7/28/2022

LECTURER’S INFORMATION
ENGLISH FOR AUDITING
Full name: DOAN THANH NGA Tittle: Doctor
Address: Building A1, Room 1101
Phone number: 0906 290208
Email: [email protected]
Faculty: School of Accounting and Auditing, NEU

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ENGLISH FOR AUDITING Main contents

1. Basic Auditing

Text book: 2. Audit Objectives in Financial Audit

Auditing and assurance services, 3. Techniques in Collecting Audit Evidences

16th Edition, Alvin A.Arens, Randal J. 4. Internal Control

Elder, Mark S.Beasley, 2017 5. Types of Audit Tests

6. Audit Process

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1.1. Nature of Auditing

1. Basic Auditing Auditing is the accumulation and evaluation
of evidence about information to determine
 Nature of Auditing
and report on the degree of correspondence
between the information and established criteria.
 Types of Audits and Types of Auditors

 Professional Ethics

 Fraud and Error Auditing should be done by a competent,

independent person.
 Materiality and Audit risk

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Information and Established Accumulating Evidence and

Criteria Evaluating Evidence

To do an audit, there must be information in a Evidence is any information used by the auditor
verifiable form and some standards (criteria) to determine whether the information being
by which the auditor can evaluate the information. audited is stated in accordance with the
established criteria.

Criteria
FASB IASB

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Competent, Independent
1.2.
Person
Judgment and
Competence
Experience Types of Audits and
Independence Types of Auditors

Evaluation of
Evidence

Proper
Conclusion
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Audit of Financial Statements

Types of Audits
Definition: A financial statement audit is conducted to
1 Audit of Financial Statements
determine whether the financial statements (the information
2 Operational Audit being verified) are stated in accordance with specified criteria.

3 Compliance Audit

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Operational Audit Compliance Audit

Definition: An Operational audit is a review of any part of an Definition: A compliance audit is conducted to determine
organization’s operating procedures and methods for the purpose of whether the auditee is following specific procedures, rules, or
evaluating efficiency and effectiveness
regulations set by some higher authority.

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Types of Auditors Independent auditors

Independent auditors/ Independent auditors are certified public accountants or

1
Certified public accountants accounting firms that perform audits of commercial and
non-commercial financial entities.

2 State auditors

3 Internal auditors

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Three Requirements for

Becoming a CPA

 Educational requirement

 Uniform CPA examination requirement

 Experience requirement

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State auditors Internal auditors

State auditor is an auditor working for the State Audit of a Internal auditors are auditors employed by a company to
nation; the State Audit reports to and is responsible solely audit for the company’s board of directors and management.
to Congress.

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What are ethics?

1.3. Professional ethics
Ethics can be defined broadly as a set of moral principles or
values.
Ethical behavior is necessary for a society to function in an
orderly manner.
The need for ethics in society is sufficiently important that
many commonly held values are incorporated into laws.

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Code of ethics for Integrity

professional accountants
A professional accountant should be straightforward and
Fundamental Principles: A professional accountant is honest in all professional and business relationships.
required to comply with the following fundamental principles:
 Integrity
 Objectivity
 Professional Competence and Due Care
 Confidentiality
 Professional Behavior

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Professional Competence and Due Care

Objectivity
A professional accountant has a continuing duty to
A professional accountant should not allow bias, conflict
maintain professional knowledge and skill at the level required
of interest or undue influence of others to override
to ensure that a client or employer receives competent
professional or business judgments.
professional service based on current developments in practice,
legislation and techniques.

A professional accountant should act diligently and in

accordance with applicable technical and professional standards
when providing professional services.

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Confidentiality Professional Behavior

A professional accountant should respect the
A professional accountant should comply with
confidentiality of information acquired as a result of
relevant laws and regulations and should avoid any
professional and business relationships and should not
action that discredits the profession.
disclose any such information to third parties without proper
and specific authority unless there is a legal or professional
right or duty to disclose.

Confidential information acquired as a result of

professional and business relationships should not be used for
the personal advantage of the professional accountant or third
parties.
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Quizz: Quizz:

1) Ethics are 2) The Code of Professional Conduct states that a CPA should maintain
integrity and objectivity. The term "objectivity" in the Code refers to a
A) needed in the professions, but is not needed for
CPA's ability to
society in general. A) choose independently between alternate accounting principles and
B) a set of moral principles or values. auditing standards.
C) not formed by life experiences. B) distinguish between accounting practices that are acceptable and
D) always incorporated in laws. those that are not.
C) be unyielding in all matters dealing with auditing procedures.
D) maintain an impartial attitude on matters that come under the
CPA's review.

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What is Fraud?
1.4. Fraud and Error
 As a broad legal concept, fraud describes any intentional deceit
 A Student took materials (textbooks or mini photocopies) in meant to deprive another person or party of their property or

examination room. (Rule: Close-book exam) rights.

 In the context of auditing financial statements, fraud is defined

as an intentional misstatement of financial statements.
Is it a fraud or an error?

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Types of Fraud Causes of Fraud

There are three conditions generally present when fraud occurs
 Misappropriation of assets

 Fraudulent Financial Reporting Attitudes/Rationalizations

Fraud
Triangle

Incentive/Pressures Opportunities

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What is Error?
Causes of accounting errors
Unintentional mistakes in financial information such as:
 Time pressure in the process of recording accounting
 Errors of commission;
transaction.
 Errors of omission;
 Pressure of working environment
 Errors of principle.
 Working style of accountants

 Limited qualification of accountants

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Materiality
1.5. Materiality and Audit risk
Materiality is the magnitude of an omission or
misstatement of accounting information that, in the light of
surrounding circumstances, make it probable that the judgment
of a reasonable person relying on the information would have
been changed or influenced by the omission or misstatement.

Source: Financial Accounting Standards Board (FASB)

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 Quantitative materiality level

Assessment of Materiality
 No official guidelines within auditing standards
 Quantitative consideration (size)  Bases for evaluating Materiality

 Qualitative consideration (nature of the misstatement)  5-10% of Net Income before Taxes

 ½-1% of Total Assets

 ½-1% of Total Revenue

 1- 2% of Equity

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 Qualitative Considerations Audit Risk

- Amount involve fraud are usually more important than
 Audit risk means the risk that the auditor expresses an
unintentional errors of equal money amounts => reflect on
inappropriate audit opinion when the financial statements are
honest and reliability of management.
materially misstated (ISA 200).
- Misstatements that are otherwise minor may be material if
 It’s not practical totally eliminate audit risk => minimize the risk
there are consequences influenced related significant
to extent possible (acceptable audit risk)
accounts

- Misstatements that are otherwise immaterial if they affect a

trend in earning.

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Acceptable audit risk (AAR) Acceptable audit risk

 Acceptable audit risk is a measure of how willing the auditor AAR = 2% ??????????????
is to accept that the financial statements may be materially Same as audit assurance = 98%

misstated after the audit is completed and an inappropriate

opinion has been issued.

 For many audit firms, acceptable audit risk is 5% or lower

(1% or 0.5%,…)

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Audit Risk Model Inherent Risk

 Inherent risk measures of the auditor’s assessment of the

Risk of Material Risk that the Auditors risk/likelihood that there are material misstatements in a
Audit Risk = Misstatement * Fail to Detect
the Misstatement segment, before considering the effectiveness of related
internal control.
= Inherent Control Detection  Or Risk of fraud/errors arising due to nature of entity
Risk * Risk * Risk

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Control Risk Planned Detection Risk (PDR)

 Planned detection risk is the risk that audit evidence for an
 Control risk measures of the auditor’s assessment of the
audit objective will fail to detect misstatements exceeding
risk/likelihood that material misstatement could occur in a performance materiality.
segment and not be prevented or detected on a timely basis by
the client’s internal controls.  Planned detection risk determines the amount of
 OR Risk that internal controls do not prevent or detect substantive evidence that the auditor plans to accumulate,
fraud/errors inversely with the size of planned detection risk.

 Auditors assess CR through evaluating the effectiveness of the

client’s internal controls.

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Interrelationship of the components of audit risk

Interrelationship of the components of audit risk
AAR
PDR =
IR x CR
Assessment of Control Risk
AAR = Acceptable Audit risk Detection risk matrix
High Medium Low
IR = Inherent risk
CR = Control risk High Low Low Medium
Assessment
PDR = Planned detection risk
of Inherent Medium Low Medium High
Risk
Low Medium High High

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2. Audit objectives in 2.1. Management Assertions

financial audit Definition: Management assertions are implied or expressed

representations by management about classes of transactions and
the related accounts and disclosures in the financial statements.
 Management Assertions
 Audit Objectives 1. Assertions about classes of transactions and events for the
period under audit

2. Assertions about account balances at period end

3. Assertions about presentation and disclosure

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Management Assertions for For example, we have some misstatements:

Each Category of Assertions 1. Over-stating $400 of cost of goods sold due to incorrect application of
method of calculating inventory price.
Transactions and Events Account Balances Presentation and Disclosure 2. Omitting a sale transaction with $200 cost of goods sold and $300 of
Occurrence Existence Occurrence and rights sales.
and obligations
3. Recording $200 of inventory into fixed assets account.
Completeness Completeness Completeness
4. On 28/12/2017, the company signed a contract to sell goods to
Accuracy Valuation and Accuracy and customer and delivered goods to customer on 3/1/2018. However,
allocation valuation accountant recorded this transaction in accounting book of Year 2017.
Classification Classification and
5. Accountant record a sale transaction to a fictitious customer to
understandability
increase sales and profit of financial year.
Cutoff
Rights and Require: Identify each of above misstatements will violate which
obligations management assertion?
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General Transaction-related Audit Objectives

2.2. Audit Objectives
Occurrence Recorded transactions exist

 Transaction-related audit objectives Completeness Existing transactions are recorded

 Balance-related audit objectives Recorded transactions are stated

Accuracy
 Presentation and disclosure-related audit objectives at the correct amounts
Posting and Transactions are included in the master
summarization files and are correctly summarized.

Classification Transactions are properly classified.

Transactions are recorded on the

Timing correct dates.
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General Balance-related Audit Objectives

Existence Amounts included exist

Completeness Existing amounts are included

Amounts included are stated at

Accuracy
the correct amounts

Classification Amounts are properly classified

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Transactions near the balance sheet

Cutoff date are recorded in the proper
period
Account balances agree with
Detail tie-in master file amounts,
and with the general ledger

Realizable Assets are included at estimated

value realizable value

Rights and Assets must be owned, liabilities

obligations must belong to the entity
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Presentation and disclosure related audit objectives

3. Audit Evidence
 Definition
 Techniques in collecting audit evidence

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Persuasiveness of Evidence
3.1. Definition of Audit Evidence
Two determinants:

Any information used by the auditor for

determining whether the information being
audited is stated in accordance with
established criteria

Appropriateness Sufficiency
(relevance and reliability) (quantity)

The persuasiveness of evidence can be evaluated only after

considering the combination of appropriateness and sufficiency
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Types of Audit Evidence

3.2. Techniques in Collecting
Audit Evidence Physical
Examination
Confirmation
Observation

Audit
Reperformance Inspection
Evidence

Analytical
Recalculation
Client Inquiries procedures

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Physical Examination Confirmations

Definition: describes the receipt of a written or

It is the inspection or count by the
auditor of a tangible asset. oral response from an independent third party
examining the accuracy of information that was

This type of evidence is most often associated requested by the auditor.

with inventory, cash or tangible fixed assets.

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Information often Confirmed

Information Source
Inspection
Assets
Cash in bank Bank
Marketable securities Investment custodian
Accounts receivable Customer
Notes receivable Maker It is the auditor’s examination of the
Owned inventory out on consignment Consignee
Inventory held in public warehouses Public warehouse
client’s documents and records.
Liabilities
Accounts payable Creditor
Notes payable Lender
Advances from customers Customer
Mortgages payable Mortgagor
Internal External
Owners’ Equity documents documents
Shares outstanding Registrar and transfer agent

Other Information
Insurance coverage Insurance company
Contingent liabilities Bank, lender, and client’s legal counsel

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Analytical Procedures Inquiries of the Client

 Understand the client’s industry and business

 Assess the entity’s ability to continue as a It is the obtaining of written or oral

going concern information from the client in response to

 Indicate the presence of possible misstatements questions from the auditor.

in the financial statements

 Reduce detailed audit tests

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Recalculation Reperformance

Involves rechecking a sample of calculations The auditor’s independent tests of client

made by the client. accounting procedures or controls that
were originally done as part of the entity’s
accounting and internal control system.

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Case study
Observation For each of following audit procedures, indicate which type of
evidence is being gathered:
1. Sending a written request to the client’s customers requesting that they
report the amount owned to the client.
2. Examining large sales invoices for period of two days before and after
 Use one’s senses to assess year- end to determine sales recorded in the proper period
client activities. 3. Agreeing the total of account receivable subsidiary ledger to account
Ex: Tour plant to obtain a general receivable gerneral ledger account

impression of client’s facilities. 4. Comparing the current year gross profit percentage with the gross
profit percentage for the last year.
5. Watching the client’s warehouse personel count of the raw material
inventory
6. Performing test count of the warehouse personel count the raw
material inventory
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Five Components of Internal

4. Internal Control Control

Definition: Internal control is the process designed, implemented, and

maintained by those charge with governance, management and other
personnel to provide reasonable assurance about the achievement of an
entity’s objectives with regard to:
- reliability of financial reporting,
- effectiveness and efficiency of operations, and
- compliance with applicable laws and regulations.

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Control environment Risk assessment

 Includes governance and management’s overall attitude,
awareness and actions regarding IC and its importance in the Client’s way of identifying and responding to business risks:
entity (ASA/ISA 315.A65).
 Identify factors that may increase risk
 Auditors should consider:
 Estimate the significance of the risk
 Communication and enforcement of integrity and ethical values
 Commitment to competence  Assess the likelihood of the risk occurring
 Participation by those charged with governance  Determine actions necessary to manage the risk
 Management’s philosophy and operating style
 Organisational structure
 Assignment of authority and responsibility
 Human resource policies and practices.
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Control activities
Information and Communication
Control activities: policies and procedures that help ensure that
necessary actions are taken to address risks in the achievement of
The purpose of an accounting information
the entity’s objectives; they typically include the following five
and communication system
specific control activities:
1. Adequate separation of duties
2. Proper authorization of transactions and activities Initiate
3. Adequate documents and records Maintain
Report
4. Physical control over assets and records Record Accountability
transactions
for Related Assets
5. Independent checks on performance
Process

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 An effective information system establishes the records and

Monitoring of controls
the methods that:  Monitoring of controls: A process to assess the
 Identify and record all valid transactions effectiveness of the performance of internal control. It
 Resolve incorrect processing of transactions involves:
 Process and account for system overrides  Evaluating the design and operation of controls
 Transfer information from transaction processing  Taking corrective action where necessary.
systems to the general ledger
 Management may monitor controls through ongoing
 Capture information relevant to financial reporting for
activities such as supervisory activities and/or separate
events and conditions other than transactions; and
evaluations.
 Present the transactions and related disclosures properly
 For many company, internal auditors contribute to the
in the financial report.
monitoring process.
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Types of Audit Tests

5. Types of Audit tests
in Financial Audit
Tests of Controls Substantive tests

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Tests of control
Substantive tests
 An auditor performs tests of control to obtain evidence
 Performed on specific transactions and balances to see
about whether the control activities of the internal control
whether the money amount of an account balance is
system are effective.
materially misstated.
 The tests are designed to provide evidence to support an
 These tests reduce detection risk.
assessment of control risk at a level below high (indicating
reliance on the keys controls).

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Types of substantive tests 6. Financial Audit process

 Analytical procedures: involve the study and comparison of
relationships between accounting data and related
Perform analytical
information. Plan and design procedures and
Phase I an audit approach Phase III tests of details
 Tests of details: obtaining evidence on the items (or details)
of balances
included in an account balance or class of transactions:
 Substantive tests of transactions (used to determine
whether all six transaction related audit objectives have Perform tests of
controls and Complete the
been satisfied for each class of transactions). audit and issue
Phase II substantive tests Phase IV
 Tests of details of balances (focus on the ending general of transactions an audit report
ledger balances for both balance sheet and income
statement accounts)
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Phase I: Plan and design an audit approach Phase II: Perform tests of controls and
substantive tests of transactions
Accept client and perform initial planning

Understand the client’s business and industry

Plan to reduce assessed No
Assess client’s business risk level of control risk?

Perform preliminary analytical procedures

Yes
Set materiality and assess acceptable
audit risk and inherent risk
Perform tests of controls

Understand internal control and assess control risk Perform substantive tests of transactions
Gather information to assess fraud risks
Assess likelihood of misstatements in
Develop overall audit strategy and audit program financial statements
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Phase III: Perform analytical procedures Phase IV: Complete the audit and
and tests of details of balances issue an audit report

Perform additional tests for

presentation and disclosure
High or
Low
Low Medium Accumulate final evidence
unknown

Perform analytical procedures Evaluate results

Perform tests of key items Issue audit report

Perform additional tests Communicate with audit

of details of balances
committee and management
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Types of Audit Report

Issue an Audit Report Audit Report

Unmodified Report Modified Report

The audit report is the only thing that most users “Fair Emphasis of Modified
presentation” or Matter Opinion
see in the audit process and the consequences of “True and Fair”
Other Matter
issuing an inappropriate report can be severe.
FS are materially Auditor unable to obtain sufficient
misstated appropriate evidence

Material Material and Material Material and

Not pervasive pervasive not pervasive pervasive

Qualified Adverse Qualified Disclaimer

Opinion Opinion Opinion of Opinion
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