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155 views31 pages

1 Chapter 1 Introduction To Auditing

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yedinkachaw shferaw
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© © All Rights Reserved
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AUDITING

By Mekonnen Mengistie
(PhD Candidate)

©2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley


COURSE CONTENT
◦Chapter One: Overview of Auditing
◦Chapter two: Professional Ethics and Legal Responsibilities of External Auditors
◦Chapter Three: Audit Planning Process
◦Chapter Four: Auditing Techniques and Audit Evidence
◦Chapter Five: Audit Objectives and Procedures for Cash, Receivables, and
Inventories
◦Chapter Six: Audit Reports
◦Chapter Seven: External Auditing and Public Accountability

©2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley


OVERVIEW OF
AN AUDIT
Chapter 1
NATURE OF AUDITING

Auditing is 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,


independent person.
INFORMATION AND
ESTABLISHED CRITERIA

To do an audit, there must be information in a


verifiable form and some standards (criteria)
by which the auditor can evaluate the information.

Criteria
FASB IASB
ACCUMULATING EVIDENCE
AND EVALUATING EVIDENCE

Evidence is any information used by the auditor


to determine whether the information being
audited is stated in accordance with the
established criteria.

Transaction
data Written and
electronic Observations
Communications
with outsiders
Client inquiry
COMPETENT, INDEPENDENT
PERSON
Judgment and
Competence
Experience

Independence

Evaluation
of Evidence

Proper
Conclusion
AUDIT REPORT
To the Board of Directors and Stockholders of
ABC Corporation and Subsidiaries
Anywhere, USA
We have audited the accompanying consolidated balance sheets of ABC Corporation and Subsidiaries (the “Company”) as of December 31, 2010 and December 31, 2009, and the
related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the
financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ABC Corporation and Subsidiaries as of December 31, 2010
and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting
as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 28, 2011, expressed an unqualified opinion on the Company’s internal control over financial reporting.
INTERNATIONAL CPA FIRM LLP
Anywhere, USA
February 28, 2011

The final step communicates the findings to users.


LEARNING OBJECTIVE 2
Distinguish between auditing
and accounting.
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.
LEARNING OBJECTIVE 3
Explain the importance of auditing
in reducing information risk.
ECONOMIC DEMAND
FOR AUDITING

Demand Driver Information risk

Auditing can have a significant effect


on information risk.

What is meant by “Information risk”?


LEARNING OBJECTIVE 4
List the causes of information risk, and
explain how this risk may be reduced.
CAUSES OF INFORMATION
RISK
 Remoteness of information

 Biases and motives of the provider

 Voluminous data

 Complex exchange transactions


REDUCING INFORMATION
RISK
 User verifies information

 User shares information risk with management

 Audited financial statements are provided


RELATIONSHIPS AMONG AUDITORS,
CLIENT, AND EXTERNAL USERS

Client or audit Auditor issues


committee hires report relied
auditor Auditor upon by users to reduce
information risk

Provides capital
External
Client
Users
Client provides financial
statements to users
LEARNING OBJECTIVE 5
Describe assurance services and distinguish audit
services from other assurance and non-assurance
services provided by CPAs.
ASSURANCE SERVICES

An independent professional service

Can be performed by CPAs or by a variety


of other professionals
ATTESTATION SERVICES

A type of assurance service

CPA reports on the reliability of an assertion

That is the responsibility of another party.


ATTESTATION SERVICES

1. Audit 3. Review
Historical
Financial
Statements

2. Internal
Control over 4. Information
Financial 5. Other
Reporting
Technology
LEARNING OBJECTIVE 6
Differentiate the three main types of audits.
TYPES OF AUDITS
 Operational

 Compliance

 Financial Statement
OPERATIONAL AUDIT

Evaluate computerized payroll system


Example
for efficiency and effectiveness
Number of records processed, costs of
Information
the department, and number of errors
Established Company standards for efficiency and
Criteria effectiveness in payroll department
Available Error reports, payroll records, and
Evidence payroll processing costs
COMPLIANCE AUDIT

Determine whether bank requirements


Example
for loan continuation have been met

Information Company records

Established
Loan agreement provisions
Criteria
Available Financial statements and
Evidence calculations by the auditor
AUDIT OF HISTORICAL
FINANCIAL STATEMENTS
Annual audit of Boeing’s financial
Example
statements

Information Boeing's financial statements

Established Generally accepted accounting


Criteria principles
Available Documents, records, and outside
Evidence sources of evidence
LEARNING OBJECTIVE 7

Identify the primary types of auditors.


TYPES OF AUDITORS
 Independent certified public accounting firms

 Governmental general accounting office auditors

 Internal Revenue agents

 Internal auditors
Auditing Standards
 Auditing Standards are general guidelines to aid
auditors in fulfilling their professional
responsibilities in the audit of historical financial
statements.

 The broadest guidelines available to auditors are the


10 GAAS, which were developed by the AICPA.
 The 10 GAAS fall into three categories:
 General standards
 Standards of field work
 Reporting standards
Cont’d……….
 The general standards stress the important
personal qualities that the auditor should possess.

 The standards of field work concern evidence


accumulation and other activities during the actual
conduct of the audit.

 The reporting standards require the auditor to


prepare a report on the financial statements taken
as a whole, including informative disclosures;
END OF CHAPTER 1

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