AUDITING
Page 2: References
Books
Auditing Textbook (Financial Publisher)
ACCA F8 Audit and Assurance Study Book (Kaplan or BPP)
ACCA F8 Audit and Assurance Revision Kit
ACCA F8 Audit a
Page 3: Contents
Chapter 1: Auditing Professional Overview
Chapter 2: Auditing Standards and Professional Ethics Code
Chapter 3: Audit Report
Chapter 4: Financial Report Assertions and Audit Objectives
Chapter 5: Fraud and Error, Materiality and Risk in an Audit
Chapter 6: Internal Control – An Overview
Chapter 7: Audit Evidence
Chapter 8: Audit Tests
Chapter 9: Audit Sampling
Chapter 10: Audit in an EDP System
Chapter 11: Organization of the Audit Process
Page 4: Chapter 1 - Auditing Professional Overview
Page 5: Chapter 1 - Overview
Key Topics
Nature of Auditing
Classification of Auditing
The Audit Process
Page 6: Nature of Auditing
Overview
Agency Theory: Relationships between shareholders, directors, and auditors.
Directors provide financial statements to users and manage the operation of the company.
Shareholders provide capital and are at risk due to agency issues.
Page 7: History of Auditing
Key Historical Points
3rd Century BC: Classical audit focused on state revenue and expenditure, aimed at fraud detection.
1920s – 1960s: Modern audits introduced standards, internal audits to ensure fairness of financial statements.
Current Practices: Combination of external and internal audits, financial statement audits, compliance audits, and performance audits.
Page 8: Definition of Auditing
Auditing Process
An independent and competent auditor evaluates evidence to report on the correspondence between information and established criteria.
Must be performed by a competent, independent auditor.
Page 9: Auditor Characteristics
Requirements for Auditors
Independence: Must be independent from the audited client to ensure objectivity.
Competence: Must have knowledge of auditing, accounting, tax, and regulations.
Page 10: Competence and Independence
Importance
Competence ensures effective evaluation of evidence; independence allows for proper conclusions.
Page 11: Collecting and Evaluating Evidence
Evidence Types
Includes transaction data, communications with outsiders, observations, and client testimony.
Page 12: Information and Established Criteria
Requirements for an Audit
Information must be in a verifiable form against criteria such as FASB and IASB standards.
Page 13: Example of Auditing Process
Elements
Collecting and evaluating evidence related to financial statements against established criteria.
Page 14: Causes of Information Risk
Gaps between information suppliers and users, large volume of transactions, and potential use of incorrect information.
Page 15: Reducing Information Risk
Users may verify directly, share risks with management, or rely on audited statements to reduce risks.
Page 16: Importance of Auditing
Benefits
Enhances user confidence, guides financial activities, and improves management abilities.
Page 17: Auditor-Client Relationships
Auditors help reduce information risk for capital providers and external users relying on the financial statements.
Page 18: Functions of Auditing
Primary and Secondary Functions
Primary: Confirm financial correspondence.
Secondary: Provide recommendations for improving management efficiency.
Page 19: Classification of Auditing
Types Based on Purpose and Organization
Financial statement audits, compliance audits, performance audits, internal and state audits.
Page 20: Operational Audit Example
Criteria
Evaluate the efficiency of a computerized payroll system using established criteria and evidence.
Page 21: Compliance Audit Example
Ensure bank compliance by evaluating company records against established loan agreement provisions.
Page 22: Audit of Financial Statements Example
Conduct annual audits to ensure compliance with GAAP using financial statements as evidence.
Page 23: True and Fair Concept
Definitions
True: Factual representation in financial records.
Fair: Free from bias, accurately reflecting transactions.
Page 24: Assurance Limitations
Auditing Constraints
Absolute assurance cannot be provided; auditing relies on judgement and evidence that is persuasive, not conclusive.
Page 25: The Auditing Process
Steps
Audit Planning
Audit Implementing
Audit Completing
Page 26: Questions
Question 1: Define external audit.
Question 2: Identify the level of assurance for a review engagement.
Page 27: Questions (Continued)
Explore the assurance level and report wording choices.
Page 28: Chapter 2: Auditing Standards and Professional Ethics Code
Page 29: Topics in Chapter 2
Auditing standards
Professional ethics code
Page 30: Importance of Auditing Standards
Need for Regulation
Ensure objective benchmarks for audits and standards for consistency in financial reporting.
Page 31: Development of ISAs
IFAC oversees auditing standards and ethics via IAASB and ISAs.
Page 32: Auditor Regulation
Levels of Regulation
National and international regulatory frameworks to ensure compliance with auditing standards.
Page 33: Professional Ethics Code
Reasons for Ethical Standards
Auditors are relied upon for truth and fairness, necessitating rigorous ethical standards.
Page 34: Fundamental Ethical Requirements
Professional integrity
Objectivity
Competence and due care
Professional confidentiality
Page 35: Threats to Independence
Types of Threats
Self-interest, familiarity, intimidation, advocacy, personal relationships affecting auditors' objectivity.
Page 36: Safeguards to Address Threats
Implementing Safeguards
Actions can include assigning additional qualified personnel, using reviews, and separate reporting lines.
Page 37: Ethical Threats in Long-Standing Relationships
Case Study
Discuss the implications and potential safeguards for long-term audit client relationships.
Page 38: Chapter 3 - Audit Report
Page 39: Topics in Chapter 3
Nature of the audit report
Content of financial statement audit report
Types of financial statement audit report
Page 40: Definition of Audit Report
An audit report expresses the auditor's opinion on audited financial information.
Page 41: Usage of Audit Reports
Users include shareholders and banks, making informed decisions based on the report's findings.
Page 42: Basic Elements of Auditor’s Report
Report Structure
Report title, address, introduction, management and auditor responsibilities, opinion paragraph, signature, date, and auditor's address.
Page 43: Types of Audit Reports
Classification
Qualified Opinion: Material misstatements exist but are not pervasive.
Adverse Opinion: Financial statements are materially misstated and pervasive.
Disclaimer of Opinion: Insufficient evidence to form an opinion.
Page 44: Unmodified Audit Report
Definition and Characteristics
An unmodified report indicates financial statements are presented fairly and aligned with accounting standards.
Page 45: Different Types of Modified Opinion
Definitions
Qualified Opinion: Insufficient evidence but misstatement not pervasive.
Adverse Opinion: Material and pervasive misstatements identified.
Page 46: Characteristics of Qualified Opinion
Defined by auditor's inability to gather sufficient evidence or disagreements with management.
Page 47: Adverse Opinion
Expressed when financial statements do not present a true and fair view.
Page 48: Disclaimer of Opinion
Issued when sufficient evidence cannot be obtained, affects the auditor's ability to form an opinion.
Page 49: Emphasis of Matter and Other Matter Paragraphs
Explanation
Used in auditor's reports to highlight critical issues affecting understanding.
Page 50: Compliance and Performance Audit Reports
Structure
Titles, addressees, scope, audit findings, recommendations, opinions, and auditor signatures included.
Page 51: Chapter 4 - Financial Report Assertions and Audit Objectives
Page 52: Topics in Chapter 4
Assertions in financial statement audits
Audit procedures related to assertions
Audit responsibilities and objectives
Page 53: Financial Statement Presentations
Reflect performance and position through all transactions and events.
Page 54: Financial Statement Assertions
Definition
Representations by management regarding financial statements that help auditors evaluate potential misstatements.
Page 55: Purpose of Testing Assertions
To ensure financial statements are free from material misstatements.
Page 56: Types of Assertions
Categories
Occurrence: Transactions recorded occurred and relate to the entity.
Completeness: All transactions that should be recorded are recognized.
Accuracy: Transactions recorded at correct amounts.
Page 57: Balance Assertions
Classification
Existence: Assertion that all balances exist at period end.
Rights and Obligations: Entity has rights to assets and obligations to liabilities recorded.
Page 58: Understanding Risk-Based Approach in Audits
Process
Understand entity, identify risks, assess them, and apply audit procedures to address risks.
Page 59: Audit Procedures
Requirements
Procedures to obtain audit evidence related to financial statements and assertions.
Page 60: Common Audit Procedures
Audit Methods
Techniques used for conducting audits include inquiry, observation, inspection, and recalculation.
Page 61: General Audit Procedures
Types
Recalculation, inquiry, observation, analytical procedures, inspection, and reperformance.
Page 62: Description of Common Procedures
Key Procedures
Inspection of documents, observation of company policies, external confirmations, and recalculation details.
Page 63: Evaluation of Audit Procedures
Analyzing results effectively through multiple methods of evidence gathering and ensuring accuracy.
Page 64: Overall Audit Objectives
Goals
Obtain reasonable assurance and report on financial statements.
Page 65: Chapter 5 - Fraud and Errors, Materiality and Audit Risk
Page 66: Topics in Chapter 5
5.1: Fraud and Error
5.2: Materiality in Planning and Performing an Audit
5.3: Risks in an Audit
5.4: Relationship Among Materiality, Risk, and Audit Evidence
Page 67: Overview of Fraud and Error
Nature and Responsibility
Differentiate between intentional fraud and unintentional errors.
Page 68: Fraud Definition
Intentional acts involving deception for an unfair advantage.
Page 69: Error Definition
Unintentional mistakes resulting in misrepresentation of financial statements.
Page 70: Differences Between Fraud and Error
Fraud involves intention; errors are unintentional mistakes.
Page 71: Factors Affecting Fraud and Error
Key Elements
Management integrity, internal pressures, complexities in transactions may escalate risks.
Page 72: Management's Responsibility
Implement internal controls to detect and prevent fraud or errors effectively.
Page 73: Auditor's Responsibility
Key Duties
To assess risk, gather sufficient evidence, and report findings on fraud/errors in financial statements.
Page 74: Materiality in Audits
Overview
Definition of materiality and its significance in audit planning.
Page 75: Nature of Materiality
Guidelines
Influences user economic decisions, considering size and nature of misstatements.
Page 76: Steps for Application of Materiality
Preliminary judgment about materiality.
Allocate materiality to segments.
Estimate total misstatement.
Review against preliminary judgments.
Page 77: Calculation of Materiality Levels
Guideline percentages for assessing profit before tax, revenue, and total assets.
Page 78: Introduction to Risk
Overview
ISA 315 emphasizes understanding entity and environment to identify risks of misstatement.
Page 79: Audit Risk Categories
Inherent Risk: Susceptibility to material misstatement.
Control Risk: Material misstatement not prevented or detected by controls.
Detection Risk: Misstatement not detected by auditor's procedures.
Page 80: Components of Audit Risk
Explanation
Combined risks form the foundation of audit assessments and approach.
Page 81: Risk of Material Misstatement
Levels
Assess inherent and control risks at both the financial statement and assertion levels.
Page 82: Inherent and Control Risks
Differentiate between susceptibility of assertions with absence of controls.
Page 83: Detection Risk Explanation
Overview
Factors such as audit scope, methodology, and auditor's expertise affect detection risk.
Page 84: Audit Risk Model
Formula
AR = IR x CR x DR, illustrating relationships between risk components.
Page 85: Relationship Between Audit Risk and Materiality
Analysis
High materiality levels correlate with lower audit risk thresholds.
Page 86: Chapter 6 - Internal Control - An Overview
Page 87: Topics in Chapter 6
Nature of Internal Control
Components of Internal Control
Understanding and Assessing Control Risk
Page 88: Nature of Internal Control
Definition
A process designed by those in governance to ensure objectives are met regarding reliability of reporting, operational efficiency, and legal compliance.
Page 89: Development of Internal Control
Historical context relating to the evolution of accounting controls from accounting-focused systems.
Page 90: Internal Control Elements
Components
Control Environment, Risk Assessment, Information Systems, Control Activities, and Monitoring of Controls.
Page 91: Control Environment Overview
Characteristics
Demonstrating commitment to integrity, structure, and accountability.
Page 92: Risk Assessment Overview
Key Points
Understanding risks and their significance to financial statements aids auditors in planning audits effectively.
Page 93: Information Systems in Internal Control
Definition
Procedures for initiating and processing transactions relevant to financial reporting.
Page 94: Control Activities in Internal Control
Nature
Established procedures to achieve entity objectives, including preventing and detecting errors.
Page 95: Monitoring of Controls
Importance
Evaluate effectiveness over time and necessary modifications in response to changes.
Page 96: Limitations of Internal Controls
Challenges
Cost-benefit analysis, human error, collusion, and ability to bypass controls.
Page 97: Use of Internal Controls by Auditors
Techniques
Narrative notes, flowcharts, and questionnaires for understanding control systems.
Page 98: Evaluation of Internal Control Components
Methods
Walk-through tests and tests of control to verify the effectiveness of internal control systems.
Page 99: Chapter 7 - Audit Evidence
Page 100: Audit Evidence Overview
Definition
Information utilized by auditors for conclusions affecting their opinions.
Page 101: Requirements of Audit Evidence
Goals
Obtain sufficient and appropriate evidence to form reasonable conclusions.
Page 102: Factors Affecting Sufficiency of Evidence
Overview
Influence of risk level, accounting systems, auditor's experience, and reliability of sources.
Page 103: Factors Affecting Appropriateness of Evidence
Key Elements
Relevance: Logical connection to the audit purpose.
Reliability: More reliable sources yield stronger evidence.
Page 104: General Procedures for Collecting Evidence
Techniques
Recalculation, inquiry, observation, analytical procedures, inspection, and reperformance.
Page 105: Chapter 8 - Audit Tests
Page 106: Audit Methodology
Overview
Measures and ways applied to achieve audit objectives.
Page 107: Test of Controls
Definition
Ensures operational effectiveness of controls related to material misstatements.
Page 108: Substantive Tests
Definition
Designed to obtain audit evidence on financial information related to assertions.
Page 109: Analytical Procedures
Types
Used in planning and substantive procedures, mandatory at different audit phases.
Page 110: Tests of Detail
Focus
Obtain evidence regarding management assertions through queries and confirmations.
Page 111: Audit Approach Relationships
Definitions
Appropriate use of varied methods according to control assessments.
Page 112: Chapter 9 - Audit Sampling
Page 113: Importance of Audit Sampling
Key Points
Sampling provides a basis for conclusive audit decisions when examining the entire book is impractical.
Page 114: Definition of Audit Sampling
Overview
Applying audit procedures to a representative section of data.
Page 115: Sampling Steps
Process
Clear steps needed to ensure accurate representation when auditing sample.
Page 116: Anomalies in Audit Sampling
Explanation
Differentiating misstatements that are representative versus isolated incidents impacting population estimation.
Page 117: Sampling Controls
Planning Considerations
Ensuring representative samples that maintain overview of audit objectives and requirements.
Page 118: Chapter 10 - Audit in an EDP System
Page 119: Importance of EDP Audits
Overview
Recognizing how auditing in electronic environments requires unique controls and methodologies.
Page 120: Risks in EDP Systems
Key Concerns
Hardware reliability, audit trail reductions, and necessity for IT separation of duties.
Page 121: Test Data and Audit Techniques
Definition
Using controlled entries to verify system outputs, detailing both advantages and disadvantages when confirming systems integrity.
Page 122: Audit Software
Functionality
Programs designed to assist auditors in managing critical data and evaluations in computerized systems.
Page 123: Chapter 11 - Organization of the Audit Process
Page 124: Overview of Audit Process
Steps
Preplan the audit
Audit planning
Audit implementing
Audit completing
Follow-up and monitor audit quality
Page 125: Audit Engagement Acceptance
Key Considerations
Evaluation of prospective client’s status and essential audit objectives for a successful engagement.
Page 126: Engagement Letter Preparation
Overview
Formalize all engagement terms and conditions to ensure clarity and mutual understanding prior to commencing audits.