AUDITING THEORY

TOPIC 4: INTRODUCTION TO AUDITING

KEY CONCEPTS

TYPES OF AUDIT
AUDITING
COMPARISON OF DIFFERENT TYPES OF AUDIT
OBJECTIVES
ELEMENTS OF FS AUDIT
VALUE OF FS AUDIT
FINANCIAL STATEMENT
AUDIT GENERAL PRINCIPLES OF AN AUDIT

THEORETICAL FRAMEWORK OF FS AUDIT

INTRODUCTION
TO AUDITING
DEMAND FOR FS AUDIT

AUDIT PROCESS: A
GENERAL APPROACH

AUDIT PROCESS: A
MORE DETAILED
APPROACH

AUDITING

Key Concepts:
a. A systematic process
b. It involves objectively obtaining and evaluating evidence about assertions.
c. It ascertains the degree of correspondence between assertions and established criteria
d. It includes communication of the results to interested users

Types of Audit
NATURE OF ASSERTION OR DATA TYPES OF AUDITOR
a. Financial Statement Audit a. External Audit
b. Operational Audit b. Internal Audit
c. Compliance Audit c. Government Audit

Comparison of the different Types of Audit

FINANCIAL
OPERATIONAL AUDIT COMPLIANCE AUDIT
STATEMENT AUDIT
FS are fairly presented Operations are conducted Activities complied with applicable
ASSERTIONS efficiently and effectively laws, rules, regulations, contracts or
management policy
GAAP or any other Objective set by the Applicable contracts, rules,
SUITABLE CRITERIA identified financial management regulations, laws or management
reporting framework policy
An opinion whether the Report on efficiency and Degree of compliance with
REPORT financial statements are effectiveness. applicable laws, rules, regulations, or
fairly presented management policy
GENERALLY External auditors Internal auditors Government auditors
PERFORMED BY

FINANCIAL STATEMENT AUDIT

Objectives:
 Expression of an opinion  Communication of the results
 Financial statements are taken as a whole
 Reasonable assurance
 In all material respects
 Presence of criteria
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Elements of Financial Statement Audit
A. Three-party relationship
PARTIES RESPONSIBILITIES
AUDITOR  Formation and expression of an opinion on the financial statements
(practitioner)  Compliance with ethical requirements (e.g. independence and competence)
 Determining the scope of audit in accordance with PSAs and other applicable regulations
of professional bodies
MANAGEMENT  Preparation and presentation of the financial statements in accordance with the
AND TCWG  Applicable financial reporting framework ✓ prevention and detection of fraud and error
(responsible  Adoption of implementation adequate accounting and internal control systems
party)
USERS OF FS  Use the audit report which contains the opinion expressed by the auditor
(intended users)

B. Appropriate subject matter – availability of adequate supporting records and documents

C. Suitable criteria – PFRS, GAAP, and other applicable financial reporting framework
D. Sufficient appropriate evidence – concepts discussed in assurance engagements apply to audit engagements
E. Written assurance report or conclusion – audit report

Material BUT NOT Pervasive Material AND Pervasive

Scope Limitation Qualified Disclaimer of Opinion
FS Materially Misstated Qualified Adverse

Assurance provided by the auditor – to enhance the credibility of the financial statements
Reasonable Assurance and the Inherent Limitations of an Audit
a. Use of selective testing
b. Inherent limitations of internal control
c. Fact that most of audit evidence is persuasive rather than conclusive
d. Work undertaken by the auditor to form opinion is permeated by judgment
e. Nature/characteristics of assertions

DEMAND FOR FS AUDIT

A. Management
a. Business Risk
b. Information Risk
FACTORS CONTRIBUTING TO INFORMATION RISK WAYS OF REDUCING INFORMATION RISK
 Voluminous data  Verify the information
 Complexity of transactions  Have the financial statements be audited
 Remoteness of information  Share information risk with the management
 Conflicts of interest between the provider and the users of
information

B. Additional Conditions Creating the need for FS Audit

 Conflict of interest  Remoteness of users
 Expertise  Financial consequence

VALUE OF FS AUDIT
 Audit reduces information risk that may lead to lower cost of capital
 Audit may be used to deter inefficiency and fraud

GENERAL PRINCIPLES OF AN FS AUDIT THEORETICAL FRAMEWORK OF FS AUDIT

CPP PJ SAE VIC BIG T
1. Comply with Code of Ethics 1. Financial date are Verifiable
2. Conduct an audit accordance to PSAs 2. Independence of an auditor
3. Plan and perform an audit with Professional 3. No long-term Conflict between the auditor and client’s
Skepticism management
4. Exercise Professional Judgment 4. Audit Benefits the public
5. Obtain Sufficient Appropriate Evidence 5. Effective Internal control system
6. Consistent Generally accepted accounting principles
7. True in the past, shall continue to hold true in the future

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 AUDIT PROCESS: A GENERAL APPROACH

ENTITY THE AUDITOR THE AUDITOR THE AUDITOR

PREPARES AND PERFORMS AUDIT GATHERS AUDIT EXPRESSES IN
PRESENTS FS PROCEDURES EVIDENCE AUDIT OPINION

1. Entity prepares and presents financial statements

OLD CATEGORIES (TAP)
A. Classes of Transactions and events for the period under Audit (TOCCAC)
 Occurrence – transactions and events have been recorded have occurred and have been recorded
 Completeness – transactions and events that should be recorded, have been recorded
 Cut-off – transactions and events have been included in the correct accounting period
 Accuracy – amounts and other data have been properly recorded appropriately
 Classification – transactions and events have been recorded in the proper accounts
B. Assertions about Account balances at the period end (ACERV)
 Completeness – ALE have been recorded
 Existence – ALEquity interest exist
 Rights and Obligations – the entity holds or controls the rights to ALE of the entity
 Valuation and Allocation – ALE are included in the appropriate amounts
C. Assertions about Presentation and disclosure (POCAC)
 Occurrence and rights and obligations – disclosed events, transactions, and other matters occurred
pertain to the entity
 Completeness – all disclosures have been included
 Accuracy and valuation – financial and other information are disclosed fairly and at appropriate amounts
 Classifications and understanding – financial information is appropriately presented and described

NEW CATEGORIES
A. Transactions and events related disclosures (POCCAC)
 Presentation – properly aggregated or disaggregated
 Occurrence – transactions & events have been recorded or disclosed
 Completeness – all transactions and events that should have been included in the FS have been included
 Cut-off – transactions and events have been included in the correct accounting period
 Accuracy – amounts and other data have been properly measured and described
 Classification – transactions and events have been recorded in the proper accounts
B. Balances and related disclosures (PACER C)
 Presentation – ALE are appropriately aggregated and disaggregated
 Accuracy, Valuation, and allocation – ALE have been included in the financial statement at appropriate
amounts
 Completeness – all ALE have been recorded, and all disclosure have been included in the FS
 Existence – ALEquity interest exist
 Rights and obligations – the entity holds or controls the rights to ALE of the entity
 Classification – ALEquity interest have been recorded in the proper accounts

2. The auditor performs audit procedures

MAJOR AUDIT PROCEDURES
1. Risk Assessment Procedures – to obtain an understanding of the entity and its environment
2. Test of Controls – to evaluate the operating effectiveness of controls in preventing, or detecting and correcting,
material misstatements at the assertion level
3. Substantive Procedures – to detect material misstatements at the assertion level
i. Test of Details (of classes of transactions, accounts balances, and disclosures)
ii. Substantive Analytical Procedures

SPECIAL AUDIT PROCEDURES

1. Inspection of Records or Documents – consists of examining records or documents
2. Inspection of Tangible Assets – consists of physical examination of the assets.
3. Observation – consists of looking at a process or procedure being performed by others
4. Inquiry (internal source) – consists of seeking information of knowledgeable persons, both financial and non-financial
5. Confirmation (external source) – process of obtaining a representation of information
6. Recalculation – consists of checking the mathematical accuracy of documents or récords
7. Reperformance – involves the auditor's independent execution of procedures or controls
8. Analytical Procedures – Procedures consist of evaluations of financial information made by a study of plausible relationships
among both financial and non-financial data.
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3. The auditor gathers audit evidence – obtains sufficient appropriate audit evidence to draw reasonable conclusions
to base the audit opinion

4. The auditor expresses an audit opinion

a. Unmodified Opinion
b. Modified Opinion
i. Qualified and Adverse
ii. Qualified and Disclaimer of Opinion

AUDIT PROCESS: A MORE DETAILED APPROACH

PRELIMINARY ENGAGEMENT ACTIVITIES Decision to accept/not the engagement

PLANNING AN AUDIT OF FS Development of the audit overall strategy

STUDY AND EVALUATION OF INTERNAL CONTROL Assessment of internal control

EVIDENCE – GATHERING (SUBSTANTIVE TESTING) Gathering sufficient appropriate evidence

COMPLETING THE AUDIT Formed overall opinion (review phase)

ISSUANCE OF THE AUDIT REPORT Issues/communication of the audit report

POST – AUDIT RESPONSIBILITIES Identifying areas for improvement