Title: About Auditing
1About Auditing Fraud Examination
- Accounting 537
- M. Popowits
2What is Philosophy?
- Philosophy is concerned with the systematic
organization of knowledge - Philosophy gets back to first principles, or
the concepts that underlie thoughts and action - The philosophy of a subject is the concepts
underlying a given branch of learning. - Sris definition the philosophy of a discipline
is the pot of unresolved intellectual questions
of that field .
3Insights from Sri Ram and Mautz Sharaf
- There is a lot of philosophy underlying auditing
FE. - Auditing is not accounting.
- Auditing and FE exist in a matrix of
philosophical and behavioral influences. - There are many logical methods used in auditing
and FE
4Why do we do what we do as professionals?
APPLICATIONS
CONCEPTS
PHILOSOPHY
5TWO BASIC PHILOSOPHICAL INQUIRIES
how do you know?
- What is true? Questions of FACT
- What should be? - Questions of VALUE
6DEFINITIONS
- Accounting the process of identifying,
measuring, and communicating economic information
to permit informed judgments and decisions by
users of the information. ASOBAT, 1966 - Auditing is a systematic process of
objectively obtaining and evaluating evidence
regarding assertions about economic actions and
events to ascertain the degree of correspondence
between those assertions and established criteria
and communicating the results to interested
users. ASOBAC, 1973
7Auditing is NOT Accounting!
- Auditing emphasizes proof, and hence, has its
roots, not in accounting, which it reviews, but
in logic, on which it leans heavily for ideas and
methods. (Mautz Sharaf, 1961) - Assurance services.
8EPISTEMOLOGY
ETHICS
PHILOSOPHICAL CONCEPTS
AUDITING FRAUD EXAMINATION
PSYCHOLOGY
LAW
ECONOMICS
9Some influences
- Ethics of reporting fraud
- Psychological factors in auditor judgment
- Background, personality, rationalization
- Economic Legal Factors
- Costs / benefits of regulation
- Time limitations on audits
- Liability
- Civil Criminal law
10EPISTEMOLOGY
ETHICS
PHILOSOPHICAL CONCEPTS
AUDITING FRAUD EXAMINATION
PSYCHOLOGY
LAW
ECONOMICS
11EPISTEMOLOGY
ETHICS
PHILOSOPHICAL CONCEPTS
AUDITING FRAUD EXAMINATION
PSYCHOLOGY
LAW
ECONOMICS
12Epistemology
EPISTEMOLOGY
- Use of Logic, Ways of knowing
- Logical procedure of auditing
- Hired to give an opinion about the fairness of
F/S - Assertions-based
- Existence or occurrence
- Completeness
- Rights and obligations
- Valuation or allocation
- Auditor tests the assertions by gathering and
evaluating evidence, using various ways of
knowing, and making decisions about truth of each
assertion, and ultimately the fairness of the F/S -
13Why Auditing?
- Viability of Capital Markets
- Investors need reliable information to determine
RISK RETURN of investments. - Auditors attest to the fairness of F/S.
- An unqualified opinion provides reasonable
assurance that financial statements are free from
material misstatement.
14Auditing Approach
- Assertions-based
- The auditor tests F/S assertions
Every number on the financial statements
represents a set of claims being made
by management known as
Assertions
15Financial Statement Assertions
Sales 1,500,000.00
- This statement asserts
- All sales are properly included,you have left
none out - 2. All sales actually occurred, numberrepresents
actual sales made - 3. Sales are properly valued, net ofreturns,
allowances, discounts - 4. You have proper claim to revenuegenerated,
sales belong to you
16Financial Statement Assertions
Sales 1,500,000.00
This statement asserts 1. All sales are
properly included, you have left none
out 2. All sales actually occurred, number
represents actual sales made 3. Sales are
properly valued, net of returns,
allowances, discounts 4. You have proper claim to
revenue generated, sales belong to you
COMPLETENESS
17Financial Statement Assertions
Sales 1,500,000.00
This statement asserts 1. All sales are
properly included, you have left none
out 2. All sales actually occurred, number
represents actual sales made 3. Sales are
properly valued, net of returns,
allowances, discounts 4. You have proper claim to
revenue generated, sales belong to you
COMPLETENESS
EXISTENCE
18Financial Statement Assertions
Sales 1,500,000.00
This statement asserts 1. All sales are
properly included, you have left none
out 2. All sales actually occurred, number
represents actual sales made 3. Sales are
properly valued, net of returns,
allowances, discounts 4. You have proper claim to
revenue generated, sales belong to you
COMPLETENESS
EXISTENCE
VALUATION
19Financial Statement Assertions
Sales 1,500,000.00
This statement asserts 1. All sales are
properly included, you have left none
out 2. All sales actually occurred, number
represents actual sales made 3. Sales are
properly valued, net of returns,
allowances, discounts 4. You have proper claim to
revenue generated, sales belong to you
COMPLETENESS
EXISTENCE
VALUATION
RIGHTS/ OBLIGATIONS
20The Logic of Auditing
- Auditors must give an opinion about the fairness
of the financial statements. - They do this chiefly by validating the F/S
assertions. - To do this they use their knowledge of
transaction cycles, risk analysis, and the audit
trail to gather evidence for validation.
21EvidenceSidebar on Information Evidence by Sri
Ramamoorti
- What is the relationship between information and
evidence?
Information
Evidence
22EvidenceSidebar on Information Evidence by Sri
Ramamoorti
- What makes information evidence?
- Relevant pertains to the question
- Sufficient quantity
- Reliable
23The CFEs Evidence Square
Testimonial
Documentary
Gathered from Individuals, Includes Interviewing,
Interrogation Honesty Tests
Gathered from Papers, Computers Written
Printed Sources
Personal Observation
Fingerprints, Weapons, Stolen Property Often
Involves Forensic Analysis
Collected by the Investigator, includes
Invigilation, Surveillance and Covert Operations
Physical
24Logical Methods (MS pp. 110-117)
- Overall our attitude is one of Professional
Skepticism - Within that we apply logical methods
- Authoritarianism Mysticism
- Rationalism Empiricism
- Pragmatism
25Logical Methods (MS pp. 110-117)
- Authoritarianism what another said
- Mysticism intuition, instinct, unexplained
understanding of relationships - Rationalism reasoning from universal concepts
to a particular case (deduction)
26Deduction
- Premise All men are mortal.
- Premise Socrates is a man.
- Inference (Conclusion) Therefore Socrates is
mortal. - The picture is above the desk.
- The desk is above the floor.
- Therefore the picture is above the floor.
- All birds can fly.
- A cardinal is a bird.
- Therefore a cardinal can fly.
27Deduction?
- Every criminal opposes the government.
- Everyone in the opposition party opposes the
government. - Therefore everyone in the opposition party is a
criminal. - LOGICAL FALLACY!
- FALLACY OF THE UNDISTRIBUTED MIDDLE
28Deduction in Auditing?
- Premise Strong internal control requires 3
people be involved in every transaction
reporting, execution, authorization - Premise Here is a transaction that does not have
3 people involved - Conclusion Internal control over this
transaction is weak
29Logical Methods (continued) (MS pp. 110-117)
- Empiricism perceptual experience
- Pragmatism truth by observing consequences,
practicality, what works
30Auditing Methods (MS pp. 118 122)
- Authoritarianism
- Testimony of people (confirmations
representations) - Testimony of documents (outside, inside)
- Mysticism
- Scanning of records, reports
- Evaluation of peoples statements
- Rationalism
- Recalculations, testing of internal controls,
using the audit trail - Empiricism
- Physical examination, counting
- Pragmatism
- Subsequent actions of company, officers,
employees, customers, vendors
31STRENGTH OF EVIDENCE
- Incontrovertible
- Conclusive
- Persuasive
- Corroborative
- Reasonable/Moderate
- Minimal
- Corroboration - by experienced auditors allows
evidentiary matter to be evaluated holistically,
and in the aggregate, not as separate, unrelated
items - Quality copies vs. originals, etc.
- Statistics used to measure adequacy of evidence
32- Auditor tests the assertions by gathering and
evaluating evidence, using various ways of
knowing, and making decisions about truth of each
assertion, and ultimately the fairness of the F/S -
33DECISION MATRIX
Type II Error (ß)
Type I Error (a)
34Bridging to Fraud Examination.
35EPISTEMOLOGY
ETHICS
PHILOSOPHICAL CONCEPTS
AUDITING FRAUD EXAMINATION
PSYCHOLOGY
LAW
ECONOMICS
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44End About Auditing
- Fraud Examination
- Actg 537