Chapter 1 – Intro to auditing

Learning Objectives

- What is the importance of auditing

- Distinguishing auditing and accounting
- Explain the role of auditing info risk reduction
o Audit reduces risk of misstatement and errors and bad decisions
- Describe major types of audits and auditors

*things such as performance audit

Introduction

- The role of audits is critical in the business environment

o Critical decisions made and audits reduce risks of these decisions based on inaccurate
info
 Three party accountability: auditors provide assurance as the accuracy of the
accounting info (user, auditor and investor)
o Auditing
 The verification of information by someone other than the one providing that
information

- The Three party accountability is used in order to trust financial info provided
o Seller may have bias thus we need the purchases and a independent auditor to make
sure the info is accurate
- The public interest
o Under the Three party accountability the auditor is expected to act in the interest of the
user of the info
 To meet public interest it is important that the auditor is trustworthy
- Agency theory and accountability
o An agent is when a task id delegated by one party to another (agent) if can create issues
when
 Agent has diff objectives
 Agent has the info
 Room for the agent to be creative
o Therefore auditor monitors the agent (management)
- What creates the demand for audits?
o Audits lend credibility to info by reducing info risks the risk that info is materially
misstated
o Financial statement misstatements arise due to
 Accidental errors
 Lack of knowledge of accounting principles
  Unintentional bias
 Deliberate falsifications
o Audits does not directly address business risks, the risk that a company will not be able
to meet its financial obligations due to economic conditions or poor management
decisions
- Auditing
o Prep of financial info by management creates a conflict of interest between users of
financial info and management
 Auditor serves as a n independent intermediary who lends credibility to the
financial info
 Also called providing assurance as to the reliability of the info
o An external auditor is independent of management and of the production of the
financial info
 This creates Three party accountability
 Auditee  the org whose financial info is being audited
 Client  refers to the person who hires the auditor and pays the fee
- Professional judgement
o Professional reaching a complex decision by incorporating standards and ethics in a
coherent manner
 Used to reach well reasoned conclusion
 Widely used in accounting and auditing
 Application of this judgement requires critical thinking (skepticism)
o Documentation of professional judgment at the time the judgment are made is also very
important
 Not document, not done  is effectively a standard of audit practice
- Professional skepticism
o Is an auditors tendency not to believe management assertions but instead to find
sufficient support for the assertion through appropriate audit evidence
 Important aspect of professional judgement
 Recognizing that the financial statements to be materially misstated my exist
- Definition of auditing
o Auditing is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between the assertions and established criteria and communicating the
results to interested parties.
- Objectives of auditing
o The purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements.
o This is achieved by the expression of an opinion by the auditor on whether the financial
statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework.
- Attestation services
o Attest info  provide assurance as to its reliability
o Attest engagement and direct reporting engagement
- Expectation gap
o Diff in expectations of users of FS and auditors expectations concerning audited FS
 Diff between the effectiveness of audit engagement what users believe and
what auditors believes
 What users believe audit is and what audit actually is
- Audit and accounting risk
o Audit risk
 Insufficient evidence being gathered on the facts concerning the entity’s
economic circumstances
o Accounting risk
 Risk that errors associated with forecasts used in GAAP accounting estimates
are not properly disclosed
- Internal audit
o Is a independent objective assurance and consulting activity designed to add value and
improve an org operations
 It helps an org accomplish its objectives by a systematic approach to evaluate
and improve the effectiveness of risk management control and governance
processes
o Internal auditors need to be independent of line managers in an org
 Independence helps internal auditors be objective
 Have the auditor report directly to a very high level in the org
o Internal auditors have a larger scope of activities than the external auditors
 Internal auditors include practices known as operational auditing
- Public sector (govt) auditing
o Public sector auditors
 Office of the Auditor General of Canada (OAG).
 Provincial auditor generals.
 Municipal internal auditors.
 Federal ministries and provincial agencies

o Comprehensive govt auditing

o Financial statement audits
o Compliance audits
o Value for money audits
o CRA auditors
o Federal and provincial bank examiners
- Fraud auditing and forensic accounting