HI guys, today we are talking about the Audit Definition, Audit Standards so after this lesson one enables the basic concepts of the audit. There are many Audit Definition that is given by different people but some are as follows
An Audit Definition is as follows
Audit Definition Standards + Procedures 2018
Audit Definition the word audit is derived from the Latin word “AUDIRE” which means to hear. Initially, the auditor was a person appointed by the owners to check account whenever the suspected fraud, he was to hear explanation given by the person responsible for financial transactions. The scope of the audit was quite limited as during those days most businesses were small and owner-operated. Since these owners-managers had extensive first-hand knowledge of the business and its operations, they had little need for the independent auditor. The owners were chiefly interested in ascertaining whether all cash receipts and payments had been properly accounted for and checking the records for possible employee fraud.
Put differently, initially, the aim of the audit was to know whether any cash had been embezzled and if so, who embezzled it and what amount was involved. But as the businesses grew both in size and complexity, the owners found it more difficult to maintain complete knowledge of all aspect of their business. Especially emergence of joint stock companies changed the approach of auditing as ownership was pestered from management. The emphasis now is clearly on the verification of accounting data with a view on the reliability of the accounting statement.
Some of the Audit Definition according to different authors are as follows
Audit Definition according to Spicer and Pegler
An audit may be said to be such an examination of the books, accounts and vouchers of a business as well enable the auditor to satisfy that the Balance Sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business and whether the Profit or Loss for the financial period according to the best of his information and the explanations given to him and as shown by the books, and if not, in what respect he is not satisfied."
Audit Definition according to Lawrence R. Dicksee
an audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate. In some instances, it may be necessary to ascertain whether the transactions themselves are supported by authority
Audit Definition according to R. K. Mautz
auditing as being "concerned with the verification of accounting data, with determining the accuracy and reliability accounting statement and reports
Audit Definition according to International Federation of Accountants (IFAC)
An audit is the independent examination of financial information of an entity, whether profit oriented or not and irrespective of its size, or legal form, when such an examination is conducted with a view to expressing an opinion thereon
200 series: General principles and responsibilities
ISA 200 Overall objectives of the independent auditor
Objectives of the auditor:
- To obtain reasonable assurance whether financial statements as a whole are free from material misstatement, whether due to fraud or error.
- To express an opinion on whether the financial statements are prepared, in all material respects, in accordance with a relevant financial reporting framework.
- To report on the financial statements, and communicate as required, in accordance with the auditor's findings.
Responsibilities of management:
- Preparation of the financial statements in accordance with the applicable financial reporting framework, including their fair presentation.
- Internal control necessary to enable preparation of financial statements that are free from material misstatement, whether due to fraud or error.
- To provide the auditor with:
- access to all information relevant to the preparation of the financial statements
- unrestricted access to persons from within the entity whom the auditor determines it necessary to obtain evidence.
Inherent limitations of audit:
Audit evidence is persuasive rather than conclusive because of:
- The nature of financial reporting;
- The nature of audit procedures; and
- The need to conduct an audit within a reasonable time and at a reasonable cost.
ISA 210 Agreeing to the terms of audit engagements
The auditor should accept or renew an engagement only if the preconditions for an audit are present:
- An appropriate financial reporting framework is to be applied in the preparation of the financial statements; and
- Management's acknowledgment and understanding of its responsibilities.
Contents of engagement letter:
- The objective and scope of the audit;
- The responsibilities of the auditor;
- The responsibilities of management;
- The identification of an applicable financial reporting framework; and
- Reference to the expected form and content of any reports to be issued.
ISA 230 Audit documentation
The objective of documentation:
- Sufficient appropriate record of the basis for the audit report
- Evidence that audit planned and performed in accordance with ISAs and legal/regulatory requirements
Content - to enable an experienced independent auditor to understand:
- Nature, timing & extent of audit procedures:
- Specific items tested.
- Who performed work and when.
- Who reviewed work and when.
- Results of audit procedures.
- Significant conclusions and professional judgements.
ISA 240 Responsibilities regarding fraud
Objectives of auditor:
- Identify risks of material misstatement in FS due to fraud.
- Obtain sufficient appropriate evidence regarding assessed risks.
Respond appropriately to fraud or suspected fraud identified.
Fraud: an intentional act involving the use of deception to obtain an unjust/illegal advantage.
Two types of fraud:
- Fraudulent financial reporting.
- Misappropriation of assets.
Professional skepticism: an attitude of a questioning mind; a critical assessment of audit evidence.
Audit procedures to identify:
- Appropriateness of journal entries.
- Review of accounting estimates.
- Identify significant transactions outside the normal course of business.
Examples of fraud risk factors:
- High degree of competition.
- Need to obtain additional financing.
- Low morale among senior staff.
- Large amounts of cash on hand.
ISA 250 Consideration of laws and regulations
- Obtain a general understanding of legal/regulatory framework applicable to the entity.
- Obtain sufficient appropriate evidence regarding compliance with provisions of laws/regulations that may materially affect FS.
ISA 260 Communication with those charged with governance
Those charged with governance:
- Those with responsibility for overseeing the strategic direction of the entity.
Matters to be communicated:
- Auditor's responsibility in relation to the FS audit.
- Planned scope and timing of audit.
- Significant findings from the audit.
- Auditor's independence (listed companies).
ISA 265 Communicating deficiencies in internal control
- Significant deficiencies, to those charged with governance.
- Other deficiencies, to an appropriate level of management.
What makes matters significant:
- Likelihood of material misstatement in FS.
- Susceptibility to loss/fraud of related asset.
- The volume of activity in the related account balance.
- Interaction of deficiency with other deficiencies.
300 & 400 series: Assessment and response to assessed risks
ISA 300 Planning
Objectives of planning:
- Help auditor to devote appropriate attention to important areas of audit.
- Help identify and resolve issues on a timely basis.
- Assist in selection of suitable audit team.
- Help the direction and supervision of the audit team.
The content of the audit strategy:
- The scope of engagement (e.g. input of other auditors).
- Reporting objectives of assignment (e.g. reporting timetable).
- Nature/timing/extent of resources.
Content of audit plan:
- Risk assessment procedures.
- Detailed planned audit procedures.
ISA 315 Identifying and assessing risks of material misstatement
Required understanding of entity and environment:
- Industry/regulatory factors affecting FS
- Nature of entity:
- Ownership and governance; and
- Accounting policies.
- Objectives and strategy.
- Audit: risk of inappropriate opinion.
- Inherent: risk of susceptibility of an assertion about a class of transaction (e.g. sales) or account balance (e.g. receivables) to material misstatement.
- Control: risk that material misstatement not detected by the entity's internal control.
- Detection: the risk that audit procedures do not detect material misstatements.
IT controls, risks:
- Unauthorized changes to data in master files.
- Unauthorized access to programs.
- Inappropriate manual intervention.
Assessing whether the control is relevant to the audit:
- The significance of related risk.
- Applicable legal / regulatory requirements.
- Nature of the entity's business.
ISA 320 Materiality
Materiality: Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements
Performance materiality: an amount set at less than materiality for the FS as a whole, to reduce to an appropriately low level the probability that the FS as a whole is materially misstated.
Tolerable error: A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population.
ISA 330 Responses to assessed risks
The auditor shall design and perform audit procedures whose nature, timing and extent are based on and are responsive to the assessed risks of material misstatement.
Test of controls: to evaluate the operating effectiveness of controls in preventing, or detecting and correcting material misstatements at the assertion level.
Substantive procedures: to detect material misstatements at the assertion level, comprising tests of details and analytical procedures.
ISA 450 Evaluation of misstatements identified during the audit
A misstatement is A difference between the amounts, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.
- Accumulate identified misstatements.
- Determine whether the audit strategy needs to be revised.
- Communicate misstatements to the appropriate level of management on a timely basis.
- Evaluate the effect of uncorrected misstatements on FS.
- Request management wrote representation that uncorrected misstatements are not material.
500 series: Evidence
ISA 500 Audit evidence
- Appropriateness: quality, linked to relevance and reliability.
- Sufficiency: quantity, linked to quality and to a risk of material misstatement.
Relevance: linked to assertions.
- SFP: Completeness, rights and obligations, valuation, existence.
- IS Occurrence, completeness, accuracy, cut-off.
- Independent better than internal.
- Auditor generated better than indirectly obtained.
- Documentary better than oral.
- Originals better than photocopies.
ISA 510 Initial audit engagements, opening balances
Objective: to obtain sufficient appropriate evidence whether:
(1)Opening balances are misstated.
(2)Consistent accounting policies with the current year
ISA 520 Analytical Procedures
- Evaluation of financial information.
- By analyzing plausible relationships.
- Among financial and non-financial data.
ISA 530 Audit Sampling
Audit Definition according to audit sampling
- Audit sampling: application of audit procedures to less than 100% of the population to provide the auditor with a reasonable basis to draw conclusions on the entire population.
- Sampling risk: of an unrepresentative sample.
- Non-sampling risk: of erroneous conclusion from a representative sample.
- Statistical sampling: random sampling plus use of probability theory to evaluate results.
Factors increasing sample size:
- Increase in risk of material misstatement.
- Increase intolerable misstatement.
- Increase in expected misstatement.
ISA 540 Auditing accounting estimates
- Review post balance sheet events
- Test management's estimate:
- Appropriateness of method.
- Reasonableness of assumptions.
- Develop an independent estimate.
ISA 560 Subsequent events
Adjusting: provide evidence of conditions existing at the balance sheet date.
Non-adjusting: provide evidence of conditions arising after the balance sheet date.
ISA 570 Going Concern
Definition An entity viewed as continuing in business for the foreseeable future.
ISA 580 Written representations
- Management responsibility for preparation of FS.
- Auditor provided with all relevant information.
- All transactions recorded in FS.
- Plans that may affect the carrying value of the assets.
600 series: Using the work of others
ISA 610 Using the work of internal audit
The external auditor must evaluate:
- the objectivity of the internal audit function;
- the technical competence of the internal audit function;
- whether the internal audit function is carried out with due professional care; and
- whether there is likely to be effective communication between the internal and external auditor.
The auditor must also review the work of the internal audit function to evaluate whether:
- the work was performed by people with adequate technical training and proficiency;
- the work was properly supervised, reviewed and documented;
- sufficient and appropriate evidence has been obtained to be able to draw reasonable conclusions;
- the conclusions reached are appropriate in the circumstances; and
- any unusual matters are properly resolved.
ISA 620 Using the work of an auditor's expert
The external auditor must assess an expert's:
- independence and objectivity; and
The auditor must assess the expert's work including:
- the consistency of the findings with other evidence;
- the significant assumptions made; and
- the use and accuracy of source data.
700 series: Audit conclusions and reporting
ISA 700 Forming an opinion and reporting on the financial statements
The content of the audit report:
- Title: reference to an independent auditor.
- Addressee: shareholders/members.
- Introductory paragraph:
- Financial Statements.
- Reporting date.
- Management's responsibility for the preparation of FS.
- Auditor's responsibility:
- To express an opinion on FS.
- An audit conducted in accordance with ISAs.
- Description of the audit.
- Audit opinion:
- FS prepared in accordance with IFRS.
- FS give a true and fair view.
ISA 705 Modifications to the audit opinion
Audit Definition according to the modification to the audit opinion
- Modified: qualified, adverse or disclaimer.
- Pervasive: not confined to specific elements or representing a substantial proportion of a single element.
- FS as a whole not free from material misstatement
- Material: qualified
- Pervasive: adverse
- Unable to obtain sufficient appropriate evidence
- Material: qualified
- Pervasive: disclaimer
ISA 706 Emphasis on matter paragraphs
The definition refers to a matter fundamental to user's understanding ofFS. Can only be used to highlight a matter already disclosed in the FS.
ISA 710 Comparative information
Responsibilities evaluate whether:
- Comparative information agrees on amounts presented in FS.
- Consistent accounting policies.
ISA 720 Auditor's responsibility relating to other information in documents containing audited Financial Statements
- Read other information to identify material inconsistencies with FS
- If inconsistencies identified:
- If FS is wrong, propose an adjustment. If refused consider modifying audit opinion.
- If other information is wrong, propose an adjustment. If refused consider:
- referring to the matter in the audit report.
- withholding audit report.
Review techniques are used by inspectors to decide the nature of the monetary data being given by their customers. The correct strategies utilized will fluctuate by customer, contingent upon the idea of the business and the review attestations that the inspectors need to demonstrate. Here are a few general characterizations of Audit procedures
- Classification testing. Audit procedures are used to determine whether activities were classified accurately in the accounting records. For example, purchase records for fixed assets can be reviewed to see if they were correctly classified within the right fixed asset account
- Completeness testing. Audit procedures can test to see if any transactions are missing from the accounting records. For example, the client's bank statements could be perused to see if any payments to suppliers were not recorded in the books, or if cash receipts from customers were not recorded. As another example, inquiries can be made with management and third parties to see if the client has additional obligations that have not been recognized in the financial statements
- Cutoff testing. Audit procedures are used to determine whether transactions have been recorded within the correct reporting period. For example, the shipping log can be reviewed to see if shipments to customers on the last day of the month were recorded within the correct period
- Event testing. Review strategies can be built to decide if the exchanges that a customer is asserting have really happened. For instance, one strategy may require the customer to indicate particular solicitations that are recorded on the business record, alongside supporting documentation, for example, a client request and sending documentation.
- Existence testing. Audit procedures are used to determine whether assets exist. For example, the auditors can observe an inventory being taken, to see if the inventory stated in the accounting records actually exists
- Rights and commitments testing. Review methodology can be pursued to check whether a customer really claims the majority of its advantages. For instance, the request can be made to check whether the stock is really possessed by the customer, or in the event that it is rather being hung on committal from an outsider.
- Valuation testing. Audit procedures are used to determine whether the valuations at which assets and liabilities are recorded in a client's books are correct. For example, one procedure would be to check market pricing data to see if the ending values of marketable securities are correct.
A complete set of Audit procedures is needed before the auditor has enough information to decide whether a client's financial statements fairly represent its financial results, financial position, and cash flows. For more detail Click Here