Question

1. The difference between direct legal act and indirect legal acts and the auditor’s responsibility toward them
2. What professional skepticism is
3. The difference between occurrence and completeness assertions
4. The difference between existence and completeness assertions
5. Types of audit evidence (8 of them), which is more reliable than the others
6. What analytical procedures are and when are they used (important)

Answer 1

1)Direct effect illegal acts affect financial and accounting aspects of an organization. Direct illegal acts can be termed as violations of laws and regulations that affect specific account balances in an organization's financial records. Examples of direct illegal acts include violations of regulations that affect the amount of revenue accrued in a contract or violating tax laws thus affecting the amount reflected as expense in financial records.

Indirect illegal acts have an indirect effect on a company's financial statements. Neebes et al (1991) provide that indirect illegal acts are characterized as being related to an organization's operating aspects more compared to its financial and accounting aspects

2)Professional skepticism is a critical component of an internal auditor's duty of care that applies throughout any engagement. It's an attitude that includes a questioning mind and a critical assessment of the appropriateness and sufficiency of audit evidence. It requires being alert to conditions that may indicate possible misstatement due to error, neglect or fraud, and a critical assessment of audit evidence.

Professional care, which is closely linked to professional skepticism, is critical during the planning, performance, and while preparing the report for every engagement. Auditors use their knowledge, skills, and abilities to diligently perform, in good faith and with integrity, the gathering and objective evaluation of evidence.

3)&4) The ’occurrence’ assertion relates to transactions. For example, when managementpresent a profit and loss statement they are asserting that the revenue shown in thestatement occurred; the sales took place. The ‘existence’ assertion relates tobalance sheet items. For example, when management present a balance sheet theyare asserting that the inventory shown on the balance sheet exists; the inventory isphysically in the warehouse or otherwise under the client’s control. The occurrenceand existence assertions are different because one relates to transactions occurringduring the period and the other to balances of accounts at the end of the period. Theassertions are similar because they both relate to management’s claim that an itemshown in the accounting records is a true reflection of an item or transaction in thereal world. They are also both opposite to ‘completeness’. When managementpresent the financial statements they are also asserting that the accounting recordsare complete; there are no items or transactions in the real world that have beenomitted from the accounting records.

5) 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.

6) Analytical procedures are performed at three stages of audit: at start, in middle and at end of audit. These three stages are risk assessment procedures, substantive analytical procedures, and final analytical procedures.

Risk assessment procedures are used to assist the auditor to better understand the business and to plan the nature, timing and extent of audit procedures.
Substantive analytical procedures are used to obtain evidential matter about particular assertions related to account balances or classes of transactions.
Final analytical procedures are used as an overall review of the financial information in the final review stage of the audit