Auditing and Assurance
Lecture Note
Subject Guide
Chapter 2:
Reasons for auditing
Chapter 3:
The theory of auditing
Content:
1. Summary of UK legislation
2. Subject Guide – Chapter 2.4-2.5
3. Summary of Auditing Concepts
4. Hierarchy of notions
Underpinning a theory of auditing
(Porter 4th ed Figure 3.1)
5. Expectation Gap
(Porter 4th ed Figure 18.1)
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Summary of Auditing Concepts
1. Social purpose of auditing:
Auditors are agents of social control in the process of corporate
accountability
2. Postulates of auditing (assumption)
Assumption 1: There is a need for an audit based on a relationship of
accountability (No need for audit if: 1. Honesty, assume true and fair
in reporting process; 2. Assumption of full or perfect information)
Assumption 2: The subject matter is too remote, too complex or too
important to accept without an audit
Remoteness:
Complexity:
Significance:
Assumption 3: An audit must be conducted with independence and
without constraints either over conduct or in reporting findings (e.g.
limitation of internal auditing, Company Act related to
independence)
Assumption 4: The subject matter of an audit can be verified by
collection of evidence (historical information vs real time
information)
Assumption 5: Standards of accountability, performance, etc., can
be set and actual performance (subject matter) can be measured
against these standards
(e.g. Company Act – True and Fair(?), an overriding principle;
Definition of T&F: compliance to accounting standards(?);
measurable by the assertions when preparing the F/S) e.g. (historical
information vs real time information)
Assumption 6: The purpose of the audit is sufficiently clear (Statutory
requirement and well defined) that its results can be communicated
clearly (report) -> auditors’ obligation and responsibility e.g. during
1856-1900
Assumption 7: An audit produces an economic (allocation of scarce
resources by informed and reasonable investment decision of user)
or social (welfare by realization of justice and fairness) benefit
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3. Concepts
Q1. List and describe the essential concepts in auditing
Q2. How auditors can prevent the blame or legal consequences in
case of scandals, or collapse of business, or financial crisis
Q3. Explain the users in a sense to close the expectation gaps
Concepts relating to the creditability of auditors’ work
A) Concept of independence and objectivity (Chapter 4) +
Company Act
B) Concept of competence (Chapter 4) + Professional Body +
Company Act
C) Concept of ethical conduct and integrity (Chapter 4) +
Professional Body
Concepts relating to the audit process (Chapter 5, 6, 7)
A) Concept of evidence (sufficiency and appropriateness)
(Chapter 6) + Company Act
B) Concept of materiality (Chapter 6, 7) + Same definition among
Financial Accounting and Auditing and Co Act + (size + nature) +
judgmental
C) Concept of audit risk (audit risk model) (Chapter 7) risk-based
and evidence-based auditing + decision on timing, nature, and
extend of audit work + judgmental
Inherent risk (management integrity, account risk, business risk)
Control risk
Detection risk (sampling risk, quality control risk)
D) Concept of judgment (limitation) + expectation gap + could be
subjective + transparency of audit work + audit report
(standardized)
E) Concept of skepticism (would not assume dishonesty; but with
questioning mind) + situational based questioning
Concepts relating to the auditors’ communication
A) Concept of reporting (clear, complete, and effective
communications (Chapter 5) + standardized vs custom made
(historical, Co Act) + Chapter 8 common law cases +
expectation gap
Concepts relating to the standard of auditors’ performance
(feedback)
A) Concept of due care (Chapter 4, 7, 8) Chapter 4 definition;
Chapter 7 quality control; Chapter 8 lawsuit
B) Concept of quality control (Chapter 7, 8) 1. Job-based; 2.
Firmwide)
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4. The auditors’ code Chapter 2: Value; Chapter 4: Rule
Chapter 3.5 – Recognition of theoretical issues in practice
Accountability
Integrity
Objectivity and independence
Competence
Rigour
Judgement
Clear communication
Association
Providing value
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