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Fundamentals II - The
Auditing Environment
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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About Auditing
 The
Auditing Environment
 Auditing:
The process of gathering and evaluating evidence
about information to determine the degree of
correspondence between the information and the standards
used to prepare the information.
 Demand
for Auditing (because business owners not directly
involved in the business)
 Licensing
(state-based regulation for CPA’s)
 Rule-Making
IIA)
Bodies (PCAOB, SEC, FASB, GASB, AICPA,
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The Auditing Regulatory
Environment
 International
Boards That Affect the Accounting Profession
(IIASB, IASB)
 The
Audit (Auditors audit companies to determine whether
their financial statements (including footnotes) present the
companies’ financial position, results of operations, and
cash flows in accordance with the accounting basis (e.g.,
generally accepted accounting principles) specified in the
footnotes. )
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Materiality and Risk
 Materiality
and Risk
 Materiality
(The magnitude of an omission or misstatement of
accounting information that, in the light of surrounding
circumstances, makes it probable that the judgment of a
reasonable person relying on the information would have been
changed or influenced by the omission or misstatement.)

preliminary judgment of materiality, allocation to segments
 Risk
(Audit risk is the likelihood that the financial statements
will contain material misstatements after the auditor has
determined that the financial statements are free of material
misstatements. Inherent risk is the likelihood that an account
or class of transactions is materially misstated before
considering the effects of internal controls. Control risk is the
likelihood that the internal controls will not detect or correct a
misstatement in an account or class of transactions.)
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Audit Reports
 Audit
Reports
 Standard
Unqualified Report
 Unqualified Report with Modified Wording
 Qualified Opinion Report
 Adverse Opinion
 Disclaimer Audit Report
 Audit
Assertions
 Presentation
and Disclosure
 Rights and Obligations
 Existence or Occurrence
 Completeness
 Valuation or Allocation
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Evidence-Gathering
Procedures
 Evidence-Gathering
Procedures
 Confirmation
 Observation
 Physical
Examination
 Reperformance
 Analytical Procedures
 Inquiry of the Client
 Documentation
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Types of Tests
 Types
of Tests
 Tests
of Controls
 Substantive Tests of Transactions
 Analytical Procedures
 Substantive Tests of Balances
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Sampling and the Audit
Process
 Sampling
Sampling Risk
 Sampling for Attributes
 Sampling for Tests of Balances

 The
Audit Process
 Plan
and Design the Audit
 Performance of Tests of Controls and Tests of
 Transactions
 Performance of Analytical Procedures and Tests of
 Balances
 Completion of the Audit and Issuance of the Audit
 Report
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The Audit of Internal Controls
 The
Audit of Internal Controls over Financial Reporting
 Design
Deficiencies
 Auditor’s Evaluation Process
 Reporting on Internal Control over Financial
 Reporting
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The Auditor’s Responsibility to
Detect Fraud
 The
Auditor’s Responsibility to Detect Fraud
 SAS
No. 99, Consideration of Fraud in a Financial Statement
Audit
 The Profession’s Response to Fraud
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Non-Audit Services
 Other
Services
 Review
 Reports
on Specified Elements, Accounts, or Items on
Financial Statements
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Other Issues and Functions
Other Issues
 Special
Characteristics of Small Public Firms
 Agreed-upon Procedures Engagements
 Compliance Reports
 How Small Public Companies Can Compensate
 Prospective Financial Statements
 Specialty Assurance Services
 Compilation
Other Auditing Functions
 Internal Auditing
 Operational Auditing
 Governmental
Auditing