3 Objectives of An Audit
To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error.
To express an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework.
4 Management Responsibilities
Preparation of financial statements.
Establish, implement & maintain internal controls relevant in FS Preparation.
Identification of the applicable financial reporting framework.
Exercise of judgment in making reasonable accounting estimates and apply appropriate
accounting policies.
5 Management Responsibilities
Provide the auditor with all information, such as records and documentation; other information
needed by the auditor in connection with the audit of financial statements.
Provide the auditor with unrestricted access to those within the entity from whom the auditor
determines necessary to obtain sufficient appropriate evidence.
6 Auditors Responsibilities
Obtain reasonable assurance that the FS are free from material misstatements.
Express opinion whether the FS are in accordance with applicable financial reporting framework.
Report on the financial statements.
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Auditor Independence
Professional skepticism
Conduct & Scope of an Audit in accordance with PSAs
Audit Evidence & FS Assertions
Audit Materiality
Audit Risk
Professional Judgment
Inherent limitations of an audit
9 Independence
Independence enhances the auditors ability to act with integrity, to be objective & to maintain
professional skepticism.
10 Professional Skepticism
Recognize that circumstances may exist that cause the FS to be materially misstated.
The auditor neither assumes that the client is dishonest nor of unquestioned honesty.
Auditors use past experience to assess honesty and integrity of client management.
However, a belief that management is honest does NOT relieve the auditor the need to maintain
professional skepticism.
Obtains sufficient and appropriate evidence to support management representation.
11 Professional Skepticism
Professional skepticism requires the auditor to be alert about:
Evidence that contradicts other evidence obtained.
Info that brings into question the reliability of documents and responses to be used as
evidence.
Conditions that may indicate possible fraud (fraud risks factors).
12 Professional Skepticism
Maintaining professional skepticism reduces the risk of:
Overlooking unusual circumstances
Over-generalizing when drawing conclusions
Using inappropriate assumptions in designing nature, timing & extent of audit procedures and
evaluating the results
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18 Audit Materiality
Information is material if it affects the decisions of the users taken on the basis of the FS.
Materiality is relative.
Depends on the size and nature of the item.
The assessment of what is material is a matter of professional judgment of the auditor.
19 Audit Risk
The likelihood or possibility that the auditor expresses
(1) an inappropriate audit opinion
(2) when the financial statements are materially misstated.
Audit risk may be assessed either in
Quantitative terms
Non-quantitative terms
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Non-quantitative terms
20 Audit Risk
Audit risk is a function of
the possibility of material misstatement and
the possibility that the auditor will not detect such misstatement
21 Audit Risk
Inherent Risk
the susceptibility of an assertion to a misstatement that could be material assuming that there
were no related internal controls.
22 Audit Risk
Control Risk
the likelihood that a misstatement that could occur in an assertion and that could be material
and will not be prevented, detected or corrected on a timely basis by the entitys internal
control
23 Audit Risk
Detection Risk
the likelihood that the auditor will not detect a misstatement that exists in the financial
statements.
While inherent and control risks are function of clients accounts and systems, detection risk is a
function of the auditors procedures.
Therefore, among the components of the audit risk, detection risk is the only component that
the auditor can control.
Thus, the auditor plans the nature, timing and extent of audit procedures to reduce the audit
risk to an acceptably low level.
25 Professional judgment
The application of relevant knowledge and experience, within the context provided by auditing,
accounting and ethical standards, in reaching decisions about courses of action that are
appropriate in the circumstances of the audit engagement.
27 Pre-Engagement Procedures
Acceptance & continuance decisions
Establishing pre-conditions for an Audit
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29 Terms of Engagement
The auditor and the client should agree on the terms of the engagement.
It is in the interest of both parties, not only of the auditor, to have an engagement letter before
the commencement of the engagement to avoid any misunderstandings with respect to the
engagement.
30 Terms of Engagement
Engagement Letter documents and confirms:
Auditors appointment
Objective and scope of audit
Auditors & managements responsibilities
Form of any reports to be issued
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39 Audit Planning
Establishing the overall audit strategy for the engagement;
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40 Audit Planning
Benefits of Audit Planning
Devote appropriate attention to important areas
Identify & resolve potential problems on timely basis
Helps organize & manage the audit engagement
Assist in selection of members of audit engagement team members
Facilitating direction & supervision
Assisting coordination of work by others
41 Audit Planning
Principal Planning Activities
Understanding client business & environment
Assessing the possibility of non-compliance
Establishing materiality and assessing risks
Identifying related parties
Performing preliminary analytical procedures
Consider use of experts, internal auditors, entity personnel & other auditors
Development of overall strategy and detailed audit plan
44 Substantive Testing
Procedures used to detect material misstatements at the assertion level.
Substantive Analytical procedures
Tests of Details
Substantive tests of transactions (test of transactions)
Substantive tests of balances (test of balances)
45 Substantive Testing
After gathering evidence, the auditor determines whether adjustments to FS should be made.
The conclusions reached based on evaluation of evidence gathered become the basis for the
expression of opinion & preparation of the audit report.
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50 Post-audit responsibilities
Audit debriefing
Consider events during the audit
Analyze activities within the audit
Produce recommendations
51 End of Discussion
QUESTIONS