Lecture Auditing and assurance services (Second international edition) Chapter 1 An introduction to assurance and financial statement auditing

In this chapter you will understand why studying auditing can be valuable to you and why it is different from studying accounting, be able to explain why there is a demand for auditing and assurance, know the basic definition of a financial statement audit,...

An Introduction to Assurance and

Financial Statement Auditing

Chapter 1

The Study of Auditing

Analytical and logical skills

Much more conceptual in

nature

Rules, techniques and

computations to

prepare and analyse financial

information

The study of auditing is different from other

accounting courses that you have taken because …

The Demand for Auditing and Assurance

The development of the corporate form of business and the expanding world economy over the last 200 years have given rise to an

explosion in the demand for assurance

provided by auditors.

Principals and Agents

Managers

Stockholder s

A public company is a company that sells its stocks or bonds to the public, giving the public a valid interest in the proper use, or stewardship, over the company’s resources

The Role of Auditing

Auditing and Assurance Defined

Assurance

A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results

to interested users

Auditing

Auditing and Assurance Defined

An engagement in which a practitioner

expresses a conclusion designed to enhance the degree of confidence of

the intended users other than the responsible party about the outcome of

the evaluation or measurement of a subject matter against criteria

Fundamental Concepts in Conducting a

Financial Statement Audit

Audit Risk

Materiality

Evidence

Overview of the Financial Statement

Audit Process

Audit Risk

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial

statements are materially misstated

The auditor’s report with

an unmodified opinion

states that the audit

provides only reasonable

assurance that the

financial statements do

not contain material

misstatements

Reasonable assurance

implies some risk that a material misstatement could be present in the financial statements and the auditor will fail to

detect it

Misstatements, including omissions, are

considered to be material if they,

individually or in the aggregate, could

reasonably be expected to influence the

economic decisions of users taken on the

basis of the financial statements

Judgements about materiality are made in light of surrounding circumstances , and are affected by the size or nature of a misstatement, or a combination of both.

Evidence Regarding Management

Assertions

Relevance – Is the

information related to

the specific assertion

being tested?

Reliability – Can the

information be relied upon

to signal the true state of the specific assertion being

tested?

Evidence that assists the auditor in evaluating management’s financial statement assertions consists of the underlying accounting data and any additional information available to the auditor, whether originating from the client or externally.

Sampling: Inferences Based on Limited

Observations

Auditors use (1) their knowledge about the transactions and/or (2) a sampling approach to examine the transactions.

It would be too costly for the auditor

to examine every

transaction.

Major Phases of the Audit

•Client acceptance/continuance and establishing an understanding with the client

•Preliminary engagement activities

•Plan the audit

•Consider internal control

•Audit business processes and related account (e.g revenue generation)

•Complete the audit

•Evaluate results and issue audit report

Issue the Audit Report

The auditor’s report is the main product

or output of the audit

The audit report with an unmodified

(‘clean’) opinion is the most common

type of report issued

Issue the Audit Report

The title line of the audit report includes the word

‘Independent,’ and usually, the report is addressed

to the stockholders of the company

The audit report includes an introductory paragraph, a

management’s responsibility paragraph, an

auditor’s responsibility paragraph, and an auditor’s

opinion paragraph.

The audit report is signed and dated.

Adverse Qualified

Unmodified

Issue the Audit Report

The auditor may issue a modified opinion

Suppose a client’s financial statements contain

a misstatement that the auditor considers material and the client refuses to correct the misstatement The auditor will likely qualify

the opinion, explaining that the financial statements are fairly stated except for the misstatement identified by the auditor.

Issue the Audit Report

The auditor may issue an adverse opinion

Suppose a client’s financial statements contain

a material misstatement and the auditor considers the significance of the effect on the

financial statements of the material misstatement pervasive Given such a

situation, the auditor will issue an adverse

opinion, indicating that the financial statements are not fairly stated and should

not be relied upon

Auditing Demands Logic, Reasoning,

and Resourcefulness

An auditor needs to understand more than just the accounting concepts and techniques.

Auditing is a fundamentally logical process of

thinking and reasoning – so use your common sense and reasoning skills!

As you learn new auditing concepts, take some time to understand the underlying logic

and how the concepts interrelate with other

concepts.

Being a good auditor sometimes requires

End of Chapter 1