Book Summary – Assurance and Auditing

Auditing is a process of examining and assure that the client’s financial statement is fairly
stated or the actual financial condition is already stated.

GAAS (General Accepted Auditing Standard)

- General Standard
1) The auditor must have adequate technical training and proficiency to perform the
audit.
2) The auditor must maintain independence in mental attitude in all matters relating
to the audit.
3) The auditor must exercise due professional care in the performance of the audit
and the preparation of the report.
- Standard of Field Work
1) The auditor must adequately plan the work and must properly supervise any
assistants.
2) The auditor must obtain a sufficient understanding of the entity and its
environment, including its internal control, to assess the risk of material
misstatement of the financial statements whether due to error or fraud, and to
design the nature, timing, and extent of further audit procedures.
3) The auditor must obtain sufficient appropriate audit evidence by performing audit
procedures to afford a reasonable basis for an opinion regarding the financial
statements under audit.
- Standard of Reporting
1) The auditor must state in the auditor’s report whether the financial statements are
presented in accordance with generally accepted accounting principles (GAAP).
2) The auditor must identify in the auditor’s report those circumstances in which
such principles have not been consistently observed in the current period in
relation to the preceding period.
3) When the auditor determines that informative disclosures are not reasonably
adequate, the auditor must so state in the auditor’s report.
4) The auditor must either express an opinion regarding the financial statements,
taken as a whole, or state that an opinion cannot be expressed, in the auditor’s
report. When the auditor cannot express an overall opinion, the auditor should
state the reasons therefor in the auditor’s report. In all cases where an auditor’s
name is associated with financial statements, the auditor should clearly indicate
the character of the auditor’s work, if any, and the degree of responsibility the
auditor is taking, in the auditor’s report.

Audit Objectives
1. Transaction related audit objectives
2. Balance related audit objectives
3. Presentation and disclosure audit objectives
Management Assertion
Implied or expressed representations by management about classes of transactions and related
accounts and disclosures in the financial statements.
1. Assertions about classes of transaction and events
 Occurrence – Transactions 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 recorded transactions and
events have been recorded appropriately
 Classification – Transactions and events have been recorded in the proper
accounts
 Cutoff – Transactions and events have been recorded in the correct accounting
period.
2. Assertions about account balances
 Existence – Assets, liabilities, and equity interests exist.
 Completeness – All assets, liabilities, and equity interests that should have
been recorded have been recorded.
 Valuation and allocation – Assets, liabilities, and equity interests are included
in the financial statements at appropriate amounts and any resulting valuation
adjustments are appropriately recorded.
 Rights and obligations – The entity holds or controls the rights to assets, and
liabilities are the obligation of the entity.
3. Assertions about presentation and disclosures
 Occurrence and rights and obligations – Disclosed events and transactions
have occurred and pertain to the entity
 Completeness – All disclosures that should have been included in the financial
statements have been included.
 Accuracy and valuation – Financial and other information are disclosed
appropriately and at appropriate amounts.
 Classification and understandability – Financial and other information is
appropriately presented and described and disclosures are clearly expressed.

- Management assertions based on PCAOB:

a. Existence and occurrence
b. Completeness
c. Valuation and allocation
d. Rights and obligations
e. Presentation and disclosure

Audit Evidence
There are four decisions about what evidence to gather and how much of it to accumulate:
1. Which audit procedures to use
 2. What sample size to select for a given procedure
3. Which items to select from the population
4. When to perform the procedures

Types of evidence
a. Physical examination - is the inspection or count by the auditor of a tangible asset.
b. Confirmation - describes the receipt of a direct written response from a third party
verifying the accuracy of information that was requested by the auditor.
c. Documentation - auditor’s inspection of the client’s documents and records to sub -
stantiate the information that is, or should be, included in the financial statements.
d. Analytical procedure - use comparisons and relationships to assess whether account
balances or other data appear reasonable compared to the auditor’s expectations.
e. Inquiries of the client - the obtaining of written or oral information from the client in
response to questions from the auditor.
f. Recalculation - involves rechecking a sample of calculations made by the client.
g. Reperformance - the auditor’s independent tests of client accounting procedures or
controls that were originally done as part of the entity’s accounting and internal
control system.
h. Observation - the use of the senses to assess client activities.

Audit Process
1. Plan and design an audit approach
a. Accept client and perform initial planning
b. Understand the client’s business and industry
c. Assess client business risk
d. Perform preliminary analytical procedures
e. Set materiality and assess acceptable audit risk and inherent risk
f. Understand internal control and assess control risk
g. Gather information to assess fraud risks
h. Develop overall audit plan and audit program
2. Perform tests of controls and substantive tests of transactions
a. Plan to reduce assessed level of control risk?*
b. Perform tests of controls (if yes)
c. Perform substantive tests of transactions (if no)
d. Asses likelihood of misstatements in financial statement (Low; Medium,
High/Unknown)
3. Perform analytical procedures and tests of details of balances
a. Classified the likelihood of misstatements in financial statement (Low; Medium;
High/Unknown)
b. Perform analytical procedures
c. Perform additional tests of details of balances
4. Complete the audit and issue an audit report
a. Perform additional tests for presentation and disclosure
b. Accumulate final evidance
c. Evaluate results
d. Issue audit report
- The Standard Unqualified report is issued when the following condition
have been met:
1) All statements—balance sheet, income statement, statement of retained
earnings, and statement of cash flows—are included in the financial
statements.
2) The three general standards have been followed in all respects on the
engagement.
3) Sufficient appropriate evidence has been accumulated, and the auditor has
conducted the engagement in a manner that enables him or her to conclude
that the three standards of field work have been met.
4) The financial statements are presented in accordance with U.S. generally
accepted accounting principles/or PSAK. This also means that adequate
disclosures have been included in the footnotes and other parts of the
financial statements.
5) There are no circumstances requiring the addition of an explanatory
paragraph or modification of the wording of the report.

- Unqualified with explanatory paragraph or modified wording

A complete audit took place with satisfactory results and financial statements
that are fairly presented, but the auditor believes that it is important or is
required to provide additional information. The following are the most
important causes of the addition of an explanatory paragraph or a modification
in the wording of the standard unqualified report:
1) Lack of consistent application of generally accepted accounting principles
2) Substantial doubt about going concern
3) Auditor agrees with a departure from promulgated accounting principles
4) Emphasis of a matter
5) Reports involving other auditors
- Qualified
The auditor concludes that the overall financial statements are fairly presented,
but the scope of the audit has been materially restricted or applicable
accounting standards were not followed in preparing the financial statements.
- Adverse/Disclaimer
 The auditor concludes that the financial statements are not fairly presented
(adverse), he or she is unable to form an opinion as to whether the financial
statements are fairly presented (disclaimer), or he or she is not independent
(disclaimer).
e. Communicate with audit committee and management

Management Assertion
IMPORTANT: Completeness, Existance, Accuracy, and Valuation
These 4 kind of assertion already cover up another assertion.
Another assertion: Disclosure, Classification, Cut-off date, Rights and Obligation.

Example:

Audit Process: start from TB

Procedure for cash and cash equivalent
Procedure for AR
1. Confirmation letter (need more time, while waiting the answer we must check on the
income payment from customer for those receivable, if the customer hasn’t been paid
the receivable, we must check the DO – give high attention to the signed date (it’s
related to the term of the sales / fob destination point and fob shipping point – affected
to the revenue recognition process)
2. Subsequent collection
Procedure for fixed assets