B4555 - Chapter 01

Study of Auditing

Focuses on the development of analytical and logical skills, different from other accounting courses.

Demand for Auditing and Assurance

Arises from the need for accountability when business owners hire others to manage their businesses.

Principal/Agent Relationship

Exists between shareholders (principals) and management (agents), resulting in information asymmetry.

Role of Auditing

Overcomes information asymmetry by providing assurance to absentee owners that management is acting in the best interest of the firm.

Relationships among Auditing, Attest, and Assurance Services

Auditing is a form of attest function, which is a form of assurance.

Audit Assertions/Objectives

Management assertions about transactions, account balances, and disclosures are tested during the audit.

Materiality

The magnitude of an omission or misstatement of accounting info that would influence users' judgments.

Audit Risk

The risk that the auditor mistakenly expresses a clean audit opinion when the financial statements are materially misstated.

Audit Evidence

Consists of underlying accounting data and additional information that assists the auditor in evaluating management's assertions.

Sampling

Auditors use a sampling approach to examine a subset of transactions based on previous audits, internal controls, or industry knowledge.

Major Phases of an Audit

Client acceptance/continuance, preliminary engagement activities, plan the audit, consider and audit internal control, audit business processes and related accounts, complete the audit, evaluate results and issue audit report.

Structure of the Audit Report

Includes sections such as "Opinion on the Financial Statements," "Basis for Opinion," and "Critical Audit Matters."

Types of Audit Reports

Unqualified (clean), qualified, adverse, and disclaimer.

Auditing Demands Logic, Reasoning, and Resourcefulness

Auditors need to understand accounting concepts, think logically, and be innovative in their approach.