AUDITINGSECTION 1.ppt

1、AUDITING SECTION 1,Introduction,Definition of Auditing,Auditing is a form of attestationAttestation refers to a specialist communicatingAuditing is also a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic events to ascertain,Assertions are the re

2、presentations of management as to the fairness of What are the established criteria?To evaluate fairness the auditor must gather evidence. What is the evidence?Evidence must be gathered objectively,Auditing is a systematic processEvidence must be sufficient and competentAuditor does not guarantee ac

3、curacy,To be competent, evidence must be both valid and relevantThe process of communicating the results is referred to as attestationWhat is the mechanism?,Generally Accepted Auditing Standards,GAAS must be observed by the auditor The General Standard The examination should be performed and the rep

4、ort prepared by a person or persons havingThe Examination Standards The work should be adequately planned and properly executed using sufficient knowledge of the entitys business as a basis. If assistants are employed, they should be properly supervised. A sufficient understanding of internal should

5、 be obtained to plan the audit. When control risk is assessed below maximum,Sufficient appropriate audit evidence should be obtained, by such means asThe Reporting Standards The report should identify the financial statements and distinguish between the responsibilities of management and the respons

6、ibilities of the auditor. The report should describe the scope of the auditors examination. The report should contain either an expression of opinion on the financial statements or an assertion that an opinion cannot be expressed.,Where an opinion is expressed, it should indicate whether the financi

7、al statements present fairly, in all material respects, the financial position, results of operations and cash flows in accordance with an appropriate disclosed basis of accounting,The report should provide adequate explanation with respect to any reservation contained in such opinion.,External vs.

8、Internal Auditing,External conducted by auditors independent of management and representing third party users.Internal serves management as opposed to third party users.,Internal auditors are also engaged in evaluating the efficiency of operationsLevel to which the internal auditor reports is import

9、antThe rule of thumb as to whom the internal auditor reports,Governmental Auditing,Federal and Provincial Auditor GeneralsCanada Customs and Revenue AgencyGovernment accounting and comprehensive auditing,Governmental Auditing and The Three Es,EconomyEfficiency An efficient operation produces the max

10、imum output for a given set of resources or inputsEffectiveness,Organizations That Affect Auditing,A variety of professional groupsIn CanadaIn the U.S.,International Federation of Accountants,About IFACWhat We DoStructure and GovernanceMission and Strategy,Establishment Of Standards,In Canada the CI

11、CA has:In the U.S. the AICPAHow about the FASB?,Organization Of The Profession,Public accounting firmsFour categories Big 4 National Regional Local,How Auditing Differs From Accounting,Auditing and accounting are related but distinct from each otherAccounting involvesAuditing utilizes,Why Is Indepen

12、dent Auditing Necessary?,Society has a perceived need for audits of publicly held companiesManagement wants to present the results of its stewardship in the most favourable lightStockholders are interested in the true financial position, results of operations, and cash flows,Requirements for an Effe

13、ctive Audit,The auditor must have a thorough understanding of the company and the industryThe auditor must have a comprehensive knowledge of GAAPA solid grasp of the concepts of internal control structure and a careful review and evaluation of the underlying structure are necessary,The auditor must

14、also be knowledgeable in the are of evidence gathering and evaluationThe most effective means for assuring sound audit judgment are the training and experience of the auditorThe competence of evidence,Communicating Audit Findings,The audit reportIntroductory paragraphManagement (or preparer) respons

15、ibility paragraphAuditor responsibility paragraphOpinion paragraph,Independent Auditors Report To the Shareholders of ABC IncWe have audited the accompanying financial statements of ABC Inc., which comprise the balance sheet as at December 31, 2010 and the statements of income, retained earnings and

16、 cash flow for the year then ended, and a summary of significant accounting policies and other explanatory information.Managements responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian

17、 generally accepted accounting principles and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making

18、accounting estimates that are reasonable in the circumstances.Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that

19、we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements

20、. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entitys preparation and fair

21、presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies

22、used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.Opinion In our opinion, the f

23、inancial statements present fairly, in all material respects, the financial position of ABC Inc. as at December 31, 2010 and its financial performance and cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.PricewaterhouseCoopers LLP (signed) Chart

24、ered Accountants One Lombard Place, Suite 2300, Winnipeg, Manitoba February 22, 2011,The standard report contains no exceptionsScope limitationGAAP departure,The Audit Process,Preliminaries Engagement Letter Audit Risk Analysis Audit Fieldwork Planning,Testing Internal Controls,Inventory Observation

25、 Testing T/As and Balances,Preliminary ArrangementsThe audit commences with preliminary arrangements being made with the clientPreliminary arrangements are especially important in a new engagement rather than a continuing engagementThe auditor may discover that they do not have the necessary skills,

26、The Engagement Letter,Summarizes the agreement of the parties formulated during the preliminariesA mutual understanding regarding the nature of the engagementSo what is it in reality?,BORITZ, KAO, KADOUS & CO., Chartered Accountants Halifax, Nova Scotia B3M 3J5June 14, 200XMr. Rick Chulick, Presiden

27、t Hillsburg Hardware Ltd. 2146 Willow Street Halifax, Nova Scotia B3H 3F9Dear Mr. Chulick:Thank you for reappointing us as your auditors for the year ending December 31,200X. The purpose of this letter is to confirm our mutual understanding of the terms of our engagement. It will be the responsibili

28、ty of J. E. Boritz to make sure that management receives quality service. J. E. Boritz will, as considered necessary, call upon other individuals with specialized knowledge, either in this office or elsewhere in our firm.While auditing and reporting on your annual financial statements is to be the r

29、ecurring basic service we provide, we would also like to assist you on issues as they arise throughout the year. Hence, we hope that you will call J. E. Boritz whenever you feel J.E. Boritz can be of assistance.Audit of Financial StatementsThe purpose of our annual engagement to audit financial stat

30、ements is to evaluate the fairness of presentation of the statements in conformity with Canadian generally accepted accounting principles.Our audit will be conducted in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain

31、 reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates

32、by management, as well as evaluating the overall financial statement presentation.,It should be noted that an audit conducted in accordance with Canadian generally accepted auditing standards is based on selective tests. Because detailed examination is not performed on all transactions, there is a r

33、isk that material fraud or error may exist but not be detected.The objective of our audit is the expression of an opinion on financial statements. Our ability to express that opinion, and the wording of our opinion, will be dependent on the facts and circumstances at the date of our report. If our a

34、udit report requires qualification, the reasons therefore will be discussed with you prior to its issuance.Managements Responsibility We direct your attention to the fact that the financial statements are the responsibility of management. In this regard, management has the responsibility for designi

35、ng effective internal controls, for properly recording transactions in the accounting records, for making appropriate accounting estimates, for safeguarding assets, and for the overall accuracy of the financial statements.Other Communications Arising from the Audit In connection with the planning an

36、d the performance of our audit, we will communicate to you, to the extent that they come to our attention, fraud and significant deficiencies in the design or operation of the internal control structure that could adversely affect the Companys ability to record, process, summarize, and report financ

37、ial data. We may also have other comments for management on matters we have observed and possible ways to improve the efficiency of operations or other recommendations concerning the internal control structure. With respect to these other communications, it is our practice to discuss all comments, i

38、f appropriate, with the level of management responsible for the matters prior to their communication to you.Coordination of the Audit Our audit is scheduled for performance and completion this year as follows:,Assistance to be supplied by your personnel, including preparation of schedules and analys

39、es of accounts, is described in a separate attachment. Timely completion of this work will facilitate the conclusion of our audit. We are, of course, available to assist you in other areas that might arise.Fees Our fees are based on the amount of time required at various levels of responsibility, pl

40、us out-of- pocket expenses (travel, printing, telephone, etc.), payable upon presentation of our invoices. We will notify you immediately of any circumstances we encounter which could significantly affect our initial estimate of total fees.We appreciate the opportunity to be of service to you and be

41、lieve this letter accurately summarizes the significant items of our engagement. If you agree with the terms of our engagement as described, please sign the copy of this letter in the space provided and return it to us.Yours very truly,J.E.Boritz Boritz, Kao, Kadous & Co. Accepted By: Title: Preside

42、nt Date: June 21, 200X,Audit Risk Analysis,The probability of rendering an unqualified opinion on F/S that are materially misstatedAuditor needs a good understanding of internal controlManagement misrepresentation fraud,Audit Fieldwork Planning,Preliminary audit programs need to be formulatedStaffin

43、g the auditPre-audit conferenceTwo phases of the audit,Interim Audit,Testing of clients internal controlFinal AuditAudit of transactions and balances,Continuous Auditing,Sophisticated EDP applicationsEmbedded audit modules,Problem 1: Although the CICA Handbook standards provide general guidance, the

44、 application of theses standards is dependent upon particular circumstance. In practice, a professional accountant may encounter situations where CICA Handbook standards do not exist or may not apply. Since there is no substitute for the exercise of professional judgment in the determination of what

45、 constitutes fair presentation and good practice, it has been suggested that too much effort is being directed towards the development of standards. Discuss the issues raised in the above statements. (CICA Adapted),Problem 2 (Chp. 1-13):Daniel Charon is the loan officer of the Georgian Bay Bank. Geo

46、rgian Bay Bank has a loan of $540,000 outstanding from Regional Delivery Service Ltd., a company specializing in the delivery of products of all types on behalf of smaller companies. Georgian Bays collateral on the loan consists of 20 small delivery trucks with an average original cost of $45,000.Ch

47、aron is concerned about the collectibility of the outstanding loan and whether the trucks still exist. He therefore engages Susan Virms , public accountant, to count the trucks, using registration information held by Charon. She is engaged because she spends most of her time auditing used automobile

48、 and truck dealerships and has extensive specialized knowledge about used trucks. Charon requests that Virms issue a report statingWhich of the 20 trucks is parked in Regionals parking lot on the night of June 30. The condition of each truck, using the categories of poor, good, and excellent. The fa

49、ir market value of each truck using the current “blue book” for trucks, which states the approximate wholesale prices of all used truck models based on the poor, good, and excellent categories.Required:a. Identify which aspects of this narrative fit each of the following parts of the definition of a

50、uditing:(1) information.(2) established criteria.(3) accumulates and evaluates evidence.(4) competent, independent person.(5) report of results.b. Identify the greatest difficulties Virms is likely to have doing this assurance engagement.,Problem 3:Raymonde, the owner of a small company, asked Holme

51、s, public accountant, to conduct an audit of the company records. Raymonde told Holmes that an audit is to be completed in time to submit audited financial statements to a bank as part of a loan application. Homes immediately accepted the engagement and agreed to provide an auditors report within th

52、ree weeks. Raymonde agreed to pay Holmes a fixed fee plus a bonus if the loan was granted.Holmes hired two accounting students to conduct the audit and spent several hours telling them what to do. Holmes told the students not to spend time reviewing the controls but instead to concentrate on proving

53、 the mathematical accuracy of the ledger accounts , and summarizing the data in the accounting records that support Raymondes financial statements. The students followed Holmes instructions and after two weeks gave Holmes the financial statements, which did not include footnotes. Holmes reviewed the

54、 statements and prepared an unqualified audit report. The report did not refer to generally accepted accounting principles.Required:Briefly each of the generally accepted auditing standards and indicate how the actions of Holmes resulted in a failure to comply with each standard.Organize your answer as follows:Brief description of GAAS Holmes Actions Resulting in Failure to Comply with GAAS,