Lecture Auditing and assurance services (Second international edition) Chapter 1 An introduction to assurance and financial statement auditing

Chapter 1

An Introduction to
Assurance and
Financial
Statement Auditing

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The Study of Auditing
The study of auditing is different from other
accounting courses that you have taken because …

OTHER COURSES
Rules,
techniques and
computations to
prepare and
analyse financial
information

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AUDITING
Analytical and
logical skills
Much more
conceptual in
nature

The Demand for Auditing and Assurance
The development of the corporate form of
business and the expanding world economy
over the last 200 years have given rise to an
explosion in the demand for assurance
provided by auditors.

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Principals and Agents
A public company is a company that sells its
stocks or bonds to the public, giving the
public a valid interest in the proper use, or
stewardship, over the company’s resources.

Managers

Stockholder
s

Agents

Principals

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The Role of Auditing

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Auditing and Assurance Defined
Assurance

Auditing

A systematic process of objectively
obtaining and evaluating evidence
regarding assertions about economic
actions and events to ascertain the
degree of correspondence between
those assertions and established
criteria and communicating the results
to interested users.
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Auditing and Assurance Defined
Auditing

Assurance

An engagement in which a practitioner
expresses a conclusion designed to
enhance the degree of confidence of
the intended users other than the
responsible party about the outcome of

the evaluation or measurement of a
subject matter against criteria.

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Fundamental Concepts in Conducting a
Financial Statement Audit

Materiality
Audit
Risk

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Evidence


Overview of the Financial Statement
Audit Process

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Audit Risk
Audit risk is the risk that the auditor expresses an
inappropriate audit opinion when the financial
statements are materially misstated.
The auditor’s report with
an unmodified opinion

states that the audit
provides only reasonable
assurance that the
financial statements do
not contain material
misstatements.
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Reasonable assurance
implies some risk that a
material misstatement
could be present in the
financial statements and
the auditor will fail to
detect it.


Materiality
Misstatements, including omissions, are
considered to be material if they,
individually or in the aggregate, could
reasonably be expected to influence the
economic decisions of users taken on the
basis of the financial statements.
Judgements about materiality are made in
light of surrounding circumstances, and
are affected by the size or nature of a
misstatement, or a combination of both.

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Evidence Regarding Management
Assertions
Evidence that assists the auditor in evaluating
management’s financial statement assertions
consists of the underlying accounting data and
any additional information available to the auditor,
whether originating from the client or externally.
Relevance – Is the
information related to
the specific assertion
being tested?

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Reliability – Can the
information be relied upon
to signal the true state of
the specific assertion being
tested?


Sampling: Inferences Based on Limited
Observations
Auditors use (1) their knowledge about
the transactions and/or (2) a sampling
approach to examine the transactions.
It would be too
costly for the auditor

to examine every
transaction.

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Major Phases of the Audit
•Client acceptance/continuance and establishing an
understanding with the client
•Preliminary engagement activities
•Plan the audit
•Consider internal control
•Audit business processes and related account (e.g.
revenue generation)
•Complete the audit
•Evaluate results and issue audit report

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Issue the Audit Report
The auditor’s report is the main product
or output of the audit.
The audit report with an unmodified
(‘clean’) opinion is the most common
type of report issued.

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Issue the Audit Report
The title line of the audit report includes the word
‘Independent,’ and usually, the report is addressed
to the stockholders of the company.
The audit report includes an introductory paragraph, a
management’s responsibility paragraph, an
auditor’s responsibility paragraph, and an auditor’s
opinion paragraph.
The audit report is signed and dated.
Unmodified

Qualified

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Adverse


Issue the Audit Report
The auditor may issue a modified opinion.
Suppose a client’s financial statements contain
a misstatement that the auditor considers
material and the client refuses to correct the
misstatement. The auditor will likely qualify
the opinion, explaining that the financial
statements are fairly stated except for the
misstatement identified by the auditor.

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Issue the Audit Report
The auditor may issue an adverse opinion.
Suppose a client’s financial statements contain
a material misstatement and the auditor
considers the significance of the effect on the
financial statements of the material
misstatement pervasive. Given such a
situation, the auditor will issue an adverse
opinion, indicating that the financial
statements are not fairly stated and should
not be relied upon.
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Auditing Demands Logic, Reasoning,
and Resourcefulness
An auditor needs to understand more than just
the accounting concepts and techniques.
Auditing is a fundamentally logical process of
thinking and reasoning – so use your common
sense and reasoning skills!
As you learn new auditing concepts, take
some time to understand the underlying logic
and how the concepts interrelate with other
concepts.
Being a good auditor sometimes requires
imagination and innovation.
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End of Chapter 1

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