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Assignment sample solution of ACC3025 - Principles of Auditing

Q.1 Discuss the importance of the audit risk model in planning an audit.

Q.2 Explain the role of professional skepticism in auditing.

Q.3 What are the key ethical considerations for auditors under the FRC’s Ethical Standard in the UK?

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Audit Assignment Sample

Q1:

Answer :

Q.1 Answer:  The audit risk model (ARM) is critical in audit planning as it helps auditors evaluate the likelihood of issuing an incorrect audit opinion. The model is represented as:


Audit Risk (AR) = Inherent Risk (IR) × Control Risk (CR) × Detection Risk (DR).
Inherent risk refers to the susceptibility of financial statements to material misstatements without considering internal controls. Control risk evaluates the likelihood that the client’s internal controls will fail to prevent or detect such misstatements. Detection risk is the possibility that the auditor's procedures will not identify material misstatements. By analyzing these components, auditors can design appropriate audit strategies and allocate resources effectively, ensuring sufficient focus on high-risk areas while maintaining audit quality.

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Answer :

Q.2 Ans. 

Professional skepticism is a fundamental concept in auditing, requiring auditors to maintain a questioning mindset and critically assess evidence throughout the audit process. It involves being alert to potential signs of misstatement due to fraud or error and not assuming management's representations are inherently accurate. For example, auditors should verify supporting documents and test internal controls rather than solely relying on management explanations. Professional skepticism is crucial to ensure objectivity and to protect the integrity of the audit, as it minimizes the risk of overlooking irregularities that could compromise the accuracy of the financial statements. 

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Answer :

Q.3 Ans.  Under the Financial Reporting Council's (FRC) Ethical Standard in the UK, auditors must adhere to key ethical principles to ensure independence and objectivity. These principles include:

  • Integrity: Auditors must act honestly and transparently in all professional dealings.
  • Objectivity: They must avoid conflicts of interest that could impair their impartial judgment.
  • Professional Competence and Due Care: Auditors should maintain relevant skills and knowledge while performing duties with diligence.
  • Confidentiality: They must protect the confidentiality of client information unless disclosure is legally required.
  • Independence: Auditors must remain independent from the client, both in fact and in appearance, avoiding any financial or personal relationships that could create bias.

These principles are designed to uphold trust in the audit process and protect stakeholders' interests.