ARSI UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING & FINANCE
M.SC. IN ACCT. AND FINANCE PROGRAM
AUDITING RE-EXAM FOR ADVANCED AUDITING AND EDP
NAME -HABTAMU DEBELE ID/NO GS/EX/0156/12
PHONE 0923264657
1. INHERENT RISK ON FINANCIAL INSTITUTIONS
A. Inherent Risk is the risk of a material misstatement in the financial statements arising
due to error or omission as a result of factors other than the failure of controls (factors
that may cause a misstatement due to absence or lapse of controls are considered
separately in the assessment of control risk).
Inherent risk is generally considered to be higher where a high degree of judgment and
estimation is involved or where transactions of the entity are highly complex.
For example, the inherent risk in the audit of a newly formed financial institution which has a
significant trade and exposure in complex derivative instruments may be considered to be
significantly higher as compared to the audit of a well-established manufacturing concern
operating in a relatively stable competitive environment.
B. Professional Skepticism means an approach towards accounting which includes a
questioning mind and being in a position which questions a possibility of fraud, errors or
misstatement and is a critical evaluation of audit evidence. It is essential for a quality audit.
Professional skepticism is a skill which is very similar to professional judgment and helps in
providing an opinion for an audit engagement. Professional skepticism helps in asking questions
which make sure that any information provided is true. It is an approach which is similar to a
judgment and auditors with professional skepticism tend to make good decisions as well as
provide correct information on the financial reports. Basically professional skepticism is an
attitude of questioning. This attitude helps gain information of the organization. With a
questioning mind, they are able to gain all the required information and ensure that they look at
both sides of an issue. Professional skepticism is also defined as a critical assessment of the
financial statements
Materiality deals with the “magnitude of an omission or misstatement of accounting information
that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable
person relying on the information would have been changed or influenced by the omission or
misstatement”.
In auditing account balances of the client and making judgments as to what has to be adjusted or
not, the auditor has to evaluate the materiality of proposed adjustments and the extent to which
adjustments will be required of the client. Those proposed adjustments that are not material are
below the recognition threshold and by definition don’t require adjustment. Overall planning
materiality is determined at the beginning of the audit and then allocated to account balances
using various methods.
Auditing standards (ISA 320 Materiality in Planning and Performing an Audit) explain the
concept of materiality in the following manner:
Misstatements, including omissions, are considered to be material if they individually or in the
aggregate, could reasonably be expected to influence the economic decision of users taken on the
basis of the financial statements. Judgments about materiality are made in light of surrounding
circumstances, and are affected by the size or nature of a misstatement, or a combination of both.
C. Tests of control and objective of each test for the sales of manufacturing company
The auditor should attempt to enter an order for a fictitious customer account number.
The system should not accept this order and the client’s permission, attempt to enter a sales order
which will take a customer over the agreed credit limit, the system should reject the order.
Inspect a sample of processed credit applications from the credit agency and follow through the
credit limit agreed to the sales system. Obtain a copy of the current price list and agree for a
sample of invoices that relevant/current prices have been used. Confirm discounts applied to
invoices agree to the customer master file. Attempt to process an order with a sales discount for a
customer not normally entitled to discounts to assess the application controls. Inspect a sample of
orders to confirm that an order acceptance email/letter has been generated. Observe the sales
order clerk processing orders and assess whether the order acceptance is automatically generated.
2. THE MAJOR AUDIT MATTERS THAT SHOULD BE CONSIDERED BY YOU AS
AUDITOR FOR BANKS INDUSTRY
From banks to Main Street investors, financial statement users place their trust in auditors to
assure the accuracy of the financial information they use to make decisions. As we navigate the
impacts of COVID-19, the auditor's role as protector of the capital markets has never been
more important.
But just as clients are scrambling to secure needed funding and managing remote workforces,
auditors are also facing challenges that many have never experienced. Where do we begin? As
many audits with Dec. 31 year ends are already underway, here are six areas to focus on as you
perform your calendar year 2019 audits.
The COVID-19 pandemic has caused the financial position of many organizations to deteriorate.
For clients in certain industries (e.g., restaurants, hospitality) and in certain geographical areas,
the entity's ability to continue as a going concern may be called into question.
Start by assessing whether there are events or conditions (e.g., the pandemic) that raise
substantial doubt that the entity can continue as a going concern. Management is also required to
evaluate the entity's ability to continue as a going concern. Next, ask for that evaluation and
consider whether it is complete and accurate. The look-forward period is one year from the date
the financial statements are issued or available to be issued, unless otherwise specified in the
financial reporting framework.
3(A).THE MATTERS OF AUDIT REVIEW AND FINALIZATION PROCESS
Advanced stage in audit finalization process, pulling earlier evidence together reviewing earlier
conclusions and forming view on financial statements including effect of uncorrected errors which
is vital to ensure auditor has sufficient appropriate evidence.
The treatment of uncorrected errors includes specific misstatements identified by the auditor
including the net effect of uncorrected misstatements identified during the audit of previous
periods and the auditors best estimate of other misstatements which cannot be specifically
identified ISA 320. If auditors consider these materials they need to consider appropriate
modification of audit report. If amendment is necessary in the audited financial statements and the
entity refuses to make the amendment, the auditor should express a modified audit report.The
overall review of financial statements should include detailed procedures such as analytical
procedures, subsequent event, validity of going concern process, review of other information in
documents containing audited financial statements ISA 720. There are 5 considerations in the
analytical procedures: such as analyzing relationship, comparing actual with predicted with
comparable businesses or industrial averages, investigating variations, obtaining explanations for
variations, evaluating results in relation to other audit evidence.
3(B).THE FOUR FORMS/TYPES OF OPINION TO BE ISSUED BY EXTERNAL
AUDITORS
There are four types of audit reports issued by auditors on financial statements. Each type of
report contains different meanings and messages from auditors to users of financial statements.
Those audit reports included the Unqualified Audit Report (Clean Audit Report), Qualified Audit
Report, Disclaimer Audit Report, and Adverse Audit Report. The following are the detail of
audit reports.
A. Unqualified Audit Report (Clean Audit Report):
Unqualified Audit Report issued by the auditor to financial statements when auditors found no
material misstatements after their testing. This report contains an unqualified opinion from an
independent auditor.
B. Qualified Audit Report:
The qualified Audit report is the report that issue by auditors to the financial statements that
found material misstatements on them. But those material misstatements are not pervasive.
For example, the opening balance of the entity contains a large number of inventories that could
not verify.
In this case, the auditor issues a qualified audit opinion on the qualified audit report. However, if
the auditor thinks that the misstatement is pervasive, they will issue the adverse opinion in their
report.
These kinds of report, only inventories that mention are matters. Others information in the
financial statements is true and fair.
The term of seriousness, the qualified audit report is more serious than unqualified due to
material misstatements on the mention items or accounts in the financial statements.

C. Adverse Audit Report:

Adverse Audit Report is a type of audit report issued to the financial statements when auditors
found that there are material misstatements in the financial statements.
The misstatements found here are different from the material misstatements found in qualified
audit reports.
They are not only material misstated for themselves but also affect others accounts and items in
the whole financial statements. These are called pervasive.
That means all the items and accounts in the whole financial statements could not be trusted by
shareholders, investors, and other stakeholders.
In this report, auditors will list down the client name, financial statements that they were audited
and the period the financial statements covered.
Auditor will also state all misstatements found and how they are affected the financial statements
and as well as the users of financial statements.
In most cases, auditors also state all the material found the Others Matters which is the message
to the users of financial statements to be aware of when they read the financial statements for
their own purpose.
D. Disclaimer Audit Report:
The disclaimer audit report is the report that issues the financial statements where there is matter
to auditor’s independence and that mater because auditors not are able to obtain sufficient audit
evidence to support their opinion.
4 (A). Some forms of disaster in EDP organized clients are listed below:-
Disaster: any human-made or natural event causing destruction and devastation that cannot be
relieved without assistance
Disasters are caused by accidents, acts of war or terrorism, or environmental events
The number of disasters, both human-made and natural, continues to increase, as does the
number of people affected by them
Natural disasters: Urbanization, overcrowding, wanting to live near areas vulnerable to
disasters
Human-made disasters: Overcrowding causes civil unrest and riots, school violence, modern
warfare
4(B) the basic elements of the Disaster Recovery Planning approaches are:-
 Communication plan and role assignments
 Plan for your equipment
 Backup check
 Detailed asset inventory
 Pictures of the office and equipment (before and after prep)
 Vendor communication and service restoration plan
4(c) the Audit Objective in auditing DRP
The primary objective of the audit is to verify the merits of the plan and that it is adequate to
ensure the timely resumption of business operations and processes during a disaster or other
adverse conditions while reflecting the current operating environment of the business.
4(D). Least three Substantive Procedures in auditing DRP audit
1. Substantive procedures for purchased fixed assets
 Obtain list of all fixed asset purchased during the period
 Select sample of addition and agree cost to suppliers invoices
 Site acquisition costs
 Material to suppliers invoices
 Labor cost
 Overheads to received evidence
2. Substantive procedure for disposals
 Obtain list of all fixed asset disposed
 Checked that cost and accumulated depreciation
 Select a sample of disposal
3. Substantive procedures for closing balance
 Obtain list of all fixed asset at year end
 Select sample of asset from non-current assets register
 If non-current assets are stated at revaluated amount ensure that:-
 Valuation is performed by a professional valuer
 Amount of valuation is reasonable
 Valuation is performed for all assets in the same class
5(A).Audit objectives are what the auditor is trying to achieve, and audit procedures are specific
tasks performed by the internal auditor to gather the evidence required to achieve the
prescribed audit objectives
5(B). ANALYTICAL REVIEW:
1. Analytical review is not the procedure that uses to obtain audit evidence, but it is the
procedure used to assess the unusual transactions or events as the principle or basic to
perform other procedures.
For example, when auditor found there is unusual transactions or event as the result of using
analytical review, then the auditor will use other procedures that are applicable to obtain
evidence

2. INQUIRE
Auditors inquire accountant and related management to gather information and obtain an
explanation on the matter that found by auditors.
Sometimes auditors inquire about management about the business process and the ways how
financial transactions are recording as well as the major control on business transactions.

6. THE FIVE ELEMENTS OF INTERNAL CONTROL SYSTEM IN BANK COMPANY

1. Management oversight and the control culture;
Board of directors
The board of directors should have responsibility for approving and periodically reviewing the
overall business strategies and significant policies of the bank; understanding the major risks run
by the bank, setting acceptable levels for these risks and ensuring that senior management takes
the steps necessary to identify, measure, monitor and control these risks; approving the
organizational structure; and ensuring that senior management is monitoring the effectiveness of
the internal control system. The board of directors is ultimately responsible for ensuring that an
adequate and effective system of internal controls is established and maintained.
Senior management
Senior management should have responsibility for implementing strategies and policies approved
by the board; developing processes that identify, measure, monitor and control risks incurred by
the bank; maintaining an organizational structure that clearly assigns responsibility, authority and
reporting relationships; ensuring that delegated responsibilities are effectively carried out; setting
appropriate internal control policies; and monitoring the adequacy and effectiveness of the
internal control system.
Control culture
The board of directors and senior management are responsible for promoting high ethical and
integrity standards, and for establishing a culture within the organization that emphasizes and
demonstrates to all levels of personnel the importance of internal controls. All personnel at a
banking organization need to understand their role in the internal controls process and be fully
engaged in the process.
2. Risk recognition and assessment;
An effective internal control system requires that the material risks that could adversely affect
the achievement of the bank’s goals are being recognized and continually assessed. This
assessment should cover all risks facing the bank and the consolidated banking organization (that
is, credit risk, country and transfer risk, market risk, interest rate risk, liquidity risk, operational
risk, legal risk and reputational risk). Internal controls may need to be revised to appropriately
address any new or previously uncontrolled risks.
Banks are in the business of risk-taking. Consequently it is imperative that, as part of an internal
control system, these risks are being recognized and continually assessed. From an internal
control perspective, a risk assessment should identify and evaluate the internal and external
factors that could adversely affect the achievement of the banking organization’s performance,
information and compliance objectives
3. Control activities and segregation of duties;
Control activities should be an integral part of the daily activities of a bank. An effective internal
control system requires that an appropriate control structure is set up, with control activities
defined at every business level. These should include: top level reviews; appropriate activity
controls for different departments or divisions; physical controls; checking for compliance with
exposure limits and follow-up on noncompliance; a system of approvals and authorizations; and,
a system of verification and reconciliation.
4. Information and communication;
Adequate information and effective communication are essential to the proper functioning of a
system of internal control. From the bank’s perspective, in order for information to be useful, it
must be relevant, reliable, timely, accessible, and provided in a consistent format. Information
includes internal financial, operational and compliance data, as well as external market
information about events and conditions that are relevant to decision making. Internal
information is part of a record-keeping process that should include established procedures for
record retention.
5. Monitoring activities and correcting deficiencies.
The overall effectiveness of the bank’s internal controls should be monitored on an ongoing
basis. Monitoring of key risks should be part of the daily activities of the bank as well as periodic
evaluations by the business lines and internal audit.

PART II CASE ANALYSIS

SOLUTIONS FOR QUESTION I
a. Accepting the audit engagement
According to my Auditing assessment I have found that MFF had good and well trained
management personnel for accepting and reviewing their companies over all activities and their
motivation toward providing good products and services to the its clients with in the country and
abroad.
In fact the company has encountered the political issues and frustrated for the moment, but the
management has taken corrective actions to relocate the company and they could growth up the
company’s sales value and their competitiveness
Therefore as my Audit Engagement I recommend the company should have to strive more to
confront its customers in order to become more competent and to achieve its objectives.
B. The client and its business environment
As a senior Auditor I have seen the environment that the company operated. As I said previously
the company faced some issues in areas of operation. Whereas the company could satisfy its
clients by offering based on their needs and wants that helped the clients to become more
beneficiary by the company.
Other issues that related to the client is the company provided the opportunity to pay for its
products and services through bank deposits and other non-cash methods; it enabled the clients
become comforted to use the MFF products easily.
The business environment of the MFF had both pros and cons that associated with its product
operation. Political issues become one of its main challenges to change its existed production
location. Quality issues also one of main challenges that the company faced. Liquidity problem
also become problems for the company. But the management of the company could to use these
challenges for opportunities by changing the mode of production and by adjusting marketing
strategies; for instance the company adopted non-cash sales strategies and lending practices to
the clients. This enabled the company to sustain in the competitive business environment even if
the company is on the breakeven point.

SOLUTIONS FOR QUESTION II

A. Audit Planning, Strategies, Programs and Schedules intended to be applied in relation
to the assignment in MFF
Generally, as Auditor I set audit plan based on the results of the assessment and evaluation of
control mechanisms. And I plan my work and develop feasible audit programs in order to
Ensure that attention is focused on critical aspects of the audit and that points raised in previous
audits for attention and follow-up are taken care of.
In addition to the pan I also establish strategies, programs and schedules to conduct auditing
work at my assignment area in professional manner. My strategies in the areas of conduct is
setting objectives to be reviewed and establishing overall report and audit results to concerned
bodies.
The performed audit work shall be recorded in the audit working paper, which should include
details of all work done in the conduct of an audit, supporting schedules, transaction and
validation tests accompanied by short notes that must be crosschecked and reviewed.
b. Risk assessment including priority areas to be considered at MFF
While carrying out my tasks I shall employ Risk Based Audit Approach by which specific risks
that prevent the MFF from achieving its objectives will be identified and I recommend the
control systems that should be established by the MFF Management to mitigate the risks are
evaluated for adequacy and effectiveness.
C. What major issues should be considered to set materiality level of the assets, liabilities,
revenues and expenses?
Materiality level is highly depends on the size and the nature of the omissions or misstatements
judged in the surrounding circumstances. The level or nature of the item, or a combination of
both, could be the determining factors and they should be considered while setting the
materiality level.
Therefore materiality relates to the significance of the transactions, balances and errors contained
in the financial statements.