What is auditing

ARMAGHAN AHMED
CPA
MBA
PGD
BCOM
mycompanion30@hotmail.com
Education4all-arman.blogspot.com
PREPARED BY ARMAGHANAHMED 050 3060762
EDUCATION4ALL-ARMAN.BLOGSPOT.COM

Why Auditing?
FINANCIAL
STATEMENTS
COMPANYMANAGEMENT
SHAREHOLDERS
BONDHOLDERS
LENDERS
ANALYSTS
REGULATORS
LABOR UNIONS
EMPLOYEES
AUDITORS
WORK WITH: HIRED BY: ISSUE AUDIT REPORT ON: RESPONSIBLE TO:
Why Auditors?
 Natural conflict of interest
 Consequence of information
 Complexity of information
 Remoteness of records
USERS

What is Auditing
Process by which a
competent, independent person
accumulates and evaluates
evidence
about quantifiable information
related to a specific economic
entity
for the purpose of determining
and
Reporting that accounts are true
and fair
on the degree of correspondence
between information and
established criteria
independent auditor
performs audit
procedures
(standards set by ISA
and PCAOB)
documents in W/P's
financial statements
corporation
CLASS CONTEXT
audit opinion
 IFRS, etc.

 An Independent 3rd party forms an opinion on
1. Whether the financial statements gives a
true & fair view of the financial position &
performance of the company
2. And have been prepared in all material
aspects in accordance with the legal &
regulatory requirements.

 True:
1. FactuallyAccurate.
2. Confirms with the required standard & laws.
 Fair:
1. Free from bias
2. Reflects commercial substance.

IFAC International Federation of Accountants
IFAC code of
ethics
IAASB International Auditing & Assurance Standard
Board.
International
Standards on
Auditing ( ISA,s)
International
Standards on
Quality Control
(ISQC)

Transactions
occur and
Source
documents
created
(e.g., sale of goods and
sales invoice)
Journal entries
in the journal
(e.g., specialized journals
such as the sales journal or in
the general journal)
Post entries to
the ledger(s)
(e.g., subsidiary ledgers such
as A/R with they exist AND the
corresponding G/L control
accounts or just the G/L
accounts)
Unadjusted
Trial balance
Financial
statements
Adjusting entries (including
Auditor proposed)
Modified from Hall 4/e Chapter 8
!
Adjusted
Trial balance
Closing entriesPost entries to
the ledger(s)
Reversing entries

Accounting vs. Auditing
ACCOUNTING FUNCTIONS
1. Analyze economic events &
transactions
2. Collecting information
3. Measure & record data
4. Classify & summarize data
AUDITING FUNCTIONS
1. Obtain & evaluate evidence
supporting the F/S
2. Determine fairness of F/S in
conformity with established
criteria
3. Prepare audit report
Creation Process Assurance Process

Complete the Audit:
Contingent
Liabilities
Subsequent
Events
Reassess:
Risk
Materiality
Evidence
Final Analytical
Procedures
Management
Representation
Letter
Issue:
Audit Report on
Financial
Statements
Audit Report on
Internal Controls
(issuers)
Management
Letters (SAS 115)
Perform:
Pre-Acceptance Client
Review
Understand Business
Business Risk
Initial Analytical Procedures
Engagement Letter
Preliminarily Determine and
Assess:
Controls
Materiality
Audit Risk
Risk of Material
Misstatement
Detection Risk
Determine audit procedures
based on previous
assessments and:
Management Assertions
Audit Objectives
Evidence Availability,
Persuasiveness, and Cost
Prepare:
Audit Plan
Test of
Controls and
Reassessment
of Control Risk
Substantive
Testing:
Substantive
Tests of
Transactions
Analytical
Procedures
Tests of
Details of
Balances
Sampling
Opening
Balances
Audit Work Papers

 To report on the truth and fairness of the financial
statements of an entity on behalf of its owners, the
shareholders.
 The auditor gives an opinion on whether the financial
statements:
 Have been prepared in accordance with an acceptable
financial reporting framework, e.g. IFRSs; and
 Comply with any specific statutory requirements,
e.g. to keep adequate accounting records.

 Assurance engagements are generally
voluntary but may be a requirement imposed
on the entity by another party.
 Examples of assurance engagements include:
 Annual external audit of financial statements (‘statutory’
assurance)
 Half-year review of results
 Going concern review
 Review of effectiveness of an entity's IT system
 Review of compliance with corporate governance requirements

 An assurance report provides the
following benefits to the users of
financial information:
 Independent opinion from an external source that
enhances the credibility of the information
 Management bias is reduced
 Modified opinion draws attention to risk
 The relevance of the information may be improved by
the expertise and knowledge of the assurance firm.

Investors and creditors may have different objectives
than management
management prefers higher salaries and benefits
(expenses)
investors wish higher profits and dividends).
Investors and creditors must depend on fair reporting of
the financial statements.To give them confidence in the
financial statements, an auditor provides an
independent and expert opinion on the fairness of the
reports, called an audit opinion.


MANAGEMENT RESPONSIBILITY
The financial statements are the responsibility of
management
AUDITOR’S RESPONSIBILITY
is to lend them credibility by giving true and fair
opinion By the audit process, the auditor enhances the
usefulness and the value of the financial statements
but he also increases the credibility of other non-
audited information released by management.
RESPONSIBILITY

 The importance of the company as a potential generator of
wealth is increasingly understood, and so is the impact that a
company’s activities have on society and the environment.
Public expectations go further and include questions such as:
 Is the company a going concern?
 Is it free of fraud?
 Is it managed properly?
 Is there integrity in its database?
 Do directors have proper and adequate information to make
decisions?
 Are there adequate controls?
 What effect do the company’s products and by-products have
on the environment?

An audit in accordance with ISAs is conducted on
the premise that management and those
charged with governance have acknowledged
certain responsibilities that are fundamental to
the conduct of the audit, such as financial
statements, accounting methods and internal
control.

 The concept of materiality is applied by the auditor both in
planning and performing the audit, and in evaluating the
effect of identified misstatements on the audit and the
financial statements.
 Misstatements, including omissions, are considered to be
material if, individually or in the aggregate, they could
reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
 Judgments about materiality are made in the light of
surrounding circumstances, and are affected by the auditor’s
perception of the financial information needs of users of the
financial statements, and by the size or nature of a
misstatement, or a combination of both.PREPARED BY ARMAGHANAHMED 050 3060762
Concept of Materiality

 Certain inherent limitations in an audit affect the
auditor’s ability to detect material misstatements.
 Test and sampling
 Internal control
 Audit evidence
 Audit process permeated by judgment
 Risk
 overall financial statements may be misstated, usually
caused by poor control environment.
 misstatement in relation to classes of transactions,
account balances, and disclosures.

Audit of financial statements
Examine financial statements, determine if they give a
true and fair view or fairly present the financial
statements.
OperationalAudit
A study of a specific unit of an organization for the
purpose of measuring its performance.
ComplianceAudit
A review of an organization’s procedures and financial
records performed to determine whether the
organization is following specific procedures, rules, or
regulations set out by some higher authority.

 Internal auditors are employed by individual
companies to investigate and appraise the
effectiveness of company operations for
management.
 Independent auditors are typically certified
either by a professional organization or
government agency.

What is auditing

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