9.401 Auditing
Chapter 1
Introduction
Definition of Auditing
The accumulation and evaluation
 Of evidence about information
 To determine and report on
 The degree of correspondence between
 The information and established criteria.
 Auditing should be done by
 A competent and independent person

Types of Audits
1.
2.
3.
4.
Financial Statement Audits

Evaluates correspondence between financial
statements and GAAP
Operational Audits

Evaluates correspondence between org’s
procedures and methods and criteria of
efficiency and effectiveness
Compliance Audits

Evaluates correspondence between org’s
operations and specific procedures or rules
Comprehensive Audits
Accounting vs. Auditing
1.
2.
Accounting

Recording, classifying and summarizing of
economic events for the purpose of
providing financial information for decision
making

Requires understanding of GAAP
Auditing

Determining whether recorded information
properly reflects the economic events of the
period

Requires understanding of GAAP AND of
accumulation and interpretation of audit
evidence
Financial Statement Audit
Objectives
The objective of the audit of
financial statements is to express an
opinion whether the financial
statements present fairly, in all
material respects, the financial
position, results of operations and
changes in financial position in
accordance with generally accepted
accounting principles.
Opinion
Fairly
Materiality
GAAP
FUNDAMENTAL CONCEPTS

Materiality


Something is material if, in auditor’s judgment, its
omission or misstatement would probably affect a
user’s decision.
Audit risk

The risk that the auditor may unknowingly provide a
“clean” opinion on financial statements that are
materiality misstated. “Presents fairly” means that
this risk is at an appropriately low level.
So, an audit opinion…

is NOT an assurance as to the future
viability of an entity

is NOT an opinion as to the efficiency or
effectiveness with which its operations,
including internal control, have been
conducted

Is NOT a guarantee that the financial
statements are free of error
Benefits of Being Audited
1.
2.
3.
Operational Audits

Improves efficiency and effectiveness
Compliance Audits

Reduces cost of non-compliance

Reassures external parties
Financial Statement Audits

May be mandatory

Reduces cost of capital. Why?…….
Business Risk vs. Information
Risk
1.
2.
Business Risk

Risk that organization will fail to
achieve its objectives
Information Risk

Risk that the information upon which a
business decision was made is
inaccurate
The financial stakeholders of a firm face
both types of risk. A financial
statement audit reduces information
risk, but not business risk
Sources of Information Risk




Remoteness of Information
Voluminous Data
Complex Exchange Transactions
Bias and Motives of Information Provider
Who Performs Audits?
1.
2.
Public Accounting Firms
•
Independent as external to audit client
•
Primarily f/s audits, but can be hired to
perform other types of audits
Internal Auditors
•
Employees of org. Less
independent:depends on org structure
•
Primarily operational and compliance
audits
Who Performs Audits?
3.
4.
Government Auditors
•
Often perform comprehensive audits,
but depends on mandate
Revenue Canada Auditors
•
Compliance audits
What makes external auditors
credible?
•
•
•
•
Legal Liability
Quality Control Adopted by Firm
Provincial Securities Commissions
Members of a Profession (usually
CICA, but in some provinces CGA’S
and CMA’s also have power to perform
external financial statement audits)
Authority of Professional
Bodies
1.
2.
CICA
•
Sets accounting and auditing
standards
CICA, SMAC, CGA
•
Publish materials for members
•
Set entrance standards and
administer exams
•
Continuing professional education
•
Codes of Professional Conduct
•
Inspection and Discipline
Financial Statement Audits


In an audit of financial statements, the auditor
complies with generally accepted auditing
standards (GAAS)……
GAAS are developed by CICA
Generally Accepted Auditing Standards
(GAAS) - General Standard

The General Standard


"The examination should be performed and
the report prepared by a person or persons
having adequate technical training and
proficiency in auditing, with due care and with
an objective state of mind" [Sept 1975]
General Standard therefore emphasizes:
 Competence
 Objectivity
 Due Professional Care
Generally Accepted Auditing Standards
(GAAS) Examination

Standards
Adequate Planning and
Supervision
 (i) The work should be
adequately planned and
properly executed. If
assistants are employed
they should be properly
supervised. [Sept. 1975]
Generally Accepted Auditing Standards
(GAAS)

Sufficient Understanding of
Internal control
 (ii) A sufficient
understanding of internal
control should be obtained
to plan the audit. When
control risk is assessed
below maximum, sufficient
appropriate audit evidence
should be obtained
through tests of controls to
support the assessment.
Quick discussion of Internal Control
 Control
comprises those elements of an
organization (including it resources, systems,
processes, culture, structure and tasks) that, taken
together, support people in the achievement of the
organization’s objectives.
 Objectives relate to:
 effectiveness and efficiency of operations,
including safeguarding of assets
 reliability of internal and external reporting
 compliance with applicable laws, regulations,
and internal policies
Generally Accepted Auditing Standards
(GAAS)

Sufficient and Appropriate
Audit Evidence
 (iii) Sufficient appropriate
audit evidence should be
obtained by such means as
inspection, observation,
enquiry, confirmation,
computation and analysis,
to afford a reasonable basis
to support the content of
the report. [Sept. 1975]
GAAS Reporting Standards



(i) The report should identify the
financial statements and distinguish
between the responsibilities of
management and the responsibilities of
the auditor.
(ii) The report should describe the scope
of the auditor's examination.
(iii) The report should contain either an
expression of opinion on the financial
statements or an assertion that an opinion
cannot be expressed. In the latter case, the
reasons therefor should be stated.
Reporting Standards

(iv) Where an opinion is expressed, it should
indicate whether the financial statements present
fairly, in all material respects, the financial
position, results of operations and changes in
financial position in accordance with an
appropriate disclosed basis of
accounting, which except in
special circumstances should be
generally accepted accounting
principles. The report should
provide adequate explanations
with respect to any reservation
contained in such opinion."