency of the
financial statement and the integrity of the management
Course:applied cooperatives auditing
C/hr:3
SAMPLING IN ADUDITING
Rationale for and methods of audit sampling
When selecting a sample from a population, the auditor strives to obtain a representative
sample. A representative sample is one in which the characteristics in the sample are
approximately the same as those of the population. This means that the sampled items are
similar to the items not sampled. Assume a client’s internal controls require a clerk to attach a
shipping document to every duplicate sales invoice, but the clerk fails to follow the procedure
exactly 3 percent of the time. If the auditor selects a sample of 100 duplicate sales invoices and
finds three are missing attached shipping documents, the sample is highly representative. If two
or four such items are found in the sample, the sample is reasonably representative. If no or
many missing items are found, the samples non-representative.

In practice, auditors never know whether a sample is representative, even after all testing is
complete. (The only way to know if a sample is representative is to subsequently audit the
entire population.) However, auditors can increase the likelihood of a sample being
representative by using care in designing the sampling process, sample selection, and
evaluation of sample results. A sample result can be non-representative due to non-sampling
error or sampling error. The risk of these two types of errors occurring is called non sampling
risk and sampling risk. Both of these can be controlled.

Non sampling risk is the risk that audit tests do not uncover existing exceptions in the sample.
The two causes of non-sampling risk are the auditor’s failure to recognize exceptions and
inappropriate or ineffective audit [Link] auditor might fail to recognize an exception
because of exhaustion, boredom,or lack of understanding of what to look for. In the preceding
example, assume 3shipping documents were not attached to duplicate sales invoices in a sample
of 100. If the auditor concluded that no exceptions existed, that is a non-sampling error. An
ineffective audit procedure for detecting the exceptions in question would be to examine a
sample of shipping documents and determine whether each is attached to duplicate sales
invoice, rather than to examine a sample of duplicate sales invoices to determine if shipping
documents are attached. In this case, the auditor has done the test in the wrong direction by
starting with the shipping document instead of the duplicate sales invoice. Careful design of
audit procedures, proper instruction,supervision, and review are ways to control non-sampling
risk.
Sampling risk is the risk that an auditor reaches an incorrect conclusion because the sample is
not representative of the population. Sampling risk is an inherent part of sampling that result
from testing less than the entire population. For example, assume the auditor decided that a
control is not effective if there is a population exception rate of 6 percent. Assume the auditor
accepts the control as effective based on tests of the control with a sample of 100 items that had
two exceptions. If the population actually has an 8 percent exception rate, the auditor
incorrectly accepted the population because the sample was not sufficiently representative of
the population.
Auditors have two ways to control sampling risk:
1. Adjust sample size
2. Use an appropriate method of selecting sample items from the population
Increasing sample size reduces sampling risk, and vice versa. At one extreme, sample of all the
items of a population has a zero sampling risk. At the other extreme, sample of one or two
items has an extremely high sampling [Link] an appropriate sample selection method
increases the likelihood of representatives. This does not eliminate or even reduce sampling
risk, but it does allow the auditor to measure the risk associated with a given sample size if
statistical methods of sample selection and evaluation are used.

Statistical and non-statistical sampling

Before discussing the methods of sample selection to obtain representative samples, its useful
to make distinctions between statistical versus non-statistical sampling, and probabilistic versus
non-probabilistic sample [Link] sampling methods can be divided into two broad
categories: statistical sampling and non-statistical sampling. These categories are similar in that
they both involve three phases:
1. Plan the sample
2. Select the sample and perform the tests
3 Evaluate the results

The purpose of planning the sample is to make sure that the audit tests are per -formed in a
manner that provides the desired sampling risk and minimizes the likelihood of non-sampling
error. Selecting the sample involves deciding how a sample is selected from the population. The
auditor can perform the audit tests only after the sample items are selected. Evaluating the
results is the drawing of conclusions based on the audit tests.
Assume that an auditor selects a sample of 100 duplicate sales invoices from population, tests
each to determine whether a shipping document is attached, and determines that there are three
exceptions. Let’s look at those actions step-by-step:

ACTION STEP

• Decide that a sample size of 100 is needed. 1. Plan the sample

• Decide which 100 items to select from the population .2. Select the sample&
• Perform the audit procedure for each of the 100 items
Perform the tests
and determine that three exceptions exist.
• Reach conclusions about the likely exception rate in the total 3. Evaluate the results
population when the sample exception rate equals 3 percent.
Statistical sampling differs from non-statistical sampling in that, by applying mathematical
rules, auditors can quantify (measure) sampling risk in planning the sample (step 1) and in
evaluating the results (step 3). (You may remember calculating statistical result at a 95 percent
confidence level in a statistics course. A 95 percent confidence level provides a 5 percent
sampling risk.)

In non-statistical sampling, auditors do not quantify sampling risk. Instead, auditors select
sample items they believe will provide the most useful information, given the circumstances,
and reach conclusions about populations on a judgmental basis. For that reason, the use of non-
statistical sampling is often termed judgmental [Link] probabilistic and non-
probabilistic sample selection fall under step 2. When using probabilistic sample selection, the
auditor randomly selects items such that each population item has a known probability of being
included in the sample. This process requires great care and uses one of several methods
discussed shortly.

In non-probabilistic sample selection, the auditor selects sample items using professional
judgment rather than probabilistic methods. Auditors can use one of several non-probabilistic
sample selection methods. Auditing standards permit auditors to use either statistical or non-
statistical sampling methods. However, it is essential that either method be applied with due
care. All steps of the process must be followed carefully. When statistical sampling is used, the
sample must be a probabilistic one and appropriate statistical evaluation methods must be used
with the sample results to make the sampling risk computations. Auditors may make non-
statistical evaluations when using probabilistic selection, but it is never acceptable to evaluate a
non-probabilistic sample using statistical methods.

Three types of sample selection methods are commonly associated with non-statistical audit
sampling. All three methods are non-probabilistic. Four types of sample selection methods are
commonly associated with statistical audit sampling. All four methods are probabilistic.
Non-probabilistic (judgmental) sample selection methods include the following:
1. Directed sample selection
2. Block sample selection
3. Haphazard sample selection
Probabilistic sample selection methods include the following:
1. Simple random sample selection
2. Systematic sample selection
3. Probability proportional to size sample selection
4. Stratified sample selection
We will now discuss each of these seven sample selection methods, starting with non-
probabilistic methods.

Non probabilistic sample selection methods

Non-probabilistic sample selection methods are those that do not meet the technical
requirements for probabilistic sample selection. Because these methods are not based on
mathematical probabilities, the representatives of the sample may be difficult to determine. In
directed sample selection auditors deliberately select each item in the sample based on their
own judgmental criteria instead of using random selection. Commonly used approaches
include:

Items Most Likely to Contain Misstatements

Auditors are often able to identify which population items are most likely to be misstated.
Examples are accounts receivable outstanding for a long time, purchases from and sales to
officers and affiliated companies, and unusually large or complex transactions. The auditor can
efficiently investigate these types of items and the results can be applied to the population
judgmentally. In evaluating such samples, auditors typically reason that if none of the items
selected are misstated, it is unlikely that the population is materially misstated.

Items Containing Selected Population Characteristics

By selecting one or more items with different population characteristics, the auditor may be
able to design the sample to be representative. For example, the auditor might select a sample
of cash disbursements that includes some from each month, each bank account or location, and
each major type of acquisition.
Large Dollar Coverage
Auditors can sometimes select a sample that includes a large portion of total population dollars
and thereby reduce the risk of drawing an improper conclusion by not examining small items.
This is a practical approach on many audits,especially smaller ones, where a few population
items make up a large portion of the total population value. Some statistical sampling methods
are also designed to accomplish the same effect.

In block sample selection auditors select the first item in a block, and the remainder of the
block is chosen in sequence. For example, assume the block sample will be sequence of 100
sales transactions from the sales journal for the third week of [Link] can select the
total sample of 100 by taking 5 blocks of 20 items, 10 blocks of10, 50 blocks of 2 or one block
of 100.
It is ordinarily acceptable to use block samples only if a reasonable number of blocks is used. If
few blocks are used, the probability of obtaining a non-representative sample is too great,
considering the possibility of employee turnover, changes in the accounting system, and the
seasonal nature of many businesses. For example, in the previous example, sampling 10 blocks
of 10 from the third week of March is far less appropriate than selecting 10 blocks of 10 from
10 different months.

Block sampling can also be used to supplement other samples when there is a high likelihood of
misstatement for a known period. For example, the auditor might select all 100 cash receipts
from the third week of March if that is when the accounting clerk was on vacation and an
inexperienced temporary employee processed the cash receipt transactions.

Haphazard sample selection is the selection of items without any conscious bias by the auditor.
In such cases, the auditor selects population items without regard to their size,source, or other
distinguishing [Link] most serious shortcoming of haphazard sample selection is
the difficulty of remaining completely unbiased in the selection. Because of the auditor’s
training and unintentional bias, certain population items are more likely than others to be
include din the sample.

Although haphazard and block sample selection appear to be less logical than directed sample
selection, they are often useful in situations where the cost of more complex sample selection
methods outweighs the benefits obtained from using these [Link] example, assume that
the auditor wants to trace credits from the accounts receivable master files to the cash receipts
journal and other authorized sources as a test for fictitious credits in the master files. In this
situation, many auditors use a haphazard or block approach, because it is simpler and much less
costly than other selection methods.
However, for many non-statistical sampling applications involving tests of controls and
substantive tests of transactions, auditors prefer to use a probabilistic sample selection method
to increase the likelihood of selecting a representative sample.
Probabilistic Sample Selection Methods
Statistical sampling requires a probabilistic sample to measure sampling risk. For probabilistic
samples, the auditor uses no judgment about which sample items are selected, except in
choosing which of the four selection methods to use.

In a simple random sample, every possible combination of population items has unequal chance
of being included in the sample. Auditors use simple random sampling to sample populations
when there is no need to emphasize one or more types of population items. Say, for example,
auditors want to sample a client’s cash disbursements for the year. They might select a simple
random sample of 60 items from the cash disbursements journal; apply appropriate auditing
procedures to the 60 items selected, and draw conclusions about all recorded cash disbursement
transactions.

When auditors obtain a simple random sample, they must use a method that ensures all items in
the population have an equal chance of selection. Suppose an auditor decides to select a sample
from a total of 12,000 cash disbursement transactions for the year. A simple random sample of
one transaction will be such that each of the 12,000 transactions has an equal chance of being
selected. The auditors will select one random number between 1 and 12,000. Assume that
number is 3,895. The auditor will select and test only the 3,895th cash disbursement
transaction. For a random sample of 100, each population item also has an equal chance of
being selected.

Random numbers are a series of digits that have equal probabilities of occurring over long runs
and which have no identifiable pattern. Auditors most often generate random numbers by using
one of three computer sample selection techniques: electronic spreadsheets, random number
generators, and generalized audit [Link] programs offer several advantages: time
savings, reduced likelihood of auditor error in selecting the numbers, and automatic
documentation. Because most auditors have access to a computer and to electronic spreadsheets
or random number generator programs, they usually prefer to use computer generation of
random numbers over other probabilistic selection methods.

In systematic sample selection (also called systematic sampling), the auditor calculates an
interval and then selects the items for the sample based on the size of the interval. The interval
is determined by dividing the population size by the desired sample size. The advantage of
systematic selection is its ease of use. In most populations, a systematic sample can be drawn
quickly and the approach automatically puts the number sin sequence, making it easy to
develop the appropriate documentation.A concern with systematic selection is the possibility of
bias. Because of the way systematic selection is done, once the first item in the sample is
selected, all other items are chosen automatically. This causes no problem if the characteristic
of interest, such as a possible control deviation, is distributed randomly throughout the
population,which may not always be the case. For example, if a control deviation occurred at
certain time of the month or only with certain types of documents, a systematic sample can
have a higher likelihood of failing to be representative than a simple random sample. Therefore,
when auditors use systematic selection, they must consider possible patterns in the population
data that can cause sample bias.

In many auditing situations, it is advantageous to select samples that emphasize population

items with larger recorded amounts. There are two ways to obtain such samples:
1. Take a sample in which the probability of selecting any individual population item is
proportional to its recorded amount. This method is called sampling with probability
proportional to size (PPS), and it is evaluated using non -statistical sampling or monetary unit
statistical sampling.
2. Divide the population into sub populations, usually by dollar size, and take larger samples
from the sub populations with larger sizes. This is called stratified sampling, and it is evaluated
using non-statistical sampling or variables statistical sampling.

Audit sampling for tests of controls and substantive tests

Auditors use sampling for tests of controls and substantive tests of transactions to estimate the
percent of items in a population containing a characteristic or attribute of interest. This percent
is called the occurrence rate or exception rate. For example, if an auditor determines that the
exception rate for the internal verification of sales invoices is approximately 3 percent, then on
average 3 of every 100 invoices are not properly verified.

Auditors are interested in the following types of exceptions in populations of accounting data:
1. Deviations from client’s established controls
2. Monetary misstatements in populations of transaction data
3. Monetary misstatements in populations of account balance details
Knowing the exception rate is particularly helpful for the first two types of exceptions, which
involve transactions. Therefore, auditors make extensive use of audit sampling that measures
the exception rate in doing tests of controls and substantive tests of transactions. With the third
type of exception, auditors usually need to estimate the total dollar amount of the exceptions
because they must decide whether the misstatements are material. When auditors want to know
the total amount of a misstatement, they use methods that measure dollars, not the exception
rate.
The exception rate in a sample is used to estimate the exception rate in the entire population,
meaning it is the auditor’s “best estimate” of the population exception rate.

The term exception should be understood to refer to both deviations from the client’s control
procedures and amounts that are not monetarily correct, whether because of an unintentional
accounting error or any other cause. The term deviation refers specifically to a departure from
prescribed controls.

Assume, for example, that the auditor wants to determine the percentage of duplicate sales
invoices that do not have shipping documents attached. Because the auditor cannot check every
invoice, the actual percentage of missing shipping documents remains unknown. The auditor
obtains a sample of duplicate sales invoices and determines the percentage of the invoices that
do not have shipping documents attached. The auditor then concludes that the sample exception
rate is the best estimate of the population exception rate. Because the exception rate is based on
a sample, there is a significant likelihood that the sample exception rate differs from the actual
population exception rate. This difference is called the sampling error. The auditor is concerned
with both the estimate of the sampling error and the reliability of that estimate, called sampling
risk.

Auditors use 14 well-defined steps to apply audit sampling to tests of controls and substantive
tests of transactions. These steps are divided into the three phases described earlier. Auditors
should follow these steps carefully to ensure proper application of both the auditing and
sampling requirements.
Plan the Sample
1. State the objectives of the audit test.
2. Decide whether audit sampling applies.
3. Define attributes and exception conditions.
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable exception rate.
7. Specify acceptable risk of assessing control risk too low.
8. Estimate the population exception rate.
9. Determine the initial sample size.
Select the Sample and Perform the Audit Procedures
10. Select the sample.
11. Perform the audit procedures.
Evaluate the Results
12. Generalize from the sample to the population.
13. Analyze exceptions.
14. Decide the acceptability of the population.

The objectives of the test must be stated in terms of the transaction cycle being tested.
Typically, auditors define the objectives of tests of controls and substantive tests of
transactions:
• Test the operating effectiveness of controls
• Determine whether the transactions contain monetary misstatements
The objectives of these tests in the sales and collection cycle are usually to test the effectiveness
of internal controls over sales and cash receipts and to determine whether sales and cash
receipts transactions contain monetary misstatements. Auditors normally define these
objectives as a part of designing the audit program.

Audit sampling applies whenever the auditor plans to reach conclusions about a population
based on a sample. The auditor should examine the audit program and select those audit
procedures where audit sampling applies.

To illustrate, assume the following partial audit program:

1. Review sales transactions for large and unusual amounts (analytical procedure).
2. Observe whether the duties of the accounts receivable clerk are separate from handling cash
(test of control).
3. Examine a sample of duplicate sales invoices for
a. credit approval by the credit manager (test of control).
b. existence of an attached shipping document (test of control).
c. inclusion of a chart of accounts number (test of control).
4. Select a sample of shipping documents and trace each to related duplicate sales invoices (test
of control).
5. Compare the quantity on each duplicate sales invoice with the quantity on related shipping
documents (substantive test of transactions).

Audit sampling does not apply for the first two procedures in this audit [Link] first is an
analytical procedure for which sampling is inappropriate. The second is an observation
procedure for which no documentation exists to perform audit sampling. Audit sampling can be
used for the remaining three procedures. When audit sampling is used, auditors must carefully
define the characteristics (attributes) being tested and the exception conditions. Unless they
carefully define each attribute in advance, the staff person who performs the audit procedures
will have no guidelines to identify exceptions. Attributes of interest and exception conditions
for audit sampling are taken directly from the auditor’s audit procedures.
 CASH AUDIT
Nature of cash
Cash and bank balances are liquid assets and include:
Notes and units.
Bank current accounts.
Bank deposit accounts.

Because of their liquidity, these assets represent the most vulnerable of all the company’s
assets. On the other hand, they are the most easily verified, because they can be confirmed
directly by third parties or by physical counts.

The auditors’ objectives in examination of cash

The auditors have five objectives in the audit of cash:

Consider internal control over cash transactions.
Determine the existence of recorded cash and the client’s ownership of this asset.
Establish the completeness of recorded cash.
Establish the clerical accuracy of cash schedules.
Determine that the statement presentation of cash is appropriate.

The overall objective of the audit of cash is to determine that cash is fairly presented in
conformity with generally accepted accounting principles.

Internal Control Over Cash

(a) Control Objectives
The central control objectives are that:
All sums are received and subsequently accounted for.
No payments are made which should not be made.
All receipts and payments are promptly and accurately recorded.

(b) Control Procedures

A detailed study of the operating routines of the individual business is necessary in developing
the most efficient control procedures. These universal rules for achieving internal control over
cash may be summarized as follows:
Do not permit any one employee to handle transaction from beginning to end.
Separate cash handling from record keeping.
Centralize receiving of cash as much as possible.
Record cash receipts immediately.
Encourage customers to obtain receipts and observe cash register totals.
Deposit each day’s cash receipts intact.
Make all disbursements by cheques with the exception of small from petty cash.
Have monthly bank Reconciliation prepared by employees not responsible for the issuance or
custody of cash. The completed reconciliation should be reviewed promptly by an appropriate
official.
Forecast expected cash receipts and disbursements and investigate variances from forecasted
amounts.
Internal control over cash receipts.
Cash receipts resulted from a variety of activities. For example, cash is received from revenue
transactions, short and long term borrowings, the issuance of stock, and the sale of marketable
securities, long term investments, and other assets. The scope of this section is limited to cash
receipts from cash sale and collection from customers on credit sales. The basic internal
controls over cash receipts include the following:
Authority to collect cash should be clearly defined.
Collections should be recorded when received.
The collector’s cash receipts should be reconciled to the eventual banking.
Receipts should be banked immediately.
Each day’s receipts should be recorded promptly in the cashbook.
Sales ledger account should have not access to the cash.
The processing of receipts from cash and credit sales involves the following cash receipts
functions:
Receiving cash receipts.
Depositing cash in bank.
Recording the receipts.

Segregation of duties in performing these functions is an important internal control activity.

Receiving cash receipts
A major risk in processing cash receipts transactions is the possible theft of cash before and
after a record of cash is made. Thus, control procedures should provide reasonable assurance
that documentation establishing accountability is created at the moment cash is received and
that the cash is subsequently safeguarded.
Depositing cash in bank
Proper physical controls over cash require that all cash receipts be deposited intact daily. Intact
means all receipts should be deposited; that is cash disbursements should not be made out of
un-deposited receipts.
Recording the receipts
This function involves journalizing over the counter and mail receipts and posting mail receipts
to customer accounts. Controls should ensure that only valid receipts are entered and that all
actual receipts entered at the correct amount.
To ensure that only valid transactions are entered, physical access to the accounting records or
computer terminals used in recording should be restricted to authorized personnel.

Internal Control Over Cash Disbursements

There are two cash disbursements functions as follows:
Paying the liability
Recording the cash disbursements.
These functions should not be performed by the same department or individual. The basic
internal controls over cash disbursements include:
 Unused checks should be held in a secure place.
The person who prepares checks should have no responsibility over purchase ledger or sales
ledger.
Checks should be signed only when evidence of a properly approved transaction is available.
These checks should be evidenced by signing the supporting documents.
Check signatories should be restricted to the minimum practical number.
Two signatories at least should be required except perhaps for checks of small amounts.
Checks should be crossed before being signed.
Supporting documents should be canceled as paid to prevent their use to support further check
payments.
Checks should preferably dispatch immediately.
Control Over Petty Cash
The level and location of cash floats should be laid down formally.
Cash should securely hold.
There should be restricted access to the floats.
All expenditure should require a voucher system signed by a responsible official, not the petty
cashier.
Vouchers should be produced before the check is signed for reimbursement.
A maximum amount should be placed on a petty cash payment to discourage normal purchase
procedures being by passed.
Periodically the petty cash should be reconciled by an independent person.
Audit program for cash
The following audit program indicates the general pattern of work performed by the auditors in
the verification of cash.
Consider internal control for cash.
Obtain an understanding of internal control for cash.
Assess control risk and design additional tests of controls for cash.
Perform additional tests of control for those controls, which the auditors plan to consider in
their assessment of control risk.
(a) Test the accounting records and reconciliation by re-performance.
Compare the detail of a sample of recorded disbursements in cash payments journal to accounts
payable postings, purchase orders, receiving reports, invoices, and paid checks.
Compare the detail of a sample of recorded cash receipts listings to the cash receipts, journal,
accounts receivable postings, and authenticated deposit slips.
Reassess control risk and design substantive tests for cash.

B. Perform substantive tests of cash transaction and balances.

Obtain analysis of cash balances and reconcile to the general ledger.
Send standard confirmation forms to banks to verify amounts on deposit.
Obtain or prepare reconciliation of bank accounts as of the balance sheet date and consider
the need to reconcile bank activity for additional months.
Obtain a cutoff bank statement containing transactions of at least seven business days
subsequent to balance sheet date.
Count and risk cash on hand.
Verify the client’s cutoff of cash receipts and disbursements.
Trace all bank transfers for last week of audit year and first week of following year.
Evaluate proper financial statement presentation and disclosure of cash.

Consider internal control for cash.

1. Obtain an understanding of internal control
By understanding internal control over cash receipts and cash disbursements helps auditors to
observe whether there is appropriate segregation of duties and to enquire who performed
various functions throughout the year.
Assess control risk and design additional tests of control.
After obtaining an understanding of the client’s internal control for cash receipts and
disbursements, the auditors perform their initial assessment of control risk.
Perform additional tests of control.
Tests directed toward the effectiveness of control help to evaluate the client’s internal control
and determine the extent to which the auditors are justified in reducing the assessed levels of
control risk for assertions about the cash account.

The following are examples of typical tests of controls.

Test the accounting records and Reconciliation by re-performance.
Compare detail of cash receipts listings to cash receipts journal, accounts receivable postings,
and authenticated deposit slips.
Compare detail of a sample of recorded disbursements in cash payments journal, accounts
payable postings, purchase orders, receiving reports, invoices, and paid checks.
Reassess control risk and design substantive tests.
When the auditors have completed the procedures described above, they should reassess control
risk and design substantive tests of cash transactions and balances.

B. Substantive tests
Obtain analyses of cash balances and reconcile to the general ledger.
Send standard confirmation forms to banks to verify amounts on deposit.
Obtain or prepare reconciliation’s of bank accounts as of the balance sheet date and consider
the need to reconcile bank activity for additional months.
Obtain a cut off bank statement.
Count and list cash on hand.
Verify the client’s cutoff of cash receipts and disbursements.
Trace all bank transfers for the last week of audit year and first week of following year.
Investigate any cheques representing large or unusual payments to related parties.
Determine proper financial statement presentation and disclosure of cash.
Every business needs to maintain a certain amount of cash to use in settlement of its current
liabilities. In addition, some firms sell goods and services primarily in cash, so they may have
significant cash balances on hand from cash receipts. These cash balances may be aggregated
into a number of bank accounts, including the following:
 Checking account. This is the general account into which customer payments flow, and from
which payable payments are disbursed.
Branch account. A company may operate a separate bank account for each of its branch
locations, which is intended to take in and disburse funds related to local operations.
 Payroll account. This account receives funding for each successive payroll, which is drawn
down as employees cash their paychecks.
Petty cash. This account is maintained internally (it is not a bank account), and contains a small
amount of cash for incidental cash purchases.
Savings account. A client may have a separate bank account that is only used for earning
interest on excess funds.
The largest amount of transaction volume usually runs through the checking account. The
payroll account usually involves a lesser, though still substantial, number of transactions. The
total amount of petty cash held within a business at any given time is likely to be immaterial,
though the total amount of expenditures paid for by this means could be material. A client may
have no savings account at all, if it instead puts excess cash into marketable securities and other
investments.
In this course, we examine the characteristics of cash from an auditing perspective, and then
note the auditing activities that can be applied
to the cash area, with particular attention to the bank reconciliation, proof of cash, and bank
transfer schedule.
Cash Equivalents When a client’s cash balance is stated on its balance sheet, the line is
frequently listed as “cash and cash equivalents.” A cash equivalent is a highly liquid investment
having a maturity of three months or less. It should be at minimal risk of a change in value.
Examples of cash equivalents are:
 Certificates of deposit
 Commercial paper
 Marketable securities
 Money market funds
 Short-term government bonds
 Treasury bills
To be classified as a cash equivalent, an item must be unrestricted, so that it is available for
immediate use. If an investment cannot be converted to cash on short notice, then it should be
not be classified as a cash equivalent.
Auditor Objectives
When developing an audit program for cash, the auditor must consider his objectives in this
area. They are as follows:
 To discern the internal controls over cash being used by the client.
 To consider the inherent risks associated with cash.
 To measuring the risk of material misstatement.
Based on these objectives, the auditor must develop an audit program that contains adequate
tests of the client’s substantive procedures and controls that are targeted at the following:
 Completeness of records. Verify that the cash stated in the client’s records has been fully
recorded.
 Cutoff. Prove that the transactions triggering the recording of
cash are recorded in the correct period.
Disclosure. Corroborate that the information about cash in the
client’s financial statements is properly presented and fully disclosed.
 Existence. Affirm the existence of cash and that the related
transactions occurred.
 Rights. Verify that the client has the legal right to the cash it is recognizing.
There is no need to certify that the valuation of cash is correct,
though one could examine whether the valuations of any foreign exchange holdings have been
properly presented.
Auditing Characteristics of Cash
There are several general characteristics of cash that can impact the contents of the audit plan.
These characteristics are:
 Liquidity. An essential problem with cash is that it is highly liquid, so it cannot be traced
once it has been stolen. This is a major concern for clients that operate largely on a cash basis,
requiring multiple layers of controls to minimize the risk of loss. Given the high risk of loss,
auditors tend to focus extra attention on cash.
Account flow-through. A vast number of accounting transactions flow through a client’s
checking account. Cash receipts from revenue transactions are deposited in it, as are cash
outflows related to payments, both to suppliers and employees. This means that the auditor will
likely want to examine a client’s cash accounts quite closely as part of the substantiation of
many elements of its financial statements.
In short, the baseline case for a client’s cash accounts indicates a relatively high level of
auditing effort, especially when the client’s cash controls are weak
Auditing Activities
In this section, we provide an overview of the auditing activities associated with cash, and
follow up with more detail on selected auditing tasks in later sections.
Inherent Risk Assessment
The auditor should use his knowledge of the client to consider inherent risks related to cash.
Inherent risk is the probability of loss based on the nature of an organization's business, without
any changes to the existing environment. The concept can be applied to the financial statements
of an organization, where inherent risk is considered to be the risk of misstatement due to
existing transaction errors or fraud. Inherent risk is considered to be more likely under the
following circumstances:
 Judgment. A high degree of judgment is involved in business transactions, which introduces
the risk that an inexperienced person is more likely to make an error.
 Estimates. Significant estimates must be included in transactions, which makes it more likely
that an estimation error will be made.
Complexity. The transactions in which a business engages are highly complex, and so are
more likely to be completed or recorded incorrectly. Transactions are also more likely to be
complex when there are a large number of subsidiaries submitting information for inclusion in
the financial statements.
There is little need for judgment or estimates when dealing with
cash-related transactions. However, there is a possibility of transaction complexity related to
cash, especially since many transactions originating in other parts of the business flow through
the cash area. Also, there is an increased risk of fraud, due to the highly liquid nature of cash.
These two issues increase the level of inherent risk associated with cash.
Material Misstatement Assessment As noted earlier, one of the objectives of the auditor is to
gauge the risk of material misstatement. This assessment is largely based on tests of the
client’s controls over its cash. Several possible misstatements are as follows:
Timing error. An accountant may record a cash receipt or cash
expenditure in the wrong period. This mistake can arise when the accounting staff does not pay
attention to the proper cutoff of transactions at the end of a reporting period.
Window dressing. A client may attempt to adjust its ending cash balance upward, in order to
make the business look more solvent than is really the case. For example, corporate insiders
who have borrowed money from the firm could repay the funds just prior to year-end and then
take out loans again immediately thereafter.
The assessment of inherent risk and material misstatement by the auditor determines the extent
of the substantive procedures related to cash.
Substantive Procedures
Substantive procedures are intended to create evidence that an auditor assembles to support the
assertion that there are no material misstatements in regard to the completeness, validity, and
accuracy of the financial records of a client. Thus, substantive procedures are performed in
order to detect whether there are any material misstatements in accounting transactions.
Substantive procedures include the following general
categories of activity:
Testing classes of transactions, account balances, and disclosures Agreeing the financial
statements and accompanying notes to the underlying accounting records Examining material
journal entries and other adjustments made during the preparation of the financial statements At
a general level, substantive procedures related to testing transactions can include the following:
Examining documentation indicating that a procedure was performed Re-performing a
procedure to ensure that the procedure functions as planned Inquiring or observing regarding a
transaction For example, the auditor may take a sample of cash receipts and trace them through
the cash receipts journal and reductions from accounts receivable, as well as into a deposit slip
and bank statement. Similarly, the auditor may take a sample of cash disbursements and trace
them back through accounts payable postings, supplier invoices, receiving documentation, and
purchase orders.
The following are all considered to be substantive procedures for cash. Many of these items are
explained more fully in the following sections of this chapter.
1. Obtain balance detail. Obtain cash balance information for each cash account and reconcile
these balances back to the general ledger.
2. Confirm balances. Send confirmation forms to the financial institutions with which the client
does business, asking for verification of account balances.
3. Reconcile accounts. Either review bank reconciliations prepared by the client or directly
prepare the reconciliations.
4. Examine cutoff. Obtain a cutoff bank statement that itemizes
transactions subsequent to the balance sheet date, and verify that
the client has properly cut off the recording of cash receipts and cash disbursements.
5. Count cash. Verify the amount of cash on hand.
6. Review bank transfers. Examine any bank transfers for one
week on both sides of the balance sheet date.
7. Examine related party transactions. Review any unusually large payments to related parties.
8. Conduct analytical procedures. Compare the client’s cash totals to its operational information
to see if there are any disparities worth discussing.
9. Review presentation. Review the client’s presentation of information in its financial
statements related to cash, including disclosures in the accompanying footnotes.
Obtain Balance Detail
Obtain from the client a listing of all cash accounts. This listing includes the ending balance in
each account, as well as the name of the bank at which the account is located and the account
number. The auditor traces the stated ending balance to the client’s general ledger, while the
rest of the information is used to prepare bank confirmations, as described in the next section.
Confirm Balances
A key step in the auditing of cash is to substantiate the existence of a client’s cash balances.
This is most commonly achieved by confirming the amounts on deposit with the relevant
financial institutions. Cash confirmation requests are made using a standard confirmation form,
which appears in the following exhibit
Completing an audit
involves several key steps to ensure that the process is thorough and accurate. Here
is a general outline of the steps involved:

Planning and Preparation:

 Define the scope and objectives of the audit.
 Identify the audit criteria and standards to be used.
 Gather information about the organization or system being audited.
 Develop an audit plan outlining the procedures and timelines.

Data Collection:
 Collect relevant data and records from various sources.
 Conduct interviews with key personnel.
 Perform physical inspections where necessary.

Analysis and Evaluation:

 Analyze the collected data to identify discrepancies, errors, or areas for
improvement.
 Evaluate the compliance of the organization or system with the established
criteria and standards.
 Identify internal controls and assess their effectiveness.

Reporting:
 Prepare detailed audit reports summarizing the findings, recommendations,
and conclusions.
 Present the findings in a clear and concise manner, often using charts and
tables to illustrate key points.

Follow-Up and Recommendations:

 Provide actionable recommendations to address identified issues.
 Develop a plan for implementing corrective actions.
 Schedule follow-up audits to monitor the progress of implemented
recommendations.

Documentation and Finalization:

 Document all audit procedures, findings, and recommendations.
 Ensure that all audit reports and documentation are complete and accurate.
the process of completing an audit into detailed steps to ensure clarity and
understanding:
1. Planning and Preparation
Define the Scope and Objectives: Clearly outline what you aim to achieve with the
audit. This could be assessing financial accuracy, compliance with regulations, or
evaluating operational efficiency.
Identify Audit Criteria and Standards: Determine the guidelines and benchmarks you
will use to evaluate the subject of the audit. These could be industry standards, legal
requirements, or internal policies.
Gather Information: Collect background information about the organization or
system being audited. This includes organizational structure, key processes, and
relevant historical data.
Develop an Audit Plan: Create a detailed plan that outlines the procedures, timelines,
and resources needed for the audit. This plan should also include potential risks and
how they will be mitigated.
2. Data Collection
Collect Relevant Data: Gather all necessary records, documents, and data from
various sources such as financial statements, operational reports, and transaction
records.
Conduct Interviews: Speak with key personnel to gain insights into specific areas and
to clarify any uncertainties.
Perform Physical Inspections: If applicable, inspect physical assets, facilities, or
processes to verify the accuracy of the collected data.
3. Analysis and Evaluation
Analyze Collected Data: Use analytical tools and techniques to identify discrepancies,
errors, or areas for improvement. This may involve comparing actual results to
budgeted figures or examining control procedures.
Evaluate Compliance: Assess whether the organization or system meets the
established criteria and standards. This involves checking for adherence to laws,
regulations, and internal policies.
Identify Internal Controls: Determine the effectiveness of existing internal controls
and identify any weaknesses or gaps.
4. Reporting
Prepare Detailed Audit Reports: Summarize the findings, recommendations, and
conclusions in a clear and structured report. Use charts, tables, and graphs to illustrate
key points and make the information more understandable.
Present Findings Clearly: Ensure that the report is easy to read and understand.
Highlight critical issues and provide actionable recommendations.
5. Follow-Up and Recommendations
Provide Actionable Recommendations: Offer specific suggestions for addressing
identified issues. These should be practical and feasible for the organization to
implement.
Develop Implementation Plans: Create plans for putting the recommendations into
action. This includes assigning responsibilities, setting timelines, and establishing
milestones.
Schedule Follow-Up Audits: Plan subsequent audits to monitor the progress of
implemented recommendations and ensure continued compliance and improvement.
6. Documentation and Finalization
Document All Procedures and Findings: Keep detailed records of all audit activities,
including interviews, inspections, analyses, and evaluations.
Ensure Completeness and Accuracy: Verify that all audit reports and documentation
are thorough and error-free. This step is crucial for maintaining the credibility of the
audit.
Obtain Final Approval: Get the necessary approvals from the appropriate authority or
stakeholders before finalizing the audit report.
7. Communication and Dissemination
Communicate Findings to Stakeholders: Share the audit outcomes and
recommendations with all relevant parties. This could involve presentations,
meetings, or written reports.
Inform About Required Actions: Ensure that everyone involved understands the steps
they need to take in response to the audit findings.
Disseminate Final Reports: Distribute the final audit reports to all necessary parties,
including management, regulatory bodies, and other stakeholders.
By following these steps, auditors can ensure that the audit process is
comprehensive, objective, and effective in identifying areas for improvement and
ensuring compliance with relevant standards and regulations.
 Planning and Preparation:
 Define the scope and objectives of the audit.
 Identify the audit criteria and standards to be used.
 Gather information about the organization or system being audited.
 Develop an audit plan outlining the procedures and timelines.
 Data Collection:
 Collect relevant data and records from various sources.
 Conduct interviews with key personnel.
 Perform physical inspections where necessary.
 Analysis and Evaluation:
 Analyze the collected data to identify discrepancies, errors, or areas for
improvement.
 Evaluate the compliance of the organization or system with the established
criteria and standards.
 Identify internal controls and assess their effectiveness.
 Reporting:
 Prepare detailed audit reports summarizing the findings, recommendations, and
conclusions.
 Present the findings in a clear and concise manner, often using charts and tables
to illustrate key points.
 Follow-Up and Recommendations:
 Provide actionable recommendations to address identified issues.
 Develop a plan for implementing corrective actions.
 Schedule follow-up audits to monitor the progress of implemented
recommendations.
 Documentation and Finalization:
 Document all audit procedures, findings, and recommendations.
 Ensure that all audit reports and documentation are complete and accurate.
 Obtain final approval from the appropriate authority.
 Communication and Dissemination:
 Communicate the audit findings and recommendations to the relevant
stakeholders.
 Ensure that all necessary parties are informed of the audit outcomes and any
required actions.

What is a Cooperative Society Audit

The Main Features of a Co-operative Society Audit
According to the government,
Adherence to Co-operative Principles
Observance of provisions of Act, Rules and bye-laws
Valuation of assets and Liabilities and Verification of Cash Balance and Securities.
Verification of balances of Depositors and Creditors.
Examination of overdue debts and classification of bad debts.
Personal verification of members and examination of their pass books.
Discussion of draft audit report with Managing Committee.
Audit classification of society;
Examination of the working and other prescribed particulars of the society.

Special Features of Cooperative Society Audits

Overdue Debts
The examination of overdue debts has to be carried out and categorized going back from six
months to five years as well as those overdue above five years, classify them in categories and
include them in it in his final report.
Auditors should assess the bad debt situation of the society and check the relevant provisions to
see if they’re applicable in their situation.
Overdue Interest
Any overdue interest should be excluded while calculating the profits of the society.
Asset & Liability Valuation
While the main intention of the Auditor is to confirm that assets and liabilities are appearing in
the balance sheet exhibiting their proper and correct value. However, valuation models can be
applied as per the general accounting rules and no special mention in the law that states
otherwise.
What are the Qualifications of an Auditor?
The Auditor can be a government-certified Chartered Accountant (within the meaning of the
Chartered Accountant Act-1949).
Apart from that,
A professional who has earned a government Diploma in Co-operative Accounts or in
Cooperation and Accountancy
Any auditor who has previously served as an auditor in the government’s Cooperative
Departments.
Appointment of the Auditor
The Registrar of Cooperative Societies appoints the Auditor who conducts the audit and
submits a report to the Registrar and the society.
Society has to bear the expenses of the Audit and pay as per the mandated rates determined by
the government. (Appointment procedure described in detail above).
The housing society upon selection of the Auditor from the government panel should send an
official request in writing to him, requesting his eligibility, availability, and Panel No. The
Auditor in question is expected to accept or deny officially along with his Panel No.

Rights of an Auditor
As per Section 17 of the Cooperative Societies Act,
“The Registrar, the Collector or any person authorised by general or special order in writing in
this behalf by the Registrar shall at all times have access to all the books, accounts, papers and
securities of a society, and every officer of the society shall furnish such information in regard
to the transactions and working of the society as the person making such inspection may
require.”
On a more general note, a housing society should make sure the Auditor is provided with clean,
comfortable and quiet surroundings to operate from within the premises and should be given
the necessary help while performing physical audits of assets.

Duties of an Auditor
He should have in-depth understanding and knowledge of society bye-laws and the Cooperative
Society Act 1912. He should:
Check membership registers to ascertain the number of shares held by each member.
Know the power of society’s officers with respect to who’s in charge of advancing, borrowing
loans and investment (one or more appointees).
With respect to loans, the auditor should check loan agreements (whether the society is the
borrower or the lender), interest due with the loan repayment cycle, actual interest received and
repaid amount received and tally it up.
Check if loans given to members are according to the legal compliance and rules passed within
the society in writing and that loans given to non- members are done after receiving permission
from the Registrar.
Any Cooperative Bank loans received are within the limit
Be well versed in physical inspection of society’s assets with different inspection techniques
required as per society.
He should also check the following:
Profit and Loss statements
Balance sheets
Income and expense statements, income tax return filing, with applicable GST and other cuts
applicable as per the Income Tax Act and Cooperative Societies Act audit cash book, bank
book, receipts and payments of financial transactions throughout the year.
In legal terms, according to the government directives,
An auditor has to inquire ,
(a) Whether The loans and advances made by the co-operative society are properly secured and
are not prejudicial to the interest of the co-operative society or its members.
(b) Whether The transactions of the co-operative society are not prejudicial to the interest of the
co-operative society.
(c) Whether personal expenses have been charged to revenue account.
(d) Whether the position as stated in the account books and the balance sheet of the co-
operative society is correct, regular and not misleading. And
(e) Whether any special issue referred for enquiry by Reserve bank or National Bank duly
enquired into and reported to the concerned.

Procedure to conduct an account audit in society?

The first step is to appoint a Statutory Auditor from the panel of Auditors approved by the State
Government or an experienced Chartered Accountant who holds a Certificate in Cooperative
Audit issued by a recognized authority. However, the chosen Auditor is not allowed to be
retained for more than two consecutive years. The selection of the Auditor is to be done by the
Managing Committee at a General Body Meeting. At the same time, a society may select an
Internal Auditor from within the society/committee (if they find it necessary).
The Auditor has to be financially compensated by the society, thus his fees have to be paid by
the statutory scale of compensation decided by the Registrar with respect to the type of society.
The Secretary of the society is required to furnish all the necessary documents included but not
limited to, ledgers, cashbooks, register of members, a record of shares/debentures, minutes
book of the society’s meetings, receipts and payments of income and expenditure, financial
statements, profit-loss balance sheets, and any other documents needed by the internal as well
as Statutory Auditor.

The Main activity of a Co-operative Society Audit

Audit of of cooperative society
the audit of a cooperative society into simpler terms and explain each step in detail:
1. Financial Audit
What It Is: This part of the audit focuses on the cooperative’s financial records and
statements.
Key Activities:
Review Financial Statements: Look at the cooperative’s balance sheets, income
statements, and cash flow statements to ensure they are accurate and follow
accounting standards.
Assess Financial Health: Check how well the cooperative is doing financially by
analyzing ratios like liquidity (ability to meet short-term obligations), profitability
(ability to generate income), and solvency (ability to meet long-term obligations).
Identify Discrepancies: Find any errors, irregularities, or potential fraud in the
financial records.
2. Operational Audit
What It Is: This part examines how the cooperative operates on a day-to-day basis.
Key Activities:
Evaluate Operational Efficiency: Look at the cooperative’s production processes,
service delivery, and overall organizational structure to see if they are efficient.
Assess Resource Utilization: Determine if the cooperative is using its resources (like
human resources, technology, and capital) effectively.
Identify Areas for Improvement: Find areas where the cooperative can improve its
operations to become more efficient and productive.
3. Compliance Audit
What It Is: This part ensures that the cooperative is following all relevant laws and
regulations.
Key Activities:
Review Legal Compliance: Check if the cooperative is complying with cooperative
laws, tax laws, and environmental regulations.
Assess Governance Practices: Evaluate the cooperative’s governance practices,
including the effectiveness of its board of directors and member participation.
Identify Regulatory Risks: Find any potential risks related to non-compliance with
legal requirements that could affect the cooperative’s operations or reputation.
4. Internal Control Audit
What It Is: This part focuses on the internal control systems in place to prevent fraud,
errors, and mismanagement.
Key Activities:
Evaluate Internal Controls: Assess the internal control systems to ensure they are
effective in preventing fraud and errors.
Identify Control Weaknesses: Find any weaknesses or gaps in the internal control
systems that could be exploited or need strengthening.
Recommend Improvements: Suggest ways to strengthen internal controls and
improve risk management practices.
5. Performance Audit
What It Is: This part looks at how well the cooperative is performing against its
strategic goals.
Key Activities:
Assess Performance Indicators: Evaluate the cooperative’s performance using key
performance indicators (KPIs).
Identify Performance Gaps: Find any gaps between actual performance and desired
outcomes and assess the underlying causes.
Recommend Performance Enhancements: Offer suggestions to improve
performance and achieve the cooperative’s strategic goals.
6. Reporting and Recommendations
What It Is: The final step involves summarizing the findings, recommendations, and
conclusions in a clear report.
Key Activities:
Prepare Detailed Audit Reports: Summarize the findings, recommendations, and
conclusions in a clear and structured report. Use charts, tables, and graphs to illustrate
key points.
Present Findings Clearly: Ensure the report is easy to read and understand.
Highlight critical issues and provide actionable recommendations.
Communicate Findings to Stakeholders: Share the audit outcomes and
recommendations with all relevant parties, including the cooperative’s board of
directors, members, and regulatory bodies.
 FOR 4the YEAR COOPERATIVES ACCOUNTING AND
AUDITING STUDENTS
AUDITING COURSE(1&2 )WORK SHEET
. PREPARED BY HUNDE EMIRU (MBA)
1. Various types of quality audits are:
A. product
B. process
C. management (system)
D. registration (certification)
E) All of above
2. When the auditor is an employee of the organization being
audited (auditee), the audit is classified as an …….. quality audit.
A. internal
B. external
C. compliance
D. Both A & B
3. The most comprehensive type of audit is the ……… system audit,
which examines suitability and effectiveness of the system as a
whole.
A. quantity
B. quality
C. Preliminary
D. sequential
4. Each of the three parties involved in an audit …………………….
plays a role that contributes to its success.
A. the client, the auditor, and the auditeer
B. the client, the auditor, and the audite
C. the client, the moderator, and the auditee
D. the client, the auditor, and the auditee
5. Audit is a fact-finding process that compares actual results with
………………….
A. specified standards and plans
B. expected results
C. premature results
D. preliminary results
6. The ……… is also expected to provide the resources needed and
select staff members to accompany the auditors.
A. auditor
B. client
C. internal auditor
D. auditee
7. Who among the following can be appointed as auditor of a
company?
A. A partner or a director of the company.
B. A person of unsound mind.
C. Mr. Y who owes Rs. 500 to the company.
D. Mr. Z the holder of C.A certificate.
8. Audit means ___________.
A. recording business transactions.
B. preparing the final accounts.
C. examination of books, accounts, vouchers etc.
D. preparing final accounts.
9. Auditor shall report on the accounts examined by him
__________.
A. to the shareholders.
B. to the court.
C. to the bank.
D. to the general public.
10. When a transaction has not been recorded in the books of
account either wholly or partially such errors are called as
_________.
A. Error of commission
B. Error of omission.
C. Compensating error.
D. Error of principle.
11. Verification of the value of assets, liabilities, the balance of
reserves, provision and the amount of profit earned or loss
suffered a firm is called _________.
A. Continuous audit.
B. Balance sheet audit.
C. Interim audit.
D. Partial audit.
12. Periodical audit is also called as _________.
A. Final audit.
B. Interim audit.
C. Balance sheet audit.
D. Income statement audit.
13. The auditor of a government company shall be appointed by
________.
A. the government company itself.
B. the central government.
C. the share holders.
D. the debenture holders.
14. The main object of the audit of the cash book may be ________.
A. to verify the assets and liabilities.
B. to know that all receipts and payments have been properly recorded.
C. to check the internal control system in business.
D. to check the bank balance.
15. The owners of the company are called __________.
A. Debenture holders.
B. Debtors
C. Shareholders
D. None of the above.
16. The main objects of investigation is _________.
A. to discover errors and frauds.
B. to prevent errors and frauds.
C. to verify statements.
D. all the above
17. The liabilities of an auditor can be _________.
A. Civil
B. Criminal
C. Civil and Criminal.
D. Official
18. A vacancy caused by resignation of an auditor is filled by
_________.
A. board of directors.
B. managing director.
C. general meeting.
D. central government.
19. When at an annual general meeting of a company no auditor is
appointed or reappointed. In that case ________
A. the central government appoints a person to fill the vacancy
B. the board of directors appoints a person to fill the vacancy.
C. the managing director of the company appoints a person to fill the
vacancy.
D. none of these can appoint a person to fill the vacancy.
20. The most difficult type of misstatement to detect fraud is
based on __________.
A. related party purchases.
B. related party sales.
C. the restatement of sales.
D. omission of a sales transaction from being recorde
21. Professional skepticism requires that the auditor assume that
management is _________.
A. reasonably honest.
B. neither honest nor dishonest.
C. not necessarily honest.
D. dishonest unless proved otherwise.
22. The use of an audit engagement letter is the best method of
assuring the auditor will have which of the following?
A. Auditor will obtain sufficient appropriate audit evidence.
B. Management representation letter.
C. Access to all books, accounts and vouchers required for audit
purpose.
D. Co-operation from other auditors
23. Audit of banks is an example of __________.
A. Statutory audit.
B. Balance sheet audit.
C. Concurrent audit.
D. All of the above.

24. Balance sheet audit included verification of ________.

A. assets
B. liabilities
C. income and expenditure accounts where appropriate.
D. all of the above.
25. In determining the level of materiality for an audit what
should not be considered?
A. Prior years errors.
B. The auditor remuneration.
C. Adjusted interim financial statement.
D. Prior year financial statements.
26. Audit Programme is prepared by ___________.
A. the auditor.
B. the client.
C. the audit assistants.
D. the auditor and his audit assistants.
27. Which of the following statement is not correct regarding
removal of first auditor before expiry of the term?
A. He is removed at a general meeting.
B. The shareholders are authorized to do so
C. The approval of the central government is required for such
removal.
28. Which of the following factors is most important in
determining the appropriations of audit evidence?
A. The reliability of audit evidence and its relevance in meeting the
audit objective
B. The objectivity and integrity of the auditor
C. The quantity of audit evidence
D. The independence of the source of evidence
29. When restrictions that significantly affect the scope of the

audit are imposed bythe client, the auditor generally should issue

which of the following opinion?

A. Qualified opinion

B. Disclaimer of opinion

C. Adverse opinion

D. Unqualified report with ‘an emphasis of matter’ paragraph;

30. The inventory consists of about one per cent of all assets. The

client has imposed restriction on auditor to prohibit observation

of stock take. The auditor cannot apply alternate audit

procedures.

A. Unqualified opinion

B. Qualified opinion

C. Disclaimer of opinion

D. Adverse opinion

31. The auditor has serious concern about the going concern of

the company. It is dependent on company’s obtaining a working

capital loan from a bank which has been applied for. Then

management of the company has made full disclosure of these

facts in the notes to the balance sheet. The auditor is satisfied

with the level of disclosure. He should issue_

A. Unqualified opinion

B. Unqualified opinion with reference to notes to the accounts

C. Qualified opinion

D. Disclaimer of opinion

32. The client changed method of depreciation from straight line

to written down value method. This has been disclosed as a note to

the financial statements. It has an immaterial effect on the

current financial statements. It is expected, however, that the

change will have a significant effect on future periods. Which of

the following option should the auditor express?

A. Unqualified opinion

B. Qualified opinion

C. Disclaimer of opinion

D. Adverse opinion

33. In case the auditor gives a disclaimer of opinion in the audit

report which of the following paragraph(s) of a standard

unqualified audit report are modified?

A. Scope paragraph

B. Opinion paragraph

C. Scope and opinion paragraphs

D. Introductory, scope and opinion paragraph

34. In case of sales return, the auditor should examine which

documents?

A. Credit notes, advice notes and inward return notes

B. Debit notes, advice notes and inward return notes

C. Purchase invoices, advice notes and inward return notes

D. Credit notes, inspection report and inward return notes

35. Which of the following is most crucial to a purchase

department?

A. Reducing the cost of acquisition

B. Selecting supplies

C. Authorizing the acquisition of goods

D. Assuring the quality of goods

36.____ is a letter from the auditor of a company that is the end result of the
audit process
A. audit evidence [Link] document C. audit confirmation D. audit report
37.__________ is the best type of report that a company can receive from an auditor
A . Clean report [Link] opinion C. Adverse opinion D .none

38________ [Link] happen when the auditor was denied access to certain financial
information or if the auditor is unable to be impartial

A. Adverse opinion
B. unqualified report
C. Qualified opinion
D. Clear report
E. None
39._________all are not reasons for planning the audit work except
A. to obtain insufficient and incompetent evidence
B. keep reasonable audit cost.
C. To avoid understanding with the client
D. all
A. _________ [Link] engagement letter includes
B. The nature of the work to be performed The
C. dead line of the audit contract
D. The amount of the audit fee
E. Limitations of the auditor with respect to detection of errors, irregularities, and
illegal acts
F. All
. _________ 41. is the measure of the quantity of audit evidence.

A. Insufficiency
B. Appropriateness
C. Occurrence
D. None
._________ 42. Transactions and events have been recorded in the correct accounting
period
A. Existence
B. Cut-off..
C. Completeness
[Link]
. _________ [Link] records or documents, whether internal or external, in
paper form, electronic form, or other media
A. Observation
B. Inspection
C. Inquiry
D. Confirmations
[Link] one is Consideration during inquiry
A. Qualifications of the individual to be questioned.
B. Asking clear, concise, and relevant questions
C. Using open or closed questions appropriately.
D. [Link]
[Link] auditor should keep his ears and eyes open but his mouth [Link] refers
A. Confidentiality
B. Integrity
C. Competence
D. Confidence
[Link] one is odd
A. Continuing profession education
B. Computer proficiency
C. Independence in mental attitude
D. Adequate planning and supervision
47. Which one is element of Standards of Field Work
A. Adequate planning and supervision
B. Understanding the clients’ internal control
C. Sufficient and competent evidence
D. All.
48.______is system of internal controls for ongoing viability
A. Risk Assessment
B. Monitor
C. Information
D. Control Activities

49.____ The auditor’s failure to recognize exception because of exhaustion,

boredom, or lack of understanding is the causes of
A. sampling risk [Link] risk C. non sampling risk D. in correct rejection risk
50._______ Auditors have to control sampling risk through except
A . Adjust sample size [Link] inappropriate method of selecting sample items
from the population. C. all [Link]

.______ 51. Which one is odd

E. Alpha risk [Link] risk [Link] risk [Link]-sampling risk

52.____ The auditor’s failure to recognize exception because of exhaustion, boredom,
or lack of understanding is the causes of
A. sampling risk [Link] risk C. non sampling risk D. in correct rejection risk
53._______ Auditors have to control sampling risk through except
A . Adjust sample size [Link] inappropriate method C. all [Link]

54.______ Which one is odd

F. Alpha risk [Link] risk [Link] risk [Link]-sampling risk

55._______ w/c one is not Internal control over cash receipts
[Link] should be banked immediately [Link] to collect cash should be clearly
defined.
C. Checks should be crosse checking before being signed [Link] should be banked
immediately
56._____ which one is not The Main Features of a Co-operative Society Audit?
A. Audit classification of society [Link] of Co-operative Principles
[Link] of overdue debts [Link] of assets and Liabilities [Link]
57.__ is one in which the characteristics in the sample of audit interest are
approximately the same as those of the population.
A. audit sample [Link] sample C,sample risk [Link]-sample risk
58.______ all are Special Features of Cooperative Society Audits except
[Link] of overdue debts [Link] of Overdue Interest [Link] & Liability Valuation
[Link] [Link]

ANSUWER
1. E
2. A
3. B
4. D
5. A
6. D
7. D
8. C
9. A
10. B
11. B
12. C
13. B
14. B
15. C
16. D
17. C
18. C
19. A
20. D
21. B
22. C
23. D
24. D
25. B
26. D
27. D
28. D
29. A
30. C
31. B
32. A
33. C
34. D
35. C