AUDITING

 EXAM  REVISION  NOTES    

 
INTRODUCTION  TO  AUDITING   The  component  independent  person  
Auditing  Defined   (auditor)  reduces  info  risk.  
-­‐ The  accumulation  and  evaluation    
of  evidence   The  Benefits  of  an  External  Audit  
-­‐ To  determine  the  degree  of   1. Obtain  access  to  capital  markets  
correspondence  between  the  info   2. Have  a  lower  cost  of  capital  
and  established  criteria   3. A  deterrent  to  inefficiency  and  
-­‐ Report   fraud  
-­‐ Should  be  performed  by  a   4. Control  and  operational  
competent,  independent  person   improvements  
   
Types  of  Auditors   Auditing  is  an  Assurance  Service  
-­‐ External  Auditor  (public  acct)   AS  are  independent  professional  services  
-­‐ Internal  Auditor   that  improve  the  quality  of  info  for  
-­‐ Officers  serving  the  Auditor   decision  makers.  
General    
-­‐ Tax  Auditors   Other  assurance  services:  
  -­‐ Review  of  historical  financial  info  
Main  types  of  Audits   -­‐ Agreed-­‐upon  procedures  
-­‐ Financial  Statement  Audit   -­‐ Compliance  auditing    
-­‐ Performance  Audit   -­‐ Performance  auditing  
-­‐ Compliance     -­‐ Internal  auditing  
   
Financial  Statement  Audit   Levels  of  Assurance:  
-­‐ An  independent  examination   -­‐ Reasonable  (external  audit)  
-­‐ Of  an  entity’s  financial  statements,   -­‐ Limited  (internal  audit)  
supporting  documentation  and   -­‐ None  
records    
-­‐ In  order  to  form  an  opinion   OVERVIEW  OF  AUDITING  
-­‐ As  to  whether  the  FS  comply  with   What  does  the  audit  report  state?  
certain  levels  of  quality  (as   Title  
specified  in  the  accounting   Addressee  
standards),  and  present  a  true  and   Introductory  paragraph  
fair  view  of  the  entity’s  financial   -­‐ Identifies  the  statements  that  have  
position  and  performance.   audited  
  Responsibility  of  those  charged  with  
Each  element  defined:   governance  for  the  financial  report  
-­‐ Responsible  party  –  the  Board   -­‐ Management’s  responsibility  to  
-­‐ Subject  Matter  –  Financial  Report   prepare  the  FS  
-­‐ Intended  User  –  Shareholders   Auditor’s  responsibility  
-­‐ Component  Independent  person  –   -­‐ Plan  and  perform  the  audit  in  
external  Auditor   accordance  with  auditing  
-­‐ Sufficient  Appropriate  Evidence  –   standards  and  code  of  ethics  
determined  by  the  Auditing   -­‐ Consider  internal  controls  
Standards   -­‐ Use  of  judgement  
-­‐ Suitable  Criteria  –  Accounting   -­‐ Obtain  sufficient  appropriate  
Standards   evidence  
-­‐   Auditor’s  Opinion  
The  Demand  for  Auditing   -­‐ FS  are  prepared  in  accordance  
Information  Risk   with  the  Accounting  Standards  and  
-­‐ Remoteness  of  Info   give  a  true  and  fair  view  
-­‐ Biases  and  motives  of  the  provider   (unqualified)  
-­‐ Voluminous  data   -­‐ FS  are  not  prepared  in  accordance  
-­‐ Complex  exchange  transactions   with  the  Accounting  Standards  and  
   AUDITING  EXAM  REVISION  NOTES    
 
give  a  true  and  fair  view  (qualified   -­‐ Allowing  the  individual  to  act  with  
or  adverse)   integrity,  and  exercise  objectivity  
-­‐ No  opinion  provided  because  we   and  professional  scepticism  
could  not  obtain  sufficient    
appropriate  evidence  (disclaimer   Professional  Scepticism  
of  opinion)   -­‐ An  attitude  that  includes  a  
Other  reporting  responsibilities   questioning  mind  and  critical  
Auditor’s  signature  and  address   assessment  of  audit  evidence  
Date  of  Report   -­‐ The  auditor  should  not  assume  
Independence  Declaration   that  management  is  either  honest  
  or  dishonest  
Majors  steps  in  the  Audit  Process   -­‐ Require  evidence!  
1. Accept  the  client    
2. Understand  the  entity  and  its   Risk  
environment   Exposure  to  the  chance  of  injury  or  loss  
3. Understand  internal  control   For  a  business:  
4. Assess  the  risks  of  material   -­‐ Risk  associated  with  being  in  
misstatement   business  (business  risk)  
5. Develop  responses  to  assessed   For  an  auditor:  
risks   -­‐ Risk  associated  with  carrying  out  a  
6. Tests  of  controls   profession  (engagement  risk)  
7. Substantive  procedures   -­‐ Risks  associated  with  each  audit  
8. Completion  and  review   (audit  risk,  inherent  risk,  control  
9. Reporting   risk  and  detection  risk)  
   
Fundamental  Principles   Business  Risk  Approach  (Audit  Risk  
Ethics   Approach)  
-­‐ Integrity   -­‐ Comprehensive  consideration  of  
-­‐ Objectivity   the  strategic  or  business  risks  
-­‐ Professional  competence  and  due   facing  the  auditee  
care   -­‐ Systematic  approach  to  planning  
-­‐ Confidentiality   the  audit,  whereby  the  auditor  
-­‐ Professional  behaviour   gains  a  thorough  understanding  of  
 The  objective  of  an  audit   the  entity  and  its  environment    
-­‐ Knowledge  (ASA  315)   -­‐ Evaluation  of  internal  control  from  
-­‐ Responsibility  (ASA  200)   a  business  perspective  
-­‐ Quality  control  (ASA  220)   -­‐ Need  to  consider  the  relevant  risk  
-­‐ Rigour  and  scepticism  (ASA  200)   and  materiality  when  planning  an  
-­‐ Professional  judgement  (ASA  200)   audit  programme.  
-­‐ Evidence  (ASA  500)    
-­‐ Documentation  (ASA  230)   Audit  Quality  
-­‐ Communication  (ASA  260)   -­‐ Discharges  professional  
-­‐ Association  (ASA  200)   responsibilities  in  an  appropriate  
-­‐ Reporting  (ASA  700)   manner.  
  -­‐ Technically  component  manner    
Auditor  Independence   -­‐ Applies  due  professional  care  
-­‐ The  state  of  mind   -­‐ Applies  code  of  ethics  
-­‐ That  permits  the  provision  of  an    
opinion   BUSINESS  PROCESSING  AND  INTERNAL  
-­‐ Without  being  affected  by   CONTROL  
influences  that  could  compromise    
professional  judgement   Sales  and  Collection  Activity  
Sales  of  goods  to  customers:  
-­‐ Process  customer  order    
   AUDITING  EXAM  REVISION  NOTES    
 
-­‐ Grant  credit     checked  by  someone  who  was  not  
-­‐ Ship  goods   involved  in  routine  processing  
-­‐ Bill  customers  and  record  sales   -­‐ Information  processing  –  Controls  
  within  IT  applications  to  ensure  
Receiving  Cash:   accuracy,  completeness  &  
-­‐ Process  and  record  cash  receipts   authorisation  of  transactions.  
-­‐ Process  and  record  sales  returns    
and  allowances   ACCOUNTING  POLICY  CHOICE,  
-­‐ Provide  for  bad  and  doubtful  debts   JUDGEMENT  AND  ESTIMATION  
-­‐ Write-­‐off  uncollectible  accounts    
receivable   Choice  
  -­‐ Choice  in  accounting  standards  
Internal  Control   -­‐ Cost  or  revaluation  model  (PPE)  
Policies  and  processes  affected  by  the   -­‐ Depreciation  method  –  e.g.  straight  
entity  to  provide  reasonable  assurance  of:   line  or  diminishing  balance  
-­‐ Reliability  of  financial  reporting   -­‐ Inventory  –  weighted  average  or  
-­‐ Compliance  with  applicable  laws   FIF0  
and  regulations   -­‐ Intangible  assets  –  best  estimate  
-­‐ Effectiveness  and  efficiency  of   (depends  on  info  available)  
operations    
  Judgement  
The  Role  of  Internal  Control:   -­‐ Inventories  shall  be  measured  at  
-­‐ Provides  checks  and  balances   the  lower  of  cost  and  NRV  
within  the  accounting  system   -­‐ Should  an  outlay  on  R&D  be  
-­‐ To  safeguard  against  both   carried  forward  or  expensed  
deliberate  and  accidental  error  and   -­‐ Impairment  of  assets  –  to  
ensure  that  transactions  are   determine  asset’s  value  in  use  
processed  completely  &  accurately.   requires  an  estimation  of  the  
  future  cash  flows  to  be  derived  
Components  of  Internal  Control:   from  it  
-­‐ The  control  environment   For  any  indication  of  impairment,  the  
-­‐ The  entity’s  risk  assessment   entity  should  consider  these  indications:  
processes   -­‐ External  sources  of  info  –  market  
-­‐ Control  activities   value,  technology,  economic,  legal,  
-­‐ Info  and  communication   interest  rates  
-­‐ Monitoring  of  controls   -­‐ Internal  sources  of  info  –  physical  
  damage,  expected  changes  in  use,  
Control  Activities   performance  of  the  asset.  
-­‐ Segregation  of  duties  –  key    
processing  activities  undertaken   Estimation  
by  different  personnel   -­‐ Useful  life  of  a  non-­‐current  asset  
-­‐ Authorisation  –  processing  only   -­‐ Provision  for  doubtful  debts  
occurs  with  the  sanction  of    
management   Choice,  Estimation  and  Judgement  
-­‐ Adequate  documents  and  records  –   Hence,  it  is  possible  to  prepare  different  
Design  and  processing  of   financial  statements  for  same  situation.  
documents  to  ensure  timely,    
accurate  and  complete  recording  of   Preparers  of  FS  must  determine  whether  
info   or  not  their  decisions  are  warranted.  
-­‐ Physical  Controls  –  Restrictions  on    
access  to  assets  and  documents   -­‐ Management/preparers  of  FS  –  
-­‐ Independent  checks  on   experience,  knowledge,  objectivity  
performance  –  processing  of  info  is   -­‐ Context  –  influences,  risk