Lesson 1 : What is a audit? Flashcards
What is an Audit?
A financial audit is an objective examination and evaluation of the financial statements of an business to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent.
What 2 things are needed to do an audit?
- There must be information in a verifiable form and criteria by which the auditor can evaluate the information
- audit should be done in accordance to legislation of each individual country and accounting standards (international acs /irs)
What is the difference between auditing and accounting?
Accounting is the recording of transactions and summarising on financial statements for decision making … whereas
… auditors focus on determining whether recorded data properly reflects the economic events that occurred in the accounting period.
In addition to understanding accounting, auditors must possess expertise in the accumulation and interpretation of audit evidence. True or false?
True
Why is there an economic demand for auditing?
Because Business owners (principal) hire agents aka mangers to run the business daily, which makes them accountable to provide financial reports to the principal. In doing so they hire auditors to report on the fairness of their financial reports to reduce the information risk.
What is information risk ?
Information risk reflects the possibility that the information upon which the business decision was made upon is inaccurate
State the 2 main objectives of auditing?
- to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement like fraud or error , which enables the auditor to make a judgement on whether financial statements are prepared in accordance to the criteria.
- To report on the financial statements and communicate as required by the isa in accordance to the auditors findings.
Who makes “ assertions and claims “about the financial statements ?
The management
Who’s job is it to validate theses said claims?
The auditors
How do auditors validate the managements assertions?
They do so by identifying audit objectives , which can be regarded as the auditors counterpart of management assertions.
State the 3 topics financial assertions are made on ?
- Assertions about classes of transactions
- Assertions about account balances at the period
- Assertions about presentation and disclosure
State the 9 general claims that are made on financial statements
Occurrence Completeness Authorisation Accuracy Cut-Off Classification Existence Rights and Obligations Valuation
What assertions can be made about classes of transactions?
Occurrence Completeness Authorisation Accuracy Cut-Off Classification
What assertions can be made about account balances at the period?
Existence
Rights and Obligations
Completeness
Valuation
What assertions can be made about presentation and disclosure?
Occurrence Rights and Obligations Completeness Classification Valuation
Define the term Occurrence
Transaction and events that have been recorded have occurred and pertain to the entity
Define the term Completeness
All transactions and events that should have been recorded.
Define the term Accuracy
Amounts and other data relating to recorded transactions and events have been recorded appropriately
Define the term Cut-Off
Transactions and events have been recorded in the correct accounting period.
Define the term Classification
Transactions and events have been recorded in the proper accounts
Define the term Existence
Assets, Liabilities and equity interests exist.
Define the term Completeness
All assets liabilities and equity and interests that should have been recorded have been recorded
Define the term valuation and allocation
Assets ,liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
What is the expectation gap?
Expectation gap is the difference between public perception of an auditor’s role and responsibilities regarding audit engagements and what the auditor’s legal responsibilities actually are.
What two categorise do expectation fit into?
Performance gap and Liability gap
State 4 expectation gaps
- Some users incorrectly believe that an audit provides absolute assurance that the audit opinion is a guarantee the financial statements are ‘correct’.
- A belief that auditors test all transactions and balances; they test on a sample basis.
- A belief that auditors are required to detect all fraud; auditors are required to provide reasonable assurance that the financial statements are free from material misstatement, which may be caused by fraud.
- Auditors provide reasonable assurance which is not absolute assurance
State the 3 A’s services
Auditing, Attest, and Assurance
Define Attestation
In an attestation engagement, an accountant expresses an opinion on the reasonableness of a particular assertion or set of assertions. Examples of assertions covered by attestation engagements include financial forecasts and compliance with laws or procedures.
what do assurance services do?
Independent professional services that improve the quality of information, or its context, for decision makers.
state and define 3 types of audits
- Audit of financial statements - examine financial statements, determine if they give a true and fair view or fairly present the financial statements.
- Operational Audit - study of a specific unit of an organization for the purpose of measuring its performance (efficiency and effectiveness)
- Compliance Audit -review of an organization’s procedures and financial records performed to determine whether the organisation is following specific procedures, rules or regulations set out by some higher authority.
Name 4 types of auditors
- Internal auditors
- Independent auditors
- government auditors
- Forensic auditors
How many stages are in the auditing process
4
What are the 4 stages?
Stage I – Client acceptance
Stage II – Planning
Stage III – Testing and evidence
Stage IV – Evaluation and Judgement.
