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Part One

INTRODUCTION TO AUDITING AND ASSURANCE SERVICES

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Chapter 2

CHAPTER 2 AN OVERVIEW OF FINANCIAL STATEMENT AUDITING

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GAAP AS AN AUDIT CRITERION

When the auditor states in the standard audit report that "the financial statement ... present fairly ... in accordance with Canadian generally accepted accounting principles," five judgments are made about GAAP:

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GAAP AS AN AUDIT CRITERION (cont.)

the accounting principles have general acceptance the accounting principles are appropriate in the circumstances the financial statements, including the notes, contain adequate disclosure the information in the financial statements is classified and summarized in a reasonable manner, and the financial statements reflect the underlying transactions and events.

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FINANCIAL STATEMENTS; MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

Management assertions Audit objectives Audit procedures

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SUMMARY OF MANAGEMENT ASSERTIONS

Existence or occurrence Completeness Rights and obligations Valuation or measurement and allocation Statement presentation

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THE AUDITORS RESPONSIBILITY FOR ERRORS, FRAUD, AND ILLEGAL ACTS

The auditors responsibility is to conduct the audit in accordance with GAAS and to detect material misstatements. The auditors responsibility to detect misstatements resulting from illegal acts is the same as that for error or fraud. The auditor is required to adopt an attitude of professional skepticism.

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ETHICS AND INDEPENDENCE

Ethics refers to a system or code of conduct based on moral duties and obligations that indicates how we should behave. Professionalism refers to the conduct, aims, or qualities that characterize or mark a profession or professional person. Without independence, the user will place little value on the auditors report. Provincial Rules of Conduct.

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THE AUDITOR AS A BUSINESS AND INDUSTRY EXPERT

The auditor must have extensive knowledge about the nature of the clients business and industry in order to determine whether financial statements assertions are valid. Client business risk is the risk that an entitys business objectives will not be attained as a result of the external and internal factors, pressures, and forces brought to bear on the entity and, ultimately the risk associated with the entitys survival and profitability.

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THREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDIT

Materiality Audit risk Evidence

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MATERIALITY
A misstatement or the aggregate of all misstatements in financial statements is considered to be material if, in light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities ( the user), would be changed or influenced by such misstatement or the aggregate of all misstatements.

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AUDIT RISK
Audit risk is the risk that the auditor will fail to express a reservation in his or her opinion on financial statements that are materiality misstated.

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EVIDENCE

Evidential matter supporting the financial statements consists of the underlying accounting records and all corroborating information available to the auditor. Relevance refers to whether the evidence relates to the specific audit objective being tested. Reliability refers to the whether or not a particular type of evidence can be relied upon to signal the true state of the assertion or audit objective.

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SAMPLING: INFERENCES BASED ON LIMITED OBSERVATIONS

Due to cost and time constraints, the auditor examines only a subset of the data (transactions) available in the clients records. As a result, the auditor uses his/her knowledge about the transactions and/or a sampling approach to examine the transactions.

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OVERVIEW OF THE AUDIT PROCESS

MAJOR PHASES

Client acceptance and continuance Establish the terms of the engagement Plan the audit Consider internal control Conduct substantive audit procedures Complete the audit Issue audit report

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AUDIT REPORTING

The auditor's report is the main product or output of the audit. CICA 5400, The auditors standard report ,provides authoritative guidance on audit reporting.

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THE AUDITOR'S STANDARD UNQUALIFIED AUDIT REPORT

This is the most common type of audit report. The standard unqualified audit report contains seven important elements: Title Addressee Introductory paragraph Scope paragraph Opinion paragraph Name of auditor Date of report
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DEPARTURES FROM AN UNQUALIFIED AUDIT REPORT

A departure from GAAP Scope limitation The auditor is not independent

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OTHER TYPES OF AUDIT REPORTS

Qualified Denial Adverse

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