ACCT 304 AUDITING
Overview of Auditing
The Audit Process
Phase 1: Client & Engagment Accep- tance
Phase 2: Planning
Phase 3: Gathering of Evidence Phase 4: Review and Evaluation Phase 5: Reporting
Phase 6: Continuing Issues
Nature & Scope of Auditing
• Auditing and Assurance Standard (AAS) -
"Auditing is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.“
• Definition by the Committee on Basic Auditing Concepts of the American Accounting Association (Accounting Review. Vol. 47) :
‘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
The Need for Auditing
– Modern auditing has developed since the concept of separate legal entity came into existence.
– To safeguard the interest of owners, who
are not involved in the day-to-day decisions
made by management
The Need for Auditing cont’d
Features of Auditing
• Audit is a systematic and scientific examination of the books of accounts of a business;
• Audit is undertaken by an independent person or body of persons who are duly qualified for the job.
• Audit is a critical review of the system of accounting and internal control.
• Audit is done with the help of vouchers, documents,
information and explanations received from the authorities.
• The auditor has to satisfy himself with the authenticity of the financial statements and report that they exhibit a true and fair view of the state of affairs of the concern.
History of Auditing
• During the various reigns of the Egyptian Pharaohs tax collectors were known as scribes. During one period the scribes imposed a tax on cooking oil. To ensure that citizens were not avoiding the cooking oil tax scribes would audit households.
• Prior to 1500 AD, nearly all accounting was concerned
with accounting for the activities of government and the
only form of auditing was the keeping of separate
records by two different scribes.
History-Cont.
• The industrial revolution (1750-1850) was the catalyst of a great period of economic growth in Great Britain, one feature of which was the passing of management from owners to professional managers or the divorce of ownership from control.
• This led, in the period 1850 to 1905, to an increased
demand for auditors who were independent of
management and who were engaged to detect not only
clerical errors, but also management fraud.
History-Cont.
• It was during this time that the concept of 'testing‘
evolved. That is, auditors selected "a few haphazard cases
• It was not economically feasible to physically examine all transactions that took place
• From 1905-1930, there was an independent progression of British and American audit objectives.
• In the USA, the audit objective gradually changed during
this period from the detection of fraud to reporting on
the 'actual' financial condition of an entity. In addition,
there was considerable use of testing.
History-Cont.
• During the period 1933-1940, there was an acceptance by auditors of somewhat 'softer' audit objectives and the wording of the standard auditor's report on the financial statements reflected this change.
• By 1940, testing was now the rule and
detailed checking the exception. There was also a
general recognition that the adequacy of 'internal
checks' (as internal controls were then called) could
reduce the extent of testing by auditors.
History-Cont.
• From 1940 onwards, it became increasingly accepted by the auditing profession, although not necessarily by the general public, that the primary objective of an audit was the provision of an opinion on the financial statements and that the detection of fraud and error was very much a secondary objective.
• Since 1960, the auditing profession throughout the world experienced significant increases in wages‘ costs. This led to the extensive use of what was called 'systems-based auditing'. Also, statistical methods were introduced to determine the extent of testing, although their use was not widespread.
• Around 1972, the concept of audit risk was recognized in the professional literature.
Theoretical Basis for Auditing
• Agency Theory
• Stewardship Theory
• Institutional Theory
– Coercive Isomorphism – Normative Isomorphism – Mimetic Isomorphism
• Stakeholder Theory
• Signaling Theory
• Political Economy Theory
Objectives of Auditing
• It increases the credibility of the information or matter being reported.
• It reduces conflict between opposing factions.
• It safeguards the interest of shareholders.
• It reduces fraud and error.
• It facilitates the work of governmental and non-governmental agencies particularly IRS, banks and donors.
• It helps in the liquidation of companies.
• It promotes accountability and good corporate governance.
• It ensures the efficient and effective functioning of systems of control.
Services Auditors Provide (Engagement)
• Assurance,
• Non-Assurance
– Attestation, and – Audit Services
Note:
• Audit services are a subset of Attest services, which
are in turn a subset of Assurance services
Services Auditors Provide (Engagement)
• ASSURANCE services are independent professional services that improve the quality of information, or its context, for decision makers.
• Examples:
– Risk assessment
– Information system reliability – Electronic commerce
– Health care performance measurement
Services Auditors Provide (Engagement)
• ATTESTATION occurs when a practitioner is engaged to issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.
• Example report on
– The effectiveness of internal control
– Financial information other than the financial statements – Future-oriented financial information
– Compliance with statutory, regulatory, or contractual obligations
– Management’s discussion and analysis
Services Auditors Provide (Engagement)
• AUDITING is a written report on the examination of
financial statements for a client.
Services Auditors Provide (Engagement)
Kinds of Non-Assurance Engagements
• Due Diligence
• Direct Reporting Engagements
• Agreed Upon Procedures Engagement
• Engagement to Compile Financial Information
• Engagement to Review Financial Information
• Reports on Compliance with Contractual Agreements
• Examination of Prospective Financial Statement
• Engagement to Review Interim Financial Information
Types of Audits
• Financial statements audits – an audit whose objective is to express an opinion on whether the financial statement present fairly, in all respects, the financial position, results of operation. (external audit)
• Compliance audits – an appraisal of the extent to
which organizational objectives are met
Types of Audits Cont’d
• Operational/ value for money audits
An audit that is concerned not only with accounting and
financial matters, but also with the overall goal achievement, effectiveness of operating procedures and internal controls, performance of individual managers and other non-financial aspects of the organization's operations.
