Chapter 1

Introduction

Nama:Annisa Wijayanti
Npm:185401
Definition of Auditing
 The accumulation and evaluation
 Of evidence about information
 To determine and report on
 The degree of correspondence between
 The information and established criteria.
 Auditing should be done by
 A competent and independent person
Types of Audits
1. Financial Statement Audits
 Evaluates correspondence between financial
statements and GAAP
2. Operational Audits
 Evaluates correspondence between org’s
procedures and methods and criteria of
efficiency and effectiveness
3. Compliance Audits
 Evaluates correspondence between org’s
operations and specific procedures or rules
4. Comprehensive Audits
Accounting vs. Auditing
1. Accounting
1. Recording, classifying and summarizing of
economic events for the purpose of
providing financial information for decision
making
2. Requires understanding of GAAP
2. Auditing
1. Determining whether recorded information
properly reflects the economic events of the
period
2. Requires understanding of GAAP AND of
accumulation and interpretation of audit
evidence
Financial Statement Audit
Objectives
The objective of the audit of
financial statements is to express an Opinion
opinion whether the financial
statements present fairly, in all Fairly
material respects, the financial
position, results of operations and Materiality
changes in financial position in
accordance with generally accepted GAAP
accounting principles.
FUNDAMENTAL CONCEPTS
 Materiality
 Something is material if, in auditor’s judgment, its
omission or misstatement would probably affect a
user’s decision.
 Audit risk
 The risk that the auditor may unknowingly provide a
“clean” opinion on financial statements that are
materiality misstated. “Presents fairly” means that
this risk is at an appropriately low level.
So, an audit opinion…
 is NOT an assurance as to the future
viability of an entity
 is NOT an opinion as to the efficiency or
effectiveness with which its operations,
including internal control, have been
conducted
 Is NOT a guarantee that the financial
statements are free of error
Benefits of Being Audited
1. Operational Audits
 Improves efficiency and effectiveness
2. Compliance Audits
 Reduces cost of non-compliance
 Reassures external parties
3. Financial Statement Audits
 May be mandatory
 Reduces cost of capital. Why?…….
Business Risk vs. Information
Risk
1. Business Risk
1. Risk that organization will fail to
achieve its objectives
2. Information Risk
1. Risk that the information upon which a
business decision was made is
inaccurate
2. The financial stakeholders of a firm
face both types of risk. A financial
statement audit reduces information
risk, but not business risk
Sources of Information Risk
 Remoteness of Information
 Voluminous Data
 Complex Exchange Transactions
 Bias and Motives of Information Provider
Who Performs Audits?
1. Public Accounting Firms
1. Independent as external to audit client
2. Primarily f/s audits, but can be hired
to perform other types of audits
2. Internal Auditors
1. Employees of org. Less
independent:depends on org structure
2. Primarily operational and compliance
audits
Who Performs Audits?
3. Government Auditors
• Often perform comprehensive audits,
but depends on mandate
4. Revenue Canada Auditors
• Compliance audits
What makes external auditors
credible?
• Legal Liability
• Quality Control Adopted by Firm
• Provincial Securities Commissions
• Members of a Profession (usually
CICA, but in some provinces CGA’S
and CMA’s also have power to
perform external financial statement
audits)
Authority of Professional
Bodies
1. CICA
• Sets accounting and auditing
standards
2. CICA, SMAC, CGA
• Publish materials for members
• Set entrance standards and
administer exams
• Continuing professional education
• Codes of Professional Conduct
• Inspection and Discipline
Financial Statement Audits
 In an audit of financial statements, the auditor
complies with generally accepted auditing
standards (GAAS)……
 GAAS are developed by CICA
Generally Accepted Auditing Standards
(GAAS) - General Standard

 The General Standard

 "The examination should be performed and the
report prepared by a person or persons having
adequate technical training and proficiency in
auditing, with due care and with an objective
state of mind" [Sept 1975]
 General Standard therefore emphasizes:
 Competence

 Objectivity

 Due Professional Care

Generally Accepted Auditing Standards
(GAAS) Examination Standards

 Adequate Planning and

Supervision
 (i) The work should be

adequately planned and

properly executed. If
assistants are employed they
should be properly
supervised. [Sept. 1975]
 Generally Accepted Auditing Standards
(GAAS)
 Sufficient Understanding of Internal
control
 (ii) A sufficient understanding of

internal control should be

obtained to plan the audit. When
control risk is assessed below
maximum, sufficient appropriate
audit evidence should be
obtained through tests of
controls to support the
assessment. [Oct. 1992]
Quick discussion of Internal Control

 Control comprises those elements of an organization

(including it resources, systems, processes, culture,
structure and tasks) that, taken together, support people
in the achievement of the organization’s objectives.
 Objectives relate to:
 effectiveness and efficiency of operations, including
safeguarding of assets
 reliability of internal and external reporting
 compliance with applicable laws, regulations, and
internal policies
 Generally Accepted Auditing Standards
(GAAS)
 Sufficient and Appropriate Audit
Evidence
 (iii) Sufficient appropriate audit

evidence should be obtained by

such means as inspection,
observation, enquiry, confirmation,
computation and analysis, to afford
a reasonable basis to support the
content of the report. [Sept. 1975]
 GAAS Reporting Standards
 (i) The report should identify the financial
statements and distinguish between the
responsibilities of management and the
responsibilities of the auditor.
 (ii) The report should describe the scope of
the auditor's examination.
 (iii) The report should contain either an
expression of opinion on the financial
statements or an assertion that an opinion
cannot be expressed. In the latter case, the
reasons therefor should be stated.
 Reporting Standards
 (iv) Where an opinion is expressed, it should indicate
whether the financial statements present fairly, in all
material respects, the financial position, results of
operations and changes in financial position in
accordance with an appropriate disclosed basis of
accounting, which except in
special circumstances should be
generally accepted accounting
principles. The report should
provide adequate explanations
with respect to any reservation
contained in such opinion."