LECTURE 1 - Chapter 1 - An Introduction To Assurance and Financial Statement Auditing
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Thảo Nhi Đinh TrầnLECTURE 1 - Chapter 1 - An Introduction To Assurance and Financial Statement Auditing
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Thảo Nhi Đinh TrầnLECTURE 1:
AN INTRODUCTION TO ASSURANCE AND
FINANCIAL STATEMENT AUDITING
Instructor:
Le Phuong Thao, MBA
School of Business
International University
Objective
• Understand the role of auditing
• Understand the relationships among auditing, attestation, and assurance
services
• Know the basic definition and three fundamental concepts of a financial
statement audit.
• Be able to describe the basic financial statement auditing process and the
phases
• Be familiar with a five-component model of business processes (or cycles)
• Understand the management’s and auditor’s responsibility for preparing and
auditing financial statements .
The Role of Auditing
The Role of Auditing
The Role of Auditing
• required by law
• solving Principle – Agent conflict
• cost of and access to capital
• operating efficiency and effectiveness
• credibility of performance indicators
• properly accounting for complex transactions
• running the company with good information
Beneficiaries of Audits
Distinguish between auditing and
accounting
Accounting is the recording, classifying,
and summarizing of economic events
for the purpose of providing financial
information used in decision making.
Auditing is determining whether
recorded information properly
reflects the economic events that
occurred during the accounting period.
Auditing Defined
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.
American Accounting Association, Committee on Basic Auditing Concepts, A Statement of Basic Auditing Concepts
(Sarasota, FL: American Accounting Association, 1973)
Types of Other Audit, Attest, and
Assurance Services
• Internal Control Audits:
to review , report , and provide opinion on internal control system of
the entity being audited
• Compliance Audits:
determines whether rules, policies, laws, covenants, or government
regulations are followed by the entity being audited
• Operational Audits:
involves a systematic review of part or all of an organization’s
activities to evaluate whether resources are being used effectively and
efficiently
to assess performance, identify areas for improvement, and develop
recommendations
Types of Auditors
• External Auditors - independent auditors or certified public
accountants (CPAs):
• they are not employees of the entity being audited
• audit financial statements for publicly traded and private companies,
partnerships, municipalities, individuals, and other types
• conduct compliance, operational, and forensic audits for such entities
• Internal Auditors
• they are employees of the entity being audited
• conduct financial, internal control, compliance, operational, and forensic
audits within their organizations
• assist the external auditors with the annual financial statement audit
• Government Auditors
are employed by federal, state, and local agencies
Government Accountability Office conduct audits of activities, financial
transactions, and accounts of the federal government
Internal Revenue Service audit the books and records of organizations and
individuals to determine their federal tax liability
Financial Statements Audit
• Audit of the financial statements of an entity
• Covers the balance sheet and related statements of income,
retained earnings and cash flows
• Goal is to determine if prepared in conformity with
regulations
• Performed by CPAs
• Users include management, investors, bankers, creditors,
financial analysts, government agencies
Fundamental Concepts in Conducting a
Financial Statement Audit
Materiality
Audit
Risk Evidence
Audit risk
• Audit risk is the risk that the auditor may
unknowingly fail to appropriately modify his or her
opinion on financial statements that are materially
misstated.
the audit provides only reasonable assurance that the
financial statements do not contain material misstatements.
reasonable assurance has been defined to mean a high but
not absolute level of assurance
Materiality
• Materiality is the magnitude of an omission or
misstatement of accounting information that, in the
light of surrounding circumstances, makes it probable
that the judgment of a reasonable person relying on
the information would have been changed or
influenced by the omission or misstatement
Evidence
• Audit evidence consists of the underlying
accounting data and any additional information
available to the auditor, whether originating from the
client or externally.
Relevance refers to whether the evidence relates to the
specific management assertion being tested.
Reliability refers to whether a particular type of evidence be
relied upon to signal the true state of the account balance or
assertion being examined
The Financial Statement Audit Process
The Financial Statement Audit Process
The Auditing Process
• Management produces financial statements
• Auditor gathers and evaluates evidence
Many forms of evidence; anything the auditor uses
• Auditor uses established standards to compare
evidence to the financial statements
Looks for correspondence between what is
presented and the underlying evidence
Uses processes described/required in auditing
standards.
• Auditor issues report
Business as the Primary Context
of Auditing
• The nature of a client’s business can have a dramatic
effect on the nature of the auditor’s work and work
environment
the auditors’ primary concern is the industry or
business of his or her audit client
Auditors often rely
on this process
model to divide
the audit of a
business’s
financial
statements into
manageable
pieces.
Management Assertions
• Management is primarily responsible for the preparation
and fairness of the company’s financial statements
• Management assertions are the assertions (claims) by
management about the accuracy of the financial
statement components.
• An auditor typically uses these assertions to help guide
the type of audit evidence gathered
Management Assertions
Auditor’s responsibility
• The auditor has a responsibility to plan and perform the
audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement,
whether caused by error or fraud.
(Auditing standards (AU 110.02)
Publics Accounting Firms
Assess Risk
• Auditor considers
▫ Fraud risk; includes asking management about fraud risk
▫ Risk of material misstatement in financial statements
▫ Material weakness exists in internal control system
• Risks in the audit risk model
▫ Overall audit risk
▫ Inherent risk and control risk – together they are the risk
of material misstatement
• Auditor makes a judgment and sets planning materiality
threshold
Audit Planning
• Plan
• Nature, Timing, Extent
• Decide on
• Controls to test
• Accounts to test
• Sampling plan
• Procedures
• Produce audit plan
Auditing Standards
• Auditing standards serve as a guideline for and a
measure of the quality of the auditor’s performance.
• Auditing standards help ensure that financial statement
audits are conducted in a thorough and systematic way
that produces reliable conclusions.
General Standards
1. The auditor must have adequate technical training and
proficiency to perform the audit.
2. The auditor must maintain independence in mental
attitude in all matters relating to the audit.
3. The auditor must exercise due professional care in the
performance of the audit and the preparation of the
report.
Standards of Field Work
1. The auditor must adequately plan the work and must properly
supervise any assistants.
2. The auditor must obtain a sufficient understanding of the
entity and its environment, including its internal control, to
assess the risk of material misstatement of the financial
statements whether due to error or fraud, and to design the
nature, timing, and extent of further audit procedures.
3. The auditor must obtain sufficient appropriate audit
evidence by performing audit procedures to afford a
reasonable basis for an opinion regarding the financial
statements under audit.
Standards of Reporting
1. The auditor must state in the auditor’s report whether the
financial statements are presented in accordance with
generally accepted accounting principles (GAAP).
2. The auditor must identify in the auditor’s report those
circumstances in which such principles have not been
consistently observed in the current period in relation to the
preceding period.
3. When the auditor determines that informative disclosures
are not reasonably adequate, the auditor must so state in the
auditor’s report.
Standards of Reporting
4. The auditor must either express an opinion regarding the
financial statements, taken as a whole, or state that an
opinion cannot be expressed, in the auditor’s report.
When the auditor cannot express an overall opinion, the
auditor should state the reasons therefor in the auditor’s
report.
In all cases where an auditor’s name is associated with
financial statements, the auditor should clearly indicate the
character of the auditor’s work, if any, and the degree of
responsibility the auditor is taking, in the auditor’s report
End of Lecture 1
