AUDITING THEORY
TOPIC 4: INTRODUCTION TO AUDITING
KEY CONCEPTS
TYPES OF AUDIT
AUDITING
COMPARISON OF DIFFERENT TYPES OF AUDIT
OBJECTIVES
ELEMENTS OF FS AUDIT
VALUE OF FS AUDIT
FINANCIAL STATEMENT
AUDIT
INTRODUCTION
TO AUDITING
GENERAL PRINCIPLES OF AN AUDIT
THEORETICAL FRAMEWORK OF FS AUDIT
DEMAND FOR FS AUDIT
AUDIT PROCESS: A
GENERAL APPROACH
AUDIT PROCESS: A
MORE DETAILED
APPROACH
AUDITING
Key Concepts:
a. A systematic process
b. It involves objectively obtaining and evaluating evidence about assertions.
c. It ascertains the degree of correspondence between assertions and established criteria
d. It includes communication of the results to interested users
Types of Audit
NATURE OF ASSERTION OR DATA
a. Financial Statement Audit
b. Operational Audit
c. Compliance Audit
Comparison of the different Types of Audit
FINANCIAL
STATEMENT AUDIT
REPORT
GENERALLY
PERFORMED BY
TYPES OF AUDITOR
External Audit
Internal Audit
Government Audit
OPERATIONAL AUDIT
COMPLIANCE AUDIT
FS are fairly presented
Operations are conducted
efficiently and effectively
GAAP or any other
identified
financial
reporting framework
An opinion whether the
financial statements are
fairly presented
External auditors
Objective
set
management
Activities complied with applicable
laws, rules, regulations, contracts or
management policy
Applicable
contracts,
rules,
regulations, laws or management
policy
Degree
of
compliance
with
applicable laws, rules, regulations, or
management policy
Government auditors
ASSERTIONS
SUITABLE CRITERIA
a.
b.
c.
by
Report on efficiency
effectiveness.
Internal auditors
the
and
FINANCIAL STATEMENT AUDIT
Objectives:
 Expression of an opinion
 Communication of the results
 Financial statements are taken as a whole
 Reasonable assurance
 In all material respects
 Presence of criteria
1
Elements of Financial Statement Audit
A. Three-party relationship
PARTIES
B.
C.
D.
E.
RESPONSIBILITIES
AUDITOR
(practitioner)



MANAGEMENT
AND
TCWG
(responsible
party)
USERS OF FS
(intended users)



Formation and expression of an opinion on the financial statements
Compliance with ethical requirements (e.g. independence and competence)
Determining the scope of audit in accordance with PSAs and other applicable regulations
of professional bodies
Preparation and presentation of the financial statements in accordance with the
Applicable financial reporting framework ✓ prevention and detection of fraud and error
Adoption of implementation adequate accounting and internal control systems

Use the audit report which contains the opinion expressed by the auditor
Appropriate subject matter – availability of adequate supporting records and documents
Suitable criteria – PFRS, GAAP, and other applicable financial reporting framework
Sufficient appropriate evidence – concepts discussed in assurance engagements apply to audit engagements
Written assurance report or conclusion – audit report
Material BUT NOT Pervasive
Material AND Pervasive
Qualified
Qualified
Disclaimer of Opinion
Adverse
Scope Limitation
FS Materially Misstated
Assurance provided by the auditor – to enhance the credibility of the financial statements
Reasonable Assurance and the Inherent Limitations of an Audit
a. Use of selective testing
b. Inherent limitations of internal control
c. Fact that most of audit evidence is persuasive rather than conclusive
d. Work undertaken by the auditor to form opinion is permeated by judgment
e. Nature/characteristics of assertions
A.
DEMAND FOR FS AUDIT
Management
a. Business Risk
b. Information Risk
FACTORS CONTRIBUTING TO INFORMATION RISK
WAYS OF REDUCING INFORMATION RISK




B.
Voluminous data
Complexity of transactions
Remoteness of information
Conflicts of interest between the provider and the users of
information
Additional Conditions Creating the need for FS Audit
 Conflict of interest

 Expertise



 Verify the information
 Have the financial statements be audited
 Share information risk with the management
Remoteness of users
Financial consequence
VALUE OF FS AUDIT
Audit reduces information risk that may lead to lower cost of capital
Audit may be used to deter inefficiency and fraud
GENERAL PRINCIPLES OF AN FS AUDIT
CPP PJ SAE
THEORETICAL FRAMEWORK OF FS AUDIT
VIC BIG T
1. Comply with Code of Ethics
2. Conduct an audit accordance to PSAs
3. Plan and perform an audit with Professional
Skepticism
4. Exercise Professional Judgment
5. Obtain Sufficient Appropriate Evidence
1. Financial date are Verifiable
2. Independence of an auditor
3. No long-term Conflict between the auditor and client’s
management
4. Audit Benefits the public
5. Effective Internal control system
6. Consistent Generally accepted accounting principles
7. True in the past, shall continue to hold true in the future
2
AUDIT PROCESS: A GENERAL APPROACH
ENTITY
PREPARES AND
PRESENTS FS
1.
THE AUDITOR
PERFORMS AUDIT
PROCEDURES
THE AUDITOR
GATHERS AUDIT
EVIDENCE
THE AUDITOR
EXPRESSES IN
AUDIT OPINION
Entity prepares and presents financial statements
OLD CATEGORIES (TAP)
A. Classes of Transactions and events for the period under Audit (TOCCAC)
 Occurrence – transactions and events have been recorded have occurred and have been recorded
 Completeness – transactions and events that should be recorded, have been recorded
 Cut-off – transactions and events have been included in the correct accounting period
 Accuracy – amounts and other data have been properly recorded appropriately
 Classification – transactions and events have been recorded in the proper accounts
B. Assertions about Account balances at the period end (ACERV)
 Completeness – ALE have been recorded
 Existence – ALEquity interest exist
 Rights and Obligations – the entity holds or controls the rights to ALE of the entity
 Valuation and Allocation – ALE are included in the appropriate amounts
C. Assertions about Presentation and disclosure (POCAC)
 Occurrence and rights and obligations – disclosed events, transactions, and other matters occurred
pertain to the entity
 Completeness – all disclosures have been included
 Accuracy and valuation – financial and other information are disclosed fairly and at appropriate amounts
 Classifications and understanding – financial information is appropriately presented and described
NEW CATEGORIES
A. Transactions and events related disclosures (POCCAC)
 Presentation – properly aggregated or disaggregated
 Occurrence – transactions & events have been recorded or disclosed
 Completeness – all transactions and events that should have been included in the FS have been included
 Cut-off – transactions and events have been included in the correct accounting period
 Accuracy – amounts and other data have been properly measured and described
 Classification – transactions and events have been recorded in the proper accounts
B. Balances and related disclosures (PACER C)
 Presentation – ALE are appropriately aggregated and disaggregated
 Accuracy, Valuation, and allocation – ALE have been included in the financial statement at appropriate
amounts
 Completeness – all ALE have been recorded, and all disclosure have been included in the FS
 Existence – ALEquity interest exist
 Rights and obligations – the entity holds or controls the rights to ALE of the entity
 Classification – ALEquity interest have been recorded in the proper accounts
2.
The auditor performs audit procedures
MAJOR AUDIT PROCEDURES
1. Risk Assessment Procedures – to obtain an understanding of the entity and its environment
2. Test of Controls – to evaluate the operating effectiveness of controls in preventing, or detecting and correcting,
material misstatements at the assertion level
3. Substantive Procedures – to detect material misstatements at the assertion level
i.
Test of Details (of classes of transactions, accounts balances, and disclosures)
ii.
Substantive Analytical Procedures
SPECIAL AUDIT PROCEDURES
Inspection of Records or Documents – consists of examining records or documents
Inspection of Tangible Assets – consists of physical examination of the assets.
Observation – consists of looking at a process or procedure being performed by others
Inquiry (internal source) – consists of seeking information of knowledgeable persons, both financial and non-financial
Confirmation (external source) – process of obtaining a representation of information
Recalculation – consists of checking the mathematical accuracy of documents or récords
Reperformance – involves the auditor's independent execution of procedures or controls
8. Analytical Procedures – Procedures consist of evaluations of financial information made by a study of plausible relationships
among both financial and non-financial data.
1.
2.
3.
4.
5.
6.
7.
3
3.
The auditor gathers audit evidence – obtains sufficient appropriate audit evidence to draw reasonable conclusions
to base the audit opinion
4.
The auditor expresses an audit opinion
a. Unmodified Opinion
b. Modified Opinion
i. Qualified and Adverse
ii. Qualified and Disclaimer of Opinion
AUDIT PROCESS: A MORE DETAILED APPROACH
PRELIMINARY ENGAGEMENT ACTIVITIES
Decision to accept/not the engagement
PLANNING AN AUDIT OF FS
Development of the audit overall strategy
STUDY AND EVALUATION OF INTERNAL CONTROL
Assessment of internal control
EVIDENCE – GATHERING (SUBSTANTIVE TESTING)
Gathering sufficient appropriate evidence
COMPLETING THE AUDIT
Formed overall opinion (review phase)
ISSUANCE OF THE AUDIT REPORT
Issues/communication of the audit report
POST – AUDIT RESPONSIBILITIES
Identifying areas for improvement
4