Lecture Auditing and assurance services (Second international edition) Chapter 2 The financial statement auditing environment

Chapter Two

The Financial
Statement
Auditing Environment

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A Time of Challenge and Change

1990

2000

During the economic boom of the late
1990s and the early 2000s, accounting
firms aggressively sought opportunities
to market a variety of high-margin
non-audit services to their audit
clients.
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A Time of Challenge and Change

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A Series of Scandals
Enron

WorldCom
Parmalat
Lernout &
Hauspie

Ahold
Arthur
Andersen
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Regulation
Self-regulation by the profession
versus
government regulation

Stricter regulation and more public
oversight
International Standards on Auditing
more comprehensive
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Auditors’ Legal Liability
Threat of legal liability:
Main deterrent to auditor’s
misconduct
Legal doctrines:
•Joint and several liability

•Proportional liability
•Liability caps
Litigation exposure and audit markets:
•Concentration
•Barriers to entry
•Liability reforms
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International Federation of Accountants
(IFAC)

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International Organisations that Affect
the Accounting Profession
International Federation
of Accountants

International Accounting
Standards Board

IFAC

IASB

International
Organization of
Securities Commissions

International Organization
of Supreme Audit
Institutions

IOSCO
European Union

EU
EU 8th Directive on Statutory
Audits

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INTOSAI
United States
Securities and Exchange Commission
(SEC)
Public Company Accounting Oversight
Board (PCAOB)
Financial Accounting Standards Board
(FASB)
American Institute of Certified Public
Accountants (AICPA)


International Auditing and Assurance
Standards Board (IAASB): Standards

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Auditing Standards
Auditing standards serve as
guidelines for and measures of
the quality of the auditor’s
performance.
IAASB issues
International Standards
on Auditing (ISAs).
IFAC
members
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ISAs are
considered to
be minimum
standards of
performance
for auditors.


General Principles and Responsibilities
• ISA 200 Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance with International
Standards on Auditing
• ISA 210 Agreeing the Terms of Audit Engagements
• ISA 220 Quality Control for an Audit of Financial Statements
• ISA 230 Audit Documentation
• ISA 240 The Auditor’s Responsibilities Relating to Fraud in an

Audit of Financial Statements
• ISA 250 Consideration of Laws and Regulations in an Audit of
Financial Statements
• ISA 260 Communication with Those Charged with
Governance
• ISA 265 Communicating Deficiencies in Internal Control to
Those Charged with Governance and Management
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Risk Assessment and Response to
Assessed Risks
• ISA 300 Planning an Audit of Financial Statements
• ISA 315 Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its
Environment
• ISA 320 Materiality in Planning and Performing an Audit
• ISA 330 The Auditor’s Responses to Assessed Risks
• ISA 402 Audit Considerations Relating to an Entity Using a
Service Organization
• ISA 450 Evaluation of Misstatements Identified during the
Audit

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Audit Evidence
• ISA 500 Audit Evidence
• ISA 501 Audit Evidence – Specific Considerations for
Selected Items

• ISA 505 External Confirmations
• ISA 510 Initial Engagements – Opening Balances
• ISA 520 Analytical Procedures
• ISA 530 Audit Sampling
• ISA 540 Auditing Accounting Estimates, Including Fair Value
Accounting Estimates, and Related Disclosures
• ISA 550 Related Parties
• ISA 560 Subsequent Events
• ISA 570 Going Concern
• ISA 580 Written Representations
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Using Work of Others
• ISA 600 Special Considerations – Audits of Group Financial
Statements (Including the Work of Component Auditors)
• ISA 610 Using the Work of Internal Auditors
• ISA 620 Using the Work of an Auditor’s Expert

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Audit Conclusions and Reporting
• ISA 700 Forming an Opinion and Reporting on Financial
Statements
• ISA 705 Modifications to the Opinion in the Independent
Auditor’s Report
• ISA 706 Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report
• ISA 710 Comparative Information – Corresponding Figures

and Comparative Financial Statements
• ISA 720 The Auditor’s Responsibilities Relating to Other
Information in Documents Containing Audited Financial
Statements

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Specialised Areas
• ISA 800 Special Considerations – Audits of Financial
Statements Prepared in Accordance with Special Purpose
Frameworks
• ISA 805 Special Considerations – Audits of Single Financial
Statements and Specific Elements, Accounts or Items of a
Financial Statement
• ISA 810 Engagements to Report on Summary Financial
Statements

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Sections in ISAs
•Introductory material
•Objectives
•Definitions
•Requirements
•Application and other
explanatory material

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Society’s Expectations and
the Auditor’s Responsibilities
The auditor has a responsibility to plan and
perform the audit to obtain reasonable
assurance about whether the financial
statements are free of material misstatement,
whether caused by error or fraud.
Because of the nature of
audit evidence and the
characteristics of fraud, the
auditor is able to obtain
reasonable, but not
absolute, assurance that
material misstatements are
detected.
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The auditor has no responsibility
to plan and perform the audit to
obtain reasonable assurance
that misstatements, whether
caused by errors or fraud, that
are not material to the financial
statements will be detected.


Ethics, Independence, and IFAC Code of
Ethics for Professional Accountants

Ethics refers to a system or code of conduct
based on moral duties and obligations that
indicates how we should behave.
Professionalism refers to the conduct, aims,
or qualities that characterise or mark a
profession or professional person. All
professions operate under some type of code
of ethics or code of conduct.
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Ethics, Independence, and IFAC Code of
Ethics for Professional Accountants
IFAC Code of
Ethics
Conceptual
Framework Approach

Principles
•Integrity
•Objectivity
•Professional competence
and due care
•Confidentiality
• Professional behaviour
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Application to
specific situations,
including situations

that threaten
independence of
mind or
independence in
appearance


Audit Firms
Audit firms range in size from a single proprietor to
thousands of owners (or “partners”) and thousands
of professional and administrative staff employees.

Big 4

Mid-Tier

PwC

BDO

Deloitte
EY
KPMG

Grant
Thornton
RSM
Praxity
Baker Tilly
Crowe

Horwath

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National

Local


Annual Global Revenue of Major Audit
Network Firms

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Audit Teams

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Types of Services Offered by Audit Firms
Assurance Services:
Audit of financial statements, review of financial information, and
other assurance services (e.g. assurance on a entity’s reporting
on sustainability performance)
Related Services:
Agreed-upon procedures regarding financial information and
compilation of financial information
Other Services:
Tax services, advisory services, accounting services and

specialised services (e.g. forensic audit)

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Global Practice Mix of Services by Major
Audit Network Firms (Revenue)

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