Audtheory Concepts

     AUDITING

• Systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of the correspondence between assertions and established criteria and communicating result to intended users

Systematic process: consist of structured, logical, and organized series of steps and procedures.

Objectively obtaining and evaluating evidence:  gathered appropriate audit evidence and                                                                                                                                                                                                                                                                                            evaluate it for affirmation of opinion.       

Assertion about economic action and events: representation of the economic result of operation by entity.(FS, internal operating reports etc….)

Degrees  of confidence: closeness or proximity of assertions with the established criteria.

Established criteria:  benchmark used use to evaluate or measure the subject matter.

Communicating results : presentation of audit findings to the users.

Intended users: individuals or entities that use or rely on audit findings.

** The responsibility for the preparation and presentation of FS ultimately rest with management. The task of the auditor is to test the fairness or reasonableness of these assertions and determine whether they comply with the provision of the PFRS.

Forms of FS assertions

• Existence
• Occurrence
• Completeness
• Right and valuation
• Accuracy
• Cut off
• Classification
• Presentation and disclosure

Transaction cycle in an Audit

1. Financing cycle
2. Personnel/payroll cycle
3. Conversion cycle
4. Expenditure cycle
5. Revenue/receipt cycle

Objective of an audit of FS: Enable the auditor to express an opinion whether the FS are prepared, in all material respects, in accordance with an applicable financial reporting framework.                                                  

Elaborated phrases:

• Expression of an opinion: opinion as to the fairness and reasonableness of FS sand issue written reports.
• In all material respects: concept of materiality recognized in the conduct of the audit.
• Applicable financial reporting framework: PFRS
• Taken as a whole: entirety of all the information contained in a complete set of FS.

4 conditions that create demand for FS Audit (AAA-American Accounting Association)

• Potential conflict between management and users of FS
• Information can have economic consequence for decision makers
• Expertise is often required for preparation and verifying information
• Users are prevented from directly assessing  the quality of information

 Information risks

• Risks that information is misstated and misleading.

Factors contribute to information risk

• Remoteness of information users from the provider. ( lackness of information about day-day transaction to the users)
• Potential bias and motives of information provider
• Voluminous data (errors may exist due to the large number of transaction)
• Complex exchange transaction (complicated transaction more difficult to record)

Approaches that reduce information risks.