Auditing and assurance exam August 2015
Chapter 1; Auditing and Assurance Services
- More companies than ever try to quantify their sustainability and CSR efforts into
measurable outputs
- Clarified the sections on managements financial statement assertions
- Relationship between a company’s internal control activities and the relevant
financial statement assertions
- Importance of professional skepticism and an auditors professional judgement
Business risk = the risk that an entity will fail to meet its objectives
Four environmental conditions increase user demand for relevant, reliable information:
Complexity
Remoteness – remoted by time and distance
Time-sensitivity – making decisions more rapidly
Consequences – Enron case life savings from $90 to $0, 90 in a year
Information risk = the probability that the information circulated by a company will be
false or misleading
Auditing = a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events that ascertain the degree of
correspondence between the assertions and established criteria and communicating the
results to interested users.
Assurance services = independent professional service that improve the quality of
information, or its context, for decision makers. Major elements:
- Independence – Keeping integrity and objectivity
- Professional services – judgment based on education
- Improving the quality of information or its context – assuring users about the
reliability and relevance of information
- For decision makers -
Attestation engagement = practitioner is engaged to issue a report on subject matter.
- Financial forecasts and projections
- An examination of an entity’s internal control over financial reporting
- Compliance attestation (debt covenants compliance)
Assurance services
Includes an even broader set of information, including non-financials
Attestation services
Expressing an opinion on any type of information or subject matter
Auditing services
Expressing an opinion on financial statements
MANAGEMENT’S FINANCIAL STATEMENT ASSERTIONS
,Existence or occurrence
(Existence) Asserts that each of the balance sheet and income statement balances
actually exist.
(Occurrence) Asserts that each of the income statement events and transactions actually
did occur.
Occurrence relates to events, transactions, presentations and footnote disclosures
(column 1 + 4)
Existence relates to account balances (column 3)
Rights and obligations
(Rights) Asserts that they have property rights for all amounts reported as assets on the
balance sheet.
(Obligation) That the amounts reported as liabilities represent the company’s own
obligation.
In simpler terms, to obtain evidence that the assets are really owned by and the liabilities
are really owed by the company being audited.
Completeness (completeness, cutoff)
Asserts that all transactions, events, assets, liabilities, and equities that should have
been recorded have been recorded.
Cutof
Special classification of completeness. Refers to accounting for revenue, expense, and
other transactions in the proper period
Valuation and allocation (accuracy, valuation)
Asserts that the transactions and events have been recorded accurately and that the
assets, liabilities, and equities listed on the balance sheet have been valued in
accordance with GAAP.
Valuation and allocation – to determine whether proper values have been assigned to
assets, liabilities, and equities
,Presentation and disclosure (classification, understandability)
Assert that all transactions and events have been presented correctly in accordance with
GAAP and that all relevant information has been disclosed to financial statement users.
(Classification) transactions must be classified in the correct accounts example
Worldcom – capitalizing leased phones – nobody can use my phone so it’s an asset????
(Understandability) Disclosure notes should be relevant, reliable and understandable to
financial statement users – example Enron, they could generate incredibly high revenues
because no-one understood their business.
In essence, the secret to writing and reviewing a list of audit procedures is to ask:
- Which assertions does this procedure evidence about?
- Does the list of procedures (the audit plan) cover all the assertions?
Professional skepticism
Having an attitude that includes a questioning mind and a critical assessment of
evidence. It is an auditor’s responsibility to not accept management assertions without
corroboration.
Internal auditing – objective
Internal auditing is an independent, objective assurance and consulting activity designed
to add value and improve the company’s operations. It helps the organization reach its
objectives and improve its effectiveness of risk management.
Internal auditing work include:
- Reviews of internal control systems
- Compliance with laws and regulations
- Appraisals of the economy and efficiency of operations
- Reviews of effectiveness in achieving program results in comparison to objectives
and goals
Governmental auditing
Audit the effective use of public funds and other resources.
Chapter 2; Professional standards
Generally accepted auditing standards (GAAS)
Are auditing standards that identify necessary qualifications and characteristics of
auditors and guide the conduct of the audit examination. The purpose of GAAS is to meet
the objectives of an audit examination:
- To obtain reasonable assurance about whether the financial statements as a
whole are free of material misstatements
- To issue a report on the financial statements
Generally accepted auditing procedures (GAAP)
GAAP are the particular and specialized actions that auditors take to obtain evidence in a
specific audit engagement. On the other hand GAAS, are quality guides to the audit that
apply to all audits.
Auditors are responsible for:
1. Having appropriate competence and capabilities to perform the audit
2. Complying with relevant ethical requirements
3. Maintaining professional skepticism and exercising professional judgement,
throughout the planning and performance of the audit
STAGES OF AN AUDIT
, Obtain (or retain) engagement
Most of the issues related to responsibilities are addressed before a firm accepts a
prospective client.
Competence and capabilities:
Begin with education in accounting as auditors hold themselves out as experts in
accounting standards, financial reporting, and auditing.
Experience, on the-job-training.
Independence and due care:
Independence in fact auditors are expected to be unbiased and impartial with
respect to the financial statements and other information they audit.
Independence in appearance relates to others perceptions of auditor’s
independence (not owning stocks in firm you audit)
Due care
Reflects a level of performance that would be exercised by reasonable auditors in similar
circumstances.
Professional skepticism and professional judgement
Critical assessment of audit evidence
Fundamental performance: PERFORMANCE
The performance principle contains 5 elements:
1. Reasonable assurance
2. Planning and supervision
3. Materiality
4. Risk assessment
5. Audit evidence
Reasonable assurance
Auditors should provide a high level of assurance regarding their work, through
considering various risks relating to the likelihood of material misstatements in the
financial statements and performing audit procedures to control the overall risk to an
acceptable level. 100% assurance not possible due to the following reasons:
- Auditors are not infallible, audit teams will make mistakes
- Certain aspects of audit process are subject to management judgements and
estimates (useful life of assets)
- Nature of many audit procedures us such that they cannot always be relied on to
detect misstatements.
- Balance benefit and cost.
Planning and supervision
