AUDITING AND THE PROFESSION OF AUDITOR

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AUDITING AND THE PROFESSION OF AUDITOR
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What is Auditing?
Standards/Criteria
Auditing
Report
Ther process of testing the conformity among
facts/events/report with the underlying standards
or criteria
Facts/ Events
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Why Auditing is Needed?

1. The possible existence conflict of interest among
   the interested parties.
2. The possible existence if the facts/events not
   conform with the underlying standard/criteria.
3. The possible existence if the report not conform
   with the facts/events being reported.
4. The users of information/report suffering loss
   due the misleading information/report.
5. The interested parties do not have any competency
   to do auditing by themselves.

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The Basic Requirements of Auditing

1. The standards or criteria to measure or to tests
   the audit objects
2. The availability of supporting data or
   corroborating data or information to tests the
   conformity of facts/events/reports with the
   underlying standards or criteria.

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The Types of Auditing

1. Financial Statements Audit ? the underlying
   standards/criteria is Financial Accounting
   Standards.
2. Compliance Audit ? the underlying
   standards/criteria is managements policies or
   procedures.
3. Operational Audit/management Audit, the
   underlying standards/criteria is standards
   operational performance.

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The Form of Audit Report

1. Financial Statements Audit ? Auditor Opinion,
   written in audit report.
2. Compliance Audit ? the notes, the comments, or
   the suggestion regarding the level of conformity
   between the rules and the implementation, written
   in auditors report.
3. Operational Audit/management Audit, the notes
   regarding the operating performance, i.e.
   sub-standards, standards, or above standards.

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Summary the Types of Audit
Types of Audit Nature of Assertions Established Criteria Nature of Auditors Report
Financial Statements Audit Financial statement data Generally accepted accounting principles Opinion on fairness of financial statements
Compliance Audit Claims or data pertaining to adherence to policies, laws, regulations, etc. Managements policies, laws, regulations, or other third-party requirements. Summary of findings or assurance regarding degree of compliance.
Operational Audit Operational or performance data. Objectives set, either by managements or enabling legislation. Efficiency and effectiveness observed recommendations for improvement.
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The Main Roles of Financial Statements Audit
Management
The Users of Financial Statements

• Investors/Potential Investors
• Creditor/potential creditors
• Government
• Others

• Financial Statements
• Income Statements
• Retained Earning
• Balance Sheet
• Cash Flow Statements
• Disclosures to the FS

FS Audit to tests the fairness of the FINANCIAL
STATEMENTS
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Overview of the Financial Statements Audit
FINANCIAL STATEMENT AUDIT
AUDIT TO PROVE THE FAIRNESS OF THE FINANCIAL
STATEMENTS AND TO SUPPORT AUDITORS OPINION TO
THE FINANCIAL STATEMENT
ARE THEY PRESENTED FAIRLY IN ACCORDANCE
WITH GAAP?

• FINANCIAL STATEMENTS
• Income statement
• Balance Sheet
• Retained Earning
• Cash flow statement

INTERNAL CONTROL STRUCTURE (ICS) (POLICIES,
PROCEDURES, DOCUMENTS, HRM, IT, ORG. CULTURE )
BUSINESS ACTIVITIES
SOURCE DOCUMENTS
ACCOUNTING RECORDS

• Financing cycle
• Expenditure cycle
• Conversion cycle

• HRM/Payroll cycle
• Revenue cycle
• Investment cycle

Cash Balance
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The Definition of Auditing

• 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.

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The Relationship Between Accounting and Auditing
AUDITING GUIDED BY GAAS RESPONSIBILITY OF AUDITOR
ACCOUNTING GUIDED BY GAAP RESPONSIBILITY OF
MANAGEMENT
Analyze events and transactions
Obtain and evaluate evidence concerning the
financial statements
Measure and record transaction data
Verify statements are presented fairly in
conformity with GAAP
Classify and summarize recorded data
Express opinion in audit report
Prepare financial statements per GAAP
Deliver audit report to client
Distribute financial statements and auditors
report to stockholders in annual report
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The Auditing Process
Obtain evidential matter through audit procedures
Dual Purpose Test
Concurrent test of control
Procedures to understand ICS
Test of controls

• Substantive tests
• Analytical procedures
• Detail of transactions
• Detail of balances

Evaluate for sufficiency and competence
Reasonable?
Express unqualified, qualified, or
adverse opinion as appropriate
Disclaim, qualify or adverse opinion as
appropriate
Yes
No
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The Profession of Independent Auditor

1. They work under CPA firm.
2. CPA firm is a practice unit for the independent
   auditor to provide their services. The
   organization form of CPA firm must conform with
   form permitted by law or regulation.
3. To set up CPA firm, someone must obtain
   certification as an auditor independent, i.e.
   they have to past the CPA examination.

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The Services of Accounting Firm

• Attest services, such as financial statements
  audit, compliance audit, and operational audit.
• Non-attest services, such as bookkeeping, tax,
  and consulting.

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The Types of Auditor

• Independent Auditors, are usually CPAs as
  individual practitioners or members of CPA firms
  who render professional auditing services to
  clients.
• Internal Auditors, are employees of the
  organizations they audit. The objective is to
  assist the management to effectively discharge
  their responsibilities.
• Government Auditors, are auditors which are
  employed by various governmental agency.

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The Assumption in Auditing

• Supporting/corroborating data are available and
  verifiable.
• Data are verifiable when two or more qualified
  individuals, working independently of one
  another, reach essentially similar conclusions
  from an examination of the data.
• The primarily concerned to verifiability is the
  availability of evidence.

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Principles in Examining Evidences

• Validity, means that evidences are authentic,
  true, sound, and well-grounded
• Appropriateness of the accounting treatment,
  means that evidences are conform with established
  accounting standard.

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The Need of Financial Statements Audit

• Conflict of interest
• Consequence
• Complexity
• Remoteness

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The Need of Financial Statements Audit
1. Conflict of interest a. Among users
and management, in a senses that financial
statement and accompanying data may be
intentionally biased in managements favor.
b. Among the different classes of users
financial statements, such as creditors and
stockholders. Users of financial
statements seek assurance from independent
auditors that the information both (1) free from
management bias and (2) neutral with respect to
the various user groups.
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The Need of Financial Statements Audit

• 2. Consequence
• Published financial statements represent an
  important and, in some cases, the only source of
  information used in making significant
  investment, lending, and other decisions.
• 3. Complexity
• Both subject matter of accounting and the process
  of preparing financial statements have become
  increasingly complex. As level of complexity
  increases, so does the risk of misinterpretations
  and unintentional errors.

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The Need of Financial Statements Audit

• 4. Remoteness
• Distance, time, and cost make it impractical to
  seek direct access to the underlying accounting
  records to perform their own verifications of
  financial assertions.

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Auditing Standards

• GENERAL STANDARDS
• The audit is to be performed by a person or
  persons having adequate technical training and
  proficiency as an auditor.
• In all matters relating to the assignment, an
  independence in mental attitude is to be
  maintained by the auditor or auditors.
• Due professional care is to be exercised in the
  performance of the audit and the preparation of
  the report.

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Auditing Standards

• STANDARDS OF FIELD WORK
• The work is to be adequately planned, and
  assistants, if any, are to be properly
  supervised.
• A sufficient understanding of the internal
  control structure (ICS) is to be obtained to plan
  the audit and to determine the nature, timing,
  and the extent of tests to be performed.
• Sufficient competent evidential matter is to be
  obtained through inspection, observation,
  inquiries, and confirmations to afford a
  reasonable basis for an opinion regarding the
  financial statements under audit.

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Auditing Standards

• STANDARDS OF REPORTING
• The report shall state whether the financial
  statements are presented in accordance with
  generally accepted accounting principles.
• 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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Auditing Standards

1. Informative disclosures in the financial
   statements are to be regarded as reasonably
   adequate unless otherwise stated in the report.
2. The report shall either contain an expression of
   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. In all cases where an auditors
   name is associated with financial statements, the
   report should contain a clear-cut indication of
   the character of the auditors work, if any, and
   the degree of responsibility the auditor is
   taking.

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Summary of Audit Tests
TESTS OF CONTROLS SUBSTANTIVE TESTS
Types Concurrent Additional Analytical procedures, tests of details of transactions, tests of details of balances.
Purpose Determine effectiveness of design and operation of internal control structure policies and procedures. Determine fairness of significant financial statement assertions.
Nature of test measurement Frequency of deviations from control structure policies and procedures Monetary errors in transactions and balances
Appicable audit procedures Inquiring, observing, inspecting, reperforming, and computer-assisted audit techniques Same as tests of controls, plus analytical procedures, counting, confirming, tracing, and vouching.
Timing Primarily interim work Primarily at or near balance sheet date
Audit risk component Control risk Detection risk
Primary field work standard Second Third
Required by GAAS No Yes
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RELATIONSHIP AMONG AUDIT RISK COMPONENTS AND THE
NATURE, TIMING, AND EXTENT OF SUBSTANTIVE TESTS
COMBINED ASSESSED LEVELS OF INHERENT AND CONTROL
RISK
Maximum
High
Moderate
Low
ACCEPTABLE LEVEL OF DETECTION RISK
Very Low
Low
Moderate
High
SUBSTANTIVE TESTS
Less Effective
NATURE
More Effective
TIMING
Interim
Year-end
EXTENT
Smaller sample
Larger sample