Financial Auditing: Addressing the Expectation Gap and Assessing Risks

This report delves into key aspects of financial auditing, beginning with a thorough examination of the audit expectation gap, which is the difference between public perception and the actual scope of a financial audit. It explores methods to narrow this gap, emphasizing the importance of fraud detection through enhanced auditor skills and proactive measures. The report also addresses the critical decisions involved in accepting audit appointments, considering ethical and legal factors such as management pressure, potential conflicts of interest, and compliance with anti-money laundering legislation. Furthermore, it discusses the necessity of sufficient and appropriate audit evidence, highlighting the auditor's judgment in determining adequacy and relevance. The report also analyzes audit risk, focusing on the potential for management to overstate net income to meet lending agreement requirements. Finally, it distinguishes between misstatements arising from fraudulent financial reporting and those resulting from misappropriation of assets, providing a comprehensive overview of the challenges and responsibilities faced by auditors in ensuring the integrity of financial statements.

QUESTION 01
Audit Expectation gap
The audit expectation divides the general public's expectations of the audit with what a
financial audit actually demands. In other cases, this difference is not the result of a failure to
audit but rather the achievements of the auditors' public wishes. There is a difference between
anticipation and reality in either scenario, (Ruhnke & Schmidt, M, 2014, p1 (1))
Approaches to reducing the expectation gap.
These prescriptions are definitely arduous to increase an auditor's ability to detect fraud.
Detection of fraud calls considerable effort and the ability to work together. Capacity is
improved by experience, training and effort. Strong audit planning, brainstorming and skills
boost efforts. All auditors, internally and externally, have the problem of reducing the
expectation gap. While law, regulation and auditing standards have advanced significantly in
this profession, this guidance must be used within its own ranges and the effort expensive and
the ability to narrow this gap, (Salehi, M. 2011, p2(1)).
Uncovering all sorts of fraud cannot be held to account by auditors. It is quite difficult to detect
collusive fraud and other sophisticated methods. However, this does not offer auditors a clear
basis to stop seeking fraud, (Salehi, M. 2011, p2(1)).. Developing the appropriate attitude,
incorporating forensic methods and asking questions about fraud all raise the likelihood of
auditors to uncover it.
 Awareness and training of practitioners in public of auditors' obligations and duties •
(external Auditors).
 Improve audit standard quality and ongoing audit performance monitoring.
QUESTION 02
Accepting decisions are vital in auditing, because these commitments might represent risks to
objectivity and risk exposure, which should be carefully assessed by the auditing company. Late,
many of the concerns under discussion in the auditing industry are whether the non-audit
service providing for audit clients should be banned outright. In light of a potential new audit

commitment, the International Standard on Auditing (ISA) criteria require the company to
decide whether preconditions for audits exist. All these factors require careful adoption of
decisions, (Whittington & Pany, 2010, p3 (1)).
In accordance with the Professional Accountants Ethics Code of IFAC, a professional accountant
in public practice shall assess before establishing a new client connection, if acceptance would
threaten the observance of the basic principles. Potential integrity threats or professional
behaviours. Such threats may alert the customer of certain doubtful problems, i.e. its owners,
management or operations, (Whittington & Pany, 2010, p3 (1)). This implies the Company
should look at the potential customer, its owners and its business activity in order to assess
whether doubts about the integrity of the potential customer generate unacceptable risks
when it comes to taking a new customer. These investigation measures are normally carried out
using due diligence methods, also to comply with the legislation on anti-money laundering.
Ethical, legal and other factors to be considered before accepting an audit appointment
Ethical factors
Management Pressure
Public firms may be putting undue stress and pressure on accountants to produce their
accounts and financial statements by the responsibility of success at a high level. For these
accountants, the ethical problem is to preserve honest reporting of the assets, liabilities and
profits of companies without allowing management and corporate managers to exercise any
pressure on them, (Brennan et al, 2007, p3(2)). Unethical accountants can easily change
financial records for companies and maneuver numbers to present deceptive image of
corporate triumphs. Whistleblower's accountant.
A financial accountant may be confronted with the ethical problem that the financial
accountings standard board has detected infringements. Although it is the obligation of an
ethics accountant to disclose these offenses, the repercussions of the reporting present the
difficulty. Government scrutiny of financial records and the bad press of an accounting scandal
might lead to a quick decrease in the company and thousands of employees were dismissed.

Managers and other business leaders could face criminal prosecution, which might lead to
significant penalties and imprisonment, (Brennan et al, 2007, p3 (2)).
The Greed Effects.
Avidness in the realm of business and finance leads to the removal of ethical limits and
protections to make up more money. An accountant can never let the desire to earn a better
livelihood and gain more wealth prevent her from following the ethical financial reporting
requirements. An accountant who keeps eye on his own bank account more than the balance
sheet of his company becomes responsible to the firm and might lead to actual accounting
infringements, leading to SEC penalties.
Financial records can be issued.
An accountant may be asked by an officer or other executive to hide or exclude specific
financial figures from a budget that could illuminate the business in a negative light for
government and investors, (Brennan et al, 2007, p3 (3)). Omission may not appear to be a
substantial infringement of accounting ethics for an accountant because it does not entail
direct numbers or data manipulation. This is why an accountant must be ethically cautious so
that he does not fall into such a trap.
Legal issues
Financial reporting fraudulent.
Over the last two decades, most accounting scandals have focused on financial reporting fake.
Fraudulent financial reporting is the corporate management's mistake in financial statements.
This is usually done in order to deceive and preserve the share price of the corporation. Whilst
the impacts of false financial reporting may in the short term increase the company's stock
prices, it has nearly always had negative long-term implications. This short-term approach is
sometimes called "myopic management" in company finances, (Krishnan et al, 2011, p2 (3)).
Disclosure.

As a sub-topic of falsified financial accounts, breaches of disclosure are ethical faults. While
deliberate recording is not deemed fraudulent financial reporting in line with generally
accepted accounting principles, it could also be considered fraudulent financial reporting unless
investors are able to provide information that would alter their company's investment
decisions. The managers of the company must go ahead and preserve the company's
proprietary information is crucial to the management, (Krishnan et al, 2011, p2 (3)).
Steps that need to be taken prior to the appointment
ISA 210 sets out the prerequisites for an audit. Use by management of an acceptable financial
reporting framework to prepare and consult financial statements and manage as well as for
management at the location of an audit, (Brennan et al, 2007, p3 (3)).This must be done by the
auditor:
 The auditor shall examine the suitability of the financial reporting structure while
generating the financial statements.
 Evaluation of whether legislation or regulation prescribes the appropriate financial
reporting framework, the financial reporting aim and the type of reporting body. In most
circumstances, the client should merely be confirmed that financial reporting standards
are in place or that the financial statements have an analogous national reporting
structure.
 The auditor must also gain management agreement to acknowledge and understand his
responsibilities for the production of financial reporting and internal monitoring
framework, in order to make financial statements prepared without major errors due to
fraud or error.
QUESTION 03
Part a
Sufficient and Appropriate Audit Evidence

The word "sufficient" refers to adequate evidence to support the auditor's finding. What is
sufficient at the end of the day relies on the judgment of the auditor, (Florea & Florea, R, 2011,
p2(1)).
The term "evidence adequacy" divides into two main ideas
 Audit evidence reliability.
 Audit evidence pertinence.
As defined in AS 2315,
In accordance with paragraph 39, the sample items should be selected to be representative of
the population. Thus it should be possible to choose all goods inside the population. Random
selection of things is one way of collecting samples of this kind. Ideally, a selection procedure
should be used that has the capacity to choose things throughout the whole audit period.
If the total misstatement expected is near to the tolerable mistake, the auditor may decide that
the actual population mistakes are unacceptably highly likely to exceed the tolerable mistake.
Conclusion: First of all, sampling chooses by Raymond is almost 60% that cover majority of the
sample part. On the other hand, Actual misstatement is less than tolerable once so we can
conclude it immaterial.
Case 2
The auditor might participate in the inventory. The auditor should also ensure that differences
identified during physical checks are properly addressed and that measures are made in good
time to prevent such events in the future.
Conclusion: Two tiny differences of a single item, which he believed inconsequential, have been
identified by the auditor here. Five small discrepant between the permanent record and the
real amount of data were also detected by the customer. In the current year inventory, these
errors should be addressed.
QUESTION 04
Part a &b

Audit Risk
The audit risk is defined as 'When there is a major lack of auditing in the financial statement,
the auditors give an inappropriate audit opinion.' The risk depends on the risk of major errors
and the risk of risk detection.' The risk of significant mistakes is defined as the risk of significant
errors prior to the audit.
The main risk involved in the particular audit would be, the client will try to improve the profit
by hook or crook. Because it is the lending agreement of bank which mandatory to earn profits
and also support from the external sources if the company ceases to earn profit.
By this we can conclude that there will be some behavior by the management to overstate the
net income so that the company would be surviving. And this would be the main risk for the
engagement.
QUESTION 05
Part A
The two forms of financial report failures that may happen as a result of fraud are - mistakes
emerging from falsified financial reports and failures resulting from the misappropriation of
assets, depending on auditing standards mandated, (Yulistyawati et al, 2019, p2(1))
Misstatements arising from fraudulent financial reporting
Intent misrepresentations or omissions in financial statements designed for misleading users of
financial statements in line with non-presented general accounting rules in all significant
respects are misrepresentations resulting from a financial statement (GAAP), (Yulistyawati et al,
2019, p2(2)).
By fake financial reporting, the following can be done:
 Manipulation, fabrication or manipulation of accounts or supporting paperwork for
preparing accounts.
 Failure or purposeful omission in the financial statements of events, transactions or
other key facts.

 Intentional misuses in amounts, categorization, and forms of submission or disclosure in
accounting standards.
There must not be fraudulent financial reports as a result of a major plan or conspire.
Management officials can simplify the appropriateness of a major mistake, for example as an
aggressive interpretation of complex accounting rules, rather than as the temporary error of
the financial statements, including interim accounts, and then be addressed when improved
operational results,( Dalnial, et al, 2014, p2(1)).
Misstatements arising from misappropriation of assets
Any mismanagement that arises from misappropriation of assets (also called robbery or
defalcation) involves the robbery of the assets of an entity, where the effects of robbery cause
the financial statements in any substantial regard not to be presented in accordance with
GAAP. The misappropriation of assets can be carried out in different manners, including the
misappropriation of revenues, the robbing of assets, or the payment for goods or services not
provided by an institution, (Boumediene, S. L, 2014, p3 (1)). Misappropriation of assets may
involve fake or erroneous records or papers, which may be generated through controlling them.
The scope of this part comprises only the asset misappropriations for which the consequence of
the misappropriation results in an inappropriate presentation, in all material aspects, of the
financial statements according to the GAAP.
Part b
Sr.
No.
Matter Fraud audit risk factor
1 Major bank loans. For objectives other than those for which they were
sanctioned, funds obtained from the bank may be used.
Misuse of loan funds for personal use by directors, etc.
2 Receivable for old
trading accounts.
Fake invoices could have been made to reflect false
receivables in order to increase sales and cover losses.
Increased profits are likely to enhance share values, and
misrepresented financial statements might deceive investors.

3 One of its primary raw
material suppliers has
been altered, revenues
increased and product
quality issues have
been raised.
Foreign companies may import from which taxes are avoided
and arm's length pricing or any illicit benefits are
manipulated. Management involvement in everyday affairs
and profitability may indicate that a priority is given to some
other operations that are not notified.
Part c
Differences
General Control Application control
General controls include software checks,
physical hardware controls, computer
controls, data security checks and system
implementation controls, and administrative
checks.
Application controls involve both automated
and human steps to guarantee that the
application processes only permitted data
fully and accurately.
General control types:
 Controls of software.
 Controls hardware.
 Controls of computer operations.
 Controls for data security.
 Controls of execution.
 Management controls.
Controls of applications may be classified as:
 Controls of input.
 Controls of processing.
 Controls for output
Combine Part d, e and f
Weakness in controls or information systems and related weakness solution
SR.
No
Weakness and Solution Cause for material
misstatement
4 A senior officer should check and allow the collector to In regards to an employee

enter information into the payroll system when an
employee is recruited and terminated. This action is not
authorized/approved. The documentation shall be
made by the employee, then authorized by the
supervisor, and the authorization of the staff shall also
be taken for authenticity to accept or terminate
employment
who has gone, the salary
expenses may be over or
below reported. Therefore,
the operational cost and
operating ratio were
improperly assessed.
5 The duties must be separated and the computer
terminal must be controlled properly. In order to enter
data in the system, the factory manager must have a
valid Login Id and password.
Incorrect/high work costs can
be imposed on accounts, and
earnings could be mitigated.
QUESTION 06
a) Three different types of modified opinions are:
Qualified opinion:
The auditor shall express a qualified view where the auditor has obtained adequate audit
evidence or cannot obtain sufficient audit evidence to confirm his view but will, if anything,
conclude that the possible repercussions of undetectable mistakes on the financial statements
are significant but non-pervasive, (Vichitsarawong & Pornupatham, 2015, p2(2)).
Adverse opinions:
The auditor expresses an adverse opinion when the auditor finds that the misconceptions,
either separately or together, are both material and omnipresent, having gathered adequate
audit evidence.
Disclaimer of opinion:
When the auditor is not able to gather adequate audit evidence for their viewpoint, the auditor
will provide a disclosure of opinion but determines that the implications of undetected

mistakes can be significant and general to the financial statements, (Vichitsarawong &
Pornupatham, 2015, p2(2)).
Since the note provided in the financial report completely corresponds with the accounts and
the Company regularly makes the other party's payments, it will not only be a modified opinion
for the note offered to bring the attention of the User.
b). Effects on Audit opinion for the matters raised during the audit work
Inventory Valuation:
In the next month, the company sold 25% of the inventories at a lower cost. In accordance with
the requirements set by the separate boards of directors of different countries, the company is
expected to evaluate Net Realizable Value in cases where such a situation exists in the
succeeding period. This issue will play a crucial part in the audit opinion, (Simamora &
Hendarjatno, 2019, p2 (1))
Payable trade Valuation:
The company has indicated no buying value $53,751, which is not displayed in the funds that is
the omission of a transaction that can directly affect the finances that can make the finances
untrustworthy. This will play a crucial part in the formulation of an audit opinion.
Trade receivables Valuation:
By considering the false exchange rates that directly affect financial activities and may boost the
profits of the company, the company overestimated trade receivables of $75,650, (Simamora &
Hendarjatno, 2019, p2 (2)).
Part c
 When taken together, those matters make the funds inaccurate and untrustworthy for
the stakeholders.
 What he believes to be prevalent or not, relies on the auditors' professional judgment.
 No doubt the issues directly affect the financial accounts, however it depends on the
professional judgment that these difficulties prevail.

 If the auditor determines that the issues in general are overwhelming, the auditor shall
issue a dissenting opinion.
 Qualified views will be issued otherwise.
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