8/29/2022 1 PRINCIPLES OF AUDITING 1 Textbook(s) 2 • Arens, A A, Elder, R J and Beasley, M S (2012) Auditing and Assurance Services, An Integrated Approach, 14th edition, Prentice Hall • Messier Jr, W[.]
8/29/2022 PRINCIPLES OF AUDITING Textbook(s) • Arens, A.A, Elder, R.J and Beasley, M.S (2012) Auditing and Assurance Services, An Integrated Approach, 14th edition, Prentice Hall • Messier Jr, W.F., Glover, S.M and Prawitt, D.F (2008) Auditing and Assurance services: A Systematic Approach, 6th edition, McGraw Hill • International Auditing Standards (ISAs) Contents Chapter 1: Introduction to Auditing and Assurance Services Chapter 2: Professional Ethics and Auditor Legal Liability Chapter 3: Client Acceptance and Management Assertions Chapter 4: Internal Control and Control Risk Chapter 5: Audit Planning Chapter 6: Audit Evidence and Audit Procedures Chapter 7: Completing the Audit Chapter 8: Audit Reports 8/29/2022 CHAPTER Introduction to Auditing and Assurance Services Chapter 1.1 Auditing 1.2 Assurance Audit Definition “Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria Auditing should be done by a competent, independent person” (Arens, A.A, Elder, R.J and Beasley, M.S.,2012) 8/29/2022 Types of Audits Operational Audit Compliance Audit Financial Statement Audit Types of Audits Operational audit • An operational audit evaluates the economy, efficiency and effectiveness of any part of an organization’s operating procedures and methods in order to improve the operation of auditee Types of Audits Compliance audit • A compliance audit is conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority 8/29/2022 Types of Audits Financial statement audit • A financial statement audit is conducted to determine whether the financial statements (the information being verified) are stated in accordance with specified criteria 10 Types of Auditors * Internal Auditor (IA) => O.A * State Auditor (SA) => C.A * External Auditor / Independent Auditor (CPA) => F.A 11 International Public Accountancy Firms • • • • Big Four international firms National firms Regional and large local firms Small local firms 12 8/29/2022 Assurance Engagement An assurance engagement is one 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 International Framework for Assurance Engagements, 2005, para.7 13 Levels of Assurance The International Framework for Assurance Engagements identifies two types of assurance engagement: Reasonable assurance engagement Limited assurance engagement 14 CHAPTER Professional Ethics and Auditor Legal Liability 15 8/29/2022 Chapter 2.1 What Are Ethics? 2.2.The IFAC Code of Ethics for Professional Accountants 2.3 Auditor’s Legal liability 16 2.1 What Are Ethics? • Ethics can be defined broadly as a set of moral principles or values 17 18 8/29/2022 2.2.The IFAC Code of Ethics for Professional Accountants 2.2.1 IFAC code of conduct (Fundamental principle of ethics) 2.2.2 Threats to compliance with fundamental ethical principles and the safeguards 19 2.2.The IFAC Code of Ethics for Professional Accountants 2.2.1 IFAC code of conduct (Fundamental principle of ethics) (a) Integrity (b) Objectivity (c) Professional Competence and Due Care (d) Confidentiality (e) Professional Behavior 20 2.2.The IFAC Code of Ethics for Professional Accountants 2.2.2 Threats to compliance with fundamental ethical principles and the safeguards (a) Self-interest threats (b) Self-review threats (c) Advocacy threats (d) Familiarity threats (e) Intimidation threats 21 8/29/2022 2.2.The IFAC Code of Ethics for Professional Accountants 2.2.2 Threats to compliance with fundamental ethical principles and the safeguards Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad categories: (a) Safeguards created by the profession, legislation or regulation; (b) Safeguards in the work environment 22 2.2.The IFAC Code of Ethics for Professional Accountants 2.2.3 Independence-Assurance Engagements • Independence of Mind • Independence in Appearance 23 2.3 Auditor’s Legal liability 2.3.1 What is Legal Liability of Auditors? 2.3.2 Sources of Legal Liability for an Auditor 2.3.3 The Legal Liability of Auditors to Third Parties 24 8/29/2022 CHAPTER Client Acceptance and Management Assertions 25 3.1 Evaluate the Client’s Background The auditor decides whether to accept a new client or continue serving an existing one The auditor identifies why the client wants or needs an audit This information is likely to affect the remaining parts of the planning process 26 3.2 Management assertion and assertion classification • Management assertion: are implied or expressed representations by management about classes of transactions and the related accounts and disclosures in the financial statements • International auditing standards classify assertions into three categories: – Assertions about classes of transactions and events for the period under audit – Assertions about account balances at period end – Assertions about presentation and disclosure 27 8/29/2022 28 Connect between management assertion and audit objective • Transaction-related audit objectives • Balance-related audit objectives • Presentation and disclosure-related audit objectives (Chapter – Arens, 6.7-6.9) 29 30 10 ... 8/29/2022 2.2.The IFAC Code of Ethics for Professional Accountants 2.2.1 IFAC code of conduct (Fundamental principle of ethics) 2.2.2 Threats to compliance with fundamental ethical principles and the... safeguards 19 2.2.The IFAC Code of Ethics for Professional Accountants 2.2.1 IFAC code of conduct (Fundamental principle of ethics) (a) Integrity (b) Objectivity (c) Professional Competence and Due... Ethics? 2.2.The IFAC Code of Ethics for Professional Accountants 2.3 Auditor’s Legal liability 16 2.1 What Are Ethics? • Ethics can be defined broadly as a set of moral principles or values 17