Chapter 1 Overall Objectives of the Auditor PDF

Chapter One: Overall Objectives of the Auditor Course Name: Auditing and Assurance II Course Code: BSAC4103 / BAAC 4210 Specialisation: Accounting and Finance College of Economics and Business Administration University of Technology and Applied Sciences (HCT) Muscat Introduction...

Chapter One: Overall Objectives of the Auditor Course Name: Auditing and Assurance II Course Code: BSAC4103 / BAAC 4210 Specialisation: Accounting and Finance College of Economics and Business Administration University of Technology and Applied Sciences (HCT) Muscat Introduction What is an audit? Why auditing is essential for companies? Let us hear this from worlds largest auditor, KPMG https://www.youtube.com/watch?v=pkKO9ZNyOIc Activity : Let’s hear from Auditors Now, answer the below mentioned questions. Q.1 What is a financial audit and why it is required? Q.2 Who is an auditor? Discuss the skills required to be an auditor. Q.3 Discuss the major functions of auditors. Cite in detail some examples of audit work. Q.5 What do you understand by Big 4? Q.6 Do you think that the career in auditing is exciting? Justify. Chapter Outline International Standards on Auditing (ISA) ISA 200: Overall Objectives of the Auditor Purpose and Scope of Audit Management responsibilities ISA 200 Requirements Audit Risk Professional Skepticism Professional Judgment Appropriate Audit Evidence Conduct of an Audit in Accordance What is ISA? International Standards on Auditing (ISA) ISA are professional standards for the auditing of financial information. These standards are issued by the International Federation of Accountants (IFAC) through the International Auditing and Assurance Standards Board (IAASB) International Auditing and Assurance Standards Board The International Auditing and Assurance Standards Board (IAASB) is an independent standard-setting body that serves the public interest by setting high-quality international standards for auditing, quality control, review, other assurance, and related services, and by facilitating the convergence of international and national standards Source: https://www.iaasb.org/ 1. ISA 200- Overall Objectives of an Auditor Let us now examine some basic purpose of a Financial Audit. 1.1 Purpose of an audit Enhance the degree of confidence of users achieved by the expression of an audit opinion by the auditor Ethical requirement for preparation of financial statement 1.2 Remember, ISA do not Impose responsibilities on management or TCWG (Those Charged With Governance) Override laws and regulations 1.3 Reasonable Assurance ISAs require the auditor to obtain reasonable assurance What is reasonable assurance? High level of assurance Not an absolute level of assurance How to obtain reasonable assurance? By obtaining sufficient and appropriate audit evidences. By exercising professional skepticism and professional judgement 1.4 Scope of the audit: An audit deals with the financial statements 1.5 Audit opinion does not assure: The future viability of the entity The efficiency or effectiveness of management 1.6 Other reporting requirements: Auditor may have to provide opinion on Effectiveness of internal control The consistency of management report with the financial statements 1.7 Inherent limitations of Auditing Audit risk cannot be eliminated, only can minimize. Cannot give absolute guarantee that the F/S are free of material misstatement. Limitations in acc. system may affect auditing also. 2. Management responsibilities in relation to financial reporting Preparatio Provide the n F/S in auditor: Ensure Exercise Select and accordanc Access to all internal judgment apply information e with control in making appropriat relevant to the applicable F/S over accountin e Any additional financial financial g accountin information reporting thereto reporting estimates. g policies. Unrestricted framework access to. personnel of the firm. 3. ISA 200 REQUIREMENTS 3.1 Ethical Requirements Relating to an Audit of Financial Statements Relevant ethical requirements, including those pertaining to independence Fundamental ethical principles:- Integrity:- Should be straightforward and honest in all professional and business relationships Objectivity:- Should not allow bias, conflict of interest or undue influence of others to override professional or business judgments Professional competence and due care: Continuing duty to maintain professional knowledge and skill. Should act diligently and by applicable technical and professional standard when providing professional services Confidentiality: Respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority. Professional behavior: Comply with relevant laws and regulations and should avoid any action that discredits the profession. Ethics and Auditing Integrity Independence Objectivity Ethical requirements for an Auditor Professional Professional Competence Behavior and Due Care Confidential ity 4. Audit risk The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk Inheren Control Detectio t risk risk n risk Inherent Risk is the risk Control Risk is the risk of a of a material misstatement material misstatement in the Detection Risk is the risk that in the financial statements financial statements arising due the auditors fail to detect a arising due to error or to absence or failure in the material misstatement in the omission as a result of operation of relevant controls of financial statements. factors other than the the entity failure of controls 5. Professional Skepticism It is an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence. It is a skill developed over time and a skill that auditors should constantly build and refine Higher the professional skepticism, higher the audit efficiency? 5.1 Why Professional Skepticism It impact the quality of the services of the auditor Appropriate application of professional standards matters? Increased audit efficiency Is over skepticism good for auditing? 5.2 How does the auditor apply professional skepticism? When assessing engagement acceptance When performing risk assessment procedures When obtaining audit evidence When evaluating evidence 5.3 Specific applications of professional skepticism Fraud Accounting estimates Going concern Related party relationships and disclosures Consideration of laws and regulations 5.4 Professional skepticism includes being alert to, for example Audit evidence that contradicts other audit evidence obtained. Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence. Conditions that may indicate possible fraud. Circumstances that suggest the need for audit procedures in addition to those required by the ISAs  Case Study on Professional skepticism Case Study Let us learn more about professional scepticism https://www.youtube.com/watch?v=0LHbrNvnnmg Let us recap what we learned. Please click the following link to take up a small quiz https://forms.office.com/Pages/ResponsePage.aspx?id=7-C1LLUExkyhkI0mEQp3- kMKJO6DUBtFpACjwhpLh7ZURTVVVjJPM1lDR1hON1RaRFo0NFJBRjRXMS4u 6. Professional Judgment The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. The auditor shall exercise professional judgment in planning and performing an audit of financial statements. 6.1 Areas where Making decisions regarding materiality. professional The evaluation of management's judgments. Drawing of conclusions. judgment is Evaluating the sufficiency and appropriateness of being used:- audit evidence obtained In fact, professional judgment will be used in almost all key decisions regarding the conduct of the audit. Professional Judgment continues.. Professional judgment needs to be exercised throughout the audit and appropriately documented It is better to request an experienced auditor to evaluate the judgment made by the auditor. Professional judgment is NOT to The facts and circumstances of be used as the engagement justification for Sufficient appropriate audit decisions that are not otherwise evidence supported by: 7. Sufficient Appropriate Audit Evidence 7.1 Sufficient and 7.2 How to collect appropriate audit Audit evidences ? evidences for:- For obtaining By performing reasonable audit procedure assurance. To draw Accounting reasonable records conclusion Expert opinion Other sources 8. Conduct of an Audit in Accordance with ISAs The auditor shall not represent compliance with ISAs in the auditor's report The auditor shall comply The auditor shall have an unless the auditor has with all ISAs relevant to the understanding of the entire complied with the audit. text of an ISA requirements of this ISA and all other ISAs relevant to the audit. References and picture courtesy https://www.accaglobal.com/crsh/en/member/discover/cpd-articles/audit-assurance/isa-200.html https://www.ifac.org/system/files/downloads/a008-2010-iaasb-handbook-isa-200.pdf https://study.com/academy/lesson/inherent-risk-control-risk.html#:~:text=Inherent%20risks%20are%20the%20 natural,a%20risk%20during%20their%20examination. https://www.iedunote.com/professional-ethics-in-auditing https://accounting-simplified.com/audit/risk-assessment/audit-risk/ https://www.berrydunn.com/blog/professional-skepticism-and-why-it-matters-to-audit-stakeholders#:~:text=The %20professional%20standards%20define%20professional,realizes%20that%20professional%20skepticism%20c an ‘ 22  CONTACT INFORMATION: Name of the Staff : Dr. Chandan Kumar Tiwari Office:: BS045 Email: [email protected] VERSION HISTORY Version No Date Approved Changes incorporated 01 Sem. (I) 2022/2023