The purpose of an audit [of financial statements] is to enhance the degree of

confidence (more reliable and more accurate for decision making) of intended
users in the financial statements.

Auditing is the accumulation and evaluation of evidence about information to

determine and report on the degree of correspondence between the information
and established criteria.
Evidence is any information used by the auditor to determine whether the
information being audited is stated in accordance with the established criteria.

Auditing should be done by a competent, and independent person.

Audits requires three important components.

1. third party that receives the information (shareholders).
2. information to be assured (financial report)
3. agreed upon criteria (Accounting standards)

Why do we have an audit?

1. Because the law requires to have an audit or to have a lower cost of capital.
2. companies provides information to users to help them make business
decisions(investment decisions) like to buy shares, to hold shares, or sell shares.
3. users want the report to be checked by having an independent expert
examine it ( to enhance it’s credibility) that means to improve the credibility of
the information.

Fundamental principles of professional ethics

1. objectivity is an unbiased mental attitude. objectivity requires that internal
auditors do not subordinate their judgment on audit matters to others.
2. confidentiality
3. professional behaviour
4. independence
5. professional competencies and due care
6. integrity
While you’re evaluating the evidence, you use two methods to help you
determine whether it’s sufficient and appropriate: being thorough and being
unbiased.
Two other factors are key when evaluating audit evidence: exercising
skepticism and asking for ideas from other audit team members.
Together, these factors constitute applying professional judgment.
Engagement risk is the overall risk associated with an audit engagement. It
can include a loss of reputation from being associated with a particular client,
and financial losses from the association.

Audit objectivity refers to the fact that an auditor’s professional judgment is

not influenced by personal interest or bias.
CRITERIA –in engagement, specifications of the desired state of the activity
under review(also called evaluation criteria)
Being competent means having technical knowledge and skills, but in order to
reach the proper conclusion an auditor must act with integrity and with
professional skepticism.
Audit independence refers to the ability of an audit team to perform an
independent assessment without interference from management, and ensures
that there is no conflict of interest.
Criteria is a principle or standard by which something could be judged or
decided or principle for evaluating or testing something.
To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information.

Distinguish Between Auditing and

Accounting
Accounting is the recording, classifying, and summarizing of economic events
for the purpose of providing financial information used in decision making.
Auditing is determining whether recorded information properly reflects the
economic events that occurred during the accounting period.
Accountants are usually employees of the company for which they work,
whereas auditors are often hired from an outside firm to verify the accuracy of
the accountant’s work.
The work performed by accountants is governed by international accounting
standards, but auditors’ work is regulated by auditing standards.
Accountants create financial statements for the company at year-end. An
auditor will look over the financial statements and determine their accuracy.
the importance of auditing in reducing information risk
auditing is essential in reducing information risk as it helps to identify errors and
fraud, ensure compliance with laws and regulations, enhance internal controls,
increase transparency and accountability, facilitate decision-making, protect
stakeholder interests, enhance corporate governance, and attract.

Information risk reflects the possibility that the information upon which the
business risk decision was made was inaccurate.
Information risk is the probability that the information circulated by a company
will be false or misleading.
Financial reporting risk is the risk that an organization's financial statements
don't accurately reflect its true financial performance. It includes potential errors,
fraud, or misstatements.

Examples of factors that can impact financial reporting risk include

materiality, volume of transactions, operating environment, the level of
judgement involved, reliance on third party data, manual intervention,
disparity of data sources, evidence of fraud, system changes and results
of previous audits by internal.

Causes of Information Risk

1. Remoteness of information
2. Biases and motives of the provider
3. Voluminous data
4. Complex exchange transactions

Information bias is any systematic difference from the truth that arises in the
collection, recording and handling of information in a study, including how
missing data is dealt with.

Major types of information bias are misclassification bias, observer bias,

and reporting bias.

Reducing Information Risk

User verifies information.
User shares information risk with management.
Audited financial statements are provided.
ADVANTAGES OF USER VERIFIES INFORMATION
1. User obtains information desired.
2. User can be more confident of the qualifications and activities of the person
getting the information.
DISADVANTAGES OF USER VERIFIES INFORMATION
1. High cost of obtaining information
2. Inconvenience to the person providing the information because large number
of users would be on premises.

ADVANTAGE USER SHARES INFORMATION RISK WITH MANAGEMENT

1. No audit costs incurred.
DISADVANTAGE USER SHARES INFORMATION RISK WITH MANAGEMENT
1. User may not be able to collect on losses.
2. ADVANTAGES

ADVANTAGES AUDITED FINANCIAL STATEMENTS ARE PROVIDED

1. Multiple users obtain the information.
2. Information risk can usually be reduced sufficiently to satisfy users at
reasonable cost.
3. Minimal inconvenience to management by having only one auditor.

DISADVANTAGES
1. May not meet needs of certain users.
2. Cost may be higher than the benefits in some situations, such as for a
small company.

Assurance services are professional services that improve the quality of

information for decision makers.

What are Assurance Services?

Assurance services are an independent examination of a company’s processes
and controls.

Assurance encompasses five key elements: relationship, subject matter,

criteria, evidence, and conclusion.
Audits are one type of assurance service and are subject to international
standards.

attestation service is a type of assurance service in which the CPA firm issues
a report about the reliability of an assertion that is the responsibility of another
party.

4 Categories of Attestation Services

1. Audit of historical financial statements
2. Effectiveness of internal control over financial reporting
3. Review of historical financial statements
4. Other attestation services

Financial statements that faithfully represent these aspects of a

business should have the following three attributes:
1. Complete Presentation
2. Error Free Presentation
3. Unbiased Presentation

Financial audits provide reasonable assurance, but not absolute

guarantees.

Types of Audits
Operational Audit is a study of a specific unit of an organization for the
purpose of measuring it’s performance.
Operational The comprehensive review of the varied functions within the
organization to appraise the efficiency and economy of operations and the
effectiveness.
Compliance The review of both financial controls and operating controls and
transactions to see how they conform with established laws, standards,
regulations and procedures.
Financial Statement The analysis of the economic activity of an entity as
measured and reported by accounting methods.

Types of Auditors
1. Certified public accounting firms is simply a firm that is licensed in the
state in which they operate and owned, at least in part by a Certified
Public Accountant
2. Internal revenue agents are specialized accounts who work
predominately for the United States Internal Revenue Service (IRS).
3. General accounting office auditors an independent auditing and
accounting agency that assists Congress and government departments
and settles claims for the federal government.
4. Internal auditors