PROFESSIONAL RESPONSIBILITIES

GENERALLY ACCEPTED AUDITING STANDARDS (GAAS)

AND

ATTESTATION ENGAGEMENT

Choirul Anwar
 STANDARDS IN
PROFESSIONAL
RESPONSIBILITIES
2

Choirul Anwar
GENERALLY ACCEPTED AUDITING STANDARDS
(GAAS)
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GENERAL STANDARDS (TIP)

T Training And Proficiency

- Auditor must have formal education, pass the CPA exam,
obtain practical experience, and pursue continuing
education.

I Independence
- Auditor must be independent in fact and in appearance

P Profesional Care
- Requires critical review of judgement excercise at the
supervisory level.

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 GENERALLY ACCEPTED AUDITING
STANDARDS (GAAS)
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STANDARD OF FIELD WORK (PIC)

P Planning and Supervision

- Work is to be properly planned and assistants must be
properly supervised

I Internal Control
- Auditor must obtain a sufficient understanding of the
internal control to plan the audit and to determine the
nature, timing, and extent of substantive tests.

C Competent Evidence
- Auditor must obtain sufficient competent evidential matter
through inspection, observation, inquiries, and
confirmations to afford a reasunable basis for an opinion on
the financial statements.
Choirul Anwar
 GENERALLY ACCEPTED AUDITING
STANDARDS (GAAS)
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STANDARDS OF REPORTING (ANOE)

A Accounting Principles
financials conform to

GAAP

N No new principles
consistency

O Omitted disclosure
none

E Express an Opinion

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STANDARDS FOR ATTESTATION ENGAGEMENTS
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GENERAL STANDARDS
Practitioner should do:

Training:

Posses technical training and proficiency in the attest function.

Have adequate knowledge of the subject matter.
Independence:

Only perform the engagement if both of the following criteria are
satisfied:
- Assertion can be evaluated against a reasonable criteria
- Assertion can be consistently measured or estimated
using the criteria

Be independent in mental attitude
Profesional Care:

Axercise due professional care

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STANDARDS FOR ATTESTATION ENGAGEMENTS
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STANDARDS OF FIELD WORK:

Planning and supervision

Competent evidence

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 STANDARDS FOR ATTESTATION ENGAGEMENTS
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STANDARDS OF REPORTING:
The report shall:

Identify assertions and state character of
examination.

State whether assertion is presented in conformity
with established criteria

Express if the practitioner has significant
reservations about engagement and assertions.

Include a statement that limits its use to those
parties who have agreed upon the procedures

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 INTERNAL CONTROL
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COSO (COMMITTEE OF SPONSORING ORGANIZATIONS):

INTERNAL CONTROL: is a process in achieving objectives that includes:
- Companies' operation in effective and efficiency manner
- Reliability of financial reporting
- Compliance with applicable Law and Regulation

Five Element of Internal Control:

- C control Environment
- R risk Assessment
- C control Activities
- I information and Communication
- M monitoring

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 CONTROL ENVIRONMENT
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Auditor must assess the overall attitude of management, owners, and

board of directors regarding the importance of controls within the entity.

AUDITOR EVALUATION CONSIDERATIONS:

- Integrity/Ethics
- Commitment to competence
- Level of board of directors or audit committee’s involvement.
- Management philosophy and style
- Organization sructure
- Assignment of authority and responsibility
- Human resource policy

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 RISK ASSESSMENT
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Entity’s identification, analysis, and management of risks relevant to the

preparation of financial statements that are in conformity with GAAP.

CIRCUMTANCES CAUSING POTENTIAL RISK:

- New personnel
- Rapid growth
- Foreign operations
- New technology products
- New of changed information system
- Corporate restructure
- Accounting pronouncements

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 CONTROL ACTIVITIES
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Policies and procedures used to provide reasonable assurance that

specified entity objectives will be achieved.

PROCEDURES INCLUDE:
- A Authorization of trancsactions and activities by management
- R Recording of transactions correctly and using the appropriate
prenumbered documents
- C Custody of assets and records should be limited to authorized
personnel
- C Comparison or reconciliation of information should be done
frequently
- S Segregation of duties. The functions of authorization, recording,
custody, and comparison should be performed by different people

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 INFORMATION AND COMMUNICATION
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Information system relevant to financial reporting objectives

consists of methods and records established to:
- Identify
- Assemble
- Analyze
- Classify
- Record entity transactions
- Report entity transactions
- Maintain accountability for the related assets and liabilities

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 MONITORING
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Process that assesses the quality of the internal control over

time.

MONITORING INVOLVES:
Assessment by appropriate personnel of the design and
operation of controls on a timely basis to determine that the
internal control is operating as intended.

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 CONSIDERING INTERNAL CONTROL
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ASSESS CONTROL RISK AT THE MAZXIMUM LEVEL:

- Auditor may believe evaluating the effectiveness of policies
and procedures is inefficient, or that the control policies
and procedures are unlikely to pertain to the assertions.
- Auditor does not have to perform test of control when not
relying on them.
- Auditor should document the auditor’s understanding of
the entity’s internal control elements, and conclusion that
control risk is at the maximum level.
- The basis of concluding tha control risk is at the maximum
level need not be documented.

Choirul Anwar
 CONSIDERING INTERNAL CONTROL
(continued)
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ASSESS CONTROL RISK BELOW THE MAXIMUM LEVEL

Auditor can identify specific control structure policies and procedures
that are likely to detect or prevent material misstatement

Auditor will perform tests of control (TOC) to evaluate the operating

effectiveness of these politicies and procedures:

TOC include:
- R Re-performance of the application of policies and procedures
- I Inquiry of personnel
- I Inspection of documents and reports
- O Observation of the application of policies and procedures

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AUDIT EVIDENCE: EVIDENTIAL MATTER
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EVIDENTIAL MATTER:
All the underlying accounting data and all corroborating
information that support the financial statements that are
available to the auditor.

COMPETENCE / QUALITY OF EVIDENTIAL MATTER:

- Relevance – Function of its usefulness in attaining audit
objectives. If the evidential matter contributes to the
attainment of audit objectives, it is relevant (useful).
- Validity – Based on the auditor’s judgement, which is
influenced by the sources of evidence.

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AUDIT EVIDENCE: EVIDENTIAL MATTER
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FOUR BROAD SOURCES OF VALIDITY EVIDENCE INFORMATION

1. LOW
Developed by the entity.
Example : Sales Invoice
2. MODERATE
Developed by independent parties
related process to the entity.
Example : Vendor’s invoice
3. HIGH
Developed by independent parties
communicated directly to auditor.
Example : Attorney’s letter
4. HIGHEST
Obtained directly by auditor through
physical examination, observation,
computation, and inspection.
Example : Observation of physical
inventory.
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AUDIT EVIDENCE: EVIDENTIAL MATTER
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OVERALL APPROACH FOR SUBSTANTIVE TESTING

1. The audit risk model classifies audit risk (AR) into three
component :
- Inherent risk (IR) Formula to Compute:
- Control risk (CR) AR = IR x CR x DR
- Detection risk (DR)

2. At this point, the auditor can solve the audit risk model for
detection risk.
- Detection risk is the risk that the auditor’s substantive testing
procedures will fail to detect material mistatements in the
financials.
- The auditor will establish his or her substantive tests (detection
risk) at a level to reduce audit risk to the desire level.
Choirul Anwar
AUDIT EVIDENCE : Example of How Substantive Tests Relate to The
Necessary Level of Dertection Risk
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Lower DR Higher DR
Nature Gather more Gather less
competent forms of competent forms of
evidence evidence

Timing Perform tests after Perform tests

year-end before year-end

Extent Examine a larger Examine a smaller

number of number of
transactions or transactions or
components components
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AUDIT EVIDENCE: EVIDENTIAL MATTER
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Auditor will follow 3 step processes in developing substantive

test for audit procedures (audit program) for each account
and transaction class to be examinded:
- Determine and evaluate the specific assertion being made
by management.
- Determine the audit objectives based on those assertion
made by management.
- Determine the appropriate audit procedures to perform,
which will depend on the types of audit evidence available
for examination.

Choirul Anwar
AUDIT EVIDENCE: EVIDENTIAL MATTER
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ASSERTIONS MANAGEMENT:
Representation by management that are implicitly or explicitly expressed in the
financial statement component. Generally, Assertion by Management fall into 5
categories:
1. P Presentation and Disclosure: Component of the financial statements
are properly classified, described, and disclosed.
2. E Existance: The assets and liabilites did exist as of a given date, and the
recorded transactions did occur during the identified period.
3. R Rights and Obligations: This assertion differs from existance or
occurance. In this case, management is implying that the entity has rights
to the assets and that the liabilities are the obligations of the entity as of
a given date.
4. C Completeness: All transactions have been recorded.
5. A Allocation: The account have been included in the financial statements
at the appropriate amount, including appropriate allocation between
balance sheet and income statement account.
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AUDIT EVIDENCE: EVIDENTIAL MATTER
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AUDIT PROCEDURES
After establishing the audit objective as (PERCA) in Management’s Assertion,
auditor determine audit procedures refers to substantive tests.

TYPES OF AUDIT PROCEDURES / ALSO FOR SUBSTANTIVE TEST

(CORIIA):
- C Confirmation - Represent direct communication by the auditor
with third parties.
- O Observation - of items (if possible) representing the account balances.
- R Recalculation - Mathematical verification of account balances.
- I Inspect document.
- I Inquiry - Inquiries of management regarding various aspects of
accounts.
- A Analytical procedures - Comparisons of relationships among
financial and nonfinancial data.

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 SUBSTANTIVE AUDITING PROCEDURES
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AUDITING CASH
C The auditor will obtain bank reconciliations to confirm cash on
deposit.
O The auditor will perform cash count for cash held on hand
R The auditor will perform various recalculation of deposit-in-
transit listings, outstanding check listings, and the bank
reconciliation itself.
I The auditor should obtain a cutoff bank statement from bank
where the client has funds deposit. This will allow auditor to to
verify that all outstanding checks are included in the clients bank
reconciliation and are properly recorded.
I The auditor will make various inquiries to determine that cash
balances are properly described, classified, and disclosed in the
financial statements.
A The auditor can compare recorded amount to budgeted amount.
Choirul Anwar
 SUBSTANTIVE AUDITING PROCEDURES
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AUDITING RECEIVABLE
C Confirm selected account with customers.
O Observe notes receivable
R Based on an aged analysis of A/R, the auditor can recalculate the
client’s provision fof bad debt expense and/or allowance for doubtful
account.
I Review cash collection on A/R occuring subsequent to year end. For
exception and nonresponses to A/R confirmation, examine sales
invoice and remittance advices.
I Inquire about A/R pledged, factored, or assigned. Also the auditor
should inquire about reasonableness of accounts written off during
the current period.
A Calculate A/R turnover ratios for reasonableness. Evaluate the
reasonableness of the client’s provision for bad debt expense and
allowance for doubtful account.
Choirul Anwar
 SUBSTANTIVE AUDITING PROCEDURES
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AUDITING INVENTORIES
C Confirm inventories held at locations outside the entity, such as public
warehouse and consignees.
O Observe physical inventory counts.
R Mathematically verify the accuracy of the client’s inventory listing and
compare the total to the general ledger balance.
I For purchased inventory, examine vendor’s invoice. For manufactured
inventory, examine the accumulation of direct materials, direct labor,
and overhead costs associated with inventory.
I Inquiry about possible obsolate inventory items.
A Examine an analysis of inventory turnover. Review industry experience
and trends.

Choirul Anwar
 SUBSTANTIVE AUDITING PROCEDURES
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AUDITING ACCOUNT PAYABLE

C Confirm recorded A/P with vendors
O This procedures is not used in auditing A/P
R Mathematically verify the total of the A/P listing and compare the total
to the General ledger balance.
I Perform cutoff tests to determine that transactions occuring near year-
end are recorded in the proper period. Also, the auditor should inspect
payment made to vendors after year-end for possible evidence of an
unrecorded liability.
I Inquiry about the appropriateness of valuation accounts for purchase
discounts, returns, and allowances.
A Evaluate the reasonableness of ratios and relationship involving A/P,
inventory, and other expenses.

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 SUBSTANTIVE AUDITING PROCEDURES
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AUDITING INVESTMENTS
C Confirm securities held by third parties
O Physical inspect investment securities (done at the same time as the
count of cash or other liquid assets to prevent substitution and double
counting)
R Recalculate the market value for investment securities and determine
the need for recognizing an unrealized holding gain or loss.
Recalculate any realized gains or losses from the disposal of
investment securities.
I Exemine document such as broker advices. Review minutes of meetings
of shareholders or board of directors to determine that purchases and
disposals of investment securities are authorized.
I Inquiry as to management’s intent for investment securities to
determine if securities are properly classified.
A Analyze investment revenue accounts based on the recorded
investment account.
Choirul Anwar
 SUBSTANTIVE AUDITING PROCEDURES
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AUDITING PROPERTY, PLANT, & EQUIPMENT (PPE)

C Confirm PPE held by others under operating lease agreements.
O Observe PPE held by the client.
R Recalculate the depreciation expense recognized during the period. For
disposals of PPE, recalculate the gain or loss on disposal.
I Verify purchases of PPE by examining documentation such as invoices
(for purchased PPE) or internal cost records (for constructed PPE).
Review minutes of meetings of shareholders or board of directors to
determine if any claims exist against PPE.
I Inquiry about the appropriateness of estimated lives, estimated salvage
values, and the methods used to depreciate PPE.
A Evaluate the reasonableness of depreciation of depreciation expense
based on the balance in PPE or depreciation expense from previous
years.
Choirul Anwar
 SUBSTANTIVE AUDITING PROCEDURES
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AUDITING LONG-TERM LIABILITIES

C Confirm long-term liabilities with the issuer or trustee. The auditor will need
to corroborate the face amount, interestrate, maturity dates, and any
important covenants.
O Examine the debt agreement and note important characteristics of this
agreement (face amount, interest rate, maturity dates, and important
covenants).
R Mathematically recalculate the client’s interest expense. If Long term liabilities
are issued at a premium or discount and the amortization of that premium or
discount.
I Trace cash proceeds from the issuance of debt to journals, bank deposit slips,
and entries on bank statements.
I Ask management about the existance and disclosure of any singking funds used
to retire long-term liabilites.
A Analyze the reasonableness of interest expense based on outstanding long
term debt.
Choirul Anwar
 SUBSTANTIVE AUDITING PROCEDURES
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AUDITING STOCKHOLDERS’ EQUITY

C Confirm year-end balances and transactions occuring in stockholders’
equity during the year with the transfer agent and registrar.
O Inspect share stubs, unissued certificates, and canceled certificates for
issuances and retirements of stock during the year.
R Recalculate the distribution of proceeds between legal capital and
additional paid-in-capital. Review declarations of dividends to determine
that they were properly recorded and valued.
I Inspect advices from brokers, the registrar, and transfer agents for capital
transactions. Review the minutes of meetings of committees, board of
directors, and stockholders to verify authorizations for capital
transactions.
I Inquiry about management’s intent with respect to repurchased shares of
its stock.
A These are not frequently used in the audit of stockholders’ equity.
Choirul Anwar
 AUDIT EVIDENCE: ANALYTICAL PROCEDURES
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Conscists of evaluations of financial information made by a

study of plausible relationships (ratios and comparisons)
between financial and nonfinancial data.

Analytical Procedures are used for:

- P Planning – the nature, timing, and extent of other
auditing procedures
required.
- R Review – of the financial information in the final
review stage of the audit
required.
- S Substantive test – to obtain evidential matter about
particular assertions related to account balances

recomended.
Choirul Anwar
 AUDIT REPORT
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SUMMARY OF AUDIT REPORT
Nature of Issue Immaterial Material Very Material
Disagreement
regarding:
- GAAP Standard Qualified Opinion
- Inadequate Unqualified “Except For” Adverse Opinion
disclosure Opinion
Scope Limitation Standard Qualified Opinion Disclaimer of
Unqualified “Except For” Opinion
Opinion
Uncertainty Standard The likelihood of risk of loss
Unqualified determines the type of audit opinion
Opinion issued.*

* Remote risk : Issue standard unqualified opinion

Probable Risk : Issue unqualified opinion with explanatory paragraph.
Reasonable Possible Risk : Issue unqualified opinion with or withouth explanatory paragraph
depending on magnitude and likelihood.
Extreme Uncertainty Risk : Issue disclaimer of opinion.

Choirul Anwar
 AUDIT REPORT
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UNQUALIFIED OPINION

UNQUALIFIED OPINION WITH EXPLANATORY
PARAGRAPH

QUALIFIED OPINION

ADVERSE OPINION

DISCLAIMER OPINION

Choirul Anwar