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

Chapter 2 The financial statement auditing environment, in this chapter you will be familiar with the different types of auditors; be familiar with the various services offered by assurance providers; understand the organization and composition of public accounting firms; understand the significant changes that have taken place in the auditing profession over the past decade;...

The Financial Statement

Auditing Environment

Chapter Two

A Time of Challenge and Change

1990

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.

A Time of Challenge and Change

A Series of Scandals

Parmalat

Lernout & Hauspie

Ahold

Arthur Andersen

Self-regulation by the profession

versus government regulation

Stricter regulation and more public

oversight International Standards on Auditing

more comprehensive

© The McGraw-Hill Companies, 2010

Auditors’ Legal Liability

Threat of legal liability:

Main deterrent to auditor’s

International Federation of Accountants

(IFAC)

International Organisations that Affect

the Accounting Profession

IOSCO

International Organization

of Supreme Audit Institutions

Board (PCAOB) Financial Accounting Standards Board

(FASB) American Institute of Certified Public

Accountants (AICPA)

International Auditing and Assurance Standards Board (IAASB): Standards

Auditing Standards

Auditing standards serve as

guidelines for and measures of

the quality of the auditor’s

performance.

IFAC members

IAASB issues

International Standards on Auditing

(ISAs).

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

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

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

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

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

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

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

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.

Ethics, Independence, and IFAC Code of

Ethics for Professional Accountants

IFAC Code of

Ethics

Conceptual Framework Approach

including situations that threaten

independence of

mind or

independence in appearance

Praxity Baker Tilly Crowe Horwath

National Local

Annual Global Revenue of Major Audit

Network Firms

Audit Teams

Types of Services Offered by Audit Firms

Global Practice Mix of Services by Major

Audit Network Firms (Revenue)

Context of Financial Statement Auditing

The primary context with which an auditor is concerned is the

industry or business of his or her audit client In other words, the context provided by the client’s business impacts the auditor

and the audit, and is thus a primary component of the environment in which financial statement auditing is conducted

How would your concerns about the inventory

account differ for a Computer Hardware Manufacturer and a Jewellery Store ? What assertions would you be most concerned about and why?

A Model of Business

Board of Directors

Audit Committee

Business organizations exist to create value for their stakeholders Due to the way resources are invested

and managed in the modern business world, a

system of corporate governance is necessary, through which managers are overseen and

supervised.

A Model of Business

Processes (5 broad categories)

Reports

A Model of Business Processes:

Five Components

Financing

Human Resource Management Process

Inventory Management

An Overview of Business

Management Assertions

Financial statements issued by management contain explicit and implicit

assertions

Management Assertions –

An Example with Inventory

Which specific assertion from the relevant category

is being described in the three examples below?

Account Balances

Management asserts that the

inventory represented in the

inventory account

Presentation

& Disclosure

Management asserts that the

financial statements

End of Chapter 2