SECTION 1 AUDIT FRAMEWORK AND REGULATION

ASSURANCE ENGAGEMENT AGENCY THEORY

An agency relationship
(1) Level of assurance --> Principal ----> shareholder
--> Reasonable assurance --> Agent ---> directors, auditor
= high level of assurance
BUT NOT absolute ACCOUNTABILITY
= Evidence: sufficient appropriate =……ANSWERABLE…
= Opnion: positive wording
--> Limited assurance STEWARD
= moderate level of assurance = take care of another's properties
= lower than absolute
= less evidence required
= Negative wording
"Nothing ….not…"
(2) Elements of an assurance engagement FINANCIAL STATEMENT
5 elements --> Obtain reasonable assurance…
--> 3 party relationship --> obtain sufficient appropriate audit
--> Responsible party evidence
= responsible for FS: preparing FS, providing report on F…. --> to give opinion on ….
--> Pratitioner
= providing assurance service
--> Intended user
= use the information
--> Subject matter
--> Suitable criteria
= used by auditor to measure SM
--> Evidence
--> Report/conclusion
 SECTION 2 CODE OF ETHICS AND CONDUCT

5 FUNDAMENTAL ETHICAL PRINCIPLES 5 THREATS

PICOP
I Integrity Self - interest
O Objectivity Self - review
P Professional Competence and Due care Familiarity
C Confidentiality Advocacy
P Professional Behavior Intimidation

Description Eg: Description

Integrity = straight forward and honest… Self - interest = direct or indirect interest…
Objectivity = not allow bias, conflic of interest…. Self - review = review their own work
Professional =……
Competence and Familiarity
Due care -….. =….
Confidentiality =……. Advocacy =….
Professional Behavior =…… Intimidation =…

(***) Confidentiality Example:

--> MUST = LEGAL DUTY Self - interest Eg: own shares, gift or other interests
Eg:……………….. Self - review ………………………………………………………….
--> MAY = RIGHT TO DISCLOSE ………………………………………………………….
Familiarity
Eg:……… ………………………………………………………….
Advocacy ………………………………………………………….
Intimidation ………………………………………………………….

SAFEGUARDS
 SECTION 3: RISK ASSESSMENT

WHY MUST AUDTOR NEED TO PERFORM RISK ASSESSMENT?

--> ………………………………………………………….
--> ………………………………………………………….
--> ………………………………………………………….
--> ………………………………………………………….
--> ………………………………………………………….
UNDERSTANDING THE ENTITY
AUDIT RISK MATERIALITY AND ITS ENVIRONMENT

R IR Inherent WHAT? Mistatement H

o Risk could reasonalbly influence WHY? WHAT? O
M CR Control the economic decision of W
M Risk users
Risk assessment IRE Industry A
DR Dectection Regulatory
Risk Materiality External O
Design & perform
--> Definition of IR, CR, DR TYPES Performane audit procedures Nature of entity I
--> Which one can be controlled materialiaty PM --> Operating
by entity? ………… (lower than M) --> Investing E
by auditor? ………… Frame of reference --> Financing
--> Illustration of IR, CR, DR for excercising audit
--> see more in lecture guide judgement Accounting
--> Calculation of Materiality level Eg: Determine M policies
--> Materiality consideration
--> Size Objectives and
(individually or when added together) Strategies
--> Nature
--> Auditor's judgement Internal control system
 SESSION 4: AUDIT PLANING & DOCUMENTATION

AUDIT PLANNING AUDIT EVIDENCCE

General principles Why plan Audit procedures

--> …… = used by auditor to gather REQUIREMENT
--> ….. evidence
---> ……
Audit strategies Audit plan Inspection Sufficiency Appropriativeness
--> …… -->….. = quantitative aspect= qualitative aspect
--> …. -->…..
Observation Sample size Reliability
--> M = sources & form
AUDIT DOCUMENTATION --> RoMM
Inquiry --> Quality Relevance
Objetives Audit Working papers of evidence = match objectives
---> Assertions
---> PAF (1) CAF (2) Confirmation
--->
--->
Which of the following documents will be included in PAF? Re-calculation
organization chart
Major shareholders, debt struture, third parties, major suppliers…
5 year loan contract Re-performance
FS 2020
accounting ledger of inventory 2020
audit working paper 2020 Analytical procedures
Completion checklists 2020
Evidence of review, review notes 2020
Boad meeting minutes (the entity's strategy)
 FINANCIAL STATEMENT ASSERTIONS

Transactions & events Account Balances

--> Occurrence --->

=……..

--> Completeness --->

=……..

--> Accuracy & Valuation --->

=……

--> Classification --->

=……proper accounts

--> Cut-off --->

=…..proper accounting period
 SECTION 5: INTERNAL CONTROLS SYSTEM

WHAT? COMPONENTS (5) LIMITATION OF

INTERNAL CONTROL USE OF IC BY AUDITOR

- process Control environment Cost of control not RECORDING

designed&affected (1) outweighing their CONTROLS
by TCWG benefits SYSTEMS
- to provide Management's Communication
reasonable assurance philosophy and & enforcement Narrative Notes
achievement of the operating style of integrity& Human errors
entity's Objectives ethical value Flowcharts
- Operation Assigment of Human resource Collusion Questionaires
- Comliance authority and policies and
responsibility practise Advatages
Controls being by Disadvantages
Commitment Orginasation by managements
to competence structure --> Deficiencies
= report to mgt
Controls designed --> Strong controls
(4) rountine transactions
Monitoring of Entity's risk assessment process
control (2)
COMMON TEST OF CONTROL PROCEDURES
Information system Control Activities (3) --> I - Inspection of documents
relevant to (5) --> Segregation of duties --> O - Observation
financial reporting --> Authorisation --> E - Enquiry about IC which leave no audit trail
--> Information processing --> Re-performance
--> Performance review
--> Physical control
 SECTION 6: AUDIT SUBSTANATIVE PROCEDURES

SUBSTANTIVE AUDIT PROCEDURES SUBSTANTIVE AUDIT PROCEDURES FOR SPECIFIC ITEMS

ANALYTICAL TEST OF Sales and Liabilitis and Cash and Fixed

PROCEDURES DETAILS receivables Inventory Capital Banks assets
TOD

Key assertion Substantive procedures [detailed in Lecture Note Chap 6]

--> Existence = perform receivables circularisation = Confirmation
= recorded R exist or Review after date cash receipt by inspecting
--> Valuation bank statements or cash receipts documents
= Receivable in the account at fair amount = review aged analysis of receivables
Receivable --> Right and Obligation
= entity controls the rights to receivables =......
--> Completeness
= all receivables that should have been =......
recorded have been recorded

--> Existence --> Observe the physical inventory count

--> Completeness --> Trace test counts to the detailed inventory listing.

Inventory --> Right and obligation --> Verify that any inventory held for third parties is not
included in the year-end inventory figure
--> Valuation --> Testing for NRV
Make enquiries of mgt to ascertain any slow-moving or
obsolete inventory that should be written down.
Check the price of goods sold after year end
--> Presentation and disclosure --> Check disclosure checklist
 --> Occurence --> Vouch the sales invoice back to customer orders &
despatch documentation.
--> Completeness --> Trace shipping documentation to sales invoices and
into the sales ledger.
Sales
--> Accuracy --> Compare the prices & terms to the authorised price list
& terms of trade documentation.
--> Cut-off --> For a sample of sales invoices around the year end,
inspect the dates & compare with dates of despatch
and the dates recorded in the ledger
--> Classification --> Take a sample of sales invoices and examine for proper
classification into revenue accounts
 SECTION 7: REPORTING

BASIC ELEMENTS OF AUDIT REPORT

- Title
- Addressee
- Auditor's opinion
- Basis for opinion
- Responsibility for the FS
- Auditor's responsibilities for the audit
of the FS
-….
 TYPES OF AUDIT REPORT & AUDIT OPINION

UNMODIFIED MODIFIED AUDIT REPORT

AUDIT REPORT

Modified audit report Modification to BOTH auditor's report and audit

with unmodified audit opinion
Unmodified opinion
opinion
= Auditor agrees Unmodified
with the FS opinion
= FS are presented draw an attention of users to the matters
fairly
Modified opinion
that presented in FS not presented in FS
Eg: subsequent events Eg: last year FS audited by other firm
with modified opinion Insufficient audit
EOM = emphasis OM - other FS contains MM evidence =
of matter para matters para (disagreement) Limitation of scope

(1) Misstatement (2) (3) Level of limitation of scope

Material but not Pervasive M and Pervasive M but not pervasive M & pervasive
(2) '(3) Adverse (2) Modified (4) Disclaimer of
Modified opinion opinion (except opinion
opinion for)
(except