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Literature Seminar AuditingSession 1: Chapter 1
1.2 An Audit Defined
Audit = 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
Systematic approach: structured and documented plan in such a way that those carrying
out the audit can fully examine and analyze all important evidence
Objectively: independent, objective and expert examination and evaluation of evidence,
fair and not following prejudice or bias, impartial attitude
Obtains and evaluates evidence: assesses the reliability, relevance and sufficiency of the
information contained in the underlying accounting records and other source data
Requirements of a financial statement audit:
Comply with relevant ethical requirements relating to financial statement audit
engagements
Plan and perform the audit with professional skepticism recognizing that circumstances
may exist that cause the financial statements to be materially misstated
Exercising professional judgement in planning and performing the audit
1.3 History
Theories on the demand and supply side of audit services:
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 stakeholder’s 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
As there is information asymmetry, auditors can give assurance to have faith in the
information for third parties
1.4 Auditing Practice Today
Objectives of an audit:
1. 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 aspects, in accordance with an applicable financial reporting framework
2. To report on the financial statements, and communicate as required by the ISAs, in
accordance with the auditor’s findings
Standard audit process model:
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. Evaluation, completion and reporting: evaluate evidence and report findings
1.5 User Expectations and Landmark Legislation
Expectation gap theory
Expectations gap = gap between society’s expectations of auditors and auditors
perceived performance, comprising ‘reasonableness’ and ‘performance’ components
For example, expectations about predicting bankruptcy, detecting every fraud etc.
Session 2: Chapter 2 & 3
,Chapter 2
2.3 Types of Auditor
There are two basic types of auditor:
1. Independent external auditor
a. Primary responsibility to the performance of the audit function
b. Typically certified either by a professional organization or a government agency
2. Internal auditor
a. Employed by individual companies to investigate and appraise the effectiveness
of company operations for management
b. Much of their attention is often given to the appraisal of internal controls
2.4 Types of Audit
Audits are typically classified into three types:
1. Audits of financial statements: examine financial statements to determine if they give a
true and fair view or present fairly in all material respects
2. Operational audits: study of a specific unit of an organization for the purpose of
measuring its performance
3. Compliance audits: review of an organization’s procedures and financial records
performed to determine whether the organization is following specific procedures, rules
or regulations set out by some higher authority
2.5 Audit Firms
Organizational pyramid of Big Four firms:
Partners/directors: owners of the firm, heavily involved in the planning of the audit,
evaluation of the results and determination of the audit opinion
Managers: helps plan the audit programs, reviews working papers, provides other
guidance
Senior accountants: in charge of audit fieldwork, takes a major part in planning the audit,
primarily responsible for conducting the audit engagement
Staff accountants: first position when someone enters the profession, performs the more
detailed routine audit tasks
2.6 Standard Setting
There are different standards relevant for the audit profession:
International Financial Reporting Standards (IFRS): generally, the standards to which an
international auditor compares financial statements
International Standards on Auditing (ISA)
o Developed by the International Auditing and Assurance Standards Board
o Standards for the financial statements audits and special purpose engagements
2.7 Regulation
Auditors carry legal liability, differing from country to country. This liability is based on one or
more of the following:
Common law: generally falls into liabilities to clients and third party liability
o Liability to clients: typically involves claim that auditor did not discover fraud because
the auditors showed negligence in the conduct of an audit
o Liabilities to third parties: include all stakeholders in an audit other than the client
Civil liability under statutory law: require a preponderance of evidence to convict resulting
in a civil penalty: proposition is more than likely to be true
Criminal liability under statutory law: requires evidence beyond a reasonable doubt to
convict resulting in loss of freedom, imprisonment and fines
Liability as members of professional accounting organizations: through the disciplinary
court of the audit profession, which typically consists of representatives of the audit and
legal professions
, Suggested solutions to auditor liability: limit on claims, system of proportionate liability,
insurance, excluding certain activities from the auditor’s liability, and a different legal
structure of the firm.
Chapter 3
3.2 What Are Ethics?
Ethics = discipline dealing with values relating to human conduct, with respect to the
rightness and wrongness of certain actions and to the goodness and badness of the motives
and ends of such actions
Ethics is divided into three general subject areas:
1. Metaethics: investigates where our ethical principles come from, and what they mean
2. Normative ethics: takes on the practical task to arrive at moral standards that regulate
right and wrong conduct
3. Applied ethics: involves examining specific controversial issues
3.3 The International Code of Ethics for Professional Accountants
The Handbook of the Code of Ethics for Professional Accountants
Intended to serve as a model on which to base national ethical guidance
Set out by International Ethics Standards Board of Accountants
Divided into four parts:
1. Part 1: establishes fundamental principles of professional ethics for professional
accountants and provides a conceptual framework
2. Part 2: applies to professional accountants in business
3. Part 3: contains applying the general principles in public practice
4. Part 4: independence for assurance
3.4 Part 1 – Complying with the Code, Fundamental Principles and Conceptual
Framework
Five fundamental principles for accountants:
1. Integrity: to be straightforward and honest in all professional and business relationships,
implies fair dealing and truthfulness
2. Objectivity: to not compromise the professional or business judgement because of bias,
conflict of interest or the undue influence of others
3. Professional competence and due care: to maintain the professional skill and knowledge
to that of a competent professional, understanding and implementing technical and
professional standards
4. Confidentiality: to respect confidentiality of information above a client’s affairs acquired in
the course of professional services
5. Professional behavior: compliance with relevant laws and regulations and avoidance of
any action that may discredit the accounting or auditing profession
Five categories of threats for the fundamental principles:
1. Self-interest: when an auditor has a self-interest that conflicts with the assurance client
2. Self-review: when (1) results of a previous engagement need to be re-evaluated in
reaching conclusions on the present assurance engagement or (2) when a member of
the assurance team previously was an employee of the client in a position to exert
significant influence over the subject matter
3. Advocacy: when a member of the assurance team promotes, or seems to promote, an
assurance client’s position or opinion
4. Familiarity: when an auditor becomes too sympathetic to the client’s interest because of
a close relationship
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