Principles of Audit

3 year
rd

Lecture 1
Lecturer: Dr Safaa Elsayed Ftohy
South Valley of University
Faculty of Commerce
 Course contents
Chapter (1): Nature and Demand for Auditing
Chapter (2): Audit Reports

Chapter (3): Audit Evidence

 Chapter (1)

Nature and Demand for Auditing

 What is Auditing?
Auditing is the examination of financial statements.
When?
After the preparation of the financial statements.
Why?
To make sure that financial statements are prepared according
to GAAP & IFARS
Where?
In the auditor report
Who do the process of auditing?
Independent auditor
How?
According to GAAS “Generally Accepted Auditing
Standards” or IFARS “International financial accounting
reporting standards”
 Learning Objectives
1.Economic Demand for Auditing
2.Causes of Information Risk
3.Reducing Information Risk
4.Nature of Auditing
5.Distinction between Auditing and Accounting
6.Common Types of Audits
7.Types of Auditors
8.Assurance Services
9.Certified Public Accountant
  The output of financial accounting,
including different financial statements
need to be audited in order to reliable and
useful in making different economic
decisions.

 Auditing plays important role in ensuring

the accuracy of accounting information
presented in the financial statements.
 1.Economic Demand for Auditing
 Explain the importance of auditing in
reducing information risk.

The need for accountants and auditors'

services has increased as a result of the
increasing need of society for accurate and
reliable information necessary to rationalize
the decision-making process.
 Auditing is the accumulation and evaluation
of evidence regarding assertions about
information to determine the degree of
correspondence between the assertions and
established criteria and to report the results
to interested users. Auditing should be done
by a competent, and independent person.
Audit services are widely used by
economic and government units and not-for-
profit organizations. In this context, studying
the economic reasons for auditing is useful
for understanding the need for auditing and
also for identifying some of the legal
problems facing auditors.
 Auditing has a significant effect on
information risk

 Causes of Information Risk

As society becomes more complex, there is an

increased likelihood that unreliable
information will be provided to decision
makers
 There are several reasons for this,
including

1. Remoteness of Information
2. Biases and Motives of the Provider
3. Voluminous Data
4. Complex Exchange Transactions
1. Remoteness of Information
In a global economy, it is nearly impossible for a
decision maker to have much firsthand knowledge
about the organization with which it does business.
Information provided by others must be relied upon.
When information is obtained from others, its
likelihood of being intentionally or unintentionally
misstated increases.
2. Biases and Motives of the Provider

If information is provided by someone

whose goals are inconsistent with those of
the decision maker, the information may
be biased in favor of the provider.

In this case, the result is a misstatement of

information.
3. Voluminous Data

As organizations become larger, so does the

volume of their exchange transactions. This
increases the likelihood that incorrectly
recorded information is included in the
records, perhaps buried in a large amount of
other information
4. Complex Exchange Transactions

In the past few decades, exchange transactions

between organizations have become increasingly

complex and therefore more difficult to record

properly or correctly
Reducing Information Risk
 There are three main ways to do so:
1. User verifies information
2. User shares information risk with
management
3. Audited financial statements are provided
1. User verifies information
The user may go to the business premises to
examine records and obtain information
about the reliability of the statements.
Normally, this is impractical because of cost.
In addition, it is economically inefficient for
all users to verify the information
individually.
2. User shares information risk with
management
• There is considerable legal precedent
indicating that management is responsible
for providing reliable information to users.

• If users rely on inaccurate financial

statements and as a result incur a financial
loss, they may have the basis for a lawsuit
against management
3. Audited financial statements are provided
 The most common way for users to obtain
reliable information is to have an independent
audit.
 Typically, management of a private company
engages the external auditor to provide
assurances to users that the financial statements
are reliable.
External users (such as shareholders and
lenders) rely on financial statements to make
business decisions look to the independent
auditor’s report as an indication of the
statements’ reliability. Decision makers can then
use the audited information on the assumption
that it is reasonably complete, accurate, and
unbiased
 Figure 1:
Accountability relationships among auditor,
client, and external users

Auditor
Client or audit auditor issues report
committee hires relied upon by users
auditor to reduce information
risk

Provide capital

External
Client Users

Client provides financial

statements to users
 Next Lecture
1. Nature of Auditing
2. Distinction between Auditing and
Accounting
3. Common Types of Audits
 •QUESTIONS
1. The criteria by which an auditor evaluates the information
under audit may vary with the information being audited.

A. True
B. False

2. An auditor must be competent and have an independent

mental attitude

A. True
B. False
1) ________ risk reflects the possibility that the information
upon which the business decision was made was inaccurate.
A) Client acceptance
B) Information
C) Business
D) Control

2) Financial statement users often receive unreliable financial

information from companies. Which of the following is not a
common reason for this?
A) Complex exchange transactions.
B) Voluminous data.
C) Remoteness of information.
D) Each of these choices is a common reason for unreliable
financial information.
Thanks