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An Introduction to Assurance and

Financial Statement Auditing

Chapter 1

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The Study of Auditing

Analytical and logical skills

Much more conceptual in

nature

Rules, techniques and computations to

prepare and analyse financial

information

The study of auditing is different from other accounting courses that you have taken because …

OTHER COURSES AUDITING

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The Demand for Auditing and Assurance

The development of the corporate form of business and the expanding world economy over the last 200 years have given rise to an

explosion in the demand for assurance provided by auditors.

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Principals and Agents

Managers

Agents Principals

Stockholders

A public company is a company that sells its stocks or bonds to the public, giving the

public a valid interest in the proper use, or stewardship, over the company’s resources.

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The Role of Auditing

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Auditing and Assurance Defined

Assurance

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.

Auditing

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Auditing and Assurance Defined

Auditing Assurance

An engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of

the intended users other than the responsible party about the outcome of

the evaluation or measurement of a subject matter against criteria.

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Fundamental Concepts in Conducting a Financial Statement Audit

AuditRisk

Materiality

Evidence

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Overview of the Financial Statement Audit Process

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Audit Risk

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial

statements are materially misstated.

The auditor’s report with an unmodified opinion states that the audit

provides only reasonable assurance that the

financial statements do not contain material

misstatements.

Reasonable assurance implies some risk that a material misstatement could be present in the

financial statements and the auditor will fail to

detect it.

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Materiality

Misstatements, including omissions, are considered to be material if they,

individually or in the aggregate, could reasonably be expected to influence the

economic decisions of users taken on the basis of the financial statements.

Judgements about materiality are made in light of surrounding circumstances, and

are affected by the size or nature of a misstatement, or a combination of both.

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Evidence Regarding Management Assertions

Relevance – Is the information related to the specific assertion

being tested?

Reliability – Can the information be relied upon to signal the true state of

the specific assertion being tested?

Evidence that assists the auditor in evaluating management’s financial statement assertions

consists of the underlying accounting data and any additional information available to the auditor, whether originating from the client or externally.

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Sampling: Inferences Based on Limited Observations

Auditors use (1) their knowledge about the transactions and/or (2) a sampling approach to examine the transactions.

It would be too costly for the auditor

to examine every transaction.

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Major Phases of the Audit

•Client acceptance/continuance and establishing an understanding with the client

•Preliminary engagement activities

•Plan the audit

•Consider internal control

•Audit business processes and related account (e.g. revenue generation)

•Complete the audit

•Evaluate results and issue audit report

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Issue the Audit Report

The auditor’s report is the main product or output of the audit.

The audit report with an unmodified (‘clean’) opinion is the most common

type of report issued.

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Issue the Audit Report

The title line of the audit report includes the word ‘Independent,’ and usually, the report is addressed

to the stockholders of the company.

The audit report includes an introductory paragraph, a management’s responsibility paragraph, an

auditor’s responsibility paragraph, and an auditor’s opinion paragraph.

The audit report is signed and dated.

Adverse QualifiedUnmodified

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Issue the Audit Report

The auditor may issue a modified opinion.

Suppose a client’s financial statements contain a misstatement that the auditor considers

material and the client refuses to correct the misstatement. The auditor will likely qualify

the opinion, explaining that the financial statements are fairly stated except for the

misstatement identified by the auditor.

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Issue the Audit Report

The auditor may issue an adverse opinion.

Suppose a client’s financial statements contain a material misstatement and the auditor

considers the significance of the effect on the financial statements of the material

misstatement pervasive. Given such a situation, the auditor will issue an adverse

opinion, indicating that the financial statements are not fairly stated and should

not be relied upon.

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Auditing Demands Logic, Reasoning, and Resourcefulness

An auditor needs to understand more than just the accounting concepts and techniques.

Auditing is a fundamentally logical process of thinking and reasoning – so use your common

sense and reasoning skills! As you learn new auditing concepts, take

some time to understand the underlying logic and how the concepts interrelate with other

concepts.

Being a good auditor sometimes requires imagination and innovation.

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End of Chapter 1