- 10 Marks
AA – L2 – Q7 – The Role and Responsibilities of Auditors
Question
(a) Briefly highlight the directors’ responsibilities relating to the financial statements at Apex Ventures.
(b) During the audit team planning meeting for Apex Ventures, a member of the audit team passed a comment that, based on past experience with the client, he was confident that the management of the client was honest and there was no issue as regards management integrity or risk of fraud in the company. The audit manager responded that the auditor should always maintain an attitude of professional scepticism throughout the audit.
Briefly describe ‘professional scepticism’ and elaborate on the response of the audit manager.
Answer
(a) The directors’ responsibilities in relation to the financial statements include the following:
- The overall responsibility for the preparation and presentation of the financial statements.
- Identifying the financial reporting framework to be used in the preparation and presentation of financial statements.
- For such internal controls determined necessary to enable the preparation of financial statements that are free from material misstatement whether due to fraud or error.
- Selecting and applying appropriate accounting policies.
- Making accounting estimates that are reasonable in the circumstances.
(b) Professional scepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. Consequently, the auditor shall make a critical assessment with a questioning mind of the validity of audit evidence obtained. The auditor may accept records and documents as genuine unless the auditor has reason to believe the contrary. However, the auditor shall remain alert to audit evidence that contradicts or brings into question the reliability of documents and responses to inquiries and the reliability of other information obtained from management and those charged with governance.
Elaboration on the response of the audit manager that auditor should always maintain an attitude of professional scepticism throughout the audit:
The auditor cannot be expected to disregard past experience of the honesty and integrity of the audit client’s management and those charged with governance. Nevertheless, a belief that management and those charged with governance are honest and have integrity does not relieve the auditor of the need to maintain professional scepticism or allow the auditor to be satisfied with less than persuasive audit evidence when obtaining reasonable assurance.
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