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Materi 1 - Overview

The document discusses key concepts in auditing. It defines auditing as independently evaluating evidence to determine how well a company's financial information adheres to established standards. The auditor's role is to complete a quality audit on time, add value to clients, and issue management letters and early warnings. Financial statements include the balance sheet, income statement, cash flow statement, changes in equity, and notes. The auditor evaluates financial statement assertions regarding existence, completeness, rights/obligations, valuation, and presentation. The auditor can issue unqualified, qualified, adverse, or disclaimer audit opinions depending on issues found. Materiality considers whether misstatements would affect financial statement users' decisions.

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Vivin Ivana Pasaribu
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32 views16 pages

Materi 1 - Overview

The document discusses key concepts in auditing. It defines auditing as independently evaluating evidence to determine how well a company's financial information adheres to established standards. The auditor's role is to complete a quality audit on time, add value to clients, and issue management letters and early warnings. Financial statements include the balance sheet, income statement, cash flow statement, changes in equity, and notes. The auditor evaluates financial statement assertions regarding existence, completeness, rights/obligations, valuation, and presentation. The auditor can issue unqualified, qualified, adverse, or disclaimer audit opinions depending on issues found. Materiality considers whether misstatements would affect financial statement users' decisions.

Uploaded by

Vivin Ivana Pasaribu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 16

Audit Concepts and

Fundamentals
BASIC CONCEPTS
What is auditing?
“Auditing is the act of independently
accumulating and evaluating
evidence of an economic entity for
the purpose of the degree of
correspondence between
information produced and
established criteria (e.g. financial
accounting standards)”

January 7, 2023 2
BASIC CONCEPTS OF AN AUDIT

What does that mean?

• Collect evidence
• Company’s financial statements
• Testing
• Communicate our findings to users of
FS
• Audit Report

January 7, 2023 3
BASIC CONCEPTS OF AN AUDIT

What is your role as an auditor?

• Complete a quality audit and meet the deadline


• Give value to our clients
• Management Letter
• Early Warnings on Emerging Issues

January 7, 2023 4
BASIC CONCEPTS OF AN AUDIT

What are financial statements?


• Statement of financial position (Balance Sheet)
• Statement of profit or loss and other
comprehensive income (Income statement)
• Cash flow statement
• Changes in Equity
• Notes to the Financial Statements

January 7, 2023 5
BASIC CONCEPTS OF AN AUDIT

Financial Statements and Basic


Principles of Accounting
• The Historical Cost and Accrual Principle
• The Revenue Recognition Principle
• The Matching Principle
• The Consistency Principle
• The Full Disclosure Principle
• The Objectivity Principle

January 7, 2023 6
BASIC CONCEPTS OF AN AUDIT

Qualitative Characteristics of
Financial Statements
A. Understandability
B. Relevance
C. Reliability:
A. faithful representation, substance over the form,
neutrality, prudence, and completeness.
D. Comparability

January 7, 2023 7
BASIC CONCEPTS OF AN AUDIT

Financial Statement Assertions


• Financial Statement Assertions are
representations by management, implicit or
otherwise, that are embodied in the financial
statements.
• There are five categories of financial statement
assertions:
• Existence or occurrence
• Completeness
• Rights and obligations
• Valuation or measurement
• Presentation and disclosure

January 7, 2023 8
BASIC CONCEPTS OF AN AUDIT

Financial Statement Assertions


•It is the auditor’s responsibility to determine
whether the financial statement assertions are
justified.

•In other words, the auditor needs to evaluate the


potential for material misstatements in the
financial statements relating to each assertion.

January 7, 2023 9
BASIC CONCEPTS OF AN AUDIT

Existence or occurrence
• An asset or liability exists at a given date, or a
transaction or event that pertains to the entity
took place during the period.
• Examples:
• Sales represent exchanges of goods that
actually took place (e.g., sales recorded
actually occurred).
• Receivables represent amounts owed to the
entity (e.g., recorded receivables are for
completed sales).

January 7, 2023 10
BASIC CONCEPTS OF AN AUDIT

Completeness
•There are no unrecorded assets, liabilities,
transactions or events, or undisclosed items.
•Examples:
–All sales of goods are recorded in the income
statement (e.g., there are no unrecorded
sales transactions).
–All amounts owed to the entity are recorded
as receivables (e.g., there are no unrecorded
receivables).

January 7, 2023 11
BASIC CONCEPTS OF AN AUDIT

Rights and obligations


• An asset or liability pertains to the entity at a
given date.
• Examples:
• The entity has right to receive the amount
represented by the receivable (e.g., receivables
have not been sold or factored).
• The trade accounts payable represents an
obligation of the company.

January 7, 2023 12
BASIC CONCEPTS OF AN AUDIT

Valuation or measurement
• An asset or liability is recorded at an appropriate
carrying value, a transaction or event is recorded at
the proper amount, and revenue or expenses are
allocated to the proper period.
• Example:
• Receivables are recorded as the amount owed to
the entity (e.g., post-balance date sales are
recorded as revenue in the subsequent period), and
are stated at net realizable value, i.e. the allowance
for doubtful accounts is adequate but not
excessive.

January 7, 2023 13
BASIC CONCEPTS OF AN AUDIT

Presentation and disclosure


•An item is disclosed, classified and described in
accordance with the financial reporting
framework.

•Example:
–Receivables collectible within one year are
classified as current receivables.

January 7, 2023 14
BASIC CONCEPTS OF AN AUDIT

Types of Audit Opinion


Unqualified Qualified
Opinion Opinion

Adverse Disclaimer of
Opinion Opinion

January 7, 2023 15
BASIC CONCEPTS OF AN AUDIT

What is Materiality?
• A misstatement in the financial
statements is material if knowledge of
it would affect the decisions of a
reasonable user of the financial
statements

January 7, 2023 16

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