Importance of Accounting Principles to an Auditor-Free-Sample

Questions: 1- Discuss the conditions that prohibit the auditor from issuing an unqualified/unmodified opinion? 2- In your opinion what are the steps used by an auditor to evaluate an entity's ability to continue as a going concern? 3- Discuss and identify the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type? 4- Explain in detail the prohibited relationships? Answers 1.The conditions that prohibit an auditor from issuing an unqualified or unmodified opinion are the limitation of the scope that has been provided to the auditor for making the necessary judgments or determining the particulars of the report. This means that the financial statements subjected to auditing provide a limited scope into its particulars thus, prohibiting the auditor to issue an unqualified report. The second reason is that the preparation of the books of accounts, if done without complying to the generally accepted accounting principles that are followed worldwide as the foundation for the preparation of the books of accounts, may pose difficulty for the auditor in reviewing the accounting particulars of the company. The generally accepted accounting principles help an auditor to measure the quality of the prepared financial statements on some common scales of judgment. Thus, the departure of GAAP might as well prohibit an auditor from providing an unmodified report. Last ly, he lack of independence on the part of the auditor in reviewing the financial statements of the concerned firm and making the necessary investigations may prohibit him from issuing an unqualified report. 2.The steps that are used by an auditor in order to measure the ability of an entity in order to continue as a going concern are that the auditor should look out for some particular indicators, the occurrence of which evidently signify that the concerned firm is not qualifies to continue as a going concern. If the auditor finds out that the firm has been incurring regular losses especially operating losses along with current year deficits, then it may imply that he financial condition of the firm is not at all healthy. The net worth of the company should also be checked along with its working capital. If both of these appear negative then it significantly implies that the firm is running the risk of becoming insolvent. In such a case the cash flow from different activities would also reveal a negative value. This would in turn lead to a negative net income or net loss and the firm would subsequently fail to pay up to its creditors. Therefore, these indications or occurrences would im ply that the firm is unable to continue as a going concern. Moreover, an auditor may also prepare an analysis report of the significant ratios that would evidently forecast the future ability of the firm to continue as a going concern. Other non-financial indicators include stoppage of work, loss of customer base, turnaround strategy pivoted on a single project and frequent legal proceedings. 3.The two primary subsequent events that require consideration by the management and evaluation by the auditor are the events that are exceptions to the common principles of accounting and had to treated separately and require disclosures in the financial report by the management of the organization. These events include: Settlement of a subsequent debt by a customer at a value lower than what he had acquired from the firm for the reason that he had run bankrupt Change in the adoption of an accounting principle as a result of an amendment The other event is any kind of change in internal control that might affect the financial reporting till the date of report to be submitted by the auditor. These events include: Change in the credit limit extended by the firm. This is likely to affect the total balance of the accounts receivables, as depending on the situation the debtors of the concerned firm is going to increase or decrease, and the debt owed by them is computed differently Change in the recognition criteria of assets and liabilities which will affect the carrying value of these financial components 4.The term prohibited relationship refers to the adverse effect of a situation when an auditor may act in the interest of the firm that is being audited on account of the relationship that it has with it. To be more precise, the independence of a particular auditing firm is considered to be impaired if an employee leaves the firm and is hired by the company whose books are being audited, in a key position. Family relationships among the members of the auditing firm or the audit team and the organization whose books are being audited also fall under the purview of prohibited relationships.