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Hoorcollege en werkcollege aantekeningen Auditing
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Alle aantekeningen van de hoorcolleges en sommige werkcolleges van Auditing aan de VU.
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AuditingHoorcollege 2 april 2024:
Brief history of auditing
First recorded auditors in ancient Persia (522 BC), acting as the king’s spies to check on provincial
governors. Auditor = hearer or listener: listened to the oral reports of responsible officials and
confirmed the accuracy of the reports.
Over the centuries, auditors have been employed in various ways as verifiers of written records.
1602: Dutch East India Company founded as first public company: ownership and control.
1623: participants demand that directors are held accountable for the prior 20 years. → call for
release of financial records that were independently audited. Two objectives: to compute rate of
return on their investment and to assess managements’ stewardship.
Industrial revolution in Great Britain led to emergence of large industrial companies and some
bankruptcies.
In the United States, in 1929 Wall Street crash created a major push for auditing.
1934: Securities and Exchange Commission is established as securities regulator; financial statement
audits became mandatory for listed companies.
→ Auditing as private-sector mechanism to achieve regulatory means (we want to have a separate
institution).
Economic demand for auditing
Risk of false or misleading information due to:
- Biases and motives of the information provider. Where is the line between optimistic and
telling a lie? Not able to judge that information properly, because of your own bias (investor,
seller).
- Remoteness of information.
- Voluminous data.
- Complex exchange transactions.
Auditors are there to generate trust.
Audited financial statements can decrease information risk, increasing:
- F/S (=financial statements) credibility
- F/S usefulness
- F/S value
Dingen moeten dus: credible, usefull en een waarde hebben.
Agency Theory
Agent: firm. Performs services on behalf of principal. Want to have auditors because they want to
know if they worked well; did their job well.
Principal: capital providers. Provides capital to agent. Want to have auditors because they want to
know if there investment is good.
→ information asymmetry and conflicting interests.
Financial statements with information role (investment, potential investors) and stewardship role.
Monitor: auditor.
Auditor issues report to mitigate information asymmetry and conflicting interests; and financial
statements are checked.
,Auditor is appointed.
Form agent to monitor to principal.
What is auditing? Including fundamental concepts
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 for internal control.
Auditing is determining whether recording information properly reflects the economic events that
occurred during the accounting period. → the auditor is responsible for the audit of the financial
statements (and for discovering material misstatements).
Conclusion: accounting is something companies do (make financial statements). Auditing is more
checking of these financial statements.
An audit is a systematic process of objectively (niet volledig mogelijk) obtaining and evaluating
evidence regarding assertions about economic actions and events to ascertain the degree of
correspondence (what management said and rules that are applied) between these assertions and
established criteria and communicating the results to interested users.
Overall objectives of a Financial Statement Audit
1. To obtain reasonable assurance (Look at a large enough number of transactions; we can’t
look at every transaction. When have you achieved 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.
2. To report on the financial statements, and communicate as required by the ISAs
(=International Standards on Auditing; audit process), in accordance with the auditor’s
findings.
Requirements of a Financial Statement Audit
The auditor is required to:
- Comply with relevant ethical requirements, including those pertaining to independence.
- Exercise professional judgement in planning and performing a financial statement audit.
o The application of relevant training, knowledge and experience, within the context
provided by auditing, accounting and ethical standards, in making informed decisions
about the courses of action that are appropriate in the circumstances of the audit
engagement. Certain level of competence.
- Plan and perform an audit with professional scepticism recognizing that circumstances may
exist that cause the financial statements to be materially misstated.
o An attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of
evidence. Mindset of questioning what management tells you.
- Obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level
and thereby enable the auditor to draw reasonable conclusions on which to base the
auditor’s opinion.
o Know what kind of information you required. Sufficiency (quantitative): enough
information. Appropriateness (qualitative): relevant information.
, Quality control
At the engagement level, i.e. a partner’s responsibility:
- Compliance with ethical/independence requirements.
- Compliance with competence requirements.
- Involvement of specialists.
At the audit firm level – overall quality control system:
- Audit methodology and electronic audit file.
- Training of audit staff.
Inherent audit limitations
- Testing and sampling.
- Accounting, internal control system and role of management.
- Audit evidence.
- Audit process permeated by judgement.
→ concept of reasonable rather than absolute assurance.
The audit process
Well defined methodology: a risk-oriented approach based on the scientific cycle
Theory → hypothesis → research → observation → theory etc. = cirkel.
Strategic analysis (organizational business model, external threat analysis) → strategic business risks
→ risk evaluation → process analysis (process maps, internal threat analysis) → process business
risks → risk evaluation → residual risks → implications? → assurance about current conditions.
= trechtervorm. Brede benadering; laatst in het nieuws? Wat verkopen ze?
Audit process model
1. Pre-planning: client acceptance and audit engagement. Waarom niet aannemen? Betaling
mogelijk, reputatieschade, hebben wij de expertise in dit bedrijf? Main question: can we
actually do our appropriately?
Objective: deciding whether to accept a new client or continue with an existing one.
Procedures:
1. Evaluate the client’s background and reasons for the audit.
2. Determine whether auditor is able to meet ethical and competence
requirements.
3. Determine need for other professionals.
4. Communicate with predecessor auditor.
5. Prepare client proposal.
6. Select staff to perform the audit.
7. Obtain an engagement letter.
2. Planning: assessing 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.
Procedures:
1. Perform audit procedures to understand the entity and its environment, including
the entity’s internal control.
2. Assess the risks of material misstatements of the financial statements.
3. Determine materiality.
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