Lectures Auditing
Lecture week 1
Main course objectives
- Understand the economic role of statutory audits
- Understand the main concepts underlying auditing
o Assertions, audit evidence, materiality, client acceptance, etc.
- Understand the professional and regulatory requirements that guide the conduct of audits
- Be familiar with audit theory and research
o Audit quality, independence, audit committees, etc.
- Be familiar with contemporary developments
o Audit market reform, auditor responsibilities, etc.
What should you know from each paper?
- Research question
- Theories and hypotheses development
- Setting and approach
- Main findings and conclusions
- Implications
o No questions about econometrics, additional analyses or sensitivity checks
Chapter 8 not examined!
Introduction to Auditing & Assurance
What is an Assurance engagement?
“An engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to
express a conclusion designed to enhance the degree of confidence of the intended users other than
the responsible party about the subject matter information.”
You need some evidence to support your conclusions. There is something which you want to provide
assurance about, and the assurance provider provides this assurance not for the management for
example but for the shareholders and other stakeholders. Therefore, there are always 3 parties:
assurance provider, company and the intended users.
Assurance Services
- An assurance service is an independent professional service that improves the quality of
information for decision makers.
- Assurance engagements include (ISAE 3000): → different types of assurance engagements
o Attestation engagements: a party other than the practitioner measures or evaluates
the underlying subject matter against the criteria and present the resulting subject
matter information in a report or statement.
▪ Attestation engagement: the company providing you information and the
auditor will check whether that statements are presenting financial
statements in a proper way.
1
, ▪ In such assertion-based engagement, for example an audit of financial
statements, the auditors conclusion addresses whether the subject matter
information is free from material misstatement.
o Direct engagements: the practitioner measures or evaluates the underlying subject
matter against the applicable criteria and presents the resulting subject matter in an
assurance report
▪ Direct engagement: the assurance provider counts something or tests
something, if you want to test whether a company sells alcohol to kids under
the age of 18, then you do mystery shopping and you get information
themselves to see if regulations are violated.
▪ The auditor’s conclusion addresses the reported outcome of the
measurement or evaluation of the underlying subject matter against criteria.
Assurance, Attestation and Direct Engagements
Within attestation services, there are different types such as Audits, Reviews, ESG etc. In this course
we are only focusing on the Audits as part of the attestation services.
2
,Pronouncements issued by the IAASB
A lot of different standards, different boards and different categories (related services engagements,
other assurance engagements, audits and reviews of historical financial information). We focus on
the international standards on auditing.
Academy Awards
PwC leads the Oscars balloting process on behalf of the Academy of Motion Picture Arts and Sciences
→ making sure that the person announced to be the winner is the right person. They count the
votes.
Multiple choice questions in Wooclap
What kind of assurance engagement is the counting and reporting of the votes for the Academy
Awards? → Direct engagement
In an attestation service, the service provider (auditor) measures the subject matter (financial
statements) using appropriate criteria (IFRS) → Incorrect: it is the accountable party (manager) which
provides the financial statements and then the auditors assess the fair view of these financial
statements.
A difference between a review and audit engagement is: while reasonable assurance is expressed in
an audit report, a review report only expresses a limited level of assurance.
Why is there a demand for auditing? Demand is exogenous (government imposed) and endogenous
(arises within the economy)
It is not the auditor’s responsibility to detect fraudulent reporting, but to detect material
misstatements (any information that has impact to change investment decisions made by users of
the financial statement).
3
, Financial Statement Audits
Objective of an Audit of Financial Statements
To enhance the degree of confidence of intended users in the financial statements. This is achieved by
the expression of an opinion by the auditor on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework. In the case of
most general purpose frameworks, that opinion is on whether the financial statements are presented
fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit
conducted in accordance with ISAs and relevant ethical requirements enables the auditor to form
that opinion.
Expectation-performance gap: difference between what the auditor is doing and what society might
expect from the auditor.
- Left hand side: how well auditors have performed
- Right hand side: expectations of society
Distinguish between two elements:
- Reasonableness Gap: auditors are expected to detect all forms of errors
- Performance Gap:
o Deficient standards: what the auditor standards currently require from an auditor
and what society expects
o Deficient performance: difference between actual performance and duty
4
Lecture week 1
Main course objectives
- Understand the economic role of statutory audits
- Understand the main concepts underlying auditing
o Assertions, audit evidence, materiality, client acceptance, etc.
- Understand the professional and regulatory requirements that guide the conduct of audits
- Be familiar with audit theory and research
o Audit quality, independence, audit committees, etc.
- Be familiar with contemporary developments
o Audit market reform, auditor responsibilities, etc.
What should you know from each paper?
- Research question
- Theories and hypotheses development
- Setting and approach
- Main findings and conclusions
- Implications
o No questions about econometrics, additional analyses or sensitivity checks
Chapter 8 not examined!
Introduction to Auditing & Assurance
What is an Assurance engagement?
“An engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to
express a conclusion designed to enhance the degree of confidence of the intended users other than
the responsible party about the subject matter information.”
You need some evidence to support your conclusions. There is something which you want to provide
assurance about, and the assurance provider provides this assurance not for the management for
example but for the shareholders and other stakeholders. Therefore, there are always 3 parties:
assurance provider, company and the intended users.
Assurance Services
- An assurance service is an independent professional service that improves the quality of
information for decision makers.
- Assurance engagements include (ISAE 3000): → different types of assurance engagements
o Attestation engagements: a party other than the practitioner measures or evaluates
the underlying subject matter against the criteria and present the resulting subject
matter information in a report or statement.
▪ Attestation engagement: the company providing you information and the
auditor will check whether that statements are presenting financial
statements in a proper way.
1
, ▪ In such assertion-based engagement, for example an audit of financial
statements, the auditors conclusion addresses whether the subject matter
information is free from material misstatement.
o Direct engagements: the practitioner measures or evaluates the underlying subject
matter against the applicable criteria and presents the resulting subject matter in an
assurance report
▪ Direct engagement: the assurance provider counts something or tests
something, if you want to test whether a company sells alcohol to kids under
the age of 18, then you do mystery shopping and you get information
themselves to see if regulations are violated.
▪ The auditor’s conclusion addresses the reported outcome of the
measurement or evaluation of the underlying subject matter against criteria.
Assurance, Attestation and Direct Engagements
Within attestation services, there are different types such as Audits, Reviews, ESG etc. In this course
we are only focusing on the Audits as part of the attestation services.
2
,Pronouncements issued by the IAASB
A lot of different standards, different boards and different categories (related services engagements,
other assurance engagements, audits and reviews of historical financial information). We focus on
the international standards on auditing.
Academy Awards
PwC leads the Oscars balloting process on behalf of the Academy of Motion Picture Arts and Sciences
→ making sure that the person announced to be the winner is the right person. They count the
votes.
Multiple choice questions in Wooclap
What kind of assurance engagement is the counting and reporting of the votes for the Academy
Awards? → Direct engagement
In an attestation service, the service provider (auditor) measures the subject matter (financial
statements) using appropriate criteria (IFRS) → Incorrect: it is the accountable party (manager) which
provides the financial statements and then the auditors assess the fair view of these financial
statements.
A difference between a review and audit engagement is: while reasonable assurance is expressed in
an audit report, a review report only expresses a limited level of assurance.
Why is there a demand for auditing? Demand is exogenous (government imposed) and endogenous
(arises within the economy)
It is not the auditor’s responsibility to detect fraudulent reporting, but to detect material
misstatements (any information that has impact to change investment decisions made by users of
the financial statement).
3
, Financial Statement Audits
Objective of an Audit of Financial Statements
To enhance the degree of confidence of intended users in the financial statements. This is achieved by
the expression of an opinion by the auditor on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework. In the case of
most general purpose frameworks, that opinion is on whether the financial statements are presented
fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit
conducted in accordance with ISAs and relevant ethical requirements enables the auditor to form
that opinion.
Expectation-performance gap: difference between what the auditor is doing and what society might
expect from the auditor.
- Left hand side: how well auditors have performed
- Right hand side: expectations of society
Distinguish between two elements:
- Reasonableness Gap: auditors are expected to detect all forms of errors
- Performance Gap:
o Deficient standards: what the auditor standards currently require from an auditor
and what society expects
o Deficient performance: difference between actual performance and duty
4
