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Auditing & Assurance:
Specialized Industries
Bankers – FS influence their decision to lend money
to the company.
Suppliers – FS influence their decision of whether to
sell goods to the company.
Customers – FS influence their decision of whether
their supply of goods is secure.
Employees – FS influence their decision of whether
their employment is secure.
Investors – FS influence their decision of whether to
invest in the company.
The following are the scope of the course:
1. Audit and Assurance Basic Concept
2. Risk Assessment
3. Risk Responses
4. Accounting Estimates and Judgements
5. Journal Entry Testing
6. Revenue Recognition
What is the objective of an audit?
Audit and Assurance Basic Concept
The overall objectives of conducting an audit of FS are:
What is Auditing?
To obtain reasonable assurance about whether the
FS as a whole are free from material misstatements,
whether due to fraud or error, thereby enabling the
auditor to express an opinion on whether the FS are
prepared, in all material respects, in accordance
with an applicable financial reporting framework.
To report on the FS and communicate as required by
the AFRF, in accordance with the auditor’s findings.
The phrases we use to express our audit opinion are
that the FS “give a true and fair view” or “are
presented fairly, in all material respects,“ in
accordance with the AFRF.
It is important to understand that the user cannot
assume that the opinion is an assurance as to the
future viability of the entity or the efficiency or
effectiveness with which management
conducted the affairs of the entity.
The act of independently accumulating and evaluating
evidence of an economic entity for the purpose of
reporting on the degree of compliance of information
produced with established criteria (such as Generally
Accepted Accounting Principles).
We, as auditors gather evidence about a company’s FS
by performing our testing procedures with the goal of
communicating our audit findings to the users (usually,
delivering an audit report to the company to include in its
period-end report to its shareholders or stakeholders).
Why are audits performed?
Certain entities may be required to have an audit
performed by law, such as:
Publicly held companies
Publicly accountable entities
Privately-owned companies
Sole proprietorships and partnerships
You may be wondering why audits must be performed
when law does not require them to be.
The auditors’ report provides credibility to the financial
statements produced by manage-ment. Therefore, audits
often are performed even though, by law, they may not
be required to be.
You may be able to think of some other examples of why
an audit could be required or requested in your country.
Some users of the entity‘s FS, including lenders, investors,
suppliers and government, may specifically request the FS
to be audited by an auditor so they can confidently rely
on the information provided in the financial statements to
make economic decisions.
The purpose of audit is to enhance the degree of
confidence of intended users in the FS by issuing an
opinion on whether the FS are prepared, in all material
respects, in accordance with an applicable financial
reporting framework.
Shareholders - FS help them monitor the custody and
performance of their investments.
Analysts – FS provide the basis for them to value a
company and advise their clients.
Regulatory Authorities – FS provide the basis for them
to monitor a company.
What are financial statements?
Are a structured representation of historical financial
information, including related disclosures intended to
communicate an entity’s economic resources or
obligations at a point in time or the changes therein
for a period of time in accordance with a financial
reporting framework.
The term “FS” ordinarily refers to a complete set of FS that
consists of:
Statement of Profit or Loss and Other
Comprehensive Income (US GAAP: Income
Elements: Income, Expenses
Statement of Financial Position (US GAAP:
Balance Sheet)
Elements: Assets, Liabilities and Equity
Statement of Cash Flows
Statement of Changes in Equity
Notes to FS
FS portray the financial effects of transactions and other
events by grouping them into broad classes according to
their economic characteristics. These broad classes are
termed the elements of FS.
Management-prepared FS must comply with the basic
principles of accounting – how assets, liabilities, revenues
and expenses are to be applied, measured and
reported. The basic principles of accounting are listed
Accrual Basis of Accounting
Financial Statement Assertions
FS are prepared on the accrual basis of accounting.
Under this basis, the effects of transactions and other
events are recognized when those effects occur (and not
as cash or its equivalent is received or paid) and they are
recorded in the accounting records and reported in the
FS of the periods to which they relate.
The FS consists of many accounts which may include the
Trade Receivables
Payroll Expense
FS prepared on the accrual basis inform users not only of
past transactions involving the payment and receipt of
cash but also of obligations to pay cash in the future and
of resources that represent cash to be received in the
future. Hence, they provide the type of information about
past transactions and other events that is most useful to
users in making economic decisions.
Each FS account has FS assertions implicit in the
financial statements.
Financial statement assertions are representations of
management, explicit or otherwise, embodied in the
financial statements as used by the auditor to
misstatements that may occur.
Historical Cost Principle
Assets are recorded at the amount of cash or cash
equivalents paid, or the fair value of the consideration
given to acquire them, at the time of their acquisition.
Financial Statement Assertions are categorized as:
Liabilities are recorded at the amount of proceeds
received in exchange for the obligation, or at the
amounts of cash or cash equivalents expected to be
paid to satisfy the liability in the normal course of business.
Realization Principle
Income, or revenue, should be recognized only when its
conversion into cash has occurred or is reasonably
Consistency Principle
The consistency principle of accounting requires that
entities give accountable events the same presentation
and accounting treatment from period to period to
ensure comparability of FS with those of previous periods.
Balance Sheet
Income Statement
Rights and
Presentation and
Presentation and
*based on ISA.
During an audit, we determine which FS assertions are
relevant to the significant accounts and disclosures.
The consistency principle means that an entity applies
the same methods from period to period in accordance
with the AFRF, but it does not mean that the entity
cannot switch from one method of accounting to
another in certain circumstances.
We design and perform substantive procedures at the
assertion level to identify material misstatements and, if
found, to quantify their effect in the FS.
Full Disclosure Principle
*Based on PSA
Accountants have adopted a principle of full disclosure
that generally calls for revealing in the FS any facts of
sufficient importance to influence the judgment of an
informed reader.
Classes of transactions and events for the period under
Thus, the full disclosure principle requires the presentation
of sufficient information to permit the knowledgeable
reader to reach an informed decision instead of
indulging in a guessing game.
The common methods of disclosure are presenting an
account with a balance, parenthetical disclosure and
footnote disclosure.
Objectivity (Verifiability) Principle
The objectivity principle states that accounting
should be
independent and supported with unbiased evidence.
This means that accounting information must be based
on research and facts, not merely a preparer’s opinion.
The objectivity principle is aimed at making FS more
Financial Statement Assertions
Account balances at the period ended:
a. Existence
b. Rights and Obligations
c. Completeness
d. Valuation and Allocation
Presentation and Disclosure:
a. Occurrence and Rights and Obligations
b. Completeness
c. Classification and Understandability
d. Accuracy and Valuation
What is an Audit Opinion?
The primary output of an audit is an opinion on an entity’s
After completion of all audit procedures, we
review and assess the conclusions drawn from
the audit evidence obtained. These conclusions
are the basis for the expression of our opinion on
the FS.
opinion on the FS due to the potential interaction
of the uncertainties and their possible cumulative
effect on the FS.
The general reader of the company’s FS will not
know the details of our audit, nor will he or she be
able to look at the work papers that you prepared
to document your testing of the client’s cash
The reader of the FS will be able to read our opinion,
and if it is an unqualified opinion, then know that the
audit team has obtained reasonable assurance that
the FS as a whole are free from material
misstatement, whether due to fraud or error.
The audit opinion is the final step in the entire
audit process.
The review and assessment considers whether the FS
have been prepared in accordance with an AFRF. These
can be either of the following:
International Financial
Reporting Standards
U.S. Generally
Accepted Accounting
Relevant National
Accounting Standards
or Practices
Another authoritative,
financial reporting
framework that has
been designed for use
in financial reporting
and is applicable in the
Types of Audit Opinions
Unmodified Opinion
An unmodified opinion should be expressed when the
auditor concludes that the FS are prepared, in all
material respects (or give a true and fair view) in
accordance with the AFRF.
Qualified Opinion
A qualified opinion should be expressed when the auditor
concludes that misstatements, individually or in the
aggregate, are material, but not pervasive, to the FS; or is
unable to obtain sufficient appropriate audit evidence
on which to base the opinion , but concludes that the
possible effects on the FS of undetected misstatements, if
any, could be material but not pervasive.
What do we mean by “presents fairly, in all material
There is no legal definition of the phrases “presents
fairly” or “true and fair”
Determining this requires significant judgment
because auditing is not an exact science.
The view presented in any set of financial statements
is only one of several possible true and fair views.
Throughout your career, you will develop the
judgment needed to determine these concepts
related to clients’ FS.
What is Materiality?
You are auditing the cash account and are currently
working on a client-provided cash reconciliation
While you are agreeing the beginning bank balance
statement, you notice that the person who prepared
the reconciliation accidentally used MU 1.3 million as
the beginning balance on the reconciliation.
The bank statement says the beginning balance is
actually MU 1.8 million, resulting in a MU 500,000
Adverse Opinion
An adverse opinion should be expressed when the
auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, individually or in
the aggregate, are both material and pervasive to the
Disclaimer of Opinion
A disclaimer of opinion should be expressed when the
auditor is unable to express an opinion because:
They are unable to obtain sufficient appropriate
audit evidence on which to base the opinion, and
the auditor concludes that the possible effects on
the FS of undetected misstatements, if any, could
be both material and pervasive.
In circumstances involving multiple uncertainties,
and not withstanding having obtained sufficient
appropriate audit evidence regarding each of the
individual uncertainties, it is not possible to form an
Is this a material difference? What if the difference were
only MU 1,000?
The concept of materiality as it relates to our audit
can be tricky. A material difference at one of your
clients might not be a material difference at another
client. It all depends on the materiality levels
established by your team in response to the factors
at that particular client. The determination of
materiality is not a mathematical exercise but
requires professional judgment involving audit
executives, including the partner in charge of the
Materiality is defined as the magnitude of an omission or
misstatement that, individually or in the aggregate, in
light of the surrounding circumstances, could reasonably
be expected to influence the economic decisions of the
users of the FS.
(What if the MU 500,000 error were to change an
investor’s mind as to whether she wants to invest in the
company’s stock?
The MU 500,000 then would be material to that
PSA and ISA.
An auditor should plan and perform an audit with an
attitude of professional skepticism.
Questioning mind of an auditor.
The objective of an audit of FS is to enable the
auditor to express an opinion about whether the FS
are prepared, in all material respects, in
accordance with an AFRF.
Our audits are designed to provide reasonable
assurance (not absolute assurance) that the FS are
not materially misstated.
The basic concepts related to materiality are:
Code of Ethics
We, as auditors, are not responsible for making sure that
the client’s FS are 100% correct or to identify every small
for Professional Accountants
We are responsible for expressing an opinion about
whether the FS are prepared, in all material respects, in
accordance with an AFRF.
General Principles and
Scope of an Audit
States the fundamental principles that should be
observed by professional accountants in order to
achieve common objectives.
In instances where a national requirement is in conflict
with a provision in the code, the national requirement
For example, the American Institute of Certified Public
Accountants (AICPA) sets out the principles and rules that
should be observed by accountants practicing in the US.
Introduction to General Principles of an Audit
The three general principles of an audit:
The principle of integrity imposes an obligation on all
professional accountants to be straightforward and
honest in all professional and business relationships.
Integrity also implies fair dealing and truthfulness.
An auditor should comply with a code of ethics
Similar to other professions, like law and medicine, the
accounting profession has a code of ethics, which we
should comply with at all times, unless certain parts of it
being precluded by laws and regulations in specific
As an auditor, you should comply with the Code of Ethics
for Professional Accountants issued by the International
Federation of Accountants (IFAC).
IFAC believes that the identity of the accountancy
profession is characterized worldwide by its endeavor to
achieve a number of common objectives and by its
observance of certain fundamental principles for that
IFAC, recognizing the responsibilities of the accountancy
profession and considering its own role to be that of
providing guidance, encouraging continuity of efforts
and promoting harmonization, has deemed it essential to
establish the International Code of ethics for Professional
Accountants to be the basis on which the ethical
requirements for professional accountants in each
country should be founded.
An auditor should conduct an audit in accordance with
applicable auditing standards.
The principle of objectivity imposes an obligation on all
professional accountants not to compromise their
professional or business judgment because of bias,
conflict of interest or the undue influence of others.
Professional Competence and Due Care
The principles of professional competence and due care
imposes the following obligations on all professional
To attain and maintain professional knowledge and
skill at the level required to ensure that clients or
employers receive competent professional service,
based on current technical and professional
standards and relevant legislations.
To act diligently in accordance with applicable
technical and professional standards.
The principle of confidentiality imposes an obligation on
all professional accountants to refrain from:
Disclosing outside the firm or employing organization
confidential information acquired as a result of
professional and business relationships without
proper and specific authority or unless there is a
legal or professional right or duty to disclose; and
Using confidential information acquired as a result of
professional and business relationships to their
personal advantage or the advantage or the
advantage of third parties.
Professional Behavior
The principle of professional behavior imposes an
obligation on professional accountants to comply with
relevant laws and regulations and avoid any conduct
that the accountant knows or should know might bring
discredit to the profession. This includes actions which a
reasonable and informed third party would be likely to
conclude negatively affects the good reputation of the
Responsibility of Professional Accountants
A distinguishing mark of a profession is acceptance of its
responsibility to the public.
Business community
Sound financial accounting and reporting
Effective financial management
Competent advice on a variety of business and
taxation matters
Inherent in this mission statement is the understanding
that “services of consistently high quality” implies that
professional standards governing those services are
also of consistently high quality.
The International Auditing and Assurance Standards
Board (IAASB), which is designated by, and operating
independently under the auspices of the IFAC, issue
the ISAs.
When local standards exist, they govern the practices
followed in the auditing of financial statements.
Professional Skepticism
Plan and perform an audit with an attitude of
professional skepticism.
Professional skepticism includes a questioning mind,
being alert to conditions which may indicate possible
misstatement due to fraud or error, and a critical
assessment of evidence.
For example, an attitude of professional skepticism is
necessary throughout the audit process for the auditor to
reduce the risk of overlooking suspicious circumstances,
of overgeneralizing when drawing conclusions from audit
observations, and using faulty assumptions in determining
the nature, timing and extent of the audit procedures
and evaluating the results.
It is your responsibility to make sure you do not
become too comfortable working with your client and
that you always question and verify the information
that you obtain.
Continue to question the reliability of documents and
information until you are comfortable that you have
obtained sufficient appropriate audit evidence.
Not be too skeptical and not believe anything that
your client tells you.
Representations from management alone are not a
substitute for obtaining sufficient appropriate audit
evidence to be able to draw reasonable conclusions
on which to base the audit opinion.
Always keep on your “auditor hat” to gather and
document sufficient appropriate audit evidence to
support your conclusion.
Professional accountant executes the services provided
at the highest level of performance and in accordance
with ethical requirements.
Audit Scope
International Standards on Auditing (ISAs)
The auditor should conduct an audit of FS in
accordance with ISAs or local auditing standards, if
IFAC will continue to strengthen the worldwide
accountancy profession and contribute to the
development of strong international economies by
establishing and promoting adherence to high-quality
professional standards.
Audit scope refers to the scope of services on a specific
audit required by statutory and other regulatory
requirements, entity expectations and/or professional
Number of locations
Number of procedures
Kinds of procedures
The procedures required to conduct an audit in
accordance with ISAs or applicable local auditing
standards should be determined by the auditor.
Requirements of ISAs
Local Auditing Standards
Relevant professional bodies
Audit Engagement and Reposting requirements
Laws and Regulations
factors from the Process for Acceptance of Clients and
Engagements tool (PACE) at the beginning of the audit.
We determine the effect on our risk assessments and
incorporate the necessary additional actions or
procedures into our audit strategy and audit plan to
address these risk factors.
We obtain an engagement agreement prepared in
accordance with APM AGREE TERMS Engagement
agreements for assurance engagements, supplemented
by local audit requirements, if applicable.
Evaluate compliance with ethical requirements, including
We determine compliance for both the firm and the
members of the audit team.
Audit Process and Other
Phases of an Audit Engagement
of a FS
In accordance with Independence Policy, we perform
procedures to determine compliance with ethical
performing other significant activities for the current audit
We determine that we are independent in fact and in
appearance with the entity being audited.
We ensure we have adequate professional competence
to perform the services required and we maintain client
confidentiality during the current audit period, including
securing the work papers.
We ensure that we have fulfilled
requirements relevant to our audit.
Establish the team.
Our understanding of the entity obtained during the
client and engagement acceptance or continuance
process, including our expectations about service
requirements of those charged with governance and
management, helps us establish our audit team and
determine team roles and responsibilities.
We determine the nature, timing and extent of resources
and establish the audit team to achieve the appropriate
balance of skills, experience and competence necessary
to perform the audit.
Understand service requirements and agree the scope of
We make a preliminary assessment of additional expertise
that is needed beyond that possessed by the members of
the audit team and develop a plan to obtain the
resources. We determine whether to use the expertise of
an internal specialist or an auditor’s external specialist.
We understand the expectations of those charged with
governance and management to help us determine the
service requirements. We meet with those charged with
governance and management early in the audit to
agree the scope of services, the timing of our work, the
expected outputs and delivery dates, and any
expectations we have of management.
The result of this meeting provides us with information for
planning the audit (e.g., the availability of data and use
of automated techniques) and gives us an initial insight
into potential areas of audit focus.
We assess the results of our client and engagement
acceptance and continuance process (including the risk
Determine the roles and responsibilities of team members.
We establish the roles and responsibilities of team
Appropriate levels of supervision should be in place so
members of the audit team understand the purpose of
the assigned work and less experienced audit team
members receive appropriate support and on-the-job
training from more experienced team members.
We conduct timely reviews to determine that the work
performed supports the conclusions reached and is
documented appropriately. More experienced team
members, including the partner in charge (PIC), review
work performed by less experienced team members.
The second phase of an audit relates to
identification and assessment of risks and
determination of our audit strategy. These are
crucial to a successful audit engagement.
The amount of effort to identify and assess risks and
determine the audit strategy will vary with the size and
complexity of the client and the auditor’s knowledge of
and experience with the client.
In general terms, the identify and assess risks element
In the execution phase, we perform tests of controls when
we adopt a controls reliance strategy.
We perform tests of controls when we plan to rely on
controls over a significant class of transactions or
significant disclosure process (SCOT) or in other special
circumstances. We then identify the controls, understand
their design and determine which are relevant to the
Test of controls may be performed either before, or at,
the balance sheet date. We exercise professional
judgment in deciding when to perform them. Testing
controls early may help us identify important matters at
an early stage of the audit and resolve them, with the
assistance of management, or address their effects on
the audit by identifying effective mitigating controls to
rely on or revising our audit strategy.
Based on the result of our tests of controls, we evaluate
the effectiveness of the design and operation of relevant
controls and assess the control risks as either ‘rely on
controls’ or ‘not rely on controls’, for each relevant
assertion for each significant account and disclosure. This
assessment, combined with our inherent risk assessment, is
the basis for our combined risk assessment (CRA) for each
relevant assertion.
Obtain an understanding of the client’s business and
Understand management’s assessment process
Understand components of internal control at the
entity level
Identify and assess fraud risks
Make preliminary judgments about materiality levels
Identify significant accounts and disclosures and
relevant assertions
Identify and understand
transactions (SCOTs)
Identify risks of material misstatement and make
inherent risk assessments
Our substantive procedures may be different if we adopt
a core GAM audit approach or a digital audit approach.
We customize our substantive procedures to respond to
our CRA.
Design an audit strategy to address identified risks of
material misstatement, including fraud risks
In addition to the CRA, other factors that may influence
the timing of our procedures include:
Execute the Executive discussion and approval points
The third phase of the audit relates to the design
and execution of audit procedures to address the
identified risks.
We design the nature, timing, and extent of our
substantive procedures to respond to our Combined Risk
Assessment (CRA). Substantive procedures may be
categorized as Primary Substantive Procedures (PSPs) or
Other Substantive Procedures (OSPs), which may include
substantive analytical procedures, tests of details and /or
tests of items to obtain information.
The entity’s reporting deadlines, readiness and the
availability of information to be audited.
Audit team’s reporting deadlines, availability and
efficiency factors.
The time needed for the entity or other parties to
respond to audit requests.
The primary objective of this audit phase is to design and
perform audit procedures to obtain sufficient appropriate
audit evidence to be able to draw reasonable
conclusions on which to base our auditor’s opinion.
Sufficiency is the measure of the quantity of audit
evidence obtained. Appropriateness is the measure of
the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on
which to base our auditor’s report. We consider all
relevant information from reliable sources, regardless of
whether it corroborates or contradicts management’s
assertions, bearing in mind potential risks of bias.
We obtain audit evidence from substantive procedures
or combined with tests of controls, as appropriate.
We aggregate the individual pieces of audit evidence
obtained from our audit procedures for each relevant
assertion to enable us to conclude whether we have
obtained sufficient appropriate audit evidence to
address the identified risks.
In addition, we evaluate the effect of accumulated
misstatements, perform an overall analytical review,
reassess our risk assessment based on the results from our
procedures and revisit our audit strategy, prepare the
management’s representation letter.
We execute the Executive Discussion and Approval Points
(EDAPs) to discuss and conclude on the overall financial
statements, as well as agree the final versions of our
communications to management and those charged
with governance.
We prepare the audit report where we express our audit
opinion on the client’s financial statements. The audit
report generally is issued when we have obtained
sufficient appropriate audit evidence to form our opinion
on the entity’s FS.
Finally, we wrap up the audit by completing the
documentation of our audit procedures, including their
review and sign-off, and archiving our documentation
within the required timeline.
Although the simplified descriptions of the phases of
an audit give you only a general understanding of
what an audit is all about, this understanding, along
with the other information you have learned so far
in this course, allows you to understand the big
picture of what an audit really is.
Review Engagement
In a review engagement, the auditor expresses a review
report that is designed to enhance the degree of
confidence of intended users regarding the preparation
of an entity’s FS in accordance with an applicable
financial reporting framework. The auditor’s report is
based on the auditor obtaining limited assurance.
The auditor performs primarily inquiry and analytical
procedures to obtain sufficient appropriate evidence.
In a review engagement, the auditor expresses a
conclusion on whether anything has come to the
auditor’s attention that causes the auditor to believe the
FS are not prepared, in all material respects, in
accordance with an applicable financial reporting
For example, EY may be asked to issue a review report on
a company’s quarterly FS.
Agreed-Upon Procedures
(AUP) Engagement
Levels of Assurance Provided
from Different Type of Services
For agreed-upon procedures, the auditor is engaged to
carry out those procedures of an audit nature to which
the auditor, the entity and any appropriate third parties
have agreed and to report on factual findings. When
performing agreed-upon procedures, no opinion is
Assurance refers to the auditor’s satisfaction as to the
reliability of an assertion (i.e., the reliability of financial
reporting and the preparation of FS) being made by one
party (i.e., entity’s management) for use by another party
(i.e., the intended users of FS). Reasonable assurance is a
high, but not absolute, level of assurance.
For example, the firm may be asked to complete agreedupon procedures related to a company’s profit-sharing
calculation for the company’s employees.
The degree of satisfaction achieved and, therefore, the
level of assurance that may be provided is determined
by the procedures performed and their results.
The level of assurance provided by the auditor is predetermined and agreed with those charged with
governance of the client prior to the acceptance or
continuance of engagement.
Audit Engagement
In an audit engagement, the auditor provides a
reasonable, but not absolute, level of assurance that the
FS as a whole are free from material misstatements
whether due to fraud or error.
Reasonable assurance is a level of assurance.
An example of an audit engagement is the period-end
audit of a company’s FS.
Compilation Engagement
Management may request a professional accountant in
public practice to assist with the preparation and
presentation of financial information of an entity.
In a compilation engagement, although the users of the
compiled information derive some benefit from the
professional accountant’s involvement, it is not an
assurance engagement. It does not require the
professional accountant to verify the completeness of the
information provided by management for the
compilation or otherwise to gather evidence to express
an audit opinion or a review conclusion on the
preparation of the financial information.
Due to the requirements for independence, an auditor is
not allowed to prepare the FS that they will later audit.
Course Summary
In this course, you have learned about the basic
information surrounding what an audit is and the basic
concepts of auditing.
The ultimate goal in performing an audit is to provide
reasonable assurance to the users of the financial
information that the balances are materially correct
through our audit opinion.
Remember the basic phases of an audit are:
Initial Planning of the Audit
Identify and Assess Risk
Design and Execute Responses to Risks
Conclude and Communicate
We follow the auditing standards and requirements of our
local countries and perform our audits in accordance
with fundamental ethical principles and with an attitude
of professional skepticism.