Question

ABC company basically manufacturing the musical instruments. You have been auditing this company from the past 8 years. The company financial statements are “true and fair” the accounts of the company never been qualified from the beginning. The company total net worth amounted OMR 10 million.

Consolidated financial statements recognize profit before tax of OMR 9 million (2018 – OMR 6 million) and total assets of OMR 20 million (2018 OMR 18 million).

The company accountant has informed that there is an unrecorded loss of OMR 25,000 from the fire accidents in one of the warehouse of the company. The company got the claims of OMR 15,000 because of underinsurance.

From the past five years’ company profits increased gradually and in the last year ABC company started manufacturing the surgical equipment’s for the hospital. Now your firm appointed more auditors for the audit engagement. While auditing the financial statements of you have observed that most of your audit assistants are not aware of the audit documentation.

Required:

1. “Is professional skepticism is required for the audit of ABC company” Justify                                                                                

2. Describe to your audit assistant about the nature and purpose of Audit documentation.

3. As per the ISA 230, Whether records, fixed assets register, vouchers, minutes book, legal books are to be obtains by auditor as audit documentation? Explain.   

Answer 1

a) Yes, professional skepticism is required in every audit engagements. Each of the audit team members should very careful about auditing the transactions even if they are auditing this client for more than 8 years. In this client given the prior years experience of the auditors, chances of likelihood of fraud is less but then also auditor should always maintain professional skepticism in the audit engagements. They should follow standards on auditing for each audit engagement.

b) Audit documentation is the process of collection of audit evidences. These audit evidences helps the auditor in forming an opinion on the financial statements of the company. Audit evidences collected confirms the fact that audit was performed by applying all the applicable auditing standards and professional standards as required by the auditor.

It solves a no. of purposes such as -:

(i) helps in planning and performance of audit.

(ii) Engagement managers and partner can easily review the work papers

(iii) helps in creating accountability

(iv) Audit evidences collected can be used in future engagements

(v) Maintaining the quality of engagement as required by the auditing standards.

(vi) Helps when investigation is done by the regulator, or any other authorized agencies.

c) As per ISA 230 states that audit documentation is not a substitute for entity's accounting records. Fixed assets register, vouchers, minutes book etc are the accounting records of the entity. The auditor should be keep all these as a part of audit documentation. Audit documentation indeed means evidences such as letter of confirmations, analytical procedures, management representation letters etc. However wherever relevant auditors are authorized to keep an extract of the entity's accounting records as a part of audit documentation and conclusions reached.