SEMESTER ASSIGNMENT # 1

Principles of Auditing

SUBMITTED TO:
Mr Shameel Zuberi

SUBMITTED BY:
Narender Kumar Roll # 33
Omair Kamran Roll #
Madiha Sahar Roll #
Sana Lakhani Roll # 14

November 12, 2007

Karachi University Business School

University of Karachi
 QUESTION 1
(a) This illegal act by Ultro’s management is matter of concern for the firm
performing the audit of the company. This illegal act may result in the fine on
the company or expropriation of company assets if the concerned authorities
get to know about this. If the Enormo’s board of directors seem to be
unconcerned regarding this illegal act and is not interested in taking any action
against it or to prevent this illegal act in the future then this shows the
alarming situation for the CPA firm. If the CPA firm would also ignore this
illegal act then its integrity and honesty can be challenged by the public or any
stakeholder of the company and there would be negative impact on the image
of CPA firm in case that illegal act comes to light.

(b) The first option available for the CPA firm would be to discuss this matter
with the Enormo’s management, board of directors and legal counsel and try
persuading the Enormo’s board of directors to take some corrective action.
Incase the board of directors fail to take any appropriate corrective action
CPA firm may opt to withdraw from the audit engagement or the firm may
issue the qualified audit report which explains this illegal act by Ultro’s
management.

(c) Appropriate course of action for the CPA firm would be to issue the audit
report with the explanations regarding this act by Ultro’s management. By
doing this CPA firm would be able to present the true picture of the company
and any illegal activities in which the company is engaged. This action by the
audit firm would mean they are not involved in concealing any illegal acts of
the client and would also help to maintain its integrity.
 QUESTION 2
Generally Accepted Auditing Actions by Jones Resulting in Failure to
Standards comply with Generally Accepted Auditing
Standards
1. The examination is to be performed by a 1. Jones hired two accounting students to
person or persons having adequate conduct the audit of John Clinton. The
technical training and proficiency as an students did not have the required adequate
auditor. technical training and proficiency to
conduct the audit.

2. Due professional care is to be exercised 2. Jones did not take any professional care
in the performance of the audit and the in conducting the audit. Jones was not
preparation of the report. involved in each and every step involved in
audit. He asked those to two students to
conduct the audit and he himself just
prepared the report after reviewing
financial statements.

3. The work is to be adequately planned 3. Jones did not bother to do any sufficient
and assistants, if any, are to be properly planning before the audit. He was in hurry
supervised. to complete the audit since Clinton had to
submit audited financial statements within
three weeks to apply for the loan

4. A sufficient understanding of internal 4. Jones asked the students not to spend a

control structure is to be obtained to plan time reviewing internal control which is the
the audit and to determine the nature, violation of third GAAS.
timing, and extent of tests to be performed.

5. Sufficient competent evidential matter is
to be obtained through inspection,
observation, inquiries and confirmation to
afford a reasonable basis for an opinion
regarding the financial statements under
audit.
5. Evidential matter was not collected while
conducting the audit. He simply asked the
students to concentrate on proving the
mathematical accuracy of the ledger
accounts and summarizing the data in
accounting records.

6. The report shall state whether the 6. The audit report that was prepared by
financial statements are presented in Jones for Clinton did not refer to the
accordance with generally accepted generally accepted accounting principles.
accounting principles.

7. Informative Disclosures in the financial 7. The financial statements that students

statements are to be regarded as reasonably gave to the Jones did not include any notes
adequate unless otherwise stated in the which is the violation of GAAS.
report.
 QUESTION 3

(a) Rezzo should not comply with White’s request for an auditor’s opinion. In the
first place preparing the financial statements of the company and providing the
auditor opinion on financial statements are completely different jobs. Audit
Report is defined as an ‘end product of an audit’ of a business entity expressing
the auditor’s opinion on the client’s financial statements. Although Rezzo is
aware of everything regarding the company and its financial statements he should
go through the proper channel, he should first perform the audit of White
Company and then issue the audit report.

(b) Yes. He should first perform the audit of the company, complying with the
generally accepted auditing standards and then issue audit report to the White
Company, although he has the deep understanding of company’s affairs. If the
Rezzo is going to issue the audit report without conducting the audit, this report
would not be reliable and his conduct will be questionable by others since he had
not gone through the appropriate audit process.

(c) CPA firm can accept the request of White Company for the audit depending upon
their knowledge of the firm and its business and others considerations that are
taken into account before accepting the audit client. National CPA firm can assign
Rezzo to perform this job since he is now the part of audit staff of the national
CPA firm and he has got the relevant training and is proficient and he also possess
the knowledge of that particular company and industry.