Introduction to Auditing and Overview of the Audit Process Flashcards
Assurance provided by the FS Audit
Auditor’s opinion is intended to enhance the credibility of the FS by providing a high but not absolute level of assurance
Relationship of Audit Risk with evidence
INVERSE RELATIONSHIP:
Lower acceptable level of audit risk = more evidence
Higher Acceptable level of audit risk = less evidence
Control Risk
The risk that a material misstatement that could occur will not be prevented or detected and corrected on a timely basis by related internal controls
Can Independent external auditor also perform an operational audit and compliance audit
Yes, but it might be more costly since they are an independent person
Objectives of an FS Audit
- Obtain reasonable assurance that FS as a whole are free from material misstatements thereby enabling the auditor to express an opinion on whether FS are prepared in accordance with applicable financial reporting framework
- Report on the FS and Communicate the results as required by the PSAs
Compliance Audit (Assertion, Suitable Criteria, Report, Performed by)
Assertions: Activities complied with applicable laws, regulations, rules, contracts, or management policies
Suitable Criteria: Applicable laws, rules & regulations, or policies
Report: Degree of compliance
Performed by : Government Auditors
Business Risk
Risk of events or activities that will prevent the entity in meeting the objectives such as wealth and profit maximization.
General Principles of an FS Audit
- Comply with relevant ethical requirements
- Conduct an audit in accordance with PSA
- Plan and perform audit with an attitude of professional skepticism
- Exercise professional judgement
- Obtain sufficient and appropriate evidence
Audit Risk
Risk that auditor expresses an inappropriate conclusion when financial statements are materially misstated
Detection Risk
The risk that auditor will not detect a material misstatement that exists
Inherent Risk
The susceptibility of Fs to a material misstatement assuming there are no related controls
Information Risk
Risk that the information prepared and presented by entity contains misstatements. Inversely proportional with reliability level.
Definition of Auditing
Systematic process of objectively obtaining and evaluating evidence regarding assertions about economic and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results.
Operational Audit (Assertion, Suitable Criteria, Report, Performed by)
Assertions: Operations are conducted efficiently and effectively
Suitable Criteria: Objective set by the management
Report: Report on the efficiency and effectiveness which includes recommendations to improve operations
Performed by: Internal Auditors
Financial Statement Audit (Assertion, Suitable Criteria, Report, Performed by)
Assertions: Financial Statements are fairly presented
Suitable Criteria: GAAP or any identified reporting framework
Report: An opinion whether FS are presented fairly in accordance with reporting framework
Performed by: External Auditors
Can the preparers of the FS be the only users of the FS in an audit engagement
No because that would entail a two party relationship which is against the three party relationship element of and FS audit
Inherent Limitations
Auditor cannot obtain absolute assurance because of the following inherent limitations:
1. Use of Selective Testing
2. Inherent limitation of internal control
3. Audit evidence is persuasive rather than conclusive
4. Work done is subject to judgement
5. Nature or Characteristics of Assertion
Elements of an FS Audit
- Three party relationship
- Appropriate Subject Matter
- Suitable Criteria
- Appropriate Sufficient Evidence
- Written Audit Report (Conclusion)
Types of Audit
Nature of Assertion or Data
1. Financial Statement Audit
2. Operational Audit
3. Compliance Audit
Types of Auditor
1. External Audit
2. Internal Audit
3. Government Audit
General Principles of an Audit (CPPJA)
- Must comply with relevant ethical requirement (Code of Ethics)
- Conduct an audit in accordance with the Philippine Standards on Auditing
- Plan and perform the audit with attitude of professional skepticism
- Exercise professional judgement
- Obtain sufficient appropriate evidence
Audit process: General Approach
- Entity prepares and presents the financial statements
- The auditor performs the audit procedures
- The auditor gathers audit evidence
- Auditor expresses an opinion
Theoretical Framework of FS Audit (VICBIGT)
- All financial data are verifiable
- Alway maintain independence
- No long term conflict
- Audit benefits the public
- Effective internal controls reduces the possibility of errors and fraud
- Consistent application of GAAP
- What holds true in the past shall continue to hold true in the future
Assertions about the classes of Transactions and Events for the period (T-OCCAC)
Occurrence- transactions and events that have been recorded have been recorded and pertain to the entity
Completeness- all transactions that should be recorded have been recorded
Cutoff- recorded in the in the correct accounting period
Accuracy- recorded transactions and events have been recorded appropriately
Classification- Recorded in the proper accounts
Assertions about Account balances at the period end (A-CERV)
Completeness- All AL&E that should have been recorded have been recorded
Existence- AL&E exists
Rights and Obligations- A holds their rights & L are the obligations of the entity
Valuation and Allocation- AL&E are included in FS at appropriate amounts and adjustments are appropriately recorded
Assertions about Presentation and Disclosure (P-OCAC)
Occurrence and Rights and Obligations- Disclosed events have occurred and pertain to the entity
Completeness- All disclosure that should been included have been included
Accuracy- disclosed fairly and at appropriate amounts
Classification and Valuation- appropriately presented and described and disclosure are clearly expressed
Major Audit procedure
- Risk Assessment Procedures
- Test of Controls
- Substantive Procedures
Risk Assessment Procedures
obtain an understanding of the entity and its environment, including internal control to identify and assess risk of material misstatement at the FS and assertion level.
Test of Controls
Designed to evaluate the operating effectiveness of controls in preventing or detecting and correcting material misstatement at an assertion level
Substantive Procedure
Audit procedure designed to detect material misstatement at the assertion level; comprised of:
1. Test of Details
2. Substantive Analytical Procedures
Specific Audit Procedures
- Inspection of Records
- Inspection of Tangible Assets
- Observation
- Inquiry
- Confirmation
- Recalculation
- Reperformance
- Analytical Procedures
Test of Balances vs Test of Transactions
Test of Balances only checks the ending balance while test of transaction checks each transaction in the period
Detailed Approach to an Audit (PPITC)
- Preliminary Engagement Activities
- Planning of Audit
- Evaluation of Internal Controls
- Substantive Testing (Evidence Gathering)
- Completing the Audit
