English for auditing compatibility mode

Audit Risk Audit risk means the risk that the auditor gives an inappropriateaudit opinion when the financial statements are materially misstated ISA 400.. Audit Risk ModelRisk of Materi

ENGLISH FOR AUDITING

3.1 Basic Auditing (Các vấn đề chung về kiểm toán)

3.2 Techniques in Collecting Audit Evidence (Các kỹ

thuật thu thập bằng chứng kiểm toán )

3.3 Types of Audit Tests (Thử nghiệm kiểm toán)

3.4 Internal Control (Kiểm soát nội bộ)

3.5 Audit of Items in Financial Statements and Business

Cycles (Kiểm toán các khoản mục trên báo cáo tài chính và

các chu trình kinh doanh)

Basic Auditing

3.1.1 Nature of Auditing

Auditing is the accumulation and evaluation

of evidence about information to determineand report on the degree of correspondencebetween the information and established criteria

Auditing should be done by a competent,

independent person

Information and Established

Criteria

To do an audit, there must be information in a

verifiable form and some standards (criteria)

by which the auditor can evaluate the information

Accumulating Evidence and

Evaluating Evidence

Evidence is any information used by the auditor

to determine whether the information being

audited is stated in accordance with the

established criteria

Transaction

electronic Communications with outsiders

Observations

ProperConclusion

Types of Audits and

Types of Auditors

Operational Audit

Example Evaluate computerized payroll systemfor efficiency and effectiveness

Information Number of records processed, costs ofthe department, and number of errors

Compliance Audit

Example Determine whether bank requirementsfor loan continuation have been met

Information Company records

Audit of Financial Statements

Boeing's financial statements

Generally accepted accounting principles

Documents, records, and outside

Certified public accounting firms

Governmental accountability office auditors

Internal auditors

Three Requirements for

Becoming a CPA

 Educational requirement

 Uniform CPA examination requirement

 Experience requirement

Learning objectives

 Fraud and Error

 Materiality and Audit risk

 Audit Evidence

3.1.3 Fundamental Concepts

in Auditing

Fraud and Error

 A Student took materials (text books or mini photocopies) inexamination room (Rule: Close-book exam)

What is fraud and error?

What is Fraud?

 Fraud is an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

 Although fraud is a broad legal concept, the auditor is concerned with fraud that causes a material misstatement in the financial statements.

Types of Fraud

 Misappropriation of assets

 Fraudulent Financial Reporting

Misappropriation of assets (“employee fraud”) involves theft of an

entity’s asset.

Examples include:

 Embezzling receipts

 Stealing physical assets or intellectual property

 Assets are used wrong purposes

 ….

Fraudulent Financial Reporting (“management fraud”)

 Misrepresentation in, or intentional omission from, the financial statements of events, transactions, or other significant information

 Manipulation, falsification or alteration of records or documents from which financial statements are prepared

 Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosures.

What is Error?

Unintentional mistakes in financial information such as:

 Errors of commission: mathematical or clerical mistakes

in the recording and accounting data;

 Errors of omission: transactions, events is left out of an

accounting statement by mistake

 Errors of principle: misapplication or misunderstanding of

accounting policies unintentionally Ex: wrong allocationbetween different accounts, wrong valuation of assets,…

Study break

An CPA has the responsibility to design the audit to provide

reasonable assurance of detecting errors and fraud that may have

a material effect on FS Which of the following, if material,

would be a fraud as defined in auditing standard:

1, Misappropriation of an assets

2, Mistake in calculation of asset’s value

3, Mistake in application of accounting principles

4, Duplication of recording accounting transaction

Materiality is the magnitude of an omission or

misstatement of accounting information that, in the light of

surrounding circumstances, make it probable that the judgment

of reasonable person relying on the information would havebeen changed or influenced by the omission or misstatement

Assessment of Materiality

 Materiality is a relative rather than absolute concept

 Materiality includes both quantitative and qualitative consideration (size and nature of the misstatement)

 Quantitative materiality level

No official guidelines within auditing standards

Bases for evaluating Materiality

 5-10% of Net Income before Taxes

 Qualitative Considerations

- Amount involve fraud are usually more important than

unintentional errors of equal dollar amounts => reflect on

honest and reliability of management

- Misstatements that are otherwise minor may be material ifthere are consequences influenced related significant

accounts

- Misstatements that are otherwise immaterial if they affect atrend in earning

Study Break

1 Which is the following statements is not correct about materiality:

A.The concept of materiality recognizes that some matters are important for fair presentation of FS in conformity with GAAP, whereas other matters are not important.

B.An auditor considers materiality for planning purpose in term of

largest aggregate level of misstatements that could be material to any one of the FS

C.Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments D.An auditor’s consideration of materiality is influenced by the auditor’s perception of needs of reasonable person who will rely on the FS

Study Break

2 Any amount of misstatement that is less than the level of materiality

would be referred to as:

A Quantitative misstatement

B Material misstatement

C Immaterial misstatement

D Probable misstatement

Audit Risk

 Audit risk means the risk that the auditor gives an inappropriateaudit opinion when the financial statements are materially

misstated (ISA 400)

 It’s not practical totally eliminate audit risk => minimize the risk

to extent possible (accepted audit risk)

Accepted audit risk

 Accepted audit risk is a measure of how willing the auditor is

to accept that the financial statements may be materially

misstated after the audit is completed and an inappropriateopinion has been issued

 For many audit firms, accepted audit risk is 5% or lower (1%

or ½%,…)

Accepted audit risk

AAR = 5%??????????????

Same as audit assurance = 95%

Audit Risk Model

Risk of Material Risk that the Auditors Audit Risk = Misstatement * Fail to Detect

the Misstatement

= Inherent Control Detection

Risk * Risk * Risk

Inherent Risk

 Inherent risk is the susceptibility of an account balance or

class of transactions to misstatements that could be material,individually or when aggregated with misstatements in otherbalances or classes, assuming that there are no related

internal control (ISA 400)

 Or Risk of fraud / errors arising due to nature of entity

Control Risk

 Risk that a material misstatement, that could occur in an

account balance or classic of transaction and that could be

material individually or when aggregated with misstatements

in other balances or classes, will not be prevented or detected

on a timely basis by the company’s internal control (ISA 400)

 OR Risk that controls do not prevent or detect fraud / errors

 Auditors assess CR through evaluating the effectiveness of

internal control system

Detection Risk

 Risk that an auditors’ substantive procedures will not detect

a material misstatement that exist in an account balance or

class of transaction, individually or when aggregated with

misstatements in other balances or classes (ISA 400)

OR Risk that auditor’s procedures do not detect material

fraud / errors

 Auditors can control DR => have responsibility to reduce

DR by performing substantive tests

Audit Risk Model

Interrelationship of the components of audit risk

AUDIT EVIDENCE

Any information used by the auditor to

determine whether the information being

audited is stated in accordance with

established criteria

Audit Evidence (AE)

 AE is the information obtained by the auditor in arriving atthe conclusions on which the audit opinion is based

 AE is the documentations and information which is

obtained by the auditor in connection with audit on which

the audit opinion is based (ISA 500 para 04)

 AE includes source documents and accounting records

underlying the financial report and corroborating

information from other sources

 Management Assertions

 Audit Objectives

3.1.4 Audit objectives in

financial audit

Management Assertions

1 Assertions about classes of transactions and

events for the period under audit

2 Assertions about account balances at period end

3 Assertions about presentation and disclosure

Management Assertions for Each Category of Assertions

Occurrence

Transactions and Events Account Balances Presentation and Disclosure

Existence Occurrence and rights

and obligations Completeness

Accuracy Classification

Cutoff

Completeness Completeness Valuation and

allocation Accuracy andvaluation

Classification and understandability Rights and

obligations

Audit Objectives

General Transaction-related Audit Objectives

Occurrence

Completeness

Accuracy

Recorded transactions exist

Existing transactions are recorded

Recorded transactions are stated

at the correct amountsPosting and

General Balance-related Audit Objectives

Existence

Completeness

Accuracy

Amounts included exist

Existing amounts are included

Amounts included are stated atthe correct amounts

Classification Amounts are properly classified

Presentation and disclosure related audit objectives

Phase I an audit approachPlan and design Phase III

Perform analyticalprocedures andtests of details

of balances

Phase II

Perform tests ofcontrols andsubstantive tests

of transactions

Phase IV audit and issueComplete the

an audit report

3.1.5 Audit process

Phase I: Plan and design an audit approach

Accept client and perform initial planning Understand the client’s business and industry

Assess client’s business risk Perform preliminary analytical procedures

Set materiality and assess acceptable

audit risk and inherent risk Understand internal control and assess control risk

Gather information to assess fraud risks

Phase II: Perform tests of controls and

substantive tests of transactions

Plan to reduce assessedlevel of control risk?

Perform tests of controlsPerform substantive tests of transactions

Assess likelihood of misstatements in

financial statements

No Yes

Phase III: Perform analytical procedures

and tests of details of balances

Low

Perform analytical procedures

Medium unknownHigh or

Perform tests of key itemsPerform additional tests

of details of balances

Phase IV: Complete the audit and

issue an audit report

Perform additional tests forpresentation and disclosureAccumulate final evidence

Evaluate resultsIssue audit reportCommunicate with auditcommittee and management

The audit report is the only thing that most users

see in the audit process and the consequences of

issuing an inappropriate report can be severe

Issue an Audit Report

Types of Audit Report

Techniques in Collecting

Audit Evidence

Types of Audit Evidence

Physical Examination

Audit Evidence

Physical Examination

It is the inspection or count by the

auditor of a tangible asset.

This type of evidence is most often

associated with inventory and cash

Definition: describes the receipt of a written or

oral response from an independent third party

examining the accuracy of information that was

requested by the auditor

Information often Confirmed

It is the auditor’s examination of the

client’s documents and records.

Internal

documents documentsExternal

Analytical Procedures

 Understand the client’s industry and business

 Assess the entity’s ability to continue as a

going concern

 Indicate the presence of possible misstatements

in the financial statements

 Reduce detailed audit tests

Inquiries of the Client

It is the obtaining of written or oral

information from the client in response to

questions from the auditor

Involves rechecking a sample of calculations

made by the client

The auditor’s independent tests of client

accounting procedures or controls that

were originally done as part of the entity’s

accounting and internal control system

 Use one’s senses to assess

client activities

 Tour plant to obtain a general

impression of client’s facilities

 Observation is rarely sufficient

by itself

 Often need to corroborate

with another kind of evidence

Appropriateness of Types of Evidence

Case study

For each of following audit procedures, indicate which type of

evidence is being gathered:

1 Sending a written request to the client’s customers requesting that they

report the amoung owned to the client.

2 Examining large sales invoices for period of two days before and after

year- end to determine sales recorded in the proper period

3 Agreeing the total of account receivable subsidiary ledger to account

receivable gerneral ledger account

4 Comparing the current year gross profit percentage with the gross

profit percentage for the last year.

5 Watching the client’s warehouse personel count of the raw material

inventory

Types of Audit tests in

Financial Audit

Types of Audit Tests

Tests of Controls Substantive tests

Tests of control

 An auditor performs tests of control to obtain evidence

about whether the control activities of the internal control

system are effective

 The tests are designed to provide evidence to support an

assessment of control risk at a level below high (indicatingreliance on the keys controls)

Substantive tests

 Performed on specific transactions and balances to see

whether the dollar amount of an account balance is

materially misstated

 These tests reduce detection risk

Types of substantive tests

 Analytical procedures: involve the study and comparison of

relationships between accounting data and related

information

 Tests of details: obtaining evidence on the items (or details)

included in an account balance or class of transactions:

 Substantive tests of transactions (used to determine

whether all six transaction related audit objectives have been satisfied for each class of transactions).

 Tests of details of balances (focus on the ending general

ledger balances for both balance sheet and income

statement accounts)

Internal Control

Five Components of Internal

Control

Control environment

 Includes governance and management’s overall attitude,

awareness and actions regarding IC and its importance in theentity (ASA/ISA 315.A65)

 Auditors should consider:

 Communication and enforcement of integrity and ethical values

 Commitment to competence

 Participation by those charged with governance

 Management’s philosophy and operating style

 Organisational structure

 Assignment of authority and responsibility

Entity’s risk assessment process

 Entity’s way of identifying and responding to business risks

 Once risks are identified, management needs to consider

their significance and how they should be managed

 Management may introduce plans to address specific risks

or it may accept a risk on a cost-benefit basis