FOREWORD

Financial Audit 1 is a very crucial subject since it is the first step in introducing students into
a deeper and broader level of auditing and other assurance services and at the same time
determines the performance in the next step, Financial Audit 2.

A tool for students to be more competent in comprehending and applying the knowledge
taught in Financial Audit 1 theory classes is Accounting Lab. This course helps students to
become more actively involved by independent problem solving.

This module has been compiled in a way that these purposes might be achieved. It contains
the key elements of each chapter, followed by specific comprehensive exercises to be
solved and discussed each meeting with a lab assistant.

After accomplishing this course, we hope that students are able to determine the nature
and amount of evidence the auditor should gather after considering the unique
circumstance of each engagement.

May God bless all of you and grant you wisdom throughout the journey.

Sincerely,
Assistant Lab. Team

Financial Auditing 1 | 9th Edition | 1

 TABLE OF CONTENTS

FOREWORD............................................................................................................................................................................ 1
INTRODUCTION ...................................................................................................................................................................... 3
OUTLINE OF THE INSTRUCTION PROGRAM (SAP) ..................................................................................................................... 5
MODULE 1 ............................................................................................................................................................................. 6
MODULE 2 ............................................................................................................................................................................. 9
MODULE 3 ........................................................................................................................................................................... 10
MODULE 4 ........................................................................................................................................................................... 19
MODULE 5 ........................................................................................................................................................................... 25
MODULE 6 ........................................................................................................................................................................... 27
MODULE 7 ........................................................................................................................................................................... 31
MODULE 8 ........................................................................................................................................................................... 35

Financial Auditing 1 | 9th Edition | 2

 INTRODUCTION

A. Description
Laboratory course is related to the main course (Theory), which cannot be separated. The
purpose of a laboratory course is to help the student understand the concept of the subject by
exercising problems and cases. All laboratory courses are of 0 credit but the duration of the class
is 100 minutes, which equivalent to 2 credits.

B. General Purpose Instruction

After this class and doing all of its materials, students are expected to be able to do
identification/ explaining/ calculating/ analyzing concepts about:
1. Ethics and The Audit Profession
2. The Audit Standards and Framework
3. Audit Reports
4. Audit Objectives and Management Assertions
5. Nature and Type of Audit Evidence
6. Main Audit Plan
7. Considering Internal Control and Control Risk
8. Audit Tests and Audit Program

C. Lecture Activities
The students are directed to involve actively in the class learning process.
1. To facilitate the learning proses, the students must read the chapter on the reference book
that related to the class material. Students are also be able to read the brief theory that
provide in each module
2. The questions that provide in this module are only the materials that partially have been
taught in the theory subject.
3. Students must do the questions on the module individually based on the instruction of the
laboratory assistant, do quizzes that will be held, follow the laboratory mid-exam and final
exam based on the given schedule

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D. Lecturing Rules
1. Attendance
At least attend 5 sessions from 6 sessions or equal to 85% attendance.
2. Lateness
>10 Minutes regarded as absent
3. Permission Exception
1. Formal permission from university or faculty
2. Hospitalized (maximum 2 weeks)
3. Sudden pass away of core family member (with supported documents).
4. Watch video in the given channels (to be announced )
5. Do the task given and instructed in the video

E. Grading Composition
The final grade is the sum of the student’s theory and lab score with a composition of 85%
theory class and 15% lab course.
Below are the components of the lab course grading:

Mid-Test : 35% Absence : 10%

Final-Test : 35% KAT : 10%
Quiz : 10%

F. Grading Scale

Score Grade
90 - 100 A
85 – 89.99 A-
80 – 84.99 B+
75 – 79.99 B
70 – 74.99 B-
65 – 69.99 C+
60 – 64.99 C
55 – 59.99 C-
40 – 54.99 D
0-39.99 E

Financial Auditing 1 | 9th Edition | 4

 OUTLINE OF THE INSTRUCTION PROGRAM (SAP)

Below is the instruction program for Financial Audit 1 lab:

Week Module Material Type Video Title Reference

1 1 Ethics and the Video Code of Ethics: part A Arens: Chapter 4, 5
Audit Profession Hayes: Chapter 3

2 2 Audit Standards Video Audit Standards Arens: Chapter 2

and Framework Hayes: Chapter 1, 4

3 3 Audit Reports Tatap Muka Arens: Chapter 3

Hayes: Chapter 12
SPAP 2015
4 4 Audit Objectives Tatap Muka Arens: Chapter 6
and Management Hayes: Chapter 1
Assertions
5 5 Audit Evidence Video Audit Evidence Arens: Chapter 7
Hayes: Chapter 8, 10
6 5 Audit Evidence Tatap Muka Arens: Chapter 7
Hayes: Chapter 8, 10
MID- EXAM
7 6 Main audit plan Video Audit planning and Arens: Chapter 8, 9
(ISA 300, 315, 320) Procedures Hayes: Chapter 6
8 6 Main audit plan Tatap Muka Arens: Chapter 8, 9
(ISA 300, 315, 320) Hayes: Chapter 6
9 7 Internal Control Video Internal Control Arens: Chapter 10, 11, 12
and Control Risk Hayes: Chapter 7

10 7 Internal Control Tatap Muka Arens: Chapter 10, 11, 12

and Control Risk Hayes: Chapter 7

11 8 Audit Tests and Video Audit Test and Program Arens: Chapter 13
Audit Program Hayes: Chapter 9
12 8 Audit Tests and Tatap Muka Arens: Chapter 13
Audit Program Hayes: Chapter 9
FINAL- EXAM

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 MODULE 1
Ethics

Video 1. Auditor’s Ethic

PROBLEMS
1. For each engagement described below, indicate whether the engagement is likely to be conducted
under international auditing standards, U.S. generally accepted auditing standards, or PCAOB auditing
standards.
a. An audit of an Italian private company with public debt in Italy
b. An audit of U.S. public company
c. An audit of a U.S. private company with no public equity or debt
d. An audit of U.S. not-for-profit organization.
e. An audit of a Spanish public company that is listed in the United States and whose financial
statements will be filed with the SEC.
f. An audit of a U.S public company that is a subsidiary of a Hong Kong company that will be used
for reporting by the parent company in Hong Kong.
g. An audit of U.S. private company to be used for loan from a publicly-traded bank.
h. An audit of a U.S. private company that has publicly-traded debt.

2. For each of the following situations involving relations between auditors and the companies they audit
indicate whether it violates IESBA’s Code of Ethics for Professional Accountants and the rationale for the
applicable guideline (Part A)
1. Krystal, CPA, discloses confidential information in a peer review of the firm’s quality control
procedures.
2. Jessica, CPA, says in an interview in the local paper that Ethan Rine, CPA, misleads his clients
about the quality of his audit work.
3. Ariana, CPA, prepares and submits a tax return to the Internal RevenueService, which he
believes, omits income his client receives from trading goods on eBay.com.
4. Marc Jacob, CPA, performs investment advisory services from an audit client and receives an
annual fee based on a percentage of the value of the client’s investment portfolio at the end of
each year.
5. Robert, CA, is auditing a company in Morocco that has offered to send him and his wife on a
holiday in Maldives for one week.
6. Tara Raichand Company wishes to defer charging certain research and development
expenditures to current income on the basis that the expenditures are virtually certain to
benefit future operations. For this reason, Sydney Tan, CPA and the company’s auditor agrees
with the proposed accounting treatment.
7. Bruno Wisley, CPA, as an auditor, he has sufficient audit evidence or data of Orlando
Corporation. Gambino used the client’s data for completing his thesis without the knowledge of
the company.
8. Senna Twainz, CPA of Carolino Bio Health ignore the fact that the company audited violates the
applied law of country’s taxation.
9. Austin and Houston, CPAs, have McAlister Global Service as audit client. McAlister ask Austin and
Houston to create and install a new computerized payroll. Because Austin and Houston do not
have the appropriate level of expertise, they referred McAlister to Comp Co., a local software
consulting company. Austin and Houston have an arrangement by which Comp Co. pays her 10%
of any fee received from her referrals. Austin and Houston have disclosed this to her client.
10. William Keppler,CPA, is auditing a big plantation company. He does not have enough
knowledge about plantation and has never audit a plantation company before.
Financial Auditing 1 | 9th Edition | 6
3. The following independent scenarios describe auditor behavior on an audit engagement:
1. Michael is the lead audit partner on the audit engagement of a publicly traded company.
Michael followed auditing standards on the audit engagement and issued an unmodified
opinion. It was subsequently discovered that the financial statements contained a material
misstatementthat had been undetected by the management of the company and by the audit
team.
2. On a recent audit engagement, the client firm neglected to inform the audit firm that a
significant percentage of inventory was stored at an outside warehouse. As a result, the
auditors did not observe the physical inventory count for that inventory, which represented 20%
of the client’s inventory balance. The auditors were able to satisfy themselves that the inventory
existed through alternative procedures and issued an unmodified opinion on the financial
statements as a whole.

3. Marc Marquez, CPA, is a sole proprietor. He recently accepted a new audit client who
was applying for a bank loan and needed to present audited financial statements to the
bank. Maria was not able to complete the audit engagement by herself, so she hired several
college students to assist her. The students completed the audit procedures without much
guidance, and Maria issued an unmodified opinion on the client’s financial statements.
4. Jennie is the lead engagement partner on a publicly traded company. The company’s CEO
recently approached Jennie and informed her that they had identified a material
misstatement in the prior year’s financial statements, which had been audited by Jennie’s firm
and submitted to the SEC. The CEO suggested they correct the misstatement by recording a
journal entry in the current year for half of the amount of the misstatement, and in the
following year for the remaining half. Jennie agreed to this plan to avoid a public
announcement of a restatement and a potential lawsuit, since the amount of the journal
entries recorded in the current and subsequent years would be considered immaterial to the
financial statements
5. The audit engagement partner, Marc Johnson, recently received a subpoena for work-papers
related to an audit engagement on which his audit firm has been named as a defendant. Marc
asked the staff auditor to remove and discard two memos from the work-paper files
documenting communication between the engagement partner and the CFO regarding the
goodwill impairment analysis.
Required: For each of the scenarios listed above, discuss whether the auditor’s behavior would be
considered non-negligence, ordinary negligence, gross negligence, constructive fraud, fraud, or
criminalbehavior.

4. Marie Janes encounters the following situations in doing the audit of a large auto dealership. Janes is
not a partner.
1. The sales manager tells her that there is a sale (at a substantial discount) on new cars that is
limited to long-established customers of the dealership. Because her firm has been doing the
audit for several years, the sales manager has decided that Janes should also be eligible.
2. The auto dealership has an executive lunchroom that is available free to employees above a
certain level. The controller informs Janes that she can also eat there any time.
3. Janes is invited to and attends the company’s annual Christmas party. When presents are handed
out, she is surprised to find her name included. The present has a value of approximately
$200.

Required:Assess whether Janes’ independence has been impaired.

a. Describe how each of the situation might threaten Janes’ independence from the auto dealership.
b. Identify a safeguard that Janes’ firm could impose that would eliminate or mitigate the threat of
each situation to Janes’ independence.

Financial Auditing 1 | 9th Edition | 7

c. Assuming no safeguard are in place and Janes accepts the offer or gift in each situation,
discuss whether she has violated the rules of conduct.
d. Discuss what Janes should do in each situation

Financial Auditing 1 | 9th Edition | 8

 MODULE 2
Audit Standards
Video 1. Audit Standards
PROBLEMS
1. Name IAASB 2 engagement frameworks and practice standards that apply to the
audit services frameworks.
2. What are non-assurance services? List the major categories.
3. Garia Manos, an ex-Deloitte partner in Chicago, has been charged in a federal
complaint with one count of conspiracy to commit securities fraud through insider
trading. The complaint alleges that Gariaprovided confidential information about
Deloitte clients to Bota Hill, a close friend, over a period of several years and that Lane
used this information to make highly profitable securities trades that generated more
than $1 million in illegal proceeds.In some cases, Gariacalled Botatwo to three days
before press releases of Deloitte clients were issued and read him the details that
would soon be made public. He also tipped him off to mergers and even
strategized with Botaon how to conceal his trading so that the two would not be
caught.From late 2015 and continuing until March 2017, Gariasecretly passed ‘highly
sensitive and confidential information’ to Botaregarding forthcoming
earningsannouncements by certain Deloitte clients, including Herbalife, Skechers, and
Deckers Outdoor Corp., before that financial information was disclosed to the public.
In exchange, Botagave Gariatens of thousands of dollars in cash, typically instructing
Gariato meet him on a side street near Bota’sbusiness in order to give him bags
containing $100 bills wrapped in $10,000 bundles. Deloitte said it plans to reassess its
internal safeguards.
Required:
a. If Deloitte contracted another Big Four firm to reassessits internal safeguards, what type
of auditor service would this be? What IAASB framework would the outside auditors
use?
b. If the audit services to reassess internal safeguards by another Big Four firm is an
assurance service:
(1) Who would be the practitioner, responsible party and intended user?
(2) What would be the subject matter and subject matter information?
(3) What criteria should be used?
(4) What would constitute sufficient appropriate evidence?
c. What quality control procedure could Deloitte put in place to assure that the risk of
insider information coming from partners would be reduced to a reasonable low level?

Financial Auditing 1 | 9th Edition | 9

 MODULE 3
Audit Reports
A. Unqualified Opinion
Contoh report real PT INDOFOOD SUKSES MAKMUR TBK

Financial Auditing 1 | 9th Edition | 10

B. Unqualified Opinion with emphasis of matter
Contoh report real PT GARUDA INDONESIA (PERSERO) TBK

Financial Auditing 1 | 9th Edition | 11

C. Qualified Opinion
Contoh report real. PT ZEBRA NUSANTARA TBK

Financial Auditing 1 | 9th Edition | 12

Financial Auditing 1 | 9th Edition | 13
D. Disclaimer
Contoh report real. PT TIGA PILAR SEJAHTERA FOOD TBK

Financial Auditing 1 | 9th Edition | 14

Siapakah yang memberi penugasan? (atas nama Pemegang Saham, dsb)

Financial Auditing 1 | 9th Edition | 15

E. Adverse
Contoh report real. PT HOTEL MANDARINE REGENCY TBK DAN ENTITA

Financial Auditing 1 | 9th Edition | 16

PROBLEM AUDIT EVIDENCE :
Seluruh problem mengacu pada contoh “real problem” diatas :

1. Unqualified opinion :
a. Siapa yang menandatangani opini diatas ?
b. Standar apa yang digunakan untuk meng-audit opini di atas ?
c. Prinsip akuntansi apa yang digunakan (PSAK untuk LK di Indonesia) pada opini diatas ?
d. apa opini yang dinyatakan ?
e. Dinyatakan “Unqualified” atau “Wajar” berdasarkan dari ?
f. Apakah pernyataan “Unqualified” menyatakan kebenaran laporan keuangan yang di audit
100% benar ?

2. Unqualified opinion with emphasis of matter :

a. Siapa yang menandatangani opini diatas ?
b. Standar apa yang digunakan untuk meng-audit opini di atas ?
c. Prinsip akuntansi apa yang digunakan (PSAK untuk LK di Indonesia) pada opini diatas ?
d. Apa opini yang dinyatakan ?
e. Pada paragraph mana dinyatakan “Unqualified with emphasis of matter”
f. Mengapa dinyatakan “Unqualified with emphasis of matter” dan bukan “Qualified” saja ?
Buktikan dengan perbandingan.

3. Qualified opinion :
a. Siapa yang menandatangani opini diatas ?
b. Standar apa yang digunakan untuk meng-audit opini di atas ?
c. Prinsip apa akuntansi yang digunakan (PSAK untuk LK di Indonesia) pada opini diatas ?
d. Apa opini yang dinyatakan ? Alasannya ?
e. Pada paragraph mana dinyatakan “Qualified” ?
f. Jika pada laporan audit dinyatakan opini “Qualified”, hal apa saja yang mempersulit
perusahaan di masa yang akan datang ?

4. Disclaimer Opinion :
a. Siapa yang menandatangani opini diatas ?
b. Standar apa yang digunakan untuk meng-audit opini di atas ?
c. Prinsip apa akuntansi yang digunakan (PSAK untuk LK di Indonesia) pada opini diatas ?
d. Apa opini yang dinyatakan ? Alasannya ?
e. Pada paragraph mana dinyatakan “Disclaimer” ?
f. Jika pada laporan audit dinyatakan opini “Disclaimer”, hal apa saja yang mempersulit
perusahaan di masa yang akan datang ?

5. Adverse opinion :
Financial Auditing 1 | 9th Edition | 17
a. Siapa yang menandatangani opini diatas ?
b. Standar apa yang digunakan untuk meng-audit opini di atas ?
c. Prinsip apa akuntansi yang digunakan (PSAK untuk LK di Indonesia) pada opini diatas ?
d. Apa opini yang dinyatakan ? Alasannya ?
e. Pada paragraph mana dinyatakan “Adverse” ?
f. Jika pada laporan audit dinyatakan opini “Adverse”, akankah perusahaan dihapus atau
delisting dari pasar modal ?

Financial Auditing 1 | 9th Edition | 18

 MODULE 4
Audit Objectives and Management

Table 1- Example of audit cycle

Cycle Journals Included in General Ledger Accounts Included in the Cycle

the Cycle Balance Sheet Income Statement
Sales and collection - Sales Journal - Cash in bank - Sales
- Cash Receipts - Trade accounts receivable - Sales return and
Journal - Other accounts receivable allowances
- General Journal - Allowance for - Bad debt expense
uncollectible accounts
Acquisition and - Acquisition Journal - Cash in Bank - Advertising
payment - Cash disbursement - Inventories - Travel and
Journal - Prepaid expenses entertainment
- General Journal - Land - Sales meeting and
- Buildings training
- Computer and other - Sales and promotional
Equipment expenses
- Furniture and fixtures - Miscellaneous sales
- Accumulated expenses
depreciation - Stationaries and
- Trade accounts payable supplies
- Other accrued payables - Postage
- Accrued income tax - Telecommunication
- Deferred tax - Computer
maintenance and
supplies
- Depreciation
- Rent
- Legal fees and
retainers
- Auditing and related
services
- Insurance
- Office repairs and
maintenance expense
- Miscellaneous office
expense
- Miscellaneous general
expense
- Gain on sale of assets
- Income taxes
Payroll and Personnel - Payroll Journal - Cash in bank - Salaries and

Financial Auditing 1 | 9th Edition | 19

 - General Journal - Accrued payroll commissions
- Accrued payroll taxes - Sales payroll taxes
- Executive and office
salaries
- Administrative payroll
taxes
Inventory and - Acquisition journal - Inventories - Cost of goods sold
warehousing - Sales journal
- General journal
Capital Acquisition and - Acquisition journal - Cash in bank - Interest expense
repayment - Cash disbursement - Notes payable
journal - Long-term notes
- General journal payable
- Accrued interest
- Capital stock
- Capital in excess of par
value
- Retained earnings
- Dividends
- Dividends payable

Management Assertions
Management makes assertions that can be grouped into three groups:
1. Assertions about classes of transactions and events for the period under audit
2. Assertions about account balances at the period end
3. Assertions about presentation and disclosure

Financial Auditing 1 | 9th Edition | 20

Transaction-related audit objectives are closely related to management’s assertions about
classes of transaction. There are 6 transaction-related audit objectives
o Occurrence – Recorded Transaction Exist This objective deals with whether recorded
transactions have actually occurred.
o Completeness – Existing Transaction Are Recorded This objective deals with whether all
transactions that should be included in the journals have actually been included.
o Accuracy – Recorded Transactions Are Stated at the Correct Amounts This objective
addresses the accuracy of information for accounting transactions and is one part of the
accuracy assertion for classes of transactions.
o Posting and Summarization – Recorded Transactions Are Properly Included in the Master
Files and Are Correctly Summarized This objective deals with the accuracy of the transfer of
information from recorded transactions in journals to subsidiary records and the general
ledger.
o Classification – Transactions Included in the Client’s Journals Are Properly Classified This
objective addresses whether transactions are included in the appropriate accounts.
o Timing – Transactions Are Recorded on the Correct Dates The timing objective for
transactions is the auditor’s counterpart to management’s cutoff assertion.

Balance-Related Audit Objectives are similar to the transaction-related audit objectives. They
also follow from management assertions and they provide a framework to help the auditor to
accumulate sufficient appropriate evidence related to account balances. There are 8 balance-
related audit objectives:
o Existence – Amounts Included Exist This objective deals with whether the amounts included
in the financial statements should actually be included.

Financial Auditing 1 | 9th Edition | 21

o Completeness – Existing Amounts are Included This objective deals with whether all
amounts that should be included have actually been included.
o Accuracy – Amounts Included Are Stated at the Correct Amounts The accuracy objective
refers to amounts being included at the correct amount.
o Classification – Amounts Included in the Client’s Listing are Properly Classified
Classification involves determining whether items included on a client’s listing are included
in the correct general ledger accounts.
o Cutoff – Transactions Near the Balance Sheet Date Are Recorded in the Proper Period In
testing for cutoff of account balances, the auditor’s objective is to determine whether
transactions are recorded and included in account balances in the proper period.
o Detail Tie-In – Details in the Account Balance Agree with Related Master File Amounts,
Foot to the Total in the Account Balance, and Agree with the Total in the General Ledger
Account balances on financial statements are supported by details in master files and
schedules prepared by clients.
o Realizable Value – Assets Are Included at the Amounts Estimated to be Realized This
objective concerns whether an account balance has been reduced for declines from
historical cost to net realizable value or when accounting standards require fair market value
accounting treatment.
o Rights and Obligation In addition to existing, most assets must be owned before it is
accepted to include them in the financial statements. Similarly, liabilities must belong to the
entit

Financial Auditing 1 | 9th Edition | 22

PROBLEMS AUDIT OBJECTIVES

1. The following are various management assertions (a. through m.) related to sales and accounts
receivable
Management assertion
a. Recorded sales transactions have occurred.
b. There are no liens or other restrictions on accounts receivable.
c. All sales transactions have been recorded.
d. Receivables are appropriately classified as to trade and other receivables in the financial
statements and are clearly described.
e. Sales transactions have been recorded in the proper period.
f. Accounts receivable are recorded at the correct amounts.
g. Sales transactions have been recorded in the appropriate accounts.
h. All required disclosures about sales and receivables have been made.
i. All accounts receivables are at the correct amounts.
j. Disclosures related to receivables are at the correct amounts.
k. Sales transactions have been recorded at the correct amounts.
l. Recorded accounts receivables exist.
m. Disclosures related to sales and receivables relate to the entity.

Required:
a. Explain the differences among management assertions about classes of transactions and
events, management assertions about account balances, and management assertions about
presentation and disclosure.
b. For each assertion, indicate whether it is an assertion about classes of transactions and
events an assertion about account balances, or an assertion about presentation and
disclosure.
c. Indicate the name of the assertion made by the management.

Financial Auditing 1 | 9th Edition | 23

2. Following are seven audit activities.
a. Examine invoices supporting recorded fixed asset additions.
b. Review industry databases to assess the risk of material misstatement in the financial
statements.
c. Summarize misstatements identified during testing to assess whether the overall financial
statements are fairly stated.
d. Test computerized controls over credit approval for sales transactions.
e. Send letters to customers confirming outstanding accounts receivables balances.
f. Perform analytical procedures comparing the client with similar companies in the industry to
gain an understanding of the client’s business and strategies.
g. Compare information on purchases invoices recorded in the acquisition journal with
information on receiving reports.

Required:
For each activity listed above, indicate in which phase of the audit the procedure was likely
performed.
1. Plan and design an audit approach based on risk assessment procedures (Phase I)
2. Perform test of controls and substantive tests of transactions (Phase II)
3. Perform analytical procedures and test of details of balances (Phase III)
4. Complete the audit and issue an audit report (Phase IV)

3. Auditors provide “reasonable assurance” that the financial statements are “fairly stated, in all
material respects.” Questions are often raised as to the responsibility of the auditor to detect
material misstatements, including misappropriation of assets and fraudulent financial reporting.
Required:
a. Discuss the concept of “reasonable assurance” and the degree of confidence that financial
statement users should have in the financial statements.
b. What are the responsibilities of the independent auditor in the audit of financial
statements? Discuss fully, but this part does not include fraud in the discussion.
c. What are the responsibilities of the independent auditor for the detection of fraud involving
misappropriation of assets and fraudulent financial reporting? Discuss fully, including your
assessment of whether the auditor’s responsibility for the detection of fraud is appropriate.

Financial Auditing 1 | 9th Edition | 24

 MODULE 5
Audit Evidence

.PROBLEMS ANALYTICAL PROCEDURES

1. VIDEO

Analytical procedures consist of evaluations of financial information made by a study of plausible

relationships among both financial and nonfinancial data. They range from simple comparisons to
the use of complex models involving many relationships and elements of data. They involve
comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations
developed by the auditors.
Required:
Describe the broad purposes of analytical procedures.
When are analytical procedures required during an audit? Explain why auditors use analytical
procedures extensively in all parts of the audit.
Describe the factors that influence the extent to which an auditor will use the results of
analytical procedures to reduce detailed tests in meeting audit objectives.

2. VIDEO
What characteristics should an audit confirmation possess if an auditor is to consider it as sufficient
appropriate audit evidence? And discuss the differences between positive and negative
confirmation.

3. VIDEO
The following are 20 examples of audit procedures:
1. Watch client employees count inventory to determine whether company procedures are
being followed.
2. Count inventory items and record the amount in the audit files.
3. Trace postings from the sales journal to the general ledger accounts.
4. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross
margin relative to the preceding year.
5. Vouch sales invoice to customer orders and shipping documents.
6. Re-compute the unit sales price times the number of units for a sample of duplicate sales
invoices and compare the totals with the calculations.
7. Obtain information about the client's internal controls by asking questions of client
personnel.
8. Trace column totals from the cash disbursements journal to the general ledger.
9. Confirm customer balances.
10. Examine a piece of equipment to make sure a recent purchase of equipment was actually
received and is in operation.
11. Review the total of repairs and maintenance for each month to determine whether any
Module Financial Auditing 1 | 9th Edition | 25
 month's total was unusually large.
12. Compare vendor names and amounts on purchase invoices with entries in the purchases
journal.
13. Foot entries in the sales journal to determine whether they were correctly totaled by the
client.
14. Make a surprise count of petty cash to verify that the amount of the petty cash fund is
intact.
15. Obtain a written statement from the client's bank stating the client's year-end balance on
deposit.
16. Read the minutes of the board of directors meetings and inquire of management to
determine whether any receivables are pledged or factored.
17. Observe the client while he is counting cash on hand.
18. Recalculate the invoice amount and compare the dollar amounts per the invoice to the
amount recorded in the acquisitions journal.
19. Question operating personnel about the possibility of obsolete slow-moving inventory.
20. Send letters directly to third parties who hold the client’s inventory and respond they
directly respond to us.
Required:
Classify each of the preceding items according to the eight types of audit evidence: (1) inquiry, (2)
observation, (3) inspection, (4) recalculation, (5) re-performance, (6) confirmation, (7) analytical
procedures.

4. PEMBAHASAN DI KELAS

Required : Jelaskan perubahan apa yang terjadi jika melihat dari rasio table diatas ?

Module Financial Auditing 1 | 9th Edition | 26

 MODULE 6
Main Audit Concepts and Planning the Audit (ISA 300, 315, 320)

PROBLEMS Audit Concept and Planning

1. Materiality
a. How is materiality defined in the ISAs (specifically ISA 320)?
b. What four factors are generally considered in determining materiality? Briefly discuss
them.
c. What guidelines or ‘rules of thumb’ related to a financial statement base such as net
income, total revenues, etc. are commonly used in practice?

2. Via internet, you have obtained the financial statements of an international manufacturer of
portable telephones. The financial statements can be summarizes as follows (in millions of
US-dollar):

Profit before taxes and minority interests: $ 4,933

Current assets: $ 23,174
Current liabilities: $ 19,657
Total assets: $ 54,602
Total Sales: $ 36,810

Required:

a. Use professional judgement in deciding on the initial judgement about materiality for
the basis of net income, current assets, current liabilities and total assets. State
materiality in both percentages of the basis and monetary amounts.
b. The company is listed on the Euronext Amsterdam Stock Exchange. During last year’
annual shareholders meeting there was a lot of resistance against the bonuses that were
paid out to the executive directors. As a result, a new remuneration package was agreed
for the CEO and CFO, including a limitation of the bonuses. The bonus for the CEO and
CFO were limited to a maximum of $ 500K. Using the materiality you have determined in
sub question A, do you believe you can use this materiality to audit and evaluate any
misstatements in the bonuses paid out to the CEO and CFO. For example, if both the
CEO and CFO were paid a bonus of $ 515K and only $ 500K is reported, do you believe
this misstatement is material?
c. After completing the audit you determine the actual estimate of misstatements in
earnings exceeds your preliminary judgement. What should you do?

Module Financial Auditing 1 | 9th Edition | 27

3. Dag Nilsson, Auktoriserad Revisor (AR), considers the audit risk at the financial statement level in the
planning of the audit of the financial statements of Lycksele Lappmark Bank (LLB) in Storuman,
Sweden, for the year ended December 31, 20X5. Audit risk at the financial statement level is
influenced by the risk of material misstatements, which may be indicated by a combination of
factors related to management, the industry and the entity. In assessing such factors, Nilsson has
gathered the following information concerning LLB’s environment.

LLB is a nationally insured bank and has been consistently more profitable than the industry average
by making mortgages on properties in a prosperous rural area, which has experienced considerable
growth in recent years. LLB packages its mortgages and sells them to large mortgage investment
trusts. Despite recent volatility of interest rates, LLB has been able to continue selling its mortgages
as a source of new lendable funds.

LLB’s board of directors is controlled by Kjell Stensaker, the majority stockholder, who is also the
chief executive officer (CEO). Management at the bank’s branch offices has authority for directing
and controlling LLB’s operations and is compensated based on branch profitability. The internal
auditor reports directly to Hakon Helvik, a minority stockholder, who is chairman of the board’s
audit committee.

The accounting department has experienced little turnover in personnel during the five years Nilsson
has audited LLB. LLB’s formula consistently underestimates the allowance for loan losses, but its
controller has always been receptive to Nilsson’s suggestions to increase the allowance during each
engagement.

During 20X5, LLB opened a branch office in Ostersund, 300 km from its principal place of business.
Although this branch is not yet profitable due to competition from several wellestablished regional
banks, management believes that the branch will be profitable by 20X7.

Also during 20X5 LLB increased the efficiency of its accounting operations by installing a new
computer system.

Required:
Based only on the information above, describe the factors that most likely would have an effect on
the risk of material misstatement. Indicate whether each factor increases or decreases the risk. Use
the format illustrated below:

Enviromental Factor Effect on Risk of Material Mistatement

Module Financial Auditing 1 | 9th Edition | 28

MULTIPLE CHOICE QUESTIONS

1. Which of the following is not one of the three main reasons why the auditor should properly plan
engagements?

a. To enable proper on-the-job training of employees.

b. To enable the auditor to obtain sufficient appropriate evidence.
c. To avoid misunderstandings with the client.
d. To help keep audit costs reasonable.

2. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is
completed and an unqualified opinion has been issued is the:

a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

3. A measure of the auditor’s assessment of the likelihood that there are material misstatements in an account
before considering the effectiveness of the client’s internal control is called:
a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. Inherent risk

4. Most auditors assess inherent risk as high for related parties and related-party transactions because:

a. of the unique classification of related-party transactions required on the balance sheet.

b. of the lack of independence between the parties.
c. of the unique classification of related-party transactions required on the income statement.
d. it is required by generally accepted accounting principles.

5. Which of the following is not correct regarding the communications between successor and predecessor
auditors?

a. The burden of initiating the communication rests with the predecessor auditor.
b. The burden of initiating the communication rests with the successor auditor.
c. The predecessor auditor must receive their former client’s permission prior to divulging information to
the successor auditor
d. The predecessor auditor may choose to provide a limited response to a successor auditor.

6. Which of the following is not a potential effect of an auditor’s decision that a lower acceptable audit risk is
appropriate?

a. More evidence is accumulated.

b. Less evidence is accumulated.
c. Special care is required in assigning experienced staff.
d. Review of audit documentation is performed by personnel not assigned to the engagement.

7. It is easier and more common to implement increased evidence accumulation for inherent risk than for
acceptable audit risk because:
a. inherent risk can usually be isolated to specific accounts.
b. inherent risk applies to the entire audit.
c. acceptable audit risk and sample sizes are set statistically.
d. acceptable audit risk does not impact on the amount of evidence which must be accumulated.
Module Financial Auditing 1 | 9th Edition | 29
 8. Which of the following statements is true regarding communications between predecessor and successor
auditors?
a. The burden of initiating the communication rests with the predecessor.
b. The predecessor’s response can be limited to stating that no information will be provided.
c. The predecessor should communicate with the successor only if the client is public.
d. There must be communication between the predecessor and successor if the successor is to
accept the engagement.

9. One means of informing the client that the auditor is not responsible for the discovery of all acts of fraud is
the:
a. engagement letter.
b. representation letter.
c. responsibility letter.
d. Client letter

10. Initial audit planning involves four matters. Which of the following is not one of these?

a. Develop an overall audit strategy.

b. Request that bank balances be confirmed.
c. Schedule engagement staff and audit specialists.
d. Identify the client’s reason for the audit.

Module Financial Auditing 1 | 9th Edition | 30

 MODULE 7
INTERNAL CONTROL AND CONTROL RISK

PROBLEMS INTERNAL CONTROL AND CONTROL RISK

1. Following are descriptions of ten internal controls.

a) Company separates cashier with data entry for cash receipt and sales.
b) Senior management obtains data about external events that might affect the entity and
evaluates the impact of that information on its existing accounting processes.
c) For effectiveness of internal control, management active deal with periodic assessment the
quality of internal audit which internal audit with performed by independent staff both the
operating and accounting department.
d) The board of the company creates an audit committee that is in charge with oversight
responsibility for financial reporting.
e) Before a cash disbursement can be processed, all payee information must be verified by
matching the payee to the company’s approved vendor listing.
f) The system automatically reconciles the detailed accounts receivable subsidiary ledger to the
accounts receivable general ledger account on daily basis.
g) The audit committee’s independence from management and of financial reporting issue to
determinants of its ability to effectively evaluate internal control and financial prepared by
management.
h) The company has an organizational chart that establishes the formal lines of reporting and
authorization protocols.
i) The sales accounting system should be designed to ensure that all shipment of goods are
correctly recorded as sales and are reflected in the financial statement in proper period
j) The compensation committee reviews compensation plans for senior executives to determine if
those plans create unintended pressures that might lead to distorted financial statements.

Required:
Indicate which of the five COSO internal control components is best represented by each
internal control:
a. Control environment
b. Risk assessment
c. Control activities
d. Information and communication
e. Monitoring

Module Financial Auditing 1 | 9th Edition | 31

2. Internal control is geared to the achievement of objectives in one or more separate overlapping
categories.
Required:
A. Define these four categories of objectives.
B. For each objective give an example of internal control goals for three industries: retail,
manufacturing and services.

3. Worked, Ltd, is a Japanese electronics games and amusements company specializing in pachinko
games. Pachinko parlours are a big industry in Japan, whose 18,000 pachinko parlours in 1996
accounted for a quarter of the country’s civil sector and are thought to produce Japanese Yen 30
trillion per year in revenue – more than Japan’s auto industry. Customers who play pachinko buy a
supply of pinballs costing around 4 Yen and cash in the balls they win back for prizes equivalent to
2.5 Yen each. Although it is illegal to give cash to winners, the customers may go to nearby shops
and sell their prizes for cash. Recently a new form of pachinko has been developed that gives very
large prizes to winners, but decreases the chances of winning. Although the number of players has
decreased over the last four years, the gross sales have doubled. Location of the stores is not crucial,
so Worked, Ltd. can locate in low-rent areas.
Government authorities have recently given much attention to pachinko gaming. Operations
featuring the game have been associated with the yakuza, the Japanese criminal organisation. Some
people in Japan are concerned that pachinko is really addictive gambling. There are complaints to
authorities over children being left to play on busy streets or locked up in parked automobiles while
their parents go to play pachinko.

Required:
Following the five-step procedure outlined in the chapter, identify the risks associated with
Worked’s business.

4. An example of a lack of internal controls with a disastrous result was the bond trading loss in the
New York Office of Empire Bank in 1995. Over 11 years 30,000 unauthorized trades were made
resulting in a $1.1 billion loss (an average of $400,000 in losses for every trading day). Empire
allowed Toshihide Iguchi, a bond trader, to authorize sales, have custody of the bond assets and
record these transactions.
As a novice trader Iguchi misjudged the bond market, racking up a $200,000 loss. To raise cash to
pay Empire’s brokers, Iguchi would order Bankers Trust New York to sell bonds held in Empire’s
account. The statements from Banker’s Trust came to Iguchi who forged duplicates, complete with
bond numbers and maturity dates, to make it look as if Banker’s Trust still held the bonds he had
sold. When he confessed to his misdeeds, Empire thought their bond account was $4.6 billion when
in fact only $3.5 billion was left.
Inadequate review of internal controls was also to blame. Empire’s internal auditors had
reviewed the New York branch several times since the fraud began, but Banker’s Trust was never
contacted for confirmation of Empire’s bank statements. If they had, Iguchi’s fraud would have been
exposed. Empire’s external auditor never audited the New York branch.

Module Financial Auditing 1 | 9th Edition | 32

 Required
A. What type of control procedures were ignored at Empire?
B. For each internal control procedure missing, what damage was caused?
C. What kind of controls could have been instituted what would have prevented the problems at
Empire?
D. For each of the five internal control procedures discussed above, applying each to a bank trading
operation, identify a specific error that is likely to be prevented if the procedure exists and is
effective!

MULTIPLE CHOICE QUESTIONS

1. Which of the following is responsible for establishing a private company’s internal control?
a. Management.
b. Auditors.
c. Management and auditors.
d. Committee of Sponsoring Organizations.

2. Which of the following is not one of the three primary objectives of effective internal control?
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk.

3. Internal controls can never be considered as absolutely effective because:

a. their effectiveness is limited by the competency and dependability of employees.
b. not all organizations have internal audit departments.
c. controls are designed to prevent and detect only material misstatements.
d. internal controls prevent separation of duties.

4. Even with the most effectively designed internal control, the auditor must obtain audit evidence, beyond
testing the controls, for every:
a. transaction.
b. financial statement account.
c. material financial statement account.
d. financial statement account that will be relied upon by third parties.

5. The essence of an effectively controlled organization lies in the:

a. effectiveness of its independent auditor.
b. effectiveness of its internal auditor.
c. attitude of its employees.
d. attitude of its management

6. Which of the following is not one of the levels of an absence of internal controls?
a. Major deficiency.
b. Material weakness.
c. Significant deficiency.
d. Control deficiency.

7. Which of the following is the correct definition of “control deficiency?”

a. A control deficiency exists if the design or operation of controls does not permit company
personnel to prevent or detect misstatements on a timely basis.
b. A control deficiency exists if one or more deficiencies exist that adversely affect a
company’s ability to prepare external financial statements reliably.

Module Financial Auditing 1 | 9th Edition | 33

 c. A control deficiency exists if the design or operation of controls results in a more than remote
likelihood that controls will not prevent or detect misstatements.
d. A control deficiency exists if the design or operation of controls results in a more than probable
likelihood that controls will prevent or detect misstatements.

8. A(n) _______ deficiency exists if a necessary control is missing or not properly formulated.
a. control
b. significant
c. design
d. operating

9. Two key concepts that underlie management’s design and implementation of internal control are:
a. costs and materiality.
b. absolute assurance and costs.
c. inherent limitations and reasonable assurance.
d. collusion and materiality.

10. A major control available in a small company, which might not be feasible in a big company, is:
a. a wider segregation of duties.
b. a voucher system.
c. fewer transactions to process.
d. the owner-manager’s personal interest and close relationship with personnel.

Module Financial Auditing 1 | 9th Edition | 34

 MODULE 8
Audit Program and Audit Tests

PROBLEMS AUDIT PROGRAM AND TEST

1. What might overall responses to address the assessed risks of material misstatement at the financial
statement level include?

2. What factors influence the auditor’s judgement as to what constitutes sufficient appropriate audit
evidence?

3. Explain what types of control tests an auditor should do in each of the following circumstances and
why:
1. The control failures and the absence of effective alternative control cause the auditor to identify
a specific risk.
2. The auditor tests controls that contribute to the reliability of accounting systems and concludes
they are effective.
3. The auditor concludes that there are no effective alternative controls that address the
transactions and potential errors to which failed controls relate.
4. There are control failures, but in identifying and testing alternative controls the auditor finds
them to be effective and therefore concludes that the accounting systems are reliable.

4. Substantive tests include (1) tests of detail of transactions, (2) tests of detail balances; and (3)
analytical procedures. Listed below are several specific audit procedures. Identify the type of
substantive test – 1, 2, or 3.
a. Compare recorded travel expense with the budget.
b. Vouch entries in the cheque register to paid cheques.
c. Re-compute accrued interest payable.
d. Calculate inventory turnover ratios by product and compare with prior periods.
e. Reconcile the year-end back account.
f. Discuss uncollectible accounts with the credit manager.
g. Count office supplies on hand at year-end.
h. Vouch entries in the sales journal to sales invoices.
i. Comparison of recorded amount of major disbursements with appropriate invoices.
j. Comparison of recorded amount of major disbursements with budgeted amounts.
k. Comparison of returned confirmation forms with individual accounts.
l. Confirm accounts receivable balance directly with debtors.
m. Multiply the inventory turnover rate by average inventory and compare the result with the cost
goods sold.

Module Financial Auditing 1 | 9th Edition | 35

MULTIPLE CHOICE QUESTIONS

1. A listing of all the things which the auditor will do to gather sufficient, competent evidence is the:
a. audit strategy.
b. audit program.
c. audit procedure.
d. audit risk model.

2. Collectively, procedures performed to obtain an understanding of the entity and its environment, including
internal controls, represent the auditor’s:
a. audit strategy.
b. tests of controls.
c. risk assessment procedures.
d. tests of transactions.

3. In which stage(s) of an audit are analytical procedures not performed?

a. In the planning stage.
b. In the test of controls stage.
c. In the completion stage.
d. In conjunction with tests of transactions and tests of details of balances.

4. Which of the following is not useful for obtaining an understanding of internal controls?
a. Make inquiries of the client’s personnel.
b. Examine documents and records.
c. Read industry trade magazines.
d. Observe client activities and operations.

5. A system walkthrough is used to:

a. test balances.
b. test details of transactions.
c. gain an understanding of internal controls.
d. determine acceptance of the client.

6. A procedure designed to test for monetary misstatements directly affecting the correctness of financial
statement balances is a:
a. test of controls.
b. substantive test.
c. test of attributes.
d. monetary-unit sampling test.

7. The primary emphasis in most tests of details of balances is on the:

a. balance sheet accounts.
b. revenue accounts.
c. cash flow statement accounts.
d. expense accounts.

8. Tests of transactions are used to determine whether ___________ have been satisfied.
a. compliance test requirements.
b. balance coverage requirements.
c. transaction-related audit objectives.
a. existence assertions

Module Financial Auditing 1 | 9th Edition | 36

9. Which of the following statements is not true?
a. Analytical procedures emphasize the overall reasonableness of transactions and balances.
b. Tests of controls are concerned with evaluating whether controls are sufficiently effective to
justify reducing control risk and thereby reducing analytical review procedures.
c. Substantive tests of transactions emphasize the verification of transactions recorded in the journals
and then posted in the general ledger.
d. Tests of details of balances emphasize the ending balances in the general ledger.

10. Which of the following audit tests is usually the least costly to perform?
a. Analytical procedures.
b. Tests of controls.
c. Tests of balances.
d. Substantive tests of transactions.

Module Financial Auditing 1 | 9th Edition | 37