Chapter 2

The Financial
Statement
Auditing
Environment
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Types of Auditors
External Auditors

Internal Auditors

(not employed by the entity

being audited, stateauthorized title)

(employed by the entity

being audited, sometimes
certified by a private body)

Government
Auditors

Forensic Auditors

(employed by
national/local government;
tax auditors)

(specialized in fraud, whitecollar crime)

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Types of Services Offered by

Audit Firms
Audit Services:
Financial statements audits, internal control audits, compliance audits,
operational audits and forensic audits reasonable assurance
Review Services:
Review of financial information, e.g. review of interim financial
information only limited assurance
Other Assurance Services:
Assurance other than audit and reviews of historic financial information,
e.g. assurance on a entitys reporting on its sustainability performance
Related Services:
Agreed-upon procedures regarding financial information and
compilation of financial information
Other Non-Assurance Services:
Tax services and management advisory services
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Audit Firms
Audit firms range in size from a single proprietor to
thousands of owners (or partners) and thousands of
professional and administrative staff employees.

Big 4

Deloitte

Mid-Tier

National

Local

Baker Tilly
BDO

EY

Crowe
Horwath

KPMG

Grant
Thornton

PwC

Praxity
RSM
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Audit Teams
Table 21 Selected Duties of Audit Team Members

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A Time of Challenge and Change

1990

2000

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 auditees.
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A Series of Scandals
Enron

WorldCom
Parmalat
Lernout &
Hauspie

Ahold
Arthur
Andersen
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An Explosion of Scandals

Brokerage
Firms

Corporate
Giants

Stock
Exchanges
Mutual
Fund
Managers

Accounting
Firms
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Regulation
Self-regulation by the profession
versus
government regulation
Stricter regulation
More public oversight and stricter
enforcement
International Standards on Auditing
more comprehensive
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Financial Crisis 2007-2009

Rating
Agencies

Banks

Supervisors
Hedge
Funds

Central
Banks
Accounting
Firms
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Societys Expectations and

the Auditors 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.
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Context of Financial
Statement Auditing
The primary context with which an auditor is concerned is the industry or
business of his or her auditee. In other words, the context provided by the
entitys business impacts the auditor and the audit, and is thus a primary
component of the environment in which financial statement auditing is
conducted.

Thought Question:
How would your concerns about the
inventory account differ for a Computer
Hardware Manufacturer versus a Jewelry
Store?
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A Model of Business
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.

Board of Directors

Audit
Committee
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A Model of Business
Strategies

Objectives

Processes
(5 broad
categories)

Transactions
(within
processes)

Internal
Controls
Reports, e.g.
accounting
reports about
transactions
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A Model of Business Processes:

Five Components

Purchasing
Process

Financing
Process
Human
Resource
Management
Process
Inventory
Management
Process

Revenue
Process

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An Overview of Business
Figure 2-1 An Overview of Business

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Organizations that Affect the

Accounting Profession
International Federation of
Accountants

International Accounting
Standards Board

IFAC

IASB

International Auditing and

Assurance Standards Board
(IAASB)
International Ethics Standards
Board for Accountants (IESBA)

International Organization of
Supreme Audit Institutions

International Organization of
Securities Commissions

IOSCO
European Union EU
EU Directive on Statutory Audits
EU Regulation about PIE Audits

INTOSAI
United States
Securities and Exchange
Commission (SEC)
Public Company Accounting
Oversight Board (PCAOB)
Financial Accounting Standards
Board (FASB)
American Institute of Certified
Public Accountants (AICPA)
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IAASB Standards

International Standards on Auditing (ISAs)

International Standards on Review
Engagements (ISREs)
International Standards on Assurance
Engagements (ISAEs)
International Standards on Related Services
(ISRSs)
International Standards on Quality Control
(ISQCs)
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Auditing Standards
Auditing standards serve as
guidelines for and measures of
the quality of the auditors
performance.
IAASB issues
International
Standards on Auditing
(ISAs).
IFAC members

ISAs are
considered to
be minimum
standards of
performance for
auditors.
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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 Auditors 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
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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 Auditors 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

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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
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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 Auditors Expert

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Audit Conclusions and

Reporting
ISA 700 Forming an Opinion and Reporting on Financial
Statements
ISA 705 Modifications to the Opinion in the Independent
Auditors Report
ISA 706 Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditors Report
ISA 710 Comparative Information Corresponding Figures
and Comparative Financial Statements
ISA 720 The Auditors Responsibilities Relating to Other
Information in Documents Containing Audited Financial
Statements

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Specialized 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

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Sections in ISAs
Introductory material
Objectives
Definitions
Requirements
Application and other
explanatory material

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Ethics, Independence and

the Code of Ethics
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 characterize or mark a
profession or professional person. All
professions operate under some type of code
of ethics or code of conduct.
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IESBA Code of Ethics for Professional

Accountants
IESBA Code of
Ethics
Conceptual
Framework Approach

Principles
Integrity
Objectivity
Professional competence
and due care
Confidentiality
Professional behaviour

Application to
specific situations,
including situations
that threaten
independence of
mind or
independence in
appearance
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Auditors Legal Liability

Threat of legal liability:
Main deterrent to auditors
misconduct
Legal doctrines:
Joint and several liability
Proportional liability
Liability caps
Litigation exposure and audit markets:
Concentration
Barriers to entry
Liability reforms
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