Class notes
College notes Auditing Free University
- Course
- Institution
Interesting summary of the field of auditing from the year .
[Show more]
Seller
Follow
annevdijk27
Reviews received
Content preview
AUDITING PERIOD 5 BACHELOR YEAR 3An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between these assertions
and established criteria and communicating the results to interested users.
Inventors and creditors have different objectives than management.
management prefers higher salaries and benefits (expenses)
investors wish higher profits and dividends
An auditor provides an independent and expert opinion on the fairness of the reports, called
an audit opinion.
The auditor assesses the reliability, relevance and sufficiency of the information contained in the
underlying accounting records and other source data by
Studying and evaluating accounting systems and internal controls on which she wished to rely
and testing those internal controls to determine the nature, extent and timing of other auditing
procedures
Carrying out such other tests, inquiries and other verification procedures of accounting
transactions and account balances, as she considers appropriate in the particular
circumstances.
Example of an assertion: all the assets reported on the balance sheet actually exist at the balance sheet
date. The assets are real, not fictious.
Purpose of the independent expert opinion is to lend credibility to the financial statements.
Auditor should exercise professional judgement and maintain professional skepticism throughout the
planning and performance of the audit.
Theories on the demand and supply of audit services
The policeman theory: an auditor’s job is to focus on arithmetical accuracy and on the
prevention and detection of fraud
Lending Credibility theory: audited financial statements are used by management to enhance
the stakeholders’ faith in management’s stewardship.
Agency theory: a company is viewed as the result of more or less formal contracts, in which
several groups make some kind of contribution to the company, given a certain price. A
reputable auditor is appointed not only in the interest of third parties, but also in the interest
of management.
Management is seen as the agent
Bankers, stockholders and employees are seen as the principal
,The phases of the audit are
1. Pre-planning: Client acceptance and audit engagement
2. Planning: Assess the risk of material misstatement
3. Testing and evidence: Respond to identified risks
4. Evaluate: Evaluate evidence and report findings
Phase I: Pre-planning: Client acceptance and audit engagement
Objective: deciding whether to accept a new client or continue with an existing one.
- Evaluate the client’s background and reasons for audit
- Determine whether the auditor can meet the ethical requirements regarding the client
- Determine need for other professional
- Communicate with predecessor auditor
- Prepare client proposal
- Select staff to perform the audit
- Obtain an engagement letter
Phase II: Planning: Assess the risk of material misstatement
Objective: determine the amount and type of evidence and review required to give the auditor
assurance that there is no material misstatement of the financial statements.
- Perform audit procedures to understand the entity and its environment, including the entity’s
internal control (COSO MODEL)
- Assess the risks of material misstatements of the financial statements
- Determine materiality
- Prepare the planning memorandum and audit program, containing the auditor’s response to the
identified risks.
Phase III: Testing and evidence: Respond to identified risks
Objective: test for evidence supporting internal controls and the fairness of the financial statements
- Tests of controls
- Substantive tests of transactions
- Analytical procedures
- Tests of details of balances
- Search for unrecorded liabilities
Phase IV: Evaluate: Evaluate evidence and report findings
Objective: complete the audit procedures and issue an opinion
- Evaluate governance evidence
- Perform procedures to identify subsequent events
- Review financial statements and other report material
- Perform wrap-up procedures
- Prepare Matters of Attention for Partners
- Report to the board of directors
- Prepare audit report
The users of audit services can broadly be classified as auditees (management, the board of directors)
and third parties (shareholders, bankers, creditors, employees, customers). Each of these groups has
its own set of expectations with regard to an auditor’s duties.
User expectations with regard to auditor opinions
The fairness of financial statements
Company’s ability to continue as a going concern
Company’s internal control system
Occurrence of fraud
Occurrence of illegal acts
,Accounting versus auditing
Accounting is the recording, classifying and summarizing of economic events for the purpose
of providing financial information used in decision making
management is responsible for the financial statements and internal control
Auditing is determining whether recorded information properly reflects the economic events
that occurred during the accounting period
the auditor is responsible for the audit of the financial statements.
Types of audits
1. Independent external auditors
2. Internal auditors: are employed by individual companies to investigate and appraise the
effectiveness of company operations for management.
o Operational audits (reviews of operations)
o Compliance audit (reviews of compliance with policies and regulations)
o Audit of financial statements
Standard Setting
International Financial Reporting Standards (IFRS), set by the International Accounting
Standards Board (IASB)
International Standards of Auditing (ISA), set by the International Auditing and Assurance
Standards Board (IAASB)
o International Standards on Quality Control (ISQCs) as the standards to be applied for
all services falling under the standards of the IAASB.
Described audit firm level controls to ensure high quality audits
, Audit Firms; the Big Four
Deloitte, KPMG, PwC, EY
Audit and accounting services represent approximately half of the firms’ total fee income.
Preconditions for Auditors
Auditor behaves ethically
Auditor exercises professional skepticism
Auditor exercises professional judgement
Needs to be independent of the auditee
Information risk in financial reporting
Biases and motives of the provider
Remoteness of information
Voluminous data
Complex exchange transactions
Audited financial statement can decrease information risk by increasing
1. F/S credibility
2. F/S usefulness
3. F/S value
Overall Objectives of a FS Audit
To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework
To report on the financial statement and communicate as required by the ISAs, in accordance
with the auditor’s findings.
Audit evidence = all the information that the auditor uses to base his opinion upon.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller annevdijk27. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.17. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
56326 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now