Topic 2 objectives and scope of financial statement audit

TOPIC 2:OBJECTIVES & SCOPE OF
FINANCIAL STATEMENT AUDIT
References: Chapter 6
AUD390 2011

 Audit Objectives & Basic Principles Governing An
Audit
 Auditor’s Responsibility For Detecting Fraud
 Management Assertions
AUD390 AUDITING DIA

 ISA200: …to enable the auditor to express an
opinion whether the FS are prepared, in all
material respects in accordance with an
identified reporting framework
AUD390 AUDITING DIA

 Statutory requirement under CA Act
 Checking on the reliability of FS
 Provides assurance to the users as to the truth &
fairness of FS
 Help owners access how well managers have
discharge their stewardship duties
AUD390 AUDITING DIA

 ISA200 that an audit is accordance with ISAs
is designed to provide reasonable assurance
that the financial statements taken as whole
are free from material misstatements.
AUD390 AUDITING DIA

Information is material if its omission or
misstatement could influence the economic
decision of users taken on the basis of the
financial statements. Materiality depends on
the size of the item or error judged in the
particular circumstances of its omission or
misstatements. Thus, materiality provides a
threshold or cut-off point rather than being a
primary qualitative characteristic which
information must have if it is to be useful.
ISA320
AUD390 AUDITING DIA

 Materiality
Information is material if its omission or
misstatement could influence the economic
decision of users taken on the basis of the FS
 Misstatement
A mistake in financial information which
would arise from errors and fraud
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 2 types of misstatements are errors & fraud
 Error
o Unintentional misstatement of the FS
o For e.g.
1. Mistake in extending prices times
quantity on sales invoice
2. Overlooking older raw materials in
determining the lower of cost or
market for inventory
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 Fraud
o Intentional misstatement of the FS
o 2 types:
1. Misappropriation of assets, often
called as defalcation or employee
fraud
 E.g. a clerk taking cash at the time
a sale is made
AUD390 AUDITING DIA

2. Fraudulent financial reporting, often
called as management fraud
 E.g. intentional overstatement of sales
near the balance sheet date to
increase reported earnings
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 Reasonable Assurance
 Assurance ~ the level of certainty that the
auditor has obtained at the completion of the
audit
 Reasonable, but not absolute assurance ~ the
auditor is not an insurer or guarantor of the
correctness of the FS
AUD390 AUDITING DIA

 Reasons why the auditor is responsible for
reasonable but not absolute assurance:
1. Most audit evidence results from testing a
sample of population
2. Accounting presentation contain complex
estimates, which involve uncertainty & can
be affected by future events
3. Fraudulent prepared financial statements
are difficult for the auditor to detect
AUD390 AUDITING DIA

AUD390 AUDITING DIA
Financial
Statements
Management
Assertions
Audit
Objectives
Audit
Programs
Audit
Evidence
Audit Reports

 Preparation of financial statements
 Maintaining adequate accounting records and
internal control
 Apply appropriate accounting policies
 Safeguard of company’s assets
 Management’s responsibility for the fairness of
the representations (assertion) in the FS carries
with it the privilege of determining which
disclosures it considers necessary
AUD390 AUDITING DIA

AUD390 AUDITING DIA
In Malaysia, it is become a practice
for many public companies to
include a statement about
management responsibilities and
relationship with the CA firms

 Implied or expressed representations by
management about classes of transactions and
related accounts in the financial statements
 Act as criteria that management uses to record
and disclose accounting information in financial
statements
 Refer to the definition of auditing … a
comparison of information (financial statements)
to established criteria (assertions established
according to approved accounting standards)
AUD390 AUDITING DIA

 ISA500 Audit Evidence classifies assertion into
7 categories:
1. Existence
2. Occurrence
3. Rights and obligations
4. Completeness
5. Valuation or allocation
6. Measurement
7. Presentation and disclosure
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 Concern whether assets, obligations and equities
included in the balance sheet actually existed on
the balance sheet date
AUD390 AUDITING DIA

 Concern whether recorded transactions included
in the FS actually occurred during the accounting
period
 E.g. management asserts that recorded sales
transactions represent exchanges of goods or
services that actually took place
AUD390 AUDITING DIA

 Concern whether assets are the rights of the
entity & liabilities are the obligations of the
entity at a given date
 E.g. management assets that assets owned by
the company or that amounts capitalized or
leases in the balance sheet represent the cost of
the entity’s rights to leased property
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 Concern whether all transactions and accounts
that should be presented in the FS are included
 E.g. management asserts that all sales of goods
and services are recorded and included in the FS
AUD390 AUDITING DIA

 Concern that whether assets, liability, equity,
revenue and expense accounts have been
included in the FS at appropriate amount
 E.g. management asserts that trade account
receivable included in the balance sheet are
stated at net realizable value
AUD390 AUDITING DIA

 Concern whether a transaction or event is
recorded at that the proper amount & revenue
and expense are allocated to the proper period
 E.g. management asserts that property is
recorded at historical cost and that such cost is
systematically allocated to the appropriate
accounting period through depreciation
AUD390 AUDITING DIA

 Concern whether components of FS are properly
combined or separated, described and disclosed
 E.g. management asserts that obligations
classified as long-term liabilities is the balance
sheet will not mature within 1 year
AUD390 AUDITING DIA

1. Objectives of an audit
2. Why there is a need for audit?
3. State whether you agree or disagree with the following statements? Justify your reasons.
a) An auditor responsible to ensure the correctness of the financial statement of the
company.
b) An auditor’s job is to ensure the correctness of the accounting records of the
company.
c) An audited financial statements which has been given a “true and fair” opinion is
free from errors and misstatements.
4. Distinguish between management assertions of valuation and measurement
5. Match the situation to the management assertions
a) The account and transaction that should be included are included and the financial
statements are completed.
b) Assets’ liabilities, equity, revenues and expenses are appropriately valued and are
allocated to the proper accounting period.
c) Amount of assets shown in the financial statement are properly presented and
disclosed.
d) The assets are the right of the entity and the liabilities are its obligations.
e) The assets and liabilities exist and the recorded transactions have occurred.
AUD390 AUDITING DIA

Topic 2 objectives and scope of financial statement audit

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Topic 2 objectives and scope of financial statement audit