Audit Overview Notes Flashcards
Primary function of Independent Audit
lend credibility to the FS prepared by the entity
Auditing(PSA)- Objective of FS Audit
enable the auditor to express an opinion whether the FS are prepared, in all material respects, in accordance with an identified Financial reporting framework
Auditing Definition (American Acctg Asso)
systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users.
Assertions
representations made by an auditee about economic actions and events
Auditor’s objective
determine whether these assertions are valid
established criteria
needed to judge the validity of the assertions
- establish and inform the users of the basis against w/c the assertions have been evaluated or measured
Types of audits (FCO)
a. FS audit
b. compliance Audit
c. operational Audit
FS Audit
determine whether the FS are fairly presented in accordance with an identified FRF
Compliance Audit
Review of an organization’s procedures to determine whether the organization has adhered to specific procedures, rules or regulations.
Operational Audit
assess entity’s performance, identify areas for improvements and make recommendations to improve performance
2 Common Characteristics of Types of Audits
- systematic examination and evaluation of evidence which are undertaken to ascertain whether assertions comply with established criteria
- communication of the results of the examination, usually in a written report, to the party by whom, or on whose behalf, the auditor was appointed
Types of Auditors
a. External
b. Internal
c. Government
External Auditor
- performs FS Audit
- independent CPA
Internal Auditor
- performs Operational Audit
- entity’s own employees who investigate and appraise the effectiveness and efficiency of operations and internal controls
Govt auditors
- performs compliance audit
- govt employees, determine whether person, entities comply with govt laws and regulation
Mgt responsibility
-prepares and present the fs in accordance with the FRF
Auditors Responsibility
- form and express an opinion on these FS based on his audit (but not a guarantee that it is dependable))
Reasonable assurance
audit conducted in accord with PSA,
- fs taken as a whole are free from material misstatements
Result of inherent limitations
a. sampling risk (not the entire population)
b. non-sampling risk (human weakness/ opinion
permeated by judgement)
c. reliance on mgt representation
d. inherent limitations of the client’s accounting and internal control systems
e. nature of evidence(does not contain hard facts)
-audit evidence is generally persuasive rather than conclusive in nature.
General Principles governing FS audit
a. auditor should comply with the Code of Prof. Ethics for CPA promulgated by BOA
b. auditor should conduct an audit in accordance with PSA
c.auditor should plan and perform the audit w/ an attitude of professional skepticism recognizing that circumstances may exist w/c may cause the FS to be materially misstated
(neither assumes honest or dishonesty)
Need for an Independent FS Audit
a. conflict of interest bet. mgt and users of FS
b. expertise- hire to verify
c. remoteness- users of FS are usually prevented from directly assessing the reliability of the info.
d. financial consequences- misleading fin info could have substantial economic consequences for a decision maker
Theoretical Framework of auditing
a. audit function operates on the assumption that all financial data are verifiable
b. the auditor should always maintain independence with respect to the FS under audit
c. there should be no long-term conflict between the auditor and the client mgt.
d. effective IC system reduces the possibility of errors and fraud affecting the FS
e. consistent application of GAAP or PFRS results in fair presentation of FS
f. what was held true in the past will continue to hold true in the future in the absence of known conditions to the contrary.
g. an audit benefits the public
