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Slide 1.1

Hayes et al. Principles of Auditing, 2e Pearson Education Limited 2005

International Auditing Overview

Principles of Auditing: An

Introduction to International

Standards on Auditing - Ch. 1

Rick Stephan Hayes,

Roger Dassen, Arnold Schilder,

Philip Wallage


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Historical background

Records of auditing activity in early Babyloniantimes (around 3,000 BC).

Ancient China, Greece and Rome.

The Latin meaning of the word 'auditor' was a'hearer or listener' because in Rome auditors

heard taxpayers,

Modern auditing dates to beginning of the

modern corporation


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International accounting and

auditing standards FASB

IASB and IAS

IFRS

IFAC

IAASB ISA PCAOB

GAAS


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The old SAS US Audit Standards are Dead

temporarilyPCAOB.

Audit standards and regulations are rapidly changing.

By the audit process, the auditor enhances the

usefulness and value of the financial statements, and

also increases the credibility of other non-audited

information released by management.


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The function of auditing is to

lend credibility to the financial statements Is the company a going concern?

Is it free of fraud?

Is it managed properly?

Is there integrity in its database?Do directors have proper and adequate information

to make decisions?

Are there adequate controls?

What effect does the company's products and by-products have on the environment?

Can an unfortunate mistake bring this company toits knees?


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Advantages of International

Auditing Standards Worldwide

increases confidence in non-domestic investment

Consistent international investors comprehend financial statements

from different countries

High quality

non-national standards encourage better quality, less

political influence


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International Auditing andAssurance Standards Board (IAASB) Issues: International Standards on Auditing (ISAs) as the standards to be

applied by auditors in reporting on historical financialinformation

International Standards on Assurance Engagements (ISAEs) asthe standards to be applied by practitioners in assurance

engagements dealing with information other than historicalfinancial information International Standards on Quality Control (ISQCs) as the

standards to be applied for all services falling under the Standardsof the IAASB,

International Standards on Related Services (ISRSs) as the

standards to be applied on related services, as it considersappropriate, and

International Standards on Review Engagements (ISREs) as thestandards to be applied to the review of historical financialinformation.


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ISAs

100-999 International Standards on Auditing (ISAs)100-199 Introductory Matters

120 Framework of International Standards on Auditing

200-299 General Principles And Responsibilities

200 Objective and General Principles Governing an Auditof Financial Statements

210 Terms of Audit Engagements

220 Quality Control for Audit Work

230 Documentation


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240 The Auditors Responsibility to Consider Fraud and Error inan Audit of Financial Statements

250 Consideration of Laws and Regulations in an Audit ofFinancial Statements

260 Communications of Audit Matters with Those Charged With

Governance

300-499 Risk Assessment And Response To Assessed Risks

300 Planning

310 Knowledge of the Business

315 Understanding the Entity and Its Environment and Assessingthe Risks of Material Misstatement

320 Audit Materiality

330 The Auditors Procedures in Response to Assessed Risks

ISAs


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400 Risk Assessments and Internal Control401 Auditing in a Computer Information Systems

Environment

402 Audit Considerations Relating to Entities Using

Service Organizations500-599 Audit Evidence

500 Audit Evidence

500R Audit Evidence501 Audit EvidenceAdditional Considerations forSpecific Items

505 External Confirmations

ISAs


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Hayeset al. Principles of Auditing

, 2e Pearson Education Limited 2005

510 Initial EngagementsOpening Balances520 Analytical Procedures

530 Audit Sampling and Other Selective TestingProcedures

540 Audit of Accounting Estimates

545 Auditing Fair Value Measurements and Disclosures

550 Related Parties

560 Subsequent Events570 Going Concern

580 Management Representations

ISAs


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600-699 Using Work Of Others

600 Using the Work of Another Auditor 610 Considering the Work of Internal Auditing

620 Using the Work of an Expert

700-799 Audit Conclusions And Reporting

700 The Auditors Report on Financial Statements

710 Comparatives

720 Other Information in Documents Containing

Audited Financial Statements 800-899 Specialized Areas

800 The Auditors Report on Special Purpose AuditEngagements

ISAs


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2000-2699 International Standards on Review Engagements(ISREs)

2400 Engagements to Review Financial Statements (Previously ISA910)

3000-3699 International Standards on Assurance Engagements(ISAEs)

3000 Assurance Engagements (Previously ISAE 100)

3000R Assurance Engagements Other Than Audits or Reviews ofHistorical Financial Information

3400 The Examination of Prospective Financial Information(Previously ISA 810)

4000-4699 International Standards on Related Services (ISRSs)

4400 Engagements to Perform Agreed-upon Procedures RegardingFinancial Information (Previously ISA 920)

4410 Engagements to Compile Financial

Information (Previously ISA 930)

ISRE

ISAE

ISRS


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ISA 200 states the objective of an auditof financialstatements is to enable the auditor to express an

opinion whether the financial statements are prepared,

in all material respects, in accordance with an

identified financial reporting framework.

Terms used 'give a true and fair view' or present

fairly, in all material respects

equivalent terms?


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Audit Definition

An 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.American Accounting Association


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General Principles Governing an

Audit of Financial Statements

An auditor could comply with the Code of Ethics for

Professional Accountants issued by IFAC.

An auditor should conduct an audit in accordance

with International Standards on Auditing.


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Scope of an audit - the audit procedures deemed necessary

to achieve the objective of the audit.

Certain inherent limitations in an audit affect the auditors

ability to detect material misstatements.

Test and sampling

Internal control

Audit evidenceAudit process permeated by judgment

Management is responsible for the financial statements,

accounting, and internal control.

General Principles Governing

an Audit of Financial Statements


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Business Risk and Audit Risk

Companies, depending on the nature of their operationsand industry, the regulatory environment in which theyoperate, and their size and complexity, they face avariety ofbusiness risks.

The risk that causes the greatest concern by the auditoris the risk that the auditor expresses an inappropriateaudit opinion when the financial statements arematerially misstated (known as audit risk). The auditorshould plan and perform the audit to reduce audit risk toan acceptably low level that is consistent with theobjective of an audit. (ISA 200)


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TYPES OF AUDIT

Audit of financial statementsExamine financial statements, determine if they give a

true and fair view or fairly present the financial

statements.

Operational AuditA study of a specific unit of an organization for the

purpose of measuring its performance.

Compliance Audit

A review of an organizations procedures and financialrecords performed to determine whether the organization

is following specific procedures, rules, or regulations set

out by some higher authority.


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Types of Auditors

Internal auditors are employed by individual

companies to investigate and appraise the

effectiveness of company operations for management.

Independent auditors are typically certified either by

a professional organization.

Government Auditors may be considered to take

both the functions of internal and external auditor.


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Certification of the Auditor

Certified Public Accountant (CPA)

Chartered Accountant (CA)

Contador Pblico (CP)

Other

Licensing requirements


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Management Assertions and

Audit Objectives The audit starts with the financial statements prepared

by the client and the claims or assertions that the

client makes about these numbers.

It is the auditor's job to validate management's

assertions. In order to do so, the auditor will identify

audit objectives, which can be regarded as theauditor's counterpart of management assertions.


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Management assertions

Management assertions are implied or expressedrepresentations by management about classes oftransactions and related accounts in the financialstatements. An example of a management assertion isthat the companys financial statements are prepared

based on international accounting standards.


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Assertions about account

balances at the period end.

Existence:- Assets, liabilities and equity interests exist.

Rights and obligations:- An entity holds or controls therights to assets, and liabilities are the obligations of the

entity.

Completeness:- all assets, liabilities and equity intereststhat should have been recorded have been recorded.

Valuation and allocation:- assets, liabilities, and equity

interests are included in the financial statements atappropriate amounts and any resulting valuation orallocation adjustments are appropriately recorded.


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Assertions about

presentation and disclosure

Occurrence and rights and obligations: disclosedevents, transactions, and other matters have occurred andpertain to the entity.

Completeness: all disclosures that should have beenincluded in the financial statements have been included.

Classification and understandability: financialinformation is appropriately presented and described,

and disclosures are clearly expressed. Accuracy and valuation: financial and other information

are disclosed fairly and at appropriate amounts.


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Assertions about classes of transactions

and events for the period under audit OccurrenceTransaction and events that have been

recorded have occurred and pertain to the entity.

Completeness all transactions and events that should

have been recorded have been recorded.

Accuracy - Amounts and other data relating to recordedtransactions and events have been recorded appropriately.

Cutoff- Transactions and events have been recorded in the

correct accounting period.

Classification - Transactions and events have beenrecorded in the proper accounts.


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Audit Process Model

Phase I - Client Acceptance

Phase II - PlanningPhase III - Testing and Evidence

Phase IV - Evaluation and Judgment


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Phase I Client Acceptance

The client acceptance phase of the audit plan, Phase I,involves deciding whether to accept a new client orcontinue with an existing one.

Procedures: (1) Evaluate the client's background and reasonsfor the audit. (2) Determine whether the auditor is able tomeet the ethical requirements regarding the client. (3)Determine need for other professionals. (4) Communicate

with predecessor auditor; (5) Prepare client proposal. (6)Select staff to perform the audit, and (7) Obtain anengagement letter.


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Phase II Planning the audit

Objective: Determine the amount and type of evidence andreview required to give the auditor assurance that there isno material misstatement of the financial statements.

Procedures (1) Perform audit procedures to understand theentity and its environment, including the entitys internalcontrol; (2) Assess the risks of material misstatements ofthe financial statements; (3) Determine materiality; and

(4) Prepare the planning memorandum and audit program,containing the auditors response to the identified risks.


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Objective Test for evidence supporting internal

controls and the fairness of the financial

statements. Procedures : (1) Tests of controls; (2)

Substantive tests of transactions; (3) Analytical

procedures; (4) Tests of details of balances; (5)Search for unrecorded liabilities.

Phase III Testing and Evidence


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Phase IV, Evaluation and Reporting

Objective Complete the audit procedures and issue anopinion.

Procedures (1) Evaluate governance evidence; (2)Perform procedures to identify subsequent events; (3)Review financial statements and other report material;(4) Perform wrap-up procedures; (5) Prepare Mattersof Attention for Partners; (6) Report to the board ofdirectors; and (7) Prepare Audit report.


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International Public

Accountancy Firms

The Big Four:

Deloitte & Touche; PriceWaterhouseCoopers; Ernst& Young; KPMG

Audit StaffStaff Accountants (or Junior Assistants then Senior)

Senior Accountants (or Supervisor)

Managers

Partners/Directors


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Auditing Standards

Most countries issue their own auditing standards.

International Federation of Accountants (IFAC) since1977.

IFACs International Auditing and Assurance StandardsBoard (IAASB) issues

International Standards on Auditing (ISA)

International Auditing Practice Statements (IAPS)

International Standard on Assurance Engagements(ISAE)

International Standards on Quality Control (ISQC)


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International Accounting

Standards International Accounting Standards Board (IASB)

issues International Financial Reporting Standards(IFRS)

International Accounting Standards (IAS) oldstandards

European Union adopt IFRSs in 2005

US moving toward adoption of IFRSs and ISAs


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Thank You for Your Attention

Any Questions?