Lecture 1: Introduction to Auditing & The Audit Process
Assurance services are services rendered by independent third parties that lend
credibility to information. Ingredient of assurance are:
1. A three-party relationship involving an independent third party (assurance
provider), a responsible party and intended users
2. An appropriate subject matter
3. Suitable criteria
Attestation engagement: An assurance engagement in which a party other
than the practitioner measures or evaluates the underlying subject matter
against the criteria. A party other than the practitioner also often presents the
resulting subject matter information in a report or statement. In an attestation
engagement, the practitioners conclusion addresses whether the subject matter
information is free from material misstatement.
Direct engagement: An assurance engagement in which the practitioner
measures or evaluates the underlying subject matter against the applicable
criteria and the practitioner presents the resulting subject matter information as
part of, or accompanying, the assurance report. In a direct engagement, the
practitioners conclusion addresses the reported outcome of the measurement or
evaluation of the underlying subject matter against the criteria.
Auditing: The overall objective of an audit is to obtain reasonable assurance
about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework
(ISA 200).
,Reasonable assurance: In a reasonable assurance engagement, the practionier
reduces engagement risk to an acceptably low level in the circumstances of the
engagement as the basis for the practitioners conclusion. The practitioner’s
conclusion is expressed in a form that conveys the practitioner's opinion on the
outcome of the measurement or evaluation of the underlying subject matter
against the criteria.
Limited assurance: In a limited assurance engagement, the practitioner
reduces engagement risk to a level that is acceptable in the circumstances of the
engagement but where that risk is greater than for a reasonable assurance
engagement as the basis for expressing a conclusion in a form that conveys
whether, based on the procedures performed and evidence obtained, a matter
has come to the practitioners attentions to cause the practitioner to believe the
subject matter information is materially misstated.
,The audit process:
1. Client acceptance
2. Understand & asses risk
3. Risk and response (building the audit plan)
4. Execute controls testing
5. Execute substantive testing
6. Complete (completion)
Audit demand:
Exogenous Audit demand: Demand influenced by factors external to the
economic model or system (statutory audit, environment agency requires audit of
pollution reports, government grant with condition external audit).
Accounting directive 2013/34/EU: A company is required to have its financial
statements audited if it is classified as a public-interest entity, a medium-sized
undertaking, or a large undertaking.
, Endogenous Audit Demand: Demand influenced by factors withing the
economic model or system (information, agency and signalling theory).
Signalling theory: Does the decision to obtain a financial statement audit convey
valuable information to external financiers? Audit choice as a signal, increases
debt and investment, improve operating performance, become more responsive
to growth opportunities.
Client Acceptance Process:
Step 1:
-Engagement risk; Litigation risk, regulatory penalties, reputation loss, lack of
profitability.
-Integrity
-Reputation and image
-Accounting practices
-Financial status
-Profitability
ISA 210: Accept or continue an audit engagement only when the basis upon
which it is to be performed has been agreed through:
A) Establishing whether the preconditions for an audit are present.
Preconditions for an audit: Determine whether the financial reporting framework
to be applied in the preparation of the financial statements is acceptable; and
obtain the agreement of management that it acknowledges and understand its
responsibility.
Assurance services are services rendered by independent third parties that lend
credibility to information. Ingredient of assurance are:
1. A three-party relationship involving an independent third party (assurance
provider), a responsible party and intended users
2. An appropriate subject matter
3. Suitable criteria
Attestation engagement: An assurance engagement in which a party other
than the practitioner measures or evaluates the underlying subject matter
against the criteria. A party other than the practitioner also often presents the
resulting subject matter information in a report or statement. In an attestation
engagement, the practitioners conclusion addresses whether the subject matter
information is free from material misstatement.
Direct engagement: An assurance engagement in which the practitioner
measures or evaluates the underlying subject matter against the applicable
criteria and the practitioner presents the resulting subject matter information as
part of, or accompanying, the assurance report. In a direct engagement, the
practitioners conclusion addresses the reported outcome of the measurement or
evaluation of the underlying subject matter against the criteria.
Auditing: The overall objective of an audit is to obtain reasonable assurance
about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework
(ISA 200).
,Reasonable assurance: In a reasonable assurance engagement, the practionier
reduces engagement risk to an acceptably low level in the circumstances of the
engagement as the basis for the practitioners conclusion. The practitioner’s
conclusion is expressed in a form that conveys the practitioner's opinion on the
outcome of the measurement or evaluation of the underlying subject matter
against the criteria.
Limited assurance: In a limited assurance engagement, the practitioner
reduces engagement risk to a level that is acceptable in the circumstances of the
engagement but where that risk is greater than for a reasonable assurance
engagement as the basis for expressing a conclusion in a form that conveys
whether, based on the procedures performed and evidence obtained, a matter
has come to the practitioners attentions to cause the practitioner to believe the
subject matter information is materially misstated.
,The audit process:
1. Client acceptance
2. Understand & asses risk
3. Risk and response (building the audit plan)
4. Execute controls testing
5. Execute substantive testing
6. Complete (completion)
Audit demand:
Exogenous Audit demand: Demand influenced by factors external to the
economic model or system (statutory audit, environment agency requires audit of
pollution reports, government grant with condition external audit).
Accounting directive 2013/34/EU: A company is required to have its financial
statements audited if it is classified as a public-interest entity, a medium-sized
undertaking, or a large undertaking.
, Endogenous Audit Demand: Demand influenced by factors withing the
economic model or system (information, agency and signalling theory).
Signalling theory: Does the decision to obtain a financial statement audit convey
valuable information to external financiers? Audit choice as a signal, increases
debt and investment, improve operating performance, become more responsive
to growth opportunities.
Client Acceptance Process:
Step 1:
-Engagement risk; Litigation risk, regulatory penalties, reputation loss, lack of
profitability.
-Integrity
-Reputation and image
-Accounting practices
-Financial status
-Profitability
ISA 210: Accept or continue an audit engagement only when the basis upon
which it is to be performed has been agreed through:
A) Establishing whether the preconditions for an audit are present.
Preconditions for an audit: Determine whether the financial reporting framework
to be applied in the preparation of the financial statements is acceptable; and
obtain the agreement of management that it acknowledges and understand its
responsibility.
