Nature of Auditing

Auditing – 1 : Week – 1
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Monday, September 25, 2023 agung nugroho soedibyo
 Accounting
Accounting :
• the system of recording and summarizing business and financial transactions and analyzing, verifying,
and reporting the results
• It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing,
interpreting and communicating financial information. It reveals profit or loss for a given period, and
the value and nature of a firm's assets, liabilities and owners' equity.

The last decade of the 15th century, witnessed a great impetus in trade and commerce, inspired by the Renaissance in
Italy.
This led to the evolution of a system of accounts capable of recording completely all kinds of business transactions.
The principles of double entry system were published in 1494, in Venice by Luca Pacioli, although the system had
already been in existence in the preceding century.

Monday, September 25, 2023 agung nugroho soedibyo

ORIGIN OF THE WORD ‘AUDIT’

The word ‘audit’ is derived from the Latin word ‘audire’, which means ‘to hear’.
In olden times, the methods of accounting were so crude and the number of transactions were so
small that every individual was in a position to check all the transactions recorded by himself or by
his employees. Whenever the owner of the business suspected frauds or misappropriation of
funds, he appointed an official to check the accounts. Such a person would meet the concerned
employees and hear whatever they had to say in connection with the accounts. The person
appointed to examine the accounts came to be known as the ‘auditor’

Monday, September 25, 2023 agung nugroho soedibyo

 EARLY HISTORY OF AUDIT
Auditing Revolution of
Industry
The ancient Egyptians, the Greeks and the Romans utilised systems of checks and counter checks among the The east-west trade
various financial officials. The duties of the auditor in ancient times were thus limited. routes between
Greece and China
The last decade of the 15th century, witnessed a great impetus in trade and commerce, inspired by the 1st
Renaissance in Italy. The principles of double entry system were published in 1494, in Venice by Luca Pacioli,

The author of the principles also defined and described, for the first time, the duties and responsibilities of 1st
‘an auditor’ in detail. Since then, the duties and responsibilities of an auditor have increased enormously
The Industrial Revolution was another landmark in the history of trade and commerce. It resulted in large 1st to 2nd
scale production requiring huge amount of capital investment
the possibilities of raising capital for industry from the general public by the issue of shares with a limited
liability. In this type of organisation, the shareholders delegated the management of the undertaking to a
board of directors and periodically the board submitted the accounts of the company to the shareholders so
that the shareholders were in a position to have a true and fair picture of the financial position and the
profit and loss of the undertaking

Monday, September 25, 2023 agung nugroho soedibyo

 AUDITING DEFINED
The word ‘Audit’ is derived from the Latin word audire, which means “to hear”. In olden times, whenever the owners of a
business suspected fraud, they appointed certain persons to check the accounts. Such persons sent for the accountant and
‘heard’ what they had to say in connection with the accounts.

auditing is the process by which competent independent individuals collect and evaluate evidence to
form an opinion and communicate their opinion to the person interested through their audit report.
( S.K Basu)

Auditing is the accumulation and evaluation of evidence about information to determine and report on
the degree of correspondence between the information and established criteria. Auditing should be done
by a competent , independent person ( Arens, 16th edition )

An audit is systematic process of objectively obtaining and evaluating evidence regarding assertion about economic
actions and events to ascertains the degree of correspondence between these assertion and established criteria and
communicating the result to interested users ( Hayes, 3rd Edition)

Monday, September 25, 2023 agung nugroho soedibyo

Slide 1.7

TYPES OF AUDIT
Audit of financial statements
Examine financial statements, determine if they give
a true and fair view or fairly present the financial
statements.
Operational Audit
A study of a specific unit of an organization for the
purpose of measuring its performance.
Compliance Audit
A review of an organization’s procedures and
financial records performed to determine whether
the organization is following specific procedures,
rules, or regulations set out by some higher
authority.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
 Points of differences
Ranking of activities
Time period of work
Professional control
Nature of work
Submission of report
12. Accountability
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Accountancy
Accountancy is not dependent on
auditing work.
Accounting work is carried out
throughout the year.
There is no professional control over
accountancy.
The nature of accountancy work is
constructive.
No report is required to be submitted at
the end of the accounting work.
The accountant is accountable to the
management.
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Auditing
Auditing can be started only after the
completion of accountancy work.
Auditing is usually carried out at the end of
the year.
There are professional rules and
regulations over the auditing work.
Auditing work, on the other hand, is mostly
analytical.
A report on the final accounts are required
to be submitted by the auditor at the end
of his work
The auditor is accountable to the
shareholde
 Accounting and Auditing
Points of differences Accountancy Auditing
Scope The scope of accountancy is limited to In auditing, the auditor is concerned with
the preparation of financial statements the checking of accounts.

Objective The objective of accountancy is to know The objective of auditing is to verify the
the financial result and financial truth and fairness of the accounts
position.
Status An accountant is an employee of the An auditor is an independent outsider.
organisation.
Accounting and Auditing
Qualification Accounting work requires no formal To be a company auditor, one should be a
qualification. qualified chartered accountant.

Tenure of Services Accountant is usually a permanent Auditor can be changed from year to year.
employee of the organisation.

Knowledge in other subjects An accountant is not expected to have An auditor must have good knowledge not
knowledge in other subjects. only in accountancy, but also in other
related subjects.

Monday, September 25, 2023 agung nugroho soedibyo

Slide 1.10

The function of auditing is to lend credibility to the financial

statements

ª Is the company a going concern?

ª Is it free of fraud?
ª Is it managed properly?
ª Is there integrity in its database?
ª Do directors have proper and adequate
information to make decisions?
ª Are there adequate controls?
ª What effect do the company's products and by-
products have on the environment?
ª Can an ‘unfortunate mistake’ bring this company
to its knees?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
 Assertion
Assertions—Representations by management, explicit or otherwise, that are embodied in the financial
statements, as used by the auditor to consider the different types of potential misstatements that may
occur ( IFAC Glossary)

Asersi (assertion) adalah pernyataan manajemen yang terkandung di dalam

komponen laporan keuangan.
Asersi (assertion) adalah suatu deklarasi, atau suatu rangkaian deklarasi secara
keseluruhan, oleh pihak yang bertanggung jawab atas deklarasi tersebut.
asersi adalah pernyataan yang dibuat oleh satu pihak yang secara implisit
dimaksudkan untuk digunakan oleh pihak lain (pihak ketiga).
Untuk laporan keuangan historis, asersi merupakan pernyataan dalam laporan
keuangan oleh manajemen sesuai dengan standar akuntansi yang berlaku di
Indonesia
Monday, September 25, 2023 agung nugroho soedibyo
Financial Statement
Management Assertion :
1. Existence
2. Rights and obligations
3. Occurrence
4. Completeness
5. Valuation and allocation
6. Accuracy
7. Cutoff
8. Classification
9. Understandability
Monday, September 25, 2023 agung nugroho soedibyo
established criteria

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Why
ISA

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Slide 1.15

Business Risk and Audit Risk

• Companies, depending on the nature
of their operations and industry, the
regulatory environment in which they
operate, and their size and
complexity, they face a variety of
business risks.
• The risk that causes the greatest
concern by the auditor is the risk that
the auditor expresses an
inappropriate audit opinion when the
financial statements are materially
misstated (known as audit risk). “The
auditor should plan and perform the
audit to reduce audit risk to an
acceptably low level that is consistent
with the objective of an audit.” (ISA
200) [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
 assurance
Non
assurance

Monday, September 25, 2023 agung nugroho soedibyo

Standar Auditing (SA) - International Standard on
AuditingPrinsip- Risk
Menggunakan Kesimpulan
assessment Bukti Area
prinsip pekerjaan Audit dan
dan risk audit Khusus
umum pihak lain pelaporan
response

SA 200 SA 300 SA 500 SA 600 SA 700 SA 800

SA 210 SA 315 SA 501 SA 610 SA 705 SA 805
SA 220 SA 505 SA 620 SA 706 SA 810
SA 320
SA 230 SA 510 SA 710
SA 330
SA 240 SA 520
SA 250 SA 402 SA 720
SA 530
SA 550
SA 260 SA 540
SA 450
SA 560
SA 265
SA 570
Monday, September 25, 2023 SA
agung nugroho soedibyo 580
17
Slide 1.18

Phase I Client Acceptance

Objective: The client acceptance phase of the

audit plan, Phase I, involves deciding whether to
accept a new client or continue with an existing
one.
Procedures: (1) Evaluate the client's background and
reasons for the audit. (2) Determine whether the
auditor is able to meet 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 an engagement
letter.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 1.19

Phase II Planning the audit

Objective: Determine the amount and type of

evidence and review required to give the auditor
assurance that there is no material misstatement
of the financial statements.
Procedures (1) Perform audit procedures to understand
the entity and its environment, including the entity’s
internal control; (2) Assess the risks of material
misstatements of the financial statements. (3)
Determine materiality; and (4) Prepare the planning
memorandum and audit program, containing the
auditor’s response to the identified risks.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 1.20

Phase III Testing and Evidence

• 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.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 1.21

Phase IV, Evaluation and Reporting

Objective: Complete the audit procedures

and issue an opinion.
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 Matters of Attention
for Partners; (6) Report to the board of
directors; and (7) Prepare Audit report.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
 Future of auditing
The auditor will account for information not only in financial but also non-financial terms, furthermore, only
retrospective, but more prospective information will be in the annual report. ( Professor P.Percy

Monday, September 25, 2023 agung nugroho soedibyo

Monday, September 25, 2023 agung nugroho soedibyo