Lesson 1 Summary

What is auditing?
Auditing is 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 users
What is assurance engagement?
Assurance engagement is an engagement in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the intended users
other than the responsible about the outcome of the evaluation or measurement
of a subject matter against criteria.
Types of assurance engagement
1. Reasonable assurance engagement statutory audit
2. Limited assurance engagement work done on specific areas (review of
cash flow forecast)
Demand for auditing and assurance
1. Agency relationship between principal and agent
2. Information asymmetry management has more info about the FS/biz (biz
3.

interest of management and shareholders are different)

Conflict interest goals of manager may coincide with those of
shareholders. If manager seeks to maximize self-interest, he may not act
in the interest of owner

Role of auditing
The manager may not give a true and fair view of the financial statement, as the
owner is not able to observe the preparation of FS directly. Hence, absentee
owner face information risk whereby manager may not report honestly.
Therefore, manager hires auditor to report on the fairness of the financial reports
to reduce agency risk (to ensure FS are not materially misstated).
Auditor has no responsibility of detecting fraud or material misstatement,
however has the responsibility to plan their audit so that they have a reasonable
expectation of discovering material misstatement.
What is audit risk?
Audit risk is the risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated
What is materiality?

Materiality concept is a misstatement, including omissions, are considered to be

material if they could reasonably be expected to influence the economic
decisions of users.
Statutory duties of an auditor
1. Express an opinion to member of co as to whether the FS provide a true
and fair view and the accounting records are properly prepared in
accordance with FRS
2. The auditors are given statutory rights to have access to all books and
records at all times (24hrs).
Fraud

Error

An intentional act by those

An unintentional misstatement

charged with governance

Involve use of deception to

in the FS
Include mathematical errors or

obtain unfair advantage

mistake in misappropriation of
accounting principles

Auditor responsibility for detecting fraud or error

Throughout the audit, maintain an attitude of professional skepticism

o Alert throughout audit for possible symptoms of fraud
o Enquiring mind & adopt mindset that the directors have intention to
manipulate the FS
Make inquiries of those charged with governance and management

Lesson 2 Summary
Code of Ethics
1. Integrity

Principle: Straightforward and honest in all professional and business relationship

Rule of Conduct: (1) Shall perform their work with honesty, diligence and
responsibility.

(2) Shall observe the law and make disclosure expected by

the law and professionals

2. Objectivity
Principle: Shall not allow bias, conflict of interest or undue influence of others to
override professional judgment
Rules of Conduct: (1) Shall not participate in any activity that may impair their
unbiased assessment. This participation include activities that may be in conflict
with the interest of organization. (2) Shall not accept anything that may impair
their professional judgment.
3. Confidentiality
Principle: Internal auditors respect the value and ownership of information they
receive and do not disclose information without appropriate authority unless
there is a legal obligation to do so.
Rules of Conduct: (1) Shall be prudent in the use and protection of information
acquired in course of their duties. (2) Shall not use information for any personal
gain or detrimental to the ethical objectives of the organization.
4. Professional Competence and Due Care
Principle: Internal auditors apply the knowledge, skills and experience needed to
ensure client receives competent professional service
Rules of Conduct: (1) Shall engage only in those services for which they have the
necessary knowledge, skills and experience. (2) Shall continually improve their
proficiency and the effectiveness and quality of their service
5. Professional Behaviour
Principle: Comply with relevant laws and regulations and should avoid any action
that discredits the profession
What is auditor independence (refer to absence of personal interest or
any family r/s) ?
1. Independence of mind maintain an unbiased attitude of mind
2. Independence in appearance avoid conflicitng situations that may create
personal bias

Threats to Independence
1. Self- interest threat member of the audit team or close family members
has financial or other interest with audit client
2. Self-review threat previous judgment needs to be re-evaluated by
members responsible for that judgment
3. Intimidation threat occurs when a member of the audit team may be
deterred from acting objectively by threats, actual or perceived
4. Familiarity threat occurs when theres a close relationship with an audit
client, that caused the audit firm or its member becomes too sympathetic
to the clients interest
5. Advocacy threat audit firm or member of the audit team promotes or
may be perceived to promote audit clients position or opinion to the point
where objectivity may be compromised
Public Interest Entity (Listed Co, Charities, Financial Institution)
1. Identify
a. Situations provision of accounting services, financial interest in client
b. Explain the threat self-interest, self-review, intimidation, advocacy,
familiarity
c. Evaluate the significance of the threat
i. Significant (PIE, KAP) AVOID
ii. Not clearly significant can do but with SAFEGUARDS
2. How to determine significant
a. Position of client what extent could influence FS
b. How close were their r/s how long ago were they colleague
c. What was his previous position in the audit firm KAP?
d. Key Audit Partner engagement partner or quality review partner
Audit Firm Total Fee Income
1. Public Interest Entity
a. NOT > 15% of firms fee income (Audit + Non-Audit Services)
2. Non-PIE
a. MUST NOT be significant (depends on firms judgment)

Lesson 3 Summary
Assertions about classes of transactions and events for the period
Completeness

All transactions and events that should have been

Occurrence

recorded have been recorded

Transactions and events that have been recorded have
occurred and pertain to the entity

Cut-of

Transactions and events have been recorded in the

Accuracy

correct accounting period

Amounts and other data relating to recorded
transactions and event have been recorded

Classification

appropriately
Transactions and events have been recorded in the
proper accounts

Assertions about account balances at period end

Completeness

All assets, liabilities and equity interests that should be

Obligation & Rights

recorded have been recorded

The entity holds or controls the right to assets, and

Valuation &

liabilities are the obligations of the entity

Assets, liabilities and equity interests are included in

Allocation

the financial statements at appropriate amounts, and

any resulting valuation or allocation adjustment are

Existence

appropriately recorded
All assets, liability and equity exist

Assertions about presentation and disclosure

Completeness

All disclosures that should have been included in the

Occurrence

financial statements have been included

Disclosed events, transactions and other matters that

Classification

have occurred pertaining to the entity

Financial information is appropriately presented,

Accuracy

described and disclosed

Financial information are disclosed at appropriate
amount

What is audit procedure?

Specific acts performed by auditor to gather evidence to determine if

specific assertions are met
1. Risk assessment procedures
2. Test of controls test the effectiveness of internal control system
a. Inspection of document/assets, observation, inquiries,
reperformance
3. Substantive procedures test the numbers in the FS
a. Recalculation, confirmation, analytical procedures

What is audit evidence?

Information used by the auditor in arriving at the conclusions on which the
auditors opinion is based. Audit evidence includes both information contained in

the accounting records underlying the financial statement sand other information
(sales invoices)
1. Sufficiency is measure of the quantity of audit evidence
o Greater risk of misstatement requires higher quantity of audit
o

evidence
Higher quality audit evidence results in lower quantity of audit

evidence
2. Appropriateness is a measure of the quality of audit evidence
o Reliability of evidence means that the evidence must be trustworthy
o Relevance of evidence means that the evidence must meet the
audit objective which the auditor wishes to achieve
For testing of overstatement: accounting records
For testing of understatement: source documents
Types of evidence
1.
2.
3.
4.
5.
6.

Documentation sales invoice, delivery order

Accounting records general ledger, sales ledger, cash book
Other records payroll listing, board minutes
Physical existence inventory
Questionnaires internal control questionnaire
Confirmation external parties

Audit procedures to obtain evidence

1. Inspection of records or documents
o It consists of examining internal or external documents.
o Two issues in inspection of documents are
a) Reliability of records or documents
External documentary evidence is viewed as more reliable
because third party initiated it

Vouching (Occurrence)
Source Document

Journal or ledger

Tracing (Completeness)
2. Inspection of tangible assets
o It consists of physical examination of the assets (reliable type of
evidence)
3. Observation
o It consists of looking at a process or procedure being performed by
entitys personnel.

It is not considered very reliable, and thus require additional

corroboration by the auditor (examine document from accounting
records)
Inquiry
o It consists of seeking information of knowledgeable person within or
outside the entity.
External confirmation
o It represent audit evidence obtained by auditor as direct written
response to the auditor from third party
o It provides a reliable evidence to test existence and completeness
assertion.
Recalculation (highly reliable)
o It consists of checking the mathematical accuracy of documents or
records using computer assisted audit techniques to check on
accuracy.
Reperformance (highly reliable)
o It involves the independent execution by the auditor of procedure or
controls that were originally performed by company personnel.
Analytical procedures
o Analysis of ratios and trends including the resulting investigation of
fluctuation and relationship that are inconsistent with other relevant
information from predicted amounts.
o The reliability of analytical procedure is a function of (1) the availability
and reliability of data used in calculations (2) the plausibility and
predictability of relationship being tested
o

4.

5.

6.

7.

8.

Reason for audit documentation

1. The auditor principal record of the audit procedures performed, evidence
obtained and conclusions reached
2. Provide the basis for the review and inspection of the quality of the audit
work by ACRA inspectors
3. Provide evidence that the audit was planned and performed in accordance
with SSA and applicable legal and regulatory requirement
4. Include the overall audit strategy (characteristics, timing) and audit plan
Nature, timing and extent of audit
1. Nature: should perform test of control or extensive substantive test (low
internal control)
2. Timing: should conduct interim audit or only final audit
3. Extent: how many sample items to test
E.g of test of controls flip through sales invoices to ensure there is signature
E.g of substantive test match sales invoice to delivery order