Auditing Principles SUMMARY
Auditing Principles SUMMARY
Auditing Principles SUMMARY
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puditors have to operate within the boundary of relevant
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ccounting standards. Understanding the financial reporting
environment is vital for an auditor. c '
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Àc IFpC - The International Federation of pccountants 5.c
± In Malaysia, auditors are
aims to develop the accounting profession across a c only required (in a financial statement audit btw) to assess
wide range of areas. Ippº - The International whether the entity¶s ºtatement on Internal Control is in line
puditing and pssurance ºtandards oard is a c with the actual system, unlike auditors in the Uº where they
committee of the IFpC. It issues auditing standards must evaluate the system¶s effectiveness (under º-Oxley)
and practices for auditors. However, these standards 6.c p
- puditors help to provide
c assurance on the preparation, supporting evidence and
are more towards providing guidance rather than
mandating the law. presentation of these financial forecasts. They however do
c not assure that the financial projections will be realised.
Àc In pmerica, the pICPp sets the auditing standards
through ºpº (ºtatement on puditing ºtandards). They 7.c )
- assessing risk management system of
are mostly similar to Iºp standards. c the entity as well as IT computer systems.
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± merely compiling data provided by
Àc Price competition among public accounting firms c client into financial statements. No assurance provided.
While not illegal in a sense to compile and audit the same
Àc Clients' opinion shopping
client, the auditor might be perceived to be less independent
Àc Clients threatening to change auditors c and less objective. Normally occurs for small private
companies.
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Àc The assets, liabilities and equities indeed exist in c
reality.
Àc The assets are owned by the entity, and the liabilities c
are the obligations of the entity.
Àc pll assets, liabilities and equities have been recorded c
(complete)
Àc The assets, liabilities and equities are accurately and
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properly valuated.
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Àc Disclosed events have indeed occurred and pertain to c
the entity.
Àc pll required disclosures have been disclosed. c
Àc Information is properly disclosed and explained.
Àc Information that is disclosed is accurately valuated. c
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1.c Malidity / Occurrence
2.c Completeness
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3.c pccuracy / valuation
4.c Classification c
5.c Rights / obligations
6.c puthorization c
7.c Cut-off
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pdditional note: usiness risk is the risk that the client will fail c
to achieve its objectives regarding efficiency and effectiveness
of its business operations. c
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Àc % ±includes accounting records c 1.c
± has 2 purposes. Tests of controls are
(journal entries, source documents, ledgers), work done to initially support control risk assessment levels.
sheets that support valuations and calculations, c They are also conducted again if the auditor is relying on
confirmations /checks with third parties, interviews, internal controls, or if he decides that substantive evidence
analyst reports, interviews, minutes of meetings, c is not sufficient.
internal control procedures, inspection, observation,
recalculations, past audit evidence, and so on. c 2.c &
± Procedures taken to detect
material misstatements in management assertions either in
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ác Relevance ± Collected evidence must relate to most detailed and assuring tests.
the tested assertion. c
ác Reliability ± Independence, internal control 3.c 0
± The auditor performs both tests of
effectiveness, direct observation or inspection, c controls and substantive procedures on a single item.
documentary as opposed to oral evidence, and
original documents. c 4.c p
± a comparison between financial
statement data and expectations formed by the auditor. It
can also involve the use of industry data or previous
c historical data. Formal Definition - valuation of financial
Àc higher risk and low quality of
evidence requires more evidence to be collected. information made by a study of plausible relationships
c among both financial and nonfinancial data¶. The puditing
ác puditor relies on persuasive (reasonable)
ºtandards oard through its ºpº has mandated the use of
rather than conclusive (absolute) evidence. c analytical procedures. pctually, analytical procedures are
generally categorized as a form of substantive procedures
Àc î ± thorough and unbiased. c as well. It is considered to be more efficient than tests of
details. pnalytical procedures are also conducted at the
p 0 beginning stage of an audit to get a feel. They help to assess
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going concern as well.
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± support for the audit
opinion and to systematically conduct the audit c
process.
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how the audit was c
THE pUDIT UCKET
performed, what evidence was collected, and the
conclusions. c
Àc p
. Permanent files include corporate c
charter, chart of accounts, internal control policies, and
so on. Current files include current financial c
statements, trial balance, working papers, and so on. c
Àc pudit documents are required to be retained for 7 years cccc
after the audit has been completed.
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Àc Required by Iºp 300. c Àc Purpose: To plan and conduct the audit in a systematic
Àc Good planning is necessary to perform an effective audit, way, to prove that the audit was properly conducted in
saves costs, and avoid misunderstanding with the client. c accordance with Gppº, and also acts as a written
record of all audit evidence that will help the auditor in
c forming the audit opinion.
Àc pudit documentation is the property of the auditor.
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c Clients have no right to those documents unless
ác e wary of accepting clients with ethical issues or required by court.
with bankrupt potential. c Àc pudit documentation must be protected ± because it
ác e wary of accepting clients that are in high risk would contain confidential and trade-related
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areas ± insurance, for example. information.
ác The auditor must be capable of accepting an Àc Permanent documentation ± generally includes general
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engagement. business information about the client and historical
ác Consultation with the former auditor of a client is audit documentation.
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mandated by MIp by-laws. Àc Current documentation ± audit programme, working
c trial balance, adjusting and reclassification entries, and
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± supporting schedules
ác ºerves to reduce the expectation gap between the c
auditor and client.
c The terms of engagement prescribes the type,
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scope and timing of the engagement.
c The main contents include the objectives of the
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audit, the auditor¶s responsibilities, management
c responsibilities, and limitations.
ác The engagement letter is a contract. It can also
c contain arrangements on the use of specialists and
other value-added services, and lastly, the audit
fee. c
ác It should also contain other agreements like the use
of an expert. c
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0 Internal control is broadly
defined as a process, effected by an entity's board of directors,c Iºp requires auditor to inform management whenever material
management, and other personnel, designed to provide weaknesses are found in internal controls. This is often done
reasonable assurance regarding the achievement of objectives inc through a
the following categories:
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a) Effectiveness and efficiency of operations;
b) Reliability of financial reporting; and c
c) Compliance with laws and regulations.
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Note: Internal control can help to decrease the expectation gap.
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p good internal control system means higher assurance on the
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part of the auditor. The internal control can affect the overall
audit strategy.
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Fraud ± pn intentional act by employees or management to gain 0 - Evaluation of financial information made by a
an unfair or illegal advantage by deceiving and cheating. study of plausible relationships among both financial and
c nonfinancial data.
There are 2 types of fraud ± misappropriation of assets and
fraudulent financial reporting. c
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Àc Detection of fraud is not the auditor¶s primary c Preliminary and final analytical procedures are mandated by
responsibility. Instead, he only obtains reasonable auditing standards.
assurance that the financial statements are free from c
material misstatements that may result from errors or fraud.
Àc However, Iºp 240 does require the auditor to maintain an c
attitude of professional skepticism that misstatements may
occur due to fraud. Controls may be overridden by c
management. The auditor has to maintain an ongoing frame
of mind that fraud is possible, even when past history of the c
client is clean.
Àc p discussion with the engagement team might be necessary c
to assess whether and where fraud may have taken place.
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Àc The auditor has to inquire of management whether they
know of any fraud cases.
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Àc Fraud risk factors ± When the auditor is assessing internal
controls, he should also assess whether risks for fraud exist. c
Àc If the auditor is aware that fraud might exists, substantive
testing have to be modified to account for that possibility. c
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Àc c ºale of goods / services
Àc Receipt of cash
Àc Return of goods
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Àc Understand
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Àc pssess risks ± ppR = IR x CR x DR
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Àc Conduct tests of controls
Àc Develop audit plan
Àc Conduct substantive audit procedures ± analytical
procedures and substantive audit tests.
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