INTRODUCTION

CHAPTER 1

AUDITING AND ASSURANCE 1

 Chapter Objectives
After successfully completing this chapter,
you will be able to:
 describe the term auditing
 Distinguish between accounting and auditing
 Explain the importance of auditing
 List the different types of audit and auditors
 Describe assurance services
 Distinguish audit services from other
assurance services & non-assurance services

AUDITING AND ASSURANCE 2

The Nature of Assurance Services
What is an assurance service?
 An assurance service is an independent
professional service that improves the
quality of information for decision makers
 Assurance services can be performed by
the independent auditors (CPAs) or by a
variety of other professionals
 It is information reliability enhancement
service
AUDITING AND ASSURANCE 3
 The Nature of Attestation Services
What is an attestation service?
 An attestation service is a type of assurance service in
which a practitioner is engaged to issue or does issue
a report on subject matter, or an assertion about
subject matter, that is the responsibility of another
party. It is not limited to economic events.
 To attest to information means to provide assurance
as to its reliability
 Five categories of attestation services:
a. Audit of historical financial statements
b. Attestation of internal control over financial reporting
c. Attestation about financial forecasts
d. Attestation services on IT
e. Other attestation services
AUDITING AND ASSURANCE 4
The Nature of Attestation Services
• May take three forms:
A. Examination (audit): designed to provide
highest degree of assurance.
B. Review: Designed to provide limited
assurance
C. Agreed procedures: designed to perform
certain procedures for a specified party
(e.g. comparing customers’ trial balance
with general ledger account)
AUDITING AND ASSURANCE 5
Relationship among Auditing, attest,&
assurance services

Assurance
Auditing Attest services

AUDITING AND ASSURANCE 6

 Relationship among Auditing, attest,
assurance services
Service Value added to Definition
information

Auditing Reliability A report on examination of financial

Credibility statements for a client

Attestation Reliability A report on subject matter, or an

Credibility assertion about subject matter that is
the responsibility of another party
Assurance Reliability A professional service that improves
services Credibility the quality of information or its
Relevance contents for decision makers
Timeliness

AUDITING AND ASSURANCE 7

 Meaning & Nature of Auditing
What is auditing?
Definition 1
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.
It has to be performed by competent and
an independent person.
AUDITING AND ASSURANCE 8
 Meaning & Nature of Auditing
Important concepts in the above definition:
1. Information and established criteria
 To do an audit, there must be information in a
verifiable form and some standards (criteria) by
which the auditor can evaluate the information
2. Accumulating & evaluating evidence
 Evidence is any information used by the auditor
to determine whether the information being
audited is stated in accordance with the
established criteria.
AUDITING AND ASSURANCE 9
 Meaning & Nature of Auditing
3. Competent independent person
 An audit is performed by a person called auditor.
 The auditor must be qualified to understand the
criteria used and must be competent to know the
types and amount of evidence to accumulate to
reach the proper conclusion after the evidence has
been examined
 The competence of the individual performing the
audit is of little value if he or she is biased in the
accumulation and evaluation of evidence

AUDITING AND ASSURANCE 10

 Meaning & Nature of Auditing
4. Opinion
 An auditor gives opinion but does not
guarantee the financial statements as accurate
or free from any error or irregularity
5. Audit report
 The final stage in the auditing process is
preparing the Audit Report, which is the
communication of the auditor’s findings to
users (to be further discussed in chapter 4
of this course)
AUDITING AND ASSURANCE 11
 Meaning & Nature of Auditing
Definition 2
An audit is an independent examination
of, and expression of opinion on, the
financial statement of the enterprise by
a duly appointed auditor in pursuance
of a relevant statutory or professional
obligation.

AUDITING AND ASSURANCE 12

 Demand for Audit
1. Control Mechanism for accountability
 The need to provide credibility for
reported or unreported information
 A monitoring activity
2. Conflict of interest between
information preparer & users
 The need for an objective review of the
information
AUDITING AND ASSURANCE 13
 Demand for Audit
3. Consequences
As wrong information have serious &
substantial economic consequences, the
accuracy of the information needs to be
verified before used
4. Complexity & voluminous
 As the need for financial information & the
process of satisfying it is complex, it needs
verification & interpretation
AUDITING AND ASSURANCE 14
 Demand for Audit
5. Remoteness
Since there is a separation of management &
owners (& other users), there is a need to
assess the information on behalf of the users
6. Regulatory Requirement
The legal requirement to get accounts audited
by companies

AUDITING AND ASSURANCE 15

 Demand for Audit
7. The stewardship (monitoring)
hypotheses
Stewardship function: the engagement of one
person (the agent) to act on behalf of the
principal.
Auditing serves as a monitoring activity for the
principal.

AUDITING AND ASSURANCE 16

 Demand for Audit
• Generally, auditing is performed to reduce
information risk. Information risk reflects
the possibility that the information upon
which the business decision was made
was inaccurate. Information risk can be
reduced through:
Verification of information by user
 User shares information risk with
management
 Auditing
AUDITING AND ASSURANCE 17
 Distinction between Accounting &
Auditing
a. Accounting
 Accounting is the recording, classifying,
and summarizing of economic events for
the purpose of providing financial
information used in decision making
 Accounting is a constructive process of
the financial data

AUDITING AND ASSURANCE 18

 Distinction between Accounting &
Auditing
b. Auditing
 Auditing is determining whether recorded
information properly reflects the economic
events that occurred during the accounting
period (test the fairness of financial
statements)
 Auditing is an analytical process
 Auditing starts with the end product of
accounting with the objective of lending
credibility to the financial statements

AUDITING AND ASSURANCE 19

Types of Audits & Auditors

AUDITING AND ASSURANCE 20

 Types of Audits
1. Audit of financial statements
 are statements fairly presented?
 Conducted by independent (external)
auditors, e.g., a public accounting firm.
2. Operational audit
 is the organization efficient and effective?
 Usually conducted by internal auditors
 Designed to assess performance, identify areas
for improvements, & develop recommendations
 Generally more difficult to conduct than other
audits because it can be difficult to identify
objective (measurable criteria) to assess
effectiveness and efficiency
AUDITING AND ASSURANCE 21
 Types of Audits
3. Compliance audit
 is the organization complying with a set of
rules, laws, & regulation?
 May be conducted by government
auditors
Examples may include audit of corporate
rules and policies, examination of tax
returns, periodic bank examination by
National banks etc.

AUDITING AND ASSURANCE 22

 Type of Audits
Auditing can also be classified in to two:
1. Internal auditing
 usually focuses on improving the efficiency and
effectiveness of the organization.
 Performed by the internal auditor
2. External auditing
 usually focuses on the fairness of the
financial statements of their clients
 Performed by external/independent auditors

AUDITING AND ASSURANCE 23

 Type of Auditors
1. Internal auditor
 An employee of the organization
 Focuses on the organization’s efficiency and
effectiveness
 Less independent as compared to external
2. External auditor
 An outsider
 Focuses of the fairness of the financial
statements

AUDITING AND ASSURANCE 24

Overlap between responsibilities of
Internal & external auditors

AUDITING AND ASSURANCE 25

Generally Accepted Auditing
Standards (GAAS)

AUDITING AND ASSURANCE 26

 Nature of GAAS
 are those guidelines which auditors must adhere
to while conducting an audit of a company's or
government entity's financial statements.
 have been required since 1941 after the
investigation of a large drug company,
McKesson & Robbins, Inc., which had had funds
embezzled by its president and his three
brothers. Neither the internal controls or the
independent auditors detected the
embezzlement
AUDITING AND ASSURANCE 27
 Nature of GAAS
 Provide a measure of audit quality and
the objectives to be achieved in an audit.
 the foundation of all auditing theory
and practice

AUDITING AND ASSURANCE 28

 GAAS Setting Bodies
• The International Federation of Accountants
(IFAC) through its International Auditing and
Assurance Standards Board (IAASB)
– Issues International Standards on Auditing (ISA)
 Each country has its own authoritative body. e.g.
a. USA: American Institute of Certified Public
Accountants (AICPA)
b. Canada: Canadian Institute of Certified Accountants
(CICA)

AUDITING AND ASSURANCE 29

 Main Areas of Auditing Standards
1) General Standards
2) Standards of Fieldwork, and
3) Standards of Reporting

AUDITING AND ASSURANCE 30

 General Standards (1)
1. Training and proficiency: The audit is
to be performed by a person or
persons having adequate technical
training and proficiency as an auditor
 Educational requirement
 Uniform examination requirement
 Experience requirement

AUDITING AND ASSURANCE 31

 General Standards (2)
2. Independence: The auditor must maintain
independence in mental attitude in all matters
relating to the audit.
 The most important attribute of an auditor
 Independence is the cornerstone to
professional audit
 Independence is an attitude of mind i.e. working
in unbiased & objective manner
 An auditor must remain independent of the
client at all times and avoid all situations that
may jeopardize his independence

AUDITING AND ASSURANCE 32

General Standards (2 Cont’d…)
• Two aspects of independence:
a. Independence in fact (or of mind):
working in unbiased and objective
manner
b. Independence in appearance: avoiding
the circumstances that might cause the
third party to conclude that the integrity
and objectivity of the auditor has been
compromised
AUDITING AND ASSURANCE 33
General Standards (2 Cont’d…)
• When is independence of the auditor
impaired?
 Financial relationship
 Employment relationship
 Business relationship
Non-attest services provided by the auditor to
the audit client
 Receipt of contingent fees etc

AUDITING AND ASSURANCE 34

 General Standards (3)
3.Due professional care: Due professional care is
to be exercised in the performance of the audit and
the preparation of the report
 Concerns audit quality:
 Completeness of work papers
 Sufficiency & appropriateness of evidence,
 Appropriate report
 working carefully and being willing to take
responsibility for the accuracy of his/her work
 Court precedents form" prudent practitioner;”
i.e., what a competent practitioner would do

AUDITING AND ASSURANCE 35

General Standards (3Cont’d…)
• Some indicators of due professional care;
– Observe technical and ethical standards
– Strive continually to improve competence &
quality of services
– Discharge professional responsibility to the
best of his/her ability etc

AUDITING AND ASSURANCE 36

 Standards of Fieldwork
1. Adequate planning and supervision: The
work is to be adequately planned & executed
using sufficient knowledge of the business.
Assistants, if any, are to be properly supervised.
 Planning: needed to schedule personnel, & to
determine the type and timing of tests
 Supervision: needed because of assistants’ lack
of experience
 Knowledge about the client’s business: needed
for planning & supervision

AUDITING AND ASSURANCE 37

 Standards of Fieldwork
2. A sufficient understanding of internal control
is to be obtained to plan the audit
 Internal control is a process designed by the
entity’s board and management to provide
reasonable assurance regarding the
achievement of the following objectives:
a. Reliability of financial reporting
b. Compliance with applicable laws & regulations
c. Effectiveness and efficiency of operations

AUDITING AND ASSURANCE 38

 Standards of Fieldwork
• The degree to which the auditor relies on
the client’s internal control directly affects
the nature, timing, & extent of the work
performed by the independent auditor

AUDITING AND ASSURANCE 39

 Standards of Fieldwork
3. Sufficient appropriate audit evidence:
Sufficient appropriate audit evidence is to be
obtained through inspection, observation,
enquiry, confirmation, computation &
analysis, to afford a reasonable basis for an
opinion regarding the financial statements
under audit

AUDITING AND ASSURANCE 40

 Standards of Reporting
1. Conformity with GAAP: Whether financial
statements are presented in accordance
with GAAP
2. Consistency in the application of GAAP:
Whether GAAP are consistently applied
3. Completeness of disclosures: Whether all
informative disclosures have been made
4. The auditor must either express the opinion
regarding the financial statements, taken as
a whole, or state that an opinion can not be
expressed , in the auditor’s report.

AUDITING AND ASSURANCE 41

 Review Questions
1. What types of assurance services are provided by the public accounting
profession?
2. What major factors create a demand for the performance of attestation
services by public accounting firms?
3. What is (are) the main objective(s) of audits of financial statements?
4. What is auditing?
5. Distinguish among financial audit, operational audit, and compliance
audit.
6. Distinguish between internal auditing and external auditing
7. List the 10 Generally Accepted Auditing Standards
8. What factors lead to the impairment of the auditor’s independence?
9. What are the objectives of internal controls?
10. What is the significance of internal control to the work of independent
auditor?

AUDITING AND ASSURANCE 42

The End Of Chapter One

Thanks!!!

AUDITING AND ASSURANCE 43