Nature of Auditing



Summary of Chapter 1

Nature of Auditing

The main subject of auditing is gathering the evidence to determine and report the degree of correspondence between the information about something with established criteria. To audit something, you must find information in a verifiable firm and some standards which relevance to this information. Evidence is the main important for auditor, information of evidence can be used by auditor to determining the audited information is in accordance with the establishing criteria, or not.

The Auditor must be someone who qualified enough to understand the criteria of information used and must be competent for knowing the types and amount of evidence needed to reach the proper conclusion after all of the evidence has been examined in the right way. The competence of auditor can be known by observing his or her performance and delve the conclusion. And the last stage of the auditing process is to prepare the AUDIT REPORT, which will be used for communication of the auditor's users.

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Distinction between auditing and accounting

In outline, accounting and auditing have many similar criteria. Accounting talk more about recording, classifying, and summarizing of all economic events to providing financial information (Financial Report). Auditing talk about determining whether the recorded information is properly reflects the real events occur during the accounting period or not.

Economic demand for audit

The risk of information reflects the business decision in the pas was made accurately or not. Auditing can decrease the risk of the information by information that verified by user, the shared information between user and management, and the audited financial statement which means the financial statements are clearly safe for user.

Types of Audits

There are three types of audits, the operational audit, the compliance audit, and audit for historical financial statements. Operational audit is concern about the operational cycle of firm. Compliance audit is concern more in relationship between the firm with other firm or bank. Audit of Historical financial statements only concern in financial statements about it is evidence or resources.

Type of audit-auditor

Auditor discerned in four types, the first is independent certified public accounting firms (Independent CPA), second governmental general accounting office auditor, third internal revenue agents, and the last is internal auditor.

Assurance Services

Assurance service is an independent professional service (abslolutely independent) that improves quality of the information provided by checking and observing all kinds related to the information for decision makers (managers). Assurance service can only be performed by CPA or by a variety of other professionals, so the person should educated enough in accounting.

The Attestation service is a type of an assurance service which CPA firm issues a report about reliability of an assertion which prepared by another party. There are five categories of attestation service, the first is audit of historical financial statements, attestation of internal control over financial reporting (five reports), review of financial statements, attestation services on the information technology, and other attestation service.

Certified Public Accounting (CPA)

To becoming CPAs, we must fill all the three requirement. The first is Educational requirement (bachelor in accountancy), then the uniform CPA examination requirement, and experience requirement.

Summary of Chapter 2

Certified Public Accounting Firms

"CPA Firms is the legal right to perform audit and assurance is granted to CPA firms by the regulation of each state. A CPA firms also provide any other services to their clients, such as managing tax and consulting services." (Auditing 12e, Arens /Beasley/Elder 2008). There are four categories to describe, the Big Four international firms, the National firms, the Regional and large local firms, and the Small local firms.

Activities of CPA Firms

CPA Firms provides any services like audit, attestation, and assurance services. Outside that, there are accounting and bookkeeping services, tax services (calculate and pay the tax), and management consulting services.

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Structure of CPA Firms

There are three main factors that influence organizational structure of all firm, First, The need for independence from the clients, second, the importance of a structure, a good structure will lead to encourage competence, and the last, the increased litigation risk faced by the auditors. Six structures are available for CPA. There are proprietorship (for personal firm), professional corporation, general partnership (for partnership firm), limited liability company, general corporation, and limited liability partnership. Each structure provides a separated entity with the accountant in private.

Securities and Exchange Commission (SEC)

Overall purpose of the SEC (Securities and Exchange Commission) is to assist firm in providing investors the reliable information upon which to make certifiable investment decisions. A good decision will make a good investment.

American Institute of Certified Public Accountants (AICPA)

"AICPA have power to set standards and rules that all members (in whole world) and other practicing CPAs must follow. AICPA establishing standards and rules in the:

1. Auditing standards (IAAS),

2. Compilation and review standards (the financial statements),

3. Other attestation service standards,

4. Consulting service standards,

5. Code of professional conduct

The other functions of AICPA :

1. Writes and grades the CPA examination.

2. Support research by its own staff and provide grants to the others.

3. Publishes many variety of materials (in mass media).

4. Provides seminars and education in many variety of subject matters.

There are five core values in AICPA, first is continuing education and life-long learning, integrity, competence, objectivity, and the last is attuned to broad business issues"

(Auditing 12e, Arens/Beasley/Elder 2008)

Generally Accepted Auditing Standards

"General Standards”

- Adequate training and proficiency

- Independence in all mental attitude

- Professional care

Standards of Field Work

- Have a proper planning and supervision

- Must understanding the entity very clearly

- Sufficient appropriate evidence

Standards of Reporting

- The prepared statements must accordance with GAAP

- Any Circumstances when GAAP not allowed

- Adequacy of disclosures (full disclosure)

- Expression of opinion on financial statements (in notes)"

(Auditing 12e, Arens/Beasley/Elder 2008)

For your information, nowadays almost company in whole world no longer uses GAAP anymore but IFRS, so we use all of the IFRS standards the way we reporting financial statements.

Quality Control

Quality control has many elements within it. Independence, objectivity, integrity, acceptance, personnel management, monitoring, continuation of clients and engagements, and engagement performance are the main elements of quality control.

Summary of Chapter 3

Standard Unqualified Audit Report

"Standard unqualified audit report consist of

1. Title of the report

2. Audit report address

3. Introductory paragraph (first paragraph)

4, Scope paragraph

5. Opinion paragraph(paragraph that consist an opinion of the auditor)

6. Name of CPA firm and signature

7. Audit report date"

(Auditing 123, Arens /Beasley /Elder 2008)

There are several conditions for standard unqualified audit report that should be fulfilled. First, all financial statements are included. All-of-five of financial statement must be completed. Then, the three general standards must have been followed (completely) in all respects on the engagement (in chapter 2). After that, the sufficient evidence has been accumulated properly, to conclude the three standards of fieldwork (in chapter 2) have been met (nothing less than three). Then, financial statements (five report) are presented in accordance with generally accepted standards by accounting principles. The last is no circumstances require the addition of an explanatory paragraph or word modification of the report.

The four categories of Audit Reports started with standard unqualified, then move to unqualified with explanatory paragraph or modified wording. The good one, qualified is the best audit reports, and the last is adverse or disclaimer.

Unqualified Report with Explanatory Paragraph


1. The report lack of application that consist in generally accepted accounting principles standards (now is IFRS)

2. Substantial doubt about going concern (going concern is one of the accounting principles)

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3. The auditor agrees with departure from promulgated accounting principles

4. The Emphasis of a matter

5. Reports that involving other auditors


Materiality is a misstatement in the financial statements. This misstatement would affect the decision maker of a reasonable user whose using it.