1. introduction to auditing

Question 1

what is auditing

Answer 1

…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.

Question 2

what is the purpose of auditing?

Answer 2

is to provide financial statement users with
an opinion by the auditor on whether the financial statements are
presented fairly, in all material aspects, in accordance with the
applicable financial accounting framework.

Question 3

Why Do We Need Auditing(from an agency perspective)?

Answer 3

…is regarded as a cost-effective monitoring device
…reduces information asymmetries by adding credibility to financial statements
…has an important role in a setting where ownership and management of the firm is separated and in the relationship between managers and creditors
…reduces risk for investors

Question 4

responsibilities of management

Answer 4

• Preparation of financial statements in accordance with applicable accounting frameworks
• Integrity and fairness of the representations (assertions) in the financial statements: presentations and disclosures
• Certification of the financial statements submitted to the SEC
- Financial statements fully comply with the requirements
- Information are fairly presented, in all material respects
• Internal Control
- Establishing and maintaining internal controls that provide reasonable, but not absolute, assurance that the financial statements are fairly stated
- Publicly report on the operating effectiveness of controls

Question 5

responsibility of auditor regards internal controls

Answer 5

• Obtain understanding of internal control

- Express an opinion on controls

Question 6

rules of conduct for auditors

Answer 6

•   Independence
–  Assurance independence
–  Independence of mind/in fact
–  Independence in appearance
•   Integrity and Objectivity
•   Confidentiality

Question 7

what is assurance independence?

Answer 7

“Assurance independence is an absence of interests that create an unacceptable risk of material bias with respect to the quality or context of information that is the subject of an assurance management.”

Question 8

Independence of Mind/in Fact

Answer 8

• Auditor’s state of mind that permits the audit to be performed with an unbiased attitude: unbiased forming of an opinion
• Ability to resist certain pressures

Question 9

Independence in Appearance

Answer 9

• Result of other’s interpretations of independence of mind/fact
• Value of auditing depends on the public’s perception of the independence of auditors
• Achieved through avoidance of facts and circumstances which are essential in the manner that a third party may doubt the auditor’s objectivity

Question 10

integrity and objectivity means

Answer 10

a member:
…shall be free of conflicts of interest
…shall not knowingly misrepresent facts
…shall not subordinate his or her judgement to others, 
e.g., supervisors on the audit

Question 11

what does an auditor evaluates?

Answer 11

– The application of the relevant accounting standards
– Material differences in the accounting of assets
– The presentation of the financial statements and the correctness of accounting

Question 12

Objectives of the Audit Report

Answer 12

• Communication of the auditor’s findings
• Permit reference to other audit reports
• Formulations are standardized within the audit profession: uniform wording

Question 13

Characteristics of the persuasiveness of evidence

Answer 13

1.    Appropriateness
•Relevance of evidence
•Reliability of evidence
-        Independence of provider
-        Effectiveness of client’s internal controls
-        Auditor’s direct knowledge
-        Qualifications of individuals providing the information
-        Degree of objectivity
-        Timeliness
2.    Sufficiency
•Adequate sample size
•Selection of proper population items

Question 14

Auditor’s goal in gathering evidence

Answer 14

getting sufficient and appropriate evidence at the minimum possible cost!

• Sufficiency: Measure of the quantity of audit evidence
– Risks of misstatement: the higher the assessed risks, the more audit evidence is likely to be required
– Quality of audit evidence: the higher the quality, the less audit evidence may be required
• Appropriateness: Measure of the quality of audit evidence
– Reliability of evidence: influenced by its source and nature, dependent on the individual circumstances und which it is obtained

Question 15

four evidence decisions

Answer 15

Audit procedures
– Detailed instruction that explains the audit evidence to be obtained during the audit
– Needs to be spelt out in sufficiently specific terms
Sample size for a given procedure
– Decision needs to be made for each audit procedure
– Sample size depending on client characteristics, e.g., extent of automated controls or required level of assurance from the procedure
Items to select from the population
– Different methods, e.g., verify largest amounts
Appropriate time to perform the procedures
– Depending on when…
…the audit needs to be completed
…the auditor believes the audit evidence will be most effective
…audit staff is available