Transcript What is Auditing Anyway?

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Independent
Auditor
Management
Management
Prepares
1
3
Auditors
serve as
Income Statement
intermediaries
Balance Sheet
between
Preparers
Stmt ofand
CF
Users of financial
information.
Auditors
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Lends
Credibility
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Users
Basic
Mistrust
Auditing Defined
Auditing is a systematic process of . . .

obtaining and

evaluating evidence regarding
management assertions

to ascertain the degree of correspondence
between those assertions and established
criteria and

communicating the results.
Management Assertions

Existence or Occurrence

Completeness

Valuation or Allocation

Rights and Obligations

Presentation and Disclosure
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Existence or Occurrence
 Whether
assets or liabilities of
the entity exist at a given date
and
 Whether
recorded transactions
have occurred during a given
period.
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Completeness

Whether all transactions and accounts
that should be presented in the financial
statements are so included.
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Valuation or Allocation

Whether asset, liability, revenue, and
expense components have been included
in the financial statements at appropriate
amounts.
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Rights and Obligations

Whether

assets are the rights of the entity and

liabilities are the obligations of the entity
at a given date.
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Presentation and Disclosure

Whether particular components of the
financial statements are properly

classified,

described, and

disclosed.
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Management Assertions:
An Example
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Inventory Example

Consider a bicycle shop that has just
prepared its financial statements and
shows an inventory of $50,000.

In order for the inventory to be a correct
representation on the financial
statements, the inventory must . . .
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The inventory must . . .

Be Complete

All of the transactions regarding the inventory
have been recorded prior to year-end;

That is, the company must have recorded all
receipts of inventory before year-end.
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The inventory must . . .

Be owned by the company (Rights)

The company had title to all the inventory
and has control over the bicycles and other
products.
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The inventory must . . .

Be properly valued

At the lower of cost or market at some
acceptable valuation method (FIFO, LIFO).

All old or obsolete inventory should be written
down to its scrap or wholesale price.
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The inventory must . . .

Be properly disclosed
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The inventory methods used (e.g., LIFO,
FIFO) must be disclosed;
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As well as the nature of the inventory (e.g.,
bicycles, parts, accessories, and so on.)
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Audit Program . . .

The audit program should gather
convincing evidence that . . .
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The inventory exists
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That it is owned
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Completely recorded,
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Properly valued and
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Properly disclosed.
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Audit Program . . .

The amount, timing, and nature of the
specific audit tests to be performed will be
influenced by:

The integrity of management

The client’s internal control system

The amount of misstatement that could make
a difference to a user (materiality).
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Overview of Financial
Statement Auditing
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Overview of Financial Statement Auditing
Assertions About
Economic Events
Fin Stmts
Audit Report
Independent
Auditor
Obtains &
Evaluates
Evidence
Other Reports
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APB
ARB
GASB
AICPA
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EITF
SEC
How’d
They do
that?
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Evidence . . .
 Consists
of . . .
The underlying accounting data
and all corroborating information
available to the auditor.
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Evidence . . .
 Must
be objectively gathered.
 Most
audits are performed on a
test basis.
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Objectively Gathered Evidence
Population
Sample
Pull sample and then infer from the
sample to the population
Guidelines for
Auditors
Generally Accepted
Auditing Standards
(GAAS)
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Generally Accepted Auditing
Standards (GAAS) . . .
. . . are general guidelines to aid
auditors in fulfilling their
professional responsibilities in the
audit of financial statements.
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Auditing Standards . . .

General Standards


Standards of Field Work


Three standards relating to the
characteristics of the auditor.
Three standards relating to the conduct
of the examination.
Reporting Standards

Four standards relating to
communication of results.
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The General
Standards
Generally Accepted
Auditing Standards
(GAAS)
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General Standards . . .
1. The examination is to be
performed by a person or
persons having adequate
technical training and
proficiency as an auditor.
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General Standards . . .
2. In all matters relating to the
assignment, an independence
in mental attitude is to be
maintained by the auditor or
auditors.
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General Standards . . .
3. Due professional care is to be
exercised in the performance
of the examination and the
preparation of the report.
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The Standards of
Field Work
Generally Accepted
Auditing Standards
(GAAS)
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Standards of Field Work
1. The work is to be adequately
planned and assistants, if
any, are to be properly
supervised.
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Standards of Field Work
2. A sufficient understanding of the
internal control structure is to be
obtained to plan the audit and to
determine the nature, timing,
and extent of tests to be
performed.
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Standards of Field Work
3. Sufficient competent evidential
matter is to be obtained through
inspection, observation, inquiries,
and confirmation to afford a
reasonable basis for an opinion
regarding the financial
statements under examination.
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The Standards of
Reporting
Generally Accepted
Auditing Standards
(GAAS)
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Standards of Reporting
1. The report shall state whether
the financial statements are
presented in accordance with
generally accepted accounting
principles.
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Standards of Reporting
2. The report shall identify those
circumstances in which such
principles have not been
consistently observed in the
current period in relation to the
preceding period.
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Standards of Reporting
3. Informative disclosures in the
financial statements are to be
regarded as reasonably
adequate unless otherwise
stated in the report.
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Standards of Reporting
4. The report shall either contain
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

An opinion regarding the financial
statements, taken as a whole, or
An assertion to the effect that an
opinion cannot be expressed.
When an overall opinion cannot be
expressed, the reasons therefor
should be stated.
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Standards of Reporting

In all cases where an auditor’s
name is associated with financial
statements,

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the report should contain a clear-cut
indication of the character of the
auditor’s examination, if any, and
the degree of responsibility taken.
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The Audit Risk Model
Overview
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The Audit Risk Model
 Generally Accepted Auditing
Standards establish a “model”
for carrying out audits.
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The Audit Risk Model
 Requires auditors to use their
judgment . . .
 In assessing risks, and
 Then in deciding what procedures
to carry out.
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Based on . . .
 The auditor’s assessment of
various risks and
 any tests of controls, the
auditor makes judgments
about kinds of evidence needed
to achieve “reasonable
assurance.”
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The Audit Risk Model
Some Terms
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Audit Risk (AR)

The risk that the auditor may
unknowingly fail to
appropriately modify his/her
opinion on financial statements
that are materially misstated.
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Inherent Risk (IR)

The risk that an assertion is
susceptible to a material
misstatement, assuming there
are no related controls.
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Control Risk (CR)

The risk that a material
misstatement that could occur
in an assertion will not be
prevented or detected on a
timely basis by the entity’s
internal control.
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Detection Risk (DR)

The risk that the auditor will
not detect a material
misstatement that exists in an
assertion.
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Mathematially

AR = IR x CR x DR
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Highly judgmental

The objective in an audit is to
limit audit risk (AR) to a low
level, as judged by an auditor.
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Audit Risk

Auditors assess IR and CR
along a spectrum

Maximum risk

Moderate risk

Low risk
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Audit Risk

A maximum risk assessment
(i.e., 100%) means that


the auditor believes controls are
unlikely to be effective; or
The evaluation of their
effectiveness would be inefficient.
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Securities and Exchange Commission
FAF
FASAC
AICPA
POB
ISB
FASB
AcSEC
ASB
SECPS
Exec
Comm.
Ethics
PRC
PITF
QCIC
SEC
Reg