Module 1 Summary
Introduction to auditing
This module provides a framework for auditing and an explanation of its nature and purpose. External and internal auditing are described and compared. The module also includes a discussion of the audit report and an overview of the umbrella concept of assurance engagements.
Define auditing and the objective of an audit of financial statements.
- Auditing is the systematic process of objectively obtaining and evaluating evidence regarding assertions to ascertain the degree of correspondence between assertions and established criteria.
- The objective of an audit of financial statements is to express an opinion as to whether or not the information in the financial statements is presented fairly.
Define information risk and explain how it arises.
- Information risk is the risk that the financial statements are false or misleading. Sources of information risk are
- asymmetry of information
- errors from weak accounting system
- deceptive management practices
- Information asymmetry arises because of
- remoteness of information
- bias or motivation of those providing information
- high volumes of transactions and data
- the complexity of transactions
Explain the purposes of an audit of financial statements.
- The purposes of an audit of financial statements include
- fulfilling statutory or other requirements
- reducing information risk
- addressing the asymmetry of information between providers and users of financial information
Describe the principal activities of a public accounting firm.
- The principal activities of a public accounting firm include
- audit engagements
- review engagements
- other assurance services
- accounting services
- taxation services
- consulting services
- bankruptcy and receivership engagements
Compare external auditing to internal auditing.
- External auditing and internal auditing are similar in a number of ways:
- Both require independence.
- Both use sampling.
- Both produce reports.
- Both function within established standards.
- External auditing and internal auditing are different in a number of ways:
- They produce reports for different people.
- They have different objectives.
- They have different scopes of work.
- They have different degrees of concern with day-to-day operations.
- The nature and form of their reports are different.
- They are remunerated in different ways.
Describe the operational auditing function in a company.
- Operational audits are defined as a review of any part of an organization’s operating procedures and methods for the purpose of evaluating the effectiveness, efficiency, and economy of the unit being audited.
Explain comprehensive auditing for the public sector.
- Comprehensive audits generally consist of three parts:
- a financial statement (attest) audit
- a compliance audit, measuring compliance with relevant legislation and government regulations and policies
- a value-for-money audit (operational audit), assessing if the program or unit being audited is providing the output (effectiveness) intended at an appropriate cost (efficiency and economy)
Describe the concept of an assurance engagement.
- In an assurance engagement, the auditor issues a written opinion about the subject matter of the engagement for which the accountable party (usually management) is responsible.
- The public accountant provides credibility or assurance to the assertions made by the responsible party.
- Financial statement audits are a sub-class of assurance engagements.
Explain the difference between an attest engagement and a direct reporting engagement.
- In an attest engagement, the public accountant is expressing an opinion on a written assertion from the responsible party (usually management).
- In a direct reporting engagement, the assertion is implied (not written) and the professional accountant expresses an opinion on the matter in a report using suitable evaluation criteria.
Explain audit engagements in terms of the general framework of assurance engagements.
- Audit engagements are attest engagements.
- Management (the asserter) is responsible for the assertions in the financial statements.
- The users are the investors, creditors, and so on, who make decisions based on the financial statements.
- The auditor (the assurer) provides a high level of assurance on the assertions made by management. The audit can only be carried out by suitably qualified, independent public accountants.
Distinguish between audit, review, and compilation engagements.
- An audit provides a high level of assurance that financial statements are fair in all material respects.
- Review engagements provide a moderate level of assurance that financial statements are in accordance with appropriate criteria, in all material respects. The accountant’s role is to ensure that the information is plausible (or credible).
- A compilation engagement is used when an accounting firm provides bookkeeping services or prepares financial statements for a client. No assurance is provided by the accountant, but there is an over-riding professional responsibility not to be associated with information that the accountant believes to be misleading.
Describe the components of a standard auditor’s report.
- The standard unqualified auditor’s report consists of three paragraphs:
- The introductory paragraph identifies the statements reported upon, states that financial statements are the responsibility of management, and states that the opinion of the financial statements is the responsibility of the auditor.
If differential reporting is used by the client, this should be identified in the introductory paragraph, with reference to the supporting note disclosure.
- The scope paragraph states that the audit has been completed in accordance with generally accepted auditing standards and sets out some of the audit work done as a basis for the auditor’s opinion.
- The opinion paragraph states the auditor’s opinion of the financial statements.
In addition, the report must contain a title, the name of the addressee, the city and date of issue, as well as the auditor’s signature.
Explain the reasons for reservations in an auditor’s report.
- There are two causes for reservations of opinion:
- Departure from generally accepted accounting principles, such as
- an inappropriate accounting treatment
- an inappropriate valuation
- inadequate disclosure
- A limitation to the scope of the audit caused by
- client-imposed restrictions
- circumstances or uncertainties
Describe the circumstances in which an auditor would issue an audit report containing an unqualified opinion, a qualified opinion, an adverse opinion, and a denial of opinion.
- If the reservation arises because of a departure from GAAP, the auditor will issue an unqualified opinion, a qualified opinion, or an adverse opinion, depending on whether the auditor considers the effect of the departure to be immaterial, material, or highly material.
- If the reservation is caused by a scope limitation, the auditor will issue an unqualified opinion, a qualified opinion, or a denial of opinion, depending on whether the auditor considers the effect of the scope limitation to be immaterial, material, or highly material.
Draft a standard auditor’s report.
- An example of a standard auditor’s report is given in CICA Handbook section 5400 and page 62 of the text.
- An interactive demonstration in Topic 1.8 also outlines the contents of the standard auditor’s report.
- Study carefully the wording of the report and be familiar with the contents of each of the three paragraphs.
Describe in general terms the recommendations concerning the presentation of additional information in the auditor’s report and disclosures for comparative figures.
- Section 5701 of the CICA Handbook — Assurance deals with these matters.
- Auditors may be required to include additional information in their reports (for example, to meet statutory requirements).
- Auditors should take care that any additional information and explanations (other than those supporting the opinion given) appear in a paragraph following the opinion paragraph.
- If the comparative figures were not audited, or were audited by other auditors, this should be disclosed in the notes to the financial statements or in the auditor’s report.