Fundamental Concepts Flashcards
MYTH: The auditor guarantees that the financial statements are 100% correct.
FACT: The auditor expresses an opinion on the financial statements that provides reasonable assurance. Auditing standards permit the auditor to undertake an audit on a sample basis. Therefore, there is always a risk that misstatements in the financial statements will not be identified by the auditor.
MYTH: The auditor is responsible for the internal controls of the company.
FACT: Management is responsible for implementing a sound system of internal controls. The auditors are responsible for gaining an understanding of the controls put in place by management as they relate to the financial statement process in order to effectively carry out their audit.
MYTH: The auditor is responsible for the detection of all instances of fraud.
FACT: Management, with the oversight of those charged with governance, is responsible for safeguarding the assets of the company and maintaining proper accounting records. Therefore, it is their responsibility to prevent and detect fraud through the implementation of sound internal control systems. The auditor is responsible for detecting material misstatements in the financial statements due to fraud or error. Consequently, the auditor may detect instances of fraudulent activity, but this is not their primary responsibility.
MYTH: The auditor prepares and produces the financial statements.
FACT: Management is responsible for preparing financial statements that show a fair view of the entity. The auditor provides an opinion on those statements.
MYTH: The auditor is responsible for checking compliance with all laws and regulations.
FACT: This is management’s responsibility, not the auditor’s. The auditor is responsible for identifying material misstatements in the financial statements due to breaches of laws and regulations.
MYTH: The auditor provides aid and advice to management.
FACT: Although this can be a byproduct of the audit, it is not the primary responsibility of the auditor to provide advice. If management requests that the auditor provide aid and advice, the auditor would undertake the work in a separate engagement, providing a consultancy function for the client. The auditor will not be able to provide both consultancy and audit services due to the importance of auditor independence; acting in the capacity of a consultant would impair independence.
MYTH: The auditor assesses the effectiveness and adequacy of the client’s operations and management.
FACT: The auditor is only required to provide such an assessment where these affect the quality of the financial statements.
Purpose of the Engagement Letter
The auditor clarifies their responsibilities with management of the audited company at the start of the engagement by issuing an engagement letter, which specifies the terms of the engagement. Such a letter will include details of the auditor’s responsibilities and the scope of the engagement. The engagement letter also indicates that there is a risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with the applicable framework.
Stages to an audit engagement (1 - 12)
- Acceptance / Continuance
- Materiality
- RMM
- Approach
- Test of controls
- Substantive procedures
- Audit evidence evaluation
- Misstatements evaluation
- Subsequent events
- Communication with mgmt and those charged with governance
- Audit opinion
- Audit report
5 Key principals of rules or professional conduct
- Objectivity - independent and objective state of mind
- Integrity and due care
- Professional competence: Maintain knowledge and skill required by professional bodies
- Confidentiality
- Professional behaviour: Maintain good reputation of the profession and serves public interest
Outline for Audit Planning Memo
Financial Accounting Issues
Materiality
• Users and concerns
• Base for materiality
• % threshold for materiality
• Overall materiality
• Normalized net income for overall materiality
• Performance Materiality 60-80%
• If required: Specific materiality % of overall - Only if there is a
specific account that the users are concerned
with
• if required: Specific performance materiality - If SM done
Risk of material misstatement
• Inherent Risk
• Control Risk
• Conclusion
Risk at the assertion level
• Inherent Risk
• Control Risk
• Conclusion
Approach
• Substantive or combined
• Discuss control risk factors or other risks and potential fraud
Procedures
Translated Audited Financial statements
CSOA 5000 Use of the Practitioner’s Communication or Name, states:
- the practitioner shall be satisfied that, if applicable:
The information includes the same information and carries the same meaning as original language - The practitioner’s communication includes the same information and carries the same meaning as original language
This means that we may need a profession translator if no one employed can read the language fluently.
CAS 210 Agreeing the Terms of Audit Engagements
preconditions that must be present for an audit, including management’s representation that it will provide the auditor with “access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters.”
