- 10 Marks
Question
ii) Auditors are required to plan and perform an audit with professional skepticism, to exercise professional judgment, and to comply with ethical standards.
Required:
Explain what is meant by ‘professional skepticism’ and why it is so important that the auditor maintains professional skepticism throughout the audit. (5 marks)
b)
i) International Standard on Auditing (ISA) 560: Subsequent Events deals with the auditor’s responsibility towards events that occur after the reporting date and especially before the auditor’s report is issued.
Required:
Explain FIVE audit procedures to test subsequent events. (5 marks)
Answer
(ii) Professional Skepticism:
Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and critically assessing audit evidence. Auditors should not simply accept the information provided by management at face value, but instead, should seek corroborative evidence.
Professional skepticism is crucial because:
- Risk of Misstatement: It helps reduce the risk of overlooking unusual transactions or anomalies, which could be signs of material misstatement.
- Fraud Detection: It ensures that the auditor remains vigilant to potential fraud or deliberate misstatements, particularly in areas where management judgment or estimates are involved.
- Independence: Maintaining skepticism supports auditor independence, as it ensures that evidence is objectively evaluated, rather than relying solely on management representations.
- Judgment: It ensures that professional judgment is applied rigorously in determining the nature, timing, and extent of audit procedures and in evaluating their results.
(Total: 5 marks)
(i) Audit Procedures for Subsequent Events (ISA 560):
- Inquiries of Management:
Auditors should inquire with management about any significant post-balance-sheet events, new commitments, borrowings, or any unusual transactions after the reporting period. - Review of Board Minutes:
The auditor should review minutes of meetings held by the board of directors, shareholders, and relevant committees to identify any major events or decisions that occurred after the reporting date. - Examination of Interim Financial Statements:
Reviewing the client’s interim financial statements prepared after the year-end helps identify significant events that might impact the financial statements under audit. - Lawyer’s Letters:
Auditors should obtain confirmations from the company’s legal counsel concerning litigation and claims that may have arisen after the balance sheet date. - Subsequent Receipts and Payments:
Auditors should test transactions that occur after the reporting date, such as payments received from customers or payments made to suppliers, to confirm the completeness and accuracy of year-end balances.
(Total: 5 marks)
- Tags: Audit Procedures, Audit report, ISA 570, Professional Skepticism, Subsequent Events
- Level: Level 2
- Uploader: Dotse