CHAPTER 1

AUDIT: An
Auditing Defined
Overview
Types of Audits

Inherent Limitations
General Principles
Theoretical framework

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Auditing

An audit is the systematic process of

objectively obtaining and evaluating
evidence regarding assertions about
economic activities and events to
ascertain the degree of correspondence
between the assertions and established
criteria and communicate the results to
interested users (American Accounting
Association).
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Types of Audit
(FOC)
Financial
Statement
Audit
Operational Audit
Compliance Audit
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Types of Auditors
(GIE)

Government Auditor
Internal Auditor
External Auditor

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Independent FS
Audit
Responsibility for the

Financial Statements
- The management is responsible
in the design, implementation
and maintenance of internal
control.
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Independent FS
Audit
Assurance provided by

the auditor
- Reasonable Assurance/ Highlevel of assurance/ Increased
assurance.
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1.
2.

3.

4.
5.

Inherent
Sampling Risk/ Use of Testing
Limitations
(SIREN)
Inherent Limitations on the clients
accounting and internal control
systems.
Reliance on Managements
Representation
Error in application of Judgment
Nature of evidence

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General Principles

Compliance with relevant ethical

requirements, including those
relating to independence,
relating to FS audit engagements
- Concern for public rather than
self-interest.
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General Principles

In accordance with PSAs.

- Designed to assist auditors
on interpreting and applying
the auditing standards

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General Principles

Exercise Professional Judgment

- Essential because informed
decisions required throughout the
audit cannot be made without the
application of auditors knowledge
and experience to the facts and
circumstances.
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General Principles

The auditor should obtain

sufficient appropriate audit
evidence to reduce audit risk to
an acceptably low level to
enable the auditor express an
opinion on the FS
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General Principles

Attitude of Professional
Skepticism
- Auditor neither assumes that
the management is honest nor
assumes unquestioned
honesty.
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1.
2.

3.
4.

Need for an
Independent FS Audit
Financial Consequences
(FIRE)

Conflict of Interest between

mgmt. and users of FS.
Remoteness
Expertise
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Theoretical Framework
of Auditing
Audit function operates on the
assumptions that all financial data
are verifiable.

The auditor should always maintain

independence with respect to the
financial statements under audit.
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Theoretical Framework
of Auditing

There should be no long-term

conflicts between the auditor and
the client management.

Effective internal control

system reduces the possibility of
errors and fraud affecting the FS.
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Theoretical Framework
of Auditing

Consistent compliance with

applicable financial reporting
framework results in fair presentation
of FS.

What was held true in the past will

continue to hold true in the future in
the absence of the known conditions to
the contrary.
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Theoretical Framework
of Auditing
An audit benefits the
public.

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END
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