Key concepts of auditing
Credibility:
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Independence and objectivity
It must not have:
• any personal relationship with the client (family member)
• Any obligations due to the client (accepted gift from the client)
• Any other factors that prevent the auditor from performing his work objectively (when its a major client)
Competency
Competency refers to the auditor’s application of due care, professional knowledge,skill and judgement to carry out
the audit.
Should not accept the work if there is not time or staff availability to do the work.
Ethical conduct and integrity
Auditor must carry themselves in a professional manner in both professional and personal life. He must not do
anything to bring disrepute to the accounting profession
He has to be honest in all business dealings with his client and must not put himself in a situation where conflict of
interest arises
Evidence
Auditor will form an opinion based on audit evidence that he has collected. Therefore, the audit evidence forms the
basis of his audit opinion and he must give his professional opinion in an unbiased and objective manner relying on
the evidence.
The auditor should not allow any other factors to impair his professional judgement from forming his audit opinion
Process:
Materiality
Materiality refers to the size of the amount of an item in the financial statements and whether the over/understatement
would lead to the financial statement not giving a true and fair view.
Therefore, the concept of materiality requires the audit to exercise judgement in assessing the impact pn the financial
statement
Audit Risk
Audit risk is the risk that the auditor may give an inappropriate audit opinion when the financial statements are
materially misstated.
Audit risk may be due to:
• Sample testing and does not test 100% of all transactions (P/L) and account balances (B/S)
• Judgement is required when certain items are estimates (provision)
• The evidence itself is persuasive in nature rather than absolute
Judgement
In an audit, judgement exercised is inevitable. Hence, the auditor has to rely on his experience and evidence before
forming an audit opinion
Scepticism
In view of many corporate failure in the last decade, the auditor has to now carry out his audit with an attitude of
professional skepticism, regardless of the number of years he had audited the entity
Audit needs
• to be alert to possible indicators of material misstatement and fraud
• To have an enquiring mind
• To have a critical attitude towards the financial statements
Communication:
Reporting
Audit needs to be mindful that his report is likely to be relied upon by many parties who use audited finacial
statements. This is because these users have no access to the accounting records of the entity. Thus they rely on
the audit reports to make decisions:
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customers
Suppliers
Bankers
Investors
Tax authorities
Management
Trade unions and employees
Standard:
Due care
In order for an auditor’s opinion to be respected and valued, the users must be able to assume that the audit was
done with due care.
But there is no definition of what constitutes of due care
Generally, it is reasonable to assume that the auditor must exercise reasonable skill, caution, his professional
knowledge and vast experience in the conduct of an audit
Quality control
If the public is to have confidence in the auditor’s work, it is essential that measures are in place to ensure the
auditor’s work is consistently of high quality
Controls like:
• continuous professional and technical training for their staff
• Formal induction program for new employees
• Review of audit files by 2 partners
• Rotation of audit partners after a certain number of years