AUDITING THEORY

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AUDIT AN OVERVIEW
INDEPENDENT AUDIT
PRIMARY FUNCTION: to lend credibility to the financial statements of an entity.
FINANCIAL STATEMENT AUDIT
OBJECTIVE: to enable the auditor to express an opinion whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting
framework.
Auditors Opinion enhances the value and usefulness of these financial statements. By attaching a report to the
financial statements, the auditor provides increased assurance to users that the financial statements are reliable.

INDEPENDENT FINANCIAL STATEMENT AUDIT

PURPOSE: is to enhance the degree of confidence of intended users in the financial statements.
This is achieved by the
expression of an opinion by the auditor on the fair presentation of the financial
statements.
RESPONSIBILITY OF FINANCIAL STATEMENTS (preparation and presentation)
WHO:
Management and where appropriate those charged with governance
RESPONSIBILITY:
preparation and presentation, design, implementation and maintenance of
internal
control.
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
established criteria
and communicating the results to interested users.
(definition given by the AMERICAN
ACCOUNTING ASSOCIATION)

SYSTEMATC PROCESS
INVOLVES OBTAINING AND EVALUATING
EVIDENCE ABOUT ASSERTIONS REGARDING
ECONOMIC ACTIONS AND EVENTS.

An ordered and structured series of steps.

Assertions representation made by an auditee
about economic actions and events.

CONDUCTED OBJECTIVELY
DEGREE OF CORRESPONDENCE BETWEEN
ASSERTIONS AND ESTABLISHED CRITERIA

COMMUNICATING THE AUDIT RESULTS TO

VARIOUS INTERESTED USERS

Conduct the audit without bias.

Established Criteria needed to judge the validity
of the assertions.
Financial statements assertions
Financial reporting Framework - criteria
Communication of audit findings is the ultimate
objective of any audit.

TYPE OF AUDITS
1. FINANCIAL STATEMENT AUDIT
statements of an entity

conducted

to

determined

whether

the

financial

are fairly presented in accordance with the applicable financial

reporting framework.
2. COMPLIANCE AUDIT
determine whether

involves a review of an organizations procedure to

the organization has adhered to specific procedures, rules or
regulations. The performance of compliance audit is dependent
upon the existence of verifiable data and recognized criteria
established by authoritative body.

3. OPERATIONAL AUDIT
Study of a specific unit of an organization for the
purpose of measuring
(Performance or Management Audit)
its performance
Main objective: is to assess entitys performance, identify
areas
for
improvements
and
make
recommendations to improve performance.
Criteria used in operational audit to evaluate the effectiveness and efficiency of operations are not
clearly established.
TYPE OF AUDITORS
1. EXTERNAL AUDITORS (FS AUDIT)

independent CPAs
Contractual Basis

2. INTERNAL AUDITORS (OPERATIONAL AUDITS) entitys own employees who investigate and
appraise the
effectiveness and efficiency of operations and internal
controls.
MAIN OBJECTIVE: to assist the members of the
organization in the effective discharge of their
responsibilities.
3. GOVERNMENT AUDITS (COMPLIANCE AUDIT)
determine whether persons or entities
comply with government
laws and regulations.
____________________________________________________________________________________________________________
ASSURANCE PROVIDED BY THE AUDITOR
The auditors opinion on the financial statements is not a guarantee that the financial statements
are dependable. An audit conducted in accordance with PSA is designed to provide only Reasonable
Assurance (not absolute assurance) that the financial statement taken as a whole are free from
material misstatement.
Not an absolute assurance because of the inherent limitations.
INHERENT LIMITATIONS
1. The use of testing / Sampling Risk
2. Error in application of judgement / Non-sampling risk human weakness
3. Reliance on managements representation oral or written representation from management.
4. Inherent limitations of the clients accounting and internal control systems.
5. Nature of evidence persuasive rather than conclusive in nature.
Because of the inherent limitations of an audit, there is an unavoidable risk that some material misstatements
of the financial statements may not be detected, even though the audit is properly planned and performed in
accordance with PSA. The subsequent discovery of a material misstatement of the financial statements does
not in itself indicate a failure to conduct an audit in accordance with PSAs.

GENERAL PRINCIPLES GOVERNING THE AUDIT OF FINANCIAL STATEMENTS

1. The auditor should comply with relevant ethical requirements, including those relating to
independence, relating to financial statement audit engagements.
-

In order to retain public confidence in the credibility of the auditors work.

2. The auditor should conduct an audit in accordance with PSA

3. The auditor should exercise judgement in planning and performing an audit of financial
statements.

Professional Judgement hallmark of auditing. Exercised by an auditor whose training, knowledge

and experience have assisted in making competent and reasonable judgement.

4. The auditor should obtain sufficient appropriate audit evidence to reduce audit risk to an
acceptable low level to enable the auditor to express an opinion on the FS.
Audit Evidence (must be both sufficient and appropriate) is necessary to support the auditors
opinion and report.

5. The auditor should plan and perform the audit with an attitude of Professional skepticism.

An attitude Professional Skepticism auditor makes a critical assessment, with questioning mind of
the validity of audit evidence obtained.
In planning and performing an audit, the auditor neither assumes that the management is honest nor
assumes unquestioned honesty.
Representations from management are not a substitute for obtaining sufficient appropriate audit
evidence.

NEED
1.
2.
3.
4.

FOR AN INDEPENDENT FINANCIAL AUDIT

Conflict of interest between management and users of FS.
Expertise
Remoteness
Financial consequences
A qualified person is hired by users to verify the reliability of the financial statements on their behalf
(expertise). Users of financial information are usually precluded from directly assessing the reliability of the
information, most of the users do not have access to the entitys records as a result an independent auditor is
needed to assist them in verifying the reliability of the financial information (remoteness). Misleading financial
information could have substantial economic consequences for a decision maker (financial consequences).

THEORITICAL FRAMEWORK OF AUDITING

1. Audit function operates on the assumption that all financial data are verifiable.
2. The auditor should always maintain independence with respect to the financial statements under
audit.
3. There should be no long-term conflict between auditor and client management.
4. Effective internal control system reduces the possibility of errors and fraud affecting the financial
statements.
5. Consistent compliance with applicable financial reporting framework results in fair presentation of
financial statements.
6. What was held true in the past will continue to hold true in the future in the absence of known
conditions to the contrary.
7. An audit benefits the public.

All balances reported in the financial statements must have supporting documents or evidence to prove their
validity. No evidence exists, no audit to perform.
Independence is essential for ensuring the credibility of the auditors report. If the auditor is not independent
his report of will have no value.
The condition of the entitys internal control system directly affects the reliability of the financial statements.
The stronger the internal control, more reliable accounting data and FS.
Independent audit of financial statement, criteria PFRS or PFRS SMEs
Experience and knowledge accumulated from auditing a client in prior years can be used to determine the
appropriate audit procedures that need to be performed.
The users who rely on financial statements as their major source of information are the primary beneficiary of
the financial statement audit.