Audit Note

Auditing Concept And Standards

• Explain The Definition of Audit?

Answer

Auditing is 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.
Systematic Process:
This means that auditing follows an organized and structured method. It involves clear steps and a logical approach to
reviewing and analyzing information.
Objectively Obtaining and Evaluating Evidence:
Auditors collect facts and data (evidence) to support their audit. They must be impartial and unbiased while doing this,
meaning their judgment shouldn't be influenced by personal feelings or external pressure
Assertions about Economic Actions and Events:
Assertions are claims made by the company being audited about its financial activities. The auditor reviews these claims to
check if they are truthful and aligned with reality.
The Degree of Correspondence between Assertions and Established Criteria:
This refers to how closely the company’s financial claims (assertions) match the accepted standards or rules, like GAAP. The
auditor compares the company's reports with these criteria to determine their accuracy.
Communicating Results to Interested Users:
At last auditors provide a report. This report communicates the auditor's findings and opinions to people who need the
information, such as investors, regulators, or company management.

• Why do We need Audit?

Answer

We need audits to ensure that financial and operational information is accurate and trustworthy. Here’s why audits are
important, explained through different types of audits:
1. Discovery: These audits are done when there’s a suspicion that something might be wrong, like an error or fraud. The goal is
to find out if the problem really exists.
2. Investigative Audits: Once it's clear that a problem exists, this audit digs deeper to understand what happened and get all
the facts.
3. Risk Assessment Audits: These audits assess how much risk (like financial loss or legal trouble) a company faces, and how
big that risk might be.
4. Validation Audits: These audits are done to double-check and confirm findings, making sure that something that was
reported is truly accurate.
Audits help ensure everything is running smoothly and any issues are identified and fixed.

• What are the type of Audits?

Answer

Audit of Financial Statement - A financial audit is an analysis of the fairness of the information contained within an entity's
financial statements. It is conducted by a CPA firm, which is independent of the entity under review. This is the most
commonly conducted type of audit, and is required for all publicly-held companies
Compliance Audit - A compliance audit is an examination of the policies and procedures of an entity or department, to see if
it is in compliance with internal or regulatory standards. This audit is most commonly used in regulated industries or
educational institutions.
Contract Audits- Examines contracts to ensure that terms are being met, costs are accurate, and the parties are complying
with the agreement's conditions. This is often done to check billing, pricing, and performance on contractual obligations.
Federal and State Audits- These audits are conducted by government agencies to ensure a company or organization is
complying with laws, regulations, and reporting requirements set by federal or state governments.
Policies and Procedures Audit- This audit reviews whether an organization is following its own internal rules, policies, and
procedures, ensuring everything is in order and consistent.
Operational Audit - An operational audit is a detailed analysis of the goals, planning processes, procedures, and results of the
operations of a business. The audit may be conducted internally or by an external entity. The intended result is an evaluation of
operations, likely with recommendations for improvement.
Effectiveness Audit: This type of audit measures how well a company or department is achieving its goals and objectives,
determining if the processes and strategies are working as intended.
Efficiency Audit: This audit evaluates whether a company is using its resources (time, money, staff) in the best possible way,
without waste, to achieve its objectives.

• What is the relationship between Audits and System Analyses ?

Answer: The relationship between audits and system analyses can be understood like this:
Audits
Audits generally focus on a broad range of financial activities within a company, covering areas like
financial reporting. They aim to ensure that the company's financial records are accurate and that there
are no financial losses or risks related to the company' s control systems.

System Analyses

System Analyses on the other hand, are a specific type of audit that looks closely at
compliance. They mainly focus on property, contracts, capital assets, and real estate. These analyses
also have a financial impact but are nar rower in scope compared to regular audits.

In simpler terms, a System Analysis is essentially an audit that specifically looks at how an organization
controls and manages its property and assets. The overall ideas of regular audits also apply to syste m
analyses.

• What are the code of professional ethics?

Answer: Core Principles of Professional Ethics

Independence, Integrity, and Objectivity : Auditors must be honest and impartial in their work. This means
they should not let personal interests or relationships influence their judgment, especially when
managing property.

General and Technical Standards : Auditors are expected to follow establi shed rules and guidelines in
their profession. They should always seek to enhance their skills and the quality of their work.

Client Responsibilities: Auditors should treat their clients fairly and communicate openly. They need to
prioritize the clients' needs while also considering their obligations to the public.

Responsibilities to Colleagues : Auditors should work well with their peers and promote a positive
professional environment. Auditors should be willing to work together, share knowledge, and sup port one
another. This collaboration helps improve the quality of work and enhances the profession as a whole.

Enhancing the Profession: Auditors should act in ways that improve the public's view of the profession
and its ability to serve.

Legal Responsibilities of Auditors

1.Legal Liability: In today's world, auditors should expect that their decisions and actions will be closely
examined. This means that no matter what they do whether they think it's right or wrong people might
challenge their work. I f there are issues with an audit, the auditor may find themselves facing legal
questions in court. This could happen if clients, investors, or other parties feel harmed by the auditor's
work.If a court finds that the auditor acted improperly or negligently , they could be required to pay
substantial damages. This means they might have to compensate the affected parties for any losses
caused by their actions.
 2.Privity of Contract is a relationship between two or more parties that creates a contractual duty. In an
auditing context, the auditor and client have a privity or contractual relationship that is usually
established by a contract called an engagement letter. Usually, however, third parties such as investors
or creditors are not parties to the contract and are said to have a nonprivity relationship.

3.Due Professional Care : Due professional care means that auditors must perform their tasks carefully
and responsibly. They should meet the quality standards expected in their profession. This helps ensure
accurate and reliable audits.

4.Negligence : Negligence occurs when an auditor does not perform their work with the care and skill
expected of a competent auditor. Essentially, it means they did not do their job properly.

5.Gross negligence : This is a more serious level of negligence. Gross negligence involves actions that
are extremely careless or reckless, indicating that the auditor knew their actions were wrong but chose
to proceed anyway. Gross negligence can lead to harsher legal consequences tha n simple negligence. If
a client or third party suffers harm due to an auditor’s gross negligence, they may have a stronger case
for legal action.

• What are the role of auditing ?/ what are the factors o f demand for auditing?

Answer: The Role of Auditing/ The demand for auditing is a result of four underlying factors:

Complexity of the System : Businesses and institutions have complicated operations and many
transactions. This complexity can make it hard to accurately record and track financial acti vities.

Physical Remoteness: Sometimes, the records or operations are located far from where decisions are
made. This distance increases the chance of mistakes (either accidental or intentional) and creates a
need for an independent party to review th e records.

Bias and Motives of the Provider :Those in charge (like management) may present information in a way
that makes things look better than they really are. An independent auditor is needed to provide an
unbiased view of the company’s financial health, especially if there are conflicting inter ests (like
management wanting to appear more successful).

Consequences of Reliability of Information : Decisions based on financial information can have serious
implications, such as investments or contracts. To ensure these decisions are based on accu rate data,
auditing is essential for verifying the reliability of financial statements.

In summary, auditing is crucial because it helps ensure accuracy in financial reporting amidst complexity, distance, potential
biases, and the significant impact of financial decisions. Understanding these factors highlights why independent audits are
important for trust and accountability in financial information.