Introduction to Auditing

The Business Model

Stakeholders
(Principal)

Integrity
of the
Financial Management
(Agent)
Statements

Results of Business
operations operations
 Demand of audit

 Information asymmetry

 Conflict of interest

 Credibility of information

“Audit is directly or indirectly aimed for the primary

stakeholders i.e. shareholders and bondholders.”

 The Rationale behind Auditing
 Authorized
Whether it’s  Occurred
True & Fair  Complete
 Accurate
? Stakeholders


Existence
Rights
 Obligations
 Presentation
Opinion on Financial
FS Statement

Financial
Auditor Management
Statement
 Objective of Audit

 No definition is given, per se, in ISAs

 Is to enable auditor to express an opinion whether

the financial statements are prepared, in all material

respects, in accordance with the identified financial

reporting fraemwrok.
 Definition of Audit

 An audit is a systematic process of

 objectively obtaining and evaluating evidence regarding

 assertions about economic actions and events

 to ascertain the degree of correspondence between

 these assertions and

 the established criteria and

 communicating the results to interested users.

 Elements of audit
1. A three party relationship
2. A subject matter or subject matter
information
3. Suitable criteria
4. Audit evidence
5. An assurance report
 The Audit Analogy
 Purchase of aused
existing
mobile
carhouse

Buyer
 Effective
 Timely
 Cost benefit
 Advise
Reliable
 Informative

 Competent
 Objective Advisor Seller
 Honest
 Independent
 Skeptical
 responsible
 Types of Auditor’s Opinion
Unmodifie
d Modified

No issue Misstatement Scope Limitation

Unqualified Adverse Qualified Qualified Disclaimer

Audit Client
acceptance /
continuance

Life
Audit
Cycle opinion Planning

Audit
Risk
Completion Assessment

Substantive Test of
Procedures controls
 Developing an audit program
Understanding entity, its environment and internal
control

Financial statement

Audit objective

Audit procedures

Audit programs
Organizational Hierarcy
 Assurance Continuum

Reasonabl Scope of
Zero Limited AbsoluteAudit
e
Assurance Assurance Assurance
Assurance
 Materiality

Misstatements, including omissions, are

considered to be material if they, individually or
in the aggregate, could reasonably be expected
to influence the economic decisions of users
taken on the basis of the financial statements.
Materiality

High Values

Scope of Audit
Reporting

Materiality
threshold

Low Values
Levels of Assurance V Materiality
Absolute High Values

Scope of
Audit
Assurance Reasonable

Materiality
threshold

Low
Low Values
 Financial Statements –
Another Perspective
1. BS
2. P&L
Financial 3. Cash flow
Statements 4. Equity
5. Notes
6. ?

Figures Narration

Account Class of
Disclosures
balances transaction
 Management Assertions
Account Balances Class of transactions Disclosures
• Occurrence • Existence • Occurrence and
• Completeness • Rights & Rights &
• Accuracy Obligations Obligations
• Authorization • Completeness • Completeness
• Cut-off • Valuation & • Classification &
Allocation Understandability
• Classification
• Accuracy &
valuation
 Annual Report
• Other Information

– About company
– Regulatory requirements
– Review and Analysis

• Financial Statement (separate)

• Group Financial Statements (consolidated)

 Parts of auditor’s report
• Addressee
• Description of subject matter
• Statement of compliance with ISAs
• Identification of responsibilities
• Summarization of work undertaken
• Identification of criteria
• Opinion
• Date
• Signature and name
 Meanings of Audit Opinion
Audit
Opinion

True Fair

Reflect
Factual and Correctly Free from Compliant
commercial
conform extracted discriminati with
substance of
with reality from books on and bias framework
transactions
 Responsibilities
Management Auditor
• Maintaining effective and • Performing audit
efficient accounting and procedures on the financial
internal control system statements

• Preparation of financial • Expressing an opinion based

statements on the audit

• Compliance with applicable • Compliance with applicable

reporting framework auditing framework
 Limitations of audit
• Test nature of the function
• Inherent limitations of internal control
• Persuasive nature of audit evidence
• Judgement permeated the work
• Possibility of fraudulent activities
 Definition of Audit Risk

1. risk that the auditor may unknowingly fail

2. to appropriately modify his or her opinion

3. on financial statements that are materially misstated.

 The Key Business Processes
• Raising capital through equity or other loans
Financing Process • Payment of return and the loan amount

Purchasing • Acquisition of good and services

• Payments to suppliers and vendors
Process
• Receiving and maintaining the items
Inventory Process • Issuing to the production or dispatch to customer

• Sale of goods and services

Revenue Process • Recovering money from customers

• Hiring and firing of employees

HRM Process • Capacity building and succession planning