Auditing theory
Key Words and Phrases in the Definition of 100. Factors that Contribute to Information Risk
Auditing
91. Systematic Process
This implies a structured, logical and
organized series of steps and procedures.
92. Competent, Independent Person
The auditor must be qualified to understand
the criteria used and the competence to know how
and what evidence to accumulate to reach the
proper conclusion.
93. Objectively Obtains and Evaluates Evidence
This means examining the bases for the
assertions (representations) and judiciously
evaluating the result without bias or prejudice either
for or against the individual (or entity) making the
representations.
94. Assertions about Economic Actions and Events
These are the representations made by the
individual or entity.
95. Degree of Correspondence
This refers to the closeness with which the
assertions can be identified with established
criteria.
96. Established Criteria
These are the standards against which the
assertions or representations are judged.
97. Communicating the Results
This is often referred to as attestation. The
final stage in the audit process is the audit report –
the communication of the findings to users.
98. Interested Users
These are individuals who use (rely on) the
auditor’s findings (e.g., stockholders, management,
creditors, governmental agencies and the public).
***
99. Information Risk
The likelihood that unreliable information
will be provided to decision makers. It is the reason
why independent auditing is necessary.
day 04
a. Remoteness of information users from
information providers
b. Potential bias and motives of
information provider
c. Voluminous data
d. Complex exchange transactions
101. Ways of Reducing Information Risk
a. Allow users to verify information.
b. User shares information risk with
management.
c. Have the financial statements audited.
General Types of Audit
103. Independent Financial Statements Audit
It consists of methodological review and
objective examination of financial statements
prepared by an enterprise (auditee) to determine if
such statements have been prepared in conformity
with financial reporting practices that are
appropriate for the auditee.
104. Internal Audit
It is an independent, objective assurance
and consulting activity designed to add value and
improve an organization’s operations. It helps an
organization accomplish its objectives by brining a
systematic, disciplined approach to evaluate and
improve the effectiveness of risk management,
control and government processes.
105. Government Audit
It involves the determination of whether
government funds are being handled properly and
in compliance with existing laws and whether the
programs are being conducted efficiently and
economically.
Types of Auditors
106. Independent or External Auditor
He or she is a certified public accountant
(CPA) who examines the financial records and
business transactions of a company with which he
is not affiliated.
107. Internal Auditor
He or she could be from a CPA firm hired by
the entity as consultant or employee of an individual
1
Auditing theory
company who perform independent appraisal
activity within the organization such as review of
accounting, financial and other operations as a
basis for service to management.
108. Government Auditor
He or she maintains and examines records
of government agencies and of private businesses
or individuals performing activities subject to
government regulations or taxation.
***
109. Objective and Scope of Independent Audit
Since the objective of an independent audit
is to express an opinion on the company’s financial
statement, the auditor will conduct a critical and
systematic examination of the statements and of
the related documents, records, procedures and
control.
Types of Assurance
111. Reasonable Assurance
It is the level of confidence that the financial
statements are not materially misstated that an
auditor, exercising professional skill and care, is
expected to attain from an audit (also known as
high level of assurance).
112. Limited Assurance
It is the level of assurance obtained where
engagement risk is reduced to a level that is
acceptable in the circumstances of the
engagement, but where that risk is greater than for
a reasonable assurance engagement.
113. Absolute Assurance
It means that there is absolutely no
misstatement in the financial statement and thus
financial statements are absolutely reliable and
relevant for the user of financial statements.
***
114. Inherent Limitations in an Audit Hindering the
Achievement of Absolute Assurance
a. The use of testing
b. Inherent limitations of any accounting
and internal control system (e.g.,
possibility of collusion)
day 04
c. The fact that most audit evidence is
persuasive rather than conclusive
d. The use of judgment in some aspects of
the auditor’s work
115. Persuasive Evidence
It is evidence that has the power to influence
or persuade someone to believe in its truth (e.g.,
evidence gathered through sampling).
116. Conclusive Evidence
It is a solid evidence after which no further
proof or inquiry is required & evidence in itself is
complete (e.g., evidence gathered if the whole
population is tested).
117. Responsibility for the Financial Statement
While the auditor is responsible for forming
and expressing an opinion on the financial
statements, the responsibility of preparing and
presenting the financial statements is that of the
management of the entity.
118. Objective and Scope of Internal Auditing
The objective of internal auditing is to assist
all members of management in the effective
discharge of their responsibilities, by furnishing
them with analyses, appraisals, recommendations,
and pertinent comments concerning the activities
reviewed.
119. Independence Required for Internal Auditors
Internal auditors are required to be
independent so that they would be able to render
impartial and unbiased judgment in the conduct of
their engagement.