Chapter 1: international auditing overview
Auditing has there always been. In anchient history you also had accountants and has evolved over
the years. New information was covered like double entry errors in 1494.
Investors/ creditors have different objectives than the management.
Accountant gives Audit opinion to give the investors and creditors confidence in the financial
statement. Not materially misstated.
Auditing: lend credibility to the financial statement. ( management responsible for it, auditor
responsible for credibility)
Expectation by investors: more information than just the financial statement. matters of
corporate governance as well all concerns of the auditor.
Expertise is needed to perform the auditing function expert in deciding what evidence is
necessary to satisfy the assertions of the financial statements.
Interpret evidence and provide reasonable assurance that the financial statements are fairly
presented.
Accounting standards
International Financial Reporting standards (IFRS) former International Accounting standards (IAS)
are set by the International Accounting Standards Board (IASB).
International Standard same credibility as domestic audit opinion.
Developing countries need foreign investment investor needs to have confidence in the
accounting and audit standard. (comparability is higher when using an International Standard.
Iaasb auditing standards.
Audit
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.
Goal: communicating the results to interested users. The audit is conducted with the aim of
expressing an informed and credible opinion in a written report.
Give credibility to the financial statements.
Auditor Attestation: communication auditors opinion =audit report
An audit is an independent, objective and expert examination and evaluation of evidence.
1. Systematic approach, it follows a plan, the audit plan. It must be planned and structured
so every important evidence can be examined and analyzed.
2. Conducted objectively: auditors are fair, don’t allow prejudice or bias to override objective.
3. Auditor obtains and evaluates evidence: assesses reliability and sufficiency of information.
a. Evaluate accounting systems + internal control to determine nature, extent, and
timing of other audit procedures. +
b. Carrying out other tests, inquiries and verification procedures
4. Obtained and evaluated evidence concerns assertions about economic actions and event. .
The basis of evidence-gathering objectives, what the evidence must prove, are the assertions
1
, of management. (for example all assets reported on balance sheet actually exist at balance
sheet date, are real)
5. Auditor ascertains the degree of correspondence between assertions and established
criteria. (audit program test assertions by physical evidence, auditor examines presentation
and disclosure if accounts are describes in accordance with applicable financial reporting
framework.
Requirements financial statement audit
The auditor is required to comply with relevant ethical requirements, including those pertaining to
independence, relating to financial statement audit engagements The auditor shall plan and perform
an audit with professional skepticism recognizing that circumstances may exist that cause the
financial statements to be materially misstated. 21 The auditor shall exercise professional
judgement in planning and performing an audit of financial statements. To obtain reasonable
assurance, the auditor must 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.
Materiality is applied by the auditor in planning and performing the audit, and in evaluating the
effect of identified misstatements on the audit and the financial statements.
Misstatements are material if they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements.
Types of audit
Audits of financial statements independent auditor
examine financial statements to determine if they give a true and fair view or fairly present the
financial statements in conformity with specified criteria. (IFRS, GAAP)
Operational audits Internal auditor
a study of a specific unit of an organization for the purpose of measuring its performance.
Operational audits review all or part of the organization’s operating procedures to evaluate
effectiveness and efficiency of the operation.
Effectiveness is a measure of whether an organization achieves its goals and objectives.
Efficiency shows how well an organization uses its resources to achieve its goals.
Compliance audits government auditors
Review of an organization’s procedures to determine whether the organization is following specific
procedures, rules or regulations set out by some higher authority. A compliance audit measures the
compliance of an entity with established criteria. The performance of a compliance audit is
dependent upon the existence of verifiable data and of recognized criteria or standards, such as
established laws and regulations, or an organization’s policies and procedures.
Similarities: they both examine the procedures. All audit. Tend to report on it. Reporting is
important. This way you give your assurance.
Difference: operational audit is about money, compliance is about non-monetary stuff.
Have different auditors: operational: internal auditor. Compliance: governmental auditor.
Users are different, criteria are different, reports are different as well. Need specific auditors for it.
2
,Audit objectives based on management assertions
Auditors responsibility to verify whether the financial statements are true and fair validate
management assertions.
Identify audit objectives for the management assertions. Then test for evidence as proof.
Determine the nature, amount and timing of the audit procedures to be carried out.
Perform risk analysis for each audit objective determine susceptibility of account balances and
transactions to misstatement.
Exactness with which he will perform the audit.
Management assertions
Assertions Categorised
According to ISA 500, financial statement assertions are assertions by management,
explicit or otherwise, that are embodied in the financial statements. They can be
categorised as follows:29
(1) Assertions about classes of transactions and events for the period under audit
■ Occurrence – transaction and events that have been recorded have occurred and
pertain to the entity. For example, management asserts that a recorded sales transaction was
actually made during the year under audit.
■ Completeness – all transactions and events that should have been recorded have been
recorded. For example, management asserts that all expense transactions are recorded,
none were excluded.
■ Accuracy – amounts and other data relating to recorded transactions and events have
been recorded appropriately. For example, management asserts that sales invoices
were properly extended and the total amounts that were thus calculated were input
into the system exactly.
■ Cut-off – transactions and events have been recorded in the correct accounting period.
For example, management asserts that expenses for the period are recorded in that
period and not in the next accounting period.
■ Classification – transactions and events have been recorded in the proper accounts.
For example, management asserts that expenses are not recorded as assets.
(2) Assertions about account balances at the period end
■ Existence – assets, liabilities and equity interests exist. For example, management asserts
that inventory in the amount given exists, ready for sale, at the balance sheet date.
Rights and obligations – the entity holds or controls the rights to assets, and liabilities
are the obligations of the entity. For example, management asserts that the company
has the legal rights to ownership of the equipment they use and that they have an obligation to pay
the notes that finance the equipment.
■ Completeness – all assets, liabilities and equity interests that should have been recorded
have been recorded. For example, management asserts that all liabilities are recorded
and included in the financial statements, that no liabilities were ‘off the books’.
■ Valuation and allocation – assets, liabilities, and equity interests are included in the
financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded. For example, management asserts that their
accounts receivable are stated at face value, less an allowance for doubtful accounts.
(3) Assertions about presentation and disclosure
■ Occurrence and rights and obligations – disclosed events, transactions, and other
3
, matters have occurred and pertain to the entity. For example, management asserts that
events that did not occur have not been included in the disclosures.
■ Completeness – all disclosures that should have been included in the financial statements have
been included. For example, management asserts that all disclosures that
are required by IFRS are made.
■ Classification and understandability – financial information is appropriately presented and
described, and disclosures are clearly expressed. For example, management
asserts that all long-term liabilities listed on the balance sheet mature after one operating cycle or
one year and that any special conditions pertaining to the liabilities are
clearly disclosed.
■ Accuracy and valuation – financial and other information are disclosed fairly and at
appropriate amounts. F or example, management asserts that account balances are not materially
misstated.
Audit process model
1. Client acceptance
2. Planning
3. Testing & evidence
4. Evaluation & reporting
4
