WHAT YOU REALLY NEED TO KNOW

CHAPTER 1: INTRODUCTION TO AUDITING

LO1 Explain the importance of auditing
Auditing is the verification of information by someone other than the one providing it.
Verification reduces the risk of the information being misleading.
The possibility that information is incorrect is known as information risk. When auditors
verify the reliability of financial information, they reduce information risk.
GAAP stands for Generally Accepted Accounting Principles. These are methods that have
been established in a particular jurisdiction by a standard-setting body or by authoritative
support such as the accounting recommendations in the CPA Canada Handbook.
Auditors must be perceived as acting in the interest of the financial statement users (acting in
the public interest).
An important distinguishing feature of auditing is known as three party accountability. The
three parties are: preparers of the information, users of the information, and auditors who
work for the users, checking the work of the preparer.
LO2 Distinguish auditing from accounting
Accounting is the process of recording, classifying, and summarizing transactions into
financial statements.
There are three underlying conditions impacting the users demand for accounting
information: complexity, remoteness and consequences. Complexity refers to the increasing
number and variety of transactions. Remoteness describes how users of financial
information are usually separated from a companys accounting records by distance and time,
as well as by lack of expertise. Consequences refer to the fact that decisions involving large
dollars and efforts are made based on financial information.
Companies prepare information to be used by financial decision makers in order to obtain
loans or sell stock. This is a potential conflict of interest. As a result, users are a naturally
skeptical of the financial information prepared by companies. External professional auditors
are hired to lend credibility to the financial information.
Professional skepticism is an auditors tendency not to believe management assertions but,
instead, to find sufficient support for the assertions through appropriate audit evidence.
Professional skepticism is an important aspect of professional judgment.
Lending credibility is also known as providing assurance. Usually when people think of
financial statements, they think of the annual report which includes both the financial
statements prepared by management and the audit opinion prepared by auditors. However,
auditing does not include financial report production. That function is performed by a
companys accountants under the direction of management. The auditors role is to determine
whether the information in the financial statements is reliable, and to communicate this to the
users.
Auditing involves a process of obtaining and evaluating evidence in order to verify the
accuracy of financial information.

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The purpose of an audit is to enhance the degree of confidence of the users of the financial
statements. Auditors express an opinion on whether the financial statements are prepared,
in all material respects, in accordance with an applicable financial reporting framework.
Professional judgment is widely used in accounting and auditing It refers to the application
of relevant training, knowledge, and experience in making informed decisions about the
courses of action that are appropriate. Critical thinking is the process of justifying ones
conclusion or decision by providing acceptable reasons.
An attest engagement is an engagement where the PA is hired to perform procedures and
issue a report to affirm the validity of an assertion.
CAS (Canadian Auditing Standard) is the audit standard in Canada using the equivalent
International Standard on Auditing (ISA).
The expectations gap in auditing refers to the difference between what the public and other
financial statement users perceive auditors' responsibilities to be and what auditors believe
their responsibilities entail. It can also refer to difference in understanding regarding nature
of audit engagement, i.e. what users believe audit is and what audit actually is. An auditor is
required to reduce audit risk to an acceptably low level to attain reasonable assurance. But
what is reasonable? This can be different in the eyes of auditor and in the eyes of users of
financial statements and this creates expectation gap.

LO3 Explain the role of auditing in information risk reduction

Business risk is the risk that a company may fail to achieve its objectives. Business risk
results from economic changes, technology changes, poor management decisions, or just bad
luck.
Auditors do not influence business risk although they do consider it and must properly
disclose the business risks in the financial statements.
Information risk is the risk that the financial information fails to reflect economic substance
of business activities. From the auditors perspective, information risk is the probability that
the financial statements distributed by a company will be materially false and misleading to a
financial statement user.
There are two major categories of information risk: audit risk and accounting risk. Audit
risk is the risk of insufficient evidence being gathered on the facts concerning the auditees
economic circumstances. Accounting risk is the risk that errors associated with estimates
used in GAAP are not properly disclosed.
LO4 Describe the other major types of audits and auditors
The Institute of Internal Auditors (IIA) defines internal auditing and its purpose as an
independent, objective assurance and consulting activity designed to add value and improve
an organizations operations.
Some internal auditing activity is known as operational auditing. Operational auditing is the
study of business operations in order to make recommendations about the economic and
efficient use of resources, effective achievement of business objectives, and compliance with
company policies. The goal of operational auditing is to help managers discharge their
management responsibilities and improve profitability.
The Office of the Auditor General of Canada (OAG) is an accounting, auditing, and
investigating agency of Parliament, headed by the Auditor General. Many provinces have
audit agencies similar to the OAG who answer to provincial legislatures. The OAG is like an
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external auditor, with respect to the government agencies they audit, because they are
organizationally independent. Many government agencies also have their own internal
auditors. Audit activities of all levels of government are frequently referred to as public
sector auditing.
In the public sector you see economy, efficiency, and effectiveness audits called value-formoney (VFM) audits. VFM audits are a means of improving accountability for the efficient
and economical use of resources and the achievement of program goals.
Comprehensive governmental auditing involves financial statements auditing, compliance
auditing, and VFM auditing. It goes beyond an audit of financial reports and compliance with
laws and regulations to include economy, efficiency, and effectiveness audits.
Fraud is an attempt by one party (the fraudster) to deceive someone (the victim) for gain.
Fraud falls under the Criminal Code and includes deception based on manipulation of
accounting records and financial statements. Recently, auditor responsibilities to detect fraud
have significantly increased. Fraud auditing is a separate engagement, a special in-depth
investigation of suspected fraud, that might be done by those with specialized training.

LO5 Provide an overview of international auditing and its impact on Canadian Auditing
Standards (CAS)
Many of the large public accounting firms are worldwide. Developments such as the
creation of the North American Free Trade Agreement (NAFTA), the evolution of the
European Economic Union and other free trade zones, and the pervasive effects of
technological change are all contributing to increased global harmonization of auditing and
accounting standards. For these reasons the International Federation of Accountants (IFAC)
was created in 1977.
The IFAC publishes its own handbook on auditing standards recommending International
Standards on Auditing (ISAs). ISAs cover basic principles of auditing, auditors reports,
professional independence, reliance on other auditors abroad, and professional qualifications.
ISAs are increasingly becoming the dominant standards worldwide. The CPA Canada policy
is to adopt ISAs as is, unless Canadian conditions require a different standard.

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