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An audit is an evaluation of an organization's financial and other policy documents. They are usually performed to determine if full and complete records are being maintained and whether these records can track all income and expenses as well as justify that funds have been spent in following the appropriate guidelines. The audit also assures the owner and any other interested party that the reports are valid and reliable. Audits may be performed internally (conducted by an organization's employees, typically to prevent fraud or assess internal controls) or externally (performed by outside parties to ensure objectivity - the outside parties are usually certified public accountants who write an opinion how accurately and fairly financial statements represent an organization's financial position).(What is an audit?). In other words an audit consists of a methodical review an objective examination of an enterprise's financial statements. The objective of the auditor's examination is to express an opinion on the financial statements. This expression takes the form of an audit report. (Eric A1-3)
The auditor, which we will talk about its functions later on, is responsible for the performance of a properly planned and executed audit .The criteria for such an audit are the ten generally accepted auditing standards (GAAS).
Statements on Auditing Standards (SASs) are interpretations of GAAS issued by Auditing Standards Board (ASB) of the AICPA .Note that compliance with GAAS is mandatory on all audit engagements.
What are the independent audit functions?
The financial statements of an enterprise are prepared by the management of the enterprise, not by the independent auditor. Further, the financial statements are the product and property of the enterprise; the independent auditor merely audits and expresses an opinion on them. The expression of an opinion by the independent auditor is known as the "audit function."
1. Company's Management = Financial Statements
2. Auditors = Expression of opinion.
The auditor's report gives credibility to the financial statements. The auditors, as a group independent of management, have an objective view and can report on a company's activities without bias or conflict of interest. Without a report from an independent auditor, a company's financial statements would be meaningless, because the public would have little faith financial statements issued by the inherently biased company.
An examination is made of a company's financial statements:
1-The auditor carries out this examination by following the ten Generally Accepted Auditing Standards (GAAS) and all of the official pronouncements that explain and interpret GAAS.
2- The auditor must be:
(1) As to accounting (knowledge of GAAP)
(2) As to auditing (knowledge of GAAS)
(3) As to industry (particular business)
3-The audit should be planned and performed with an attitude of "professional skepticism," whereby the auditor neither assumes management is dishonest nor assumes unquestioned honesty.
The auditor must then report his or her findings based upon the evidence examination:
1. The primary assertion is whether the statements are "presented fairly "in accordance with GAAP (Generally Accepted Accounting Principles).
a. This decision as to fair presentation is a judgment call by the auditor. The American institute of Certified Public Accountants (AICPA) defines fair presentation as follows: the financial statements reflect the underlying transaction of the company in a manner that represents the financial statements within a range of acceptable.
b. GAAP sources are further discussed in the Appendix.
2. Most audits are preformed not only for the primary benefit of the stockholders, but also for any interested outside parties. (Eric A1-3)
What are the types of auditing?
Internal auditing is a profession and activity involved in helping organizations achieve their stated objectives. It does this by using a systematic methodology for analyzing business processes, procedures and activities with the goal of highlighting organizational problems and recommending solutions. Professionals called internal auditors are employed by organizations to perform the internal auditing activity.
-The range of internal auditing within an organization is wide and may engage topics such as the reliability of financial reporting, the effectiveness of operations, protecting assets, deterring and investigating fraud, and compliance with laws and regulations.
-Internal auditing often involves measuring agreement with the entity's policies and procedures, but internal auditors are not responsible for the implementation of company activities; they give their opinion to management and the Board of Directors (or similar oversight body) regarding how to better execute their responsibilities. Internal auditors may have a variety of higher educational and professional backgrounds as a result of their wide range of participation.
-All the publicly-traded corporations usually have an internal auditing department, which is directed by a Chief Audit Executive ("CAE") that is responsible of reporting to the Audit Committee of Board of Directors, which will in his case report finally to the Chief Executive Officer.
-There are a number of international standard institutions that are setting rules, one of the biggest one is Institute of Internal Auditors (IIA) (Internal Auditor).
What is the Institute of Internal Auditors?
Established in 1941, The Institute of Internal Auditors (IIA) is a guidance-setting body. Serving members in 165 countries, The IIA is the internal audit profession's global voice, chief advocate, recognized authority, and principal educator, with global headquarters in Altamonte Springs, Fla., United States.
The stated mission of The Institute of Internal Auditors is to provide "dynamic leadership" for the global profession of internal auditing. This includes:
-Advocating and promoting the value that internal audit professionals add to their organizations.
-Providing comprehensive professional education and development opportunities; standards and other professional practice guidance; and certification programs.
-Researching, disseminating, and promoting to practitioners and stakeholders knowledge concerning internal auditing and its appropriate role in control, risk management, and governance.
-Educating practitioners and other relevant audiences on best practices in internal auditing.
-Bringing together internal auditors from all countries to share information and experiences. (Why auditing is important?)
The IIA has three levels of Professional Standards:
-Standards and Code of Ethics: These guidelines are mandatory for IIA members and internal audit organizations claiming to complete audits to IIA standards around the world. The Standards are recorded in what is referred to as the "Red Book".
- Practice Advisories: Practice Advisories are not guidelines, but are strongly recommended. They help define and explain.
- Development and Practice Aids: Includes a variety of materials that are developed and/or endorsed by The IIA, including research studies, books, seminars, conferences, and other products and services related to the professional practice of internal auditing.
Global Technology Audit Guide (GTAG)
GTAGs are written in straightforward business language to address a timely issue related to information technology (IT) management, control, and security. To date, The IIA has released GTAGs on the following topics:
-GTAG 1: Information Technology Controls
- GTAG 2: Change and Patch Management Controls: Critical for Organizational Success
- GTAG 3: Continuous Auditing: Implications for Assurance, Monitoring, and Risk Assessment
- GTAG 4: Management of IT Auditing
- GTAG 5: Managing and Auditing Privacy Risks
- GTAG 6: Managing and Auditing IT Vulnerabilities
- GTAG 7: Information Technology Outsourcing
- GTAG 8: Auditing Application Controls
- GTAG 9: Identity and Access Management
- GTAG 10: Business Continuity Management (Institute of Internal Auditors).
Certified Internal Auditor (CIA)
The IIA offers the most important certified title which is the CIA. It is a worldwide recognized certification for internal auditors, and is a certification by which individuals may show their capability and professionalism in the internal audit field. Moreover, today there is a lot of CIA that are Vice Presidents, Senior Internal Audit Managers, Directors and Chief Audit Executives in top global MNC companies leading internal audit functions in their respective companies. So the CIA is very relevant to internal audit profession.
Other Certificates Offered by the IIA:
-Certification in Control Self-Assessment (CCSA)
- Certified Government Auditing Professional (CGAP)
- Certified Financial Services Auditor (CFSA)( Certified Internal Auditor )
An external auditor is an audit professional who performs an audit on the financial statements of a company, government, individual, or any other legal entity or organization, and who is independent of the entity being audited. Users of these entities' financial information, such as investors, government agencies, and the general public, rely on the external auditor to present an unbiased and independent evaluation on such entities. They are distinguished from internal auditors for two main reasons:
-The internal auditor's primary responsibility is appraising an entity's risk management strategy and practices, management (including IT) control frameworks and governance processes.
- They do not express an opinion on the entity's financial statements. Besides providing audit services, external auditors also provide different other kind of services. Most common of them are reviews of financial statements and compilation. In review auditors are generally required to tick and tie numbers to general ledger and make inquiries of management. In compilation auditors are required to take a look at financial statement to make sure they are free of obvious misstatements and errors.
The primary role of external auditors is to express an opinion on whether an entity's financial statements are free of material misstatements. Some people confuse auditors with people who detect fraud but auditors have nothing to do with fraud detection exclusively. Auditors just want to make sure that company's financial statements are true and fair representation of its actual position. If they come across any fraud related information, it is their responsibility to bring it to the management's attention and consider withdrawing from the engagement if management does not take appropriate actions. Normally, external auditors review the entity's information technology control procedures when assessing its overall internal controls. They must also investigate any material issues raised by inquiries from professional or regulatory authorities, such as the local taxing authority. For public companies listed on stock exchanges in the United States, the Sarbanes-Oxley Act (SOX) has imposed stringent requirements on external auditors in their evaluation of internal controls and financial reporting.
The independence of external auditors is crucial to a correct and thorough appraisal of an entity's financial controls and statements. Any relationship between the external auditors and the entity, other than retention for the audit itself, must be disclosed in the external auditor's reports. These rules also prohibit the auditor from owning a stake in public clients and severely limit the types of non-audit services they can provide. In the United States, certified public accountants are the only authorized non-governmental type of external auditors who may perform audits and attestations on an entity's financial statements and provide reports on such audits for public review. In the UK, Canada and other Commonwealth nations Chartered Accountants have served this role (External Auditor).
Certified Public Accountant (CPA)
Certified Public Accountant (CPA) is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA.
The primary functions CPA fulfills relate to assurance services, or public accounting. In assurance services, also known as financial audit services, CPAs attest to the reasonableness of disclosures, the freedom from material misstatement, and the adherence to the applicable generally accepted accounting principles (GAAP) in financial statements. CPAs can also be employed by corporations-termed "the private sector"-in finance functions such as Chief Financial Officer (CFO) or finance manager, or as CEOs subject to their full business knowledge and practice. These CPAs do not provide services directly to the public.
Although some CPAs serve as business consultants, the consulting role is under scrutiny following the corporate climate in the aftermath of the Enron scandal. This has resulted in divestitures in the consulting divisions by many accounting firms. This trend has since reversed. In audit engagements, CPAs are (and have always been) required by professional standards and Federal and State laws to maintain independence (both in fact and in appearance) from the entity for which they are conducting an attestation (audit and review) engagement. However, most individual CPAs who work as consultants do not work as auditors, or vice versa.
CPAs also have a niche within the income tax preparation industry. Many small to mid-sized firms have both a tax and an auditing department.
Whether providing services directly to the public or employed by corporations or associations, CPAs can operate in virtually any area of finance including:
- Assurance and Attestation Services
- Corporate Finance (Merger & Acquisition, initial public offerings, share & debt issuing)
- Corporate Governance
- Estate Planning
- Financial Accounting
- Financial Analysis
- Financial Planning
- Forensic Accounting (preventing, detecting, and investigating financial frauds)
- Income Tax
- Information Technology, especially as applied to accounting and auditing
- Management Consulting and Performance Management
- Tax Preparation and Planning
- Venture Capital
While some CPAs are generalists and offer a range of services (especially those in small practices) many CPAs specialize in just one area and do not provide all the services listed above. (Certified Public Accountant)
What are the Generally Accepted Auditing Standards?
The ten Generally Accepted Auditing Standards compromise the foundation of auditing. These standards are qualitative in nature and set minimum requirements for the profession. Auditing standards differ from auditing procedures in that "procedures" relate to be performed, whereas "standards" deal with measures of audit quality and the objectives to be achieved in an audit. Auditing standards (as distinct from auditing procedures) concern themselves not only with the auditor's professional qualities, but also with the judgment exercised in the performance of the examination and in the auditor's report.
The General Standards:
"The auditor must have adequate training and proficiency to perform the audit."
Comment: the auditor must have the education in accounting, the practical experience in auditing, and knowledge of the practical industry being audited.
"The auditor must maintain independence in mental attitude in all matters relating to the audit".
Comment: This standard is often called the cornerstone of the profession since it is necessary to add credibility to what we do. It is defined as independence in fact and appearance. The auditor is judicially impartial.
a. Independence in Fact and in Appearance
The auditor must be independent in fact and in appearance. Auditors must leave no doubt as to their independence in the mind of the general public. Activities or relationship that even suggest or imply a possible lack of independence must be avoided by the auditors.
For example, assume the auditor owns an insignificant amount of the client's common stock, and the auditor can in no way influence corporate policy. Thus in fact, the auditor is independent. However, the appearance is nonetheless impaired. Any direct ownership of a company, no matter how small, will impair independence. (An indirect financial interest that is immaterial does not impair independence. (Eric A1-8)
Under the Sarbanes-Oxley Act of 2002, an accounting firm may not provide audit services to a public company if a top official of that company is also a previous employee of the accounting firm who worked on the audit during the last year.
"The auditor must exercise due professional care in the planning and performance of the audit and the preparation of the report."
Due professional care impose a responsibility upon each person within an independence auditor's organization to observe the standards of the fieldwork and reporting.
The auditor will be held to exercise the same components of the professional care as a reasonable auditor would exercise, which include good faith, integrity, and diligence, but due professional care does not imply infallibility. Due professional care is concerned with what the auditor does and how well it is done. The exercise of due professional care implies that the auditor will obtain sufficient appropriate audit evidence to limit audit risk to a low level. The high level of assurance expected to be obtained is referred to as "reasonable assurance"; absolute assurance is not possible.
Due professional care also requires the auditor to exercise professional skepticism. Professional skepticism can be defined as the maintenance of an objective attitude throughout the audit, including a question mind and a critical assessment of audit evidence. The auditor neither presumes management dishonesty nor presumes unquestioned management honesty. The auditor needs to exercise professional skepticism throughout the audit process, from engagement planning through conducting fieldwork.
Comment: Often called the "average auditor" concept. The auditor should do what the average auditor would do and never less, including review of work performed by assistants and maintaining an attitude of professional skepticism . Evidence of "due professional care" is indicated by critical management reviews of work performed at every level of supervision. (EricA1-9)
The Standards of Fieldwork
-Planning and Supervision:
"The auditor must adequately plan the work and must properly supervise assistants."
-Internal Control, Entity, and Environment:
"The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statement whether due to error or fraud, and to design the nature, extent, and timing of further audit procedures."
Comment: Appropriate internal controls provide the auditor with confidence that material misstatement will be prevented or detected on a timely basis.
a. Strong controls imply the auditor will require less evidence.
b. Weak controls imply the auditor will require more evidence.
"The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit."
Comment: All specific audit work is performed in order to gather evidence. Virtually no specific audit evidence is required. The auditor applied his or her judgment. (Eric A1-10)
The Standards of Reporting:
Accounting = GAAP
"The auditor must state in the auditor's report whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP)."
Comment: Explicit statement in auditor's report."
"The auditor must identify in the auditor's report those circumstances in relation to the preceding period."
Comment: Implicit in auditor's report."
"When the auditor determines that informative
disclosures are not reasonably adequate, the auditor must so state in the auditor's report."
Comment: Implicit in auditor's report."
"The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor's report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor's report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work if any, and degree of responsibility the auditor is taking, in the auditor's report."
Comment: Explicit statement in auditor's report. (Eric A1-10)
Reports on Audited Financial Statements
The auditor's unqualified report states that the financial statements are presented material respects. The three-paragraph standard report includes all of the following:
"Independent" (auditor's report) must be including in the report title.
The report is generally addressed to the company, its stockholders and/or its board of directors. It generally is not addressed to management.
The introductory paragraph contains the following:
1. A statement that the financial statements as identified in the report were audited.
2. A statement that the financial statements are the responsibility of management and that the auditor's responsibility is to express an opinion.
The scope paragraph contains the following:
1. A statement that the audit was conducted in accordance with United States GAAS;
for audits of issuers, reference is made to PCAOB standards instead of United States GAAS (covered later).
2. A statement that the audit was planned and performed to obtain reasonable assurance that the financial statements are free from material misstatement.
3.Statements that the audit included examining evidence on a test basic; assessing the accounting principles used and significant estimates made by management and evaluating the overall presentation .
4. A statement that the audit provides a reasonable basis for opinion.
e. Opinion Paragraph
The opinion paragraph of the report contains the following:
1. A statement referring to the financial statements specifically identified in the introductory paragraph.
2. An opinion as the fair presentation of the financial statements (ACDO).
3. A statement regarding conformity with United States generally accepted accounting principles. (ACDO)
f. Firm Name
The firm's name, either printer or signed, must in the report. (Eric A1-13)
g. Report Date
The date of the audit report must be included in the report.
1. The report should be dated on or after the date on which appropriate audit evidence, sufficient to support the opinion, has been obtained. Sufficient appropriate audit evidence includes evidence that:
- Audit documentation has been reviewed.
- Financial statements have been prepared.
- Management has taken responsibility for the financial statements.
2. The report date shows the final date the auditor's responsibility.
3. For comparative statements, the date appropriate for the most recent audit should be used. (Eric A1-14)
The Types of Opinions are:
a. Unqualified (clean) opinion
-An unqualified opinion states that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with United States GAAP. The opinion is expressed in the standard report.
-Explanatory language (Modified Unqualified Opinion)
Explanatory language may be added to the auditor's standard (unqualified) report. Certain circumstances, even those not affecting the auditor's unqualified opinion on the financial statements, may require that the auditor add an explanatory (or other explanatory language) to the report.
b. Qualified Opinion (excerptors)
A qualified opinion states that, "except for" the effects of the matter (s) to which the qualification relates, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with United States GAPP.
c. Adverse Opinion
An adverse opinion states that the financial statements do not present fairly the financial position, results of operations, or cash flows of the entity in conformity with United States GAAP.
d. Disclaimer of Opinion
A disclaimer of opinion states that the auditor does not express an opinion on the financial statements because he or she was not able to perform an audit sufficient in scope to render an opinion. (EricA1-16)
Brief summery of when to use different opinions (EricA1-17)
Materiality of problem
Conformity with GAAP
Adherence to GAAS
None or immaterial =
Qualified Opinion (modify opinion paragraph)
Qualified opinion (modify scope and opinion paragraphs)
Highly Material =
Disclaimer of Opinion
REPORTING WITH DIFFERENT OPINIONS
The auditor's current year report will cover all financial statements for all years presented. It is quite possible that different opinions will have been issues for the different years presented years presented. Some examples of varying opinions are included below.
Sample report-unqualified prior year with current year qualified:
INDEPANDENT AUDITOR'S REPORT
The company has excluded, from property and d debt in the accompanying 20*1 balance sheet, certain lease obligations that were entered into in 20*1, which in our opinion, should be (someone might say) capitalized, in order to conform with generally accepted accounting principles. If these lease obligations were capitalized, property would be increased by$-----
Long-term debt by $----- and retained earnings by $------as of December 31, 20*1, and net income and earnings per share would be increased (decreased) by $------and $------- respectively, for the year then ended.
In our opinion, except for the effects on the 20*1 financial statements of not capitalizing certain lease obligations as described in the preceding paragraph, the financial statements referred to above present fairy, in all material respects, the financial position of ABC Company as 31, 20*1 and 20*10, and the results of its operations and its cash flow for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Sample report- unqualified current year with disclaimer on prop years' statements of income retained earnings, and cash flows:
Independent auditor's report [same intro paragraph]
Except as explained in the following paragraph, we conducted our audit in accordance with audits standards generally accepted in the United States of America. Those standards require that we plan and perform our audit to obtain reasonable assurance about whether 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 statement, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
We did observe the taking of the physical inventory as of December 31,20X0, since that date was prior to our appointment as auditors for the company, and we were unable to satisfy ourselves regarding inventory quantities by means of net income and cash flaws for the year ended December 31,20X1.
Because of the matter discussed in the preceding paragraph, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the results of operations and cash flows for the year ended December 31,20X1
In our opinion, the balance sheets of ABC company as of December 31,20X2 and 20X1, and the related statements of income , retained earnings, and cash flows for the year ended December 31,20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the year ended December 31,20X2, present fairly, in all material respects, the financial position of ABC company as of December 31,20X2 and 20X1, and the results of its operation and its cash flows for the year ended December 31,20X2, in conformity with accounting principle generally accepted in the united states of America.
J. Pinkerton snoopington certified public Accountant
July 19, year X
To Management and [those charged with governance-list specific parties]:
In planning and performing our audit of the financial statements of ABC company as of and for the year ended December 31, 20XX, in accordance with auditing standards generally accepted in the united states of America we considered ABC company's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we do not express an opinion on the effectiveness of the Company's internal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses; however, as discussed below, we identified certain deficiencies in control that we consider to be significant deficiencies [and other deficiencies that we consider to be material weaknesses].
A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiency affects the entity's ability initiate, authorize, record , process, or report financial data reliably in accordance with generally accepted accounting principle such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected by the entity's financial statements that is more than is more than inconsequential will not be prevented or detected by the entity's internal control. We consider the following deficiencies to be significant deficiencies in control.
[Describe the significant deficiencies that were identified]
[A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's internal control. We believe that the following deficiencies constitute material weaknesses
[scribe the material weaknesses that were identified]
This communication is intended solely for the information and use of management, [identify the body or individuals charged with governance], others within the organization, and [identify any specified governmental authorities] and is not intended to be and should not be used by anyone other than these specified parties.
J. Pinkerton Snoopington' CPA
[signed by CPA or firm] (Dana S. Beane & Company)
Sample Audit Opinion for Business Entity
Independent Auditors' Report
To the Board of Directors and Shareholders
21We have audited the accompanying balance sheets of X Company as of December 31, 20X2, 20X1 and 20X0, and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20X2, 20X1 and 20X0, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
(Dana S. Beane & Company)
Standard Auditing Procedures
In performing an audit, the auditor gathers evidence using a variety of procedures to accomplish specific objectives. Sampling, which will be covered in Auditing & Attestation 5, is an aspect of the performance of most audit procedures. The specifics for the sampling plan (objective, population, sample size, method of selection) are included in the audit plan for each procedure and are documented along with the results and evaluation of the results.
The following standard procedures are used in very audit as risk assessment procedures tests of controls, or substantive tests.
1. Footing, Crossfooting, and Recalculation
An auditor may verify the mathematical accuracy of statements and schedules by adding down (footing), adding across (crossfooting), or recomputing amount included therein. For example, the auditor may substantiate the valuation of financial accounts and allocation of them such as depreciation, amortization, and accruals by recompuling those items.
Inquiry consists of requesting information from knowledgeable parties both internally (e.g., managers and supervisors) and externally (e.g., attorneys and bankers).
Examples include inquiries about pending litigation or obsolete inventories.
Inquiry is used extensively throughout most audits, bit since inquiry alone is generally considered insufficient, it is most often used in conjunction with other audit procedures in using inquiry, and the auditor should. (Eric A1-31)
a-consider the specific characteristics (knowledge, objectivity, qualifications, etc.) of the person to work the inquiry is directed.
b-ask appropriate questions.
c-evaluates the response and takes appropriate action (e.g., following up with additional inquiry, modifying planned audit procedures, etc.)
Vouching is directional testing in which the auditor examines support for what has been recorded in the records and statements, going from the financial statements back to supporting documents. The objective of vouching is to gather evidence regarding possible overstatement errors (the existence or occurrence assertion).
4. Examination / Inspection
The auditor may inspect or examine records, documents, or tangible assets. Records or documents may be internal or external, and may be in paper or electronic form.
Inspection or examination generally provides evidence about the existence assertion rather than about ownership, rights, obligations, or valuation. Examination may also provide evidence to the exact terms of contracts, loans, and commitments. The procedure of inspecting documents is often referred to as examination of evidence and includes the activities of scanning, scrutinizing, and reading. For example, the auditor may scan or scrutinize entries in general ledger accounts for a period, looking for evidence of unusual amounts or sources of input, which, if found, would be investigated further. Or, the auditor may read the minutes of the board of directors meetings for authorization of treasury stock transactions.
Confirmation is a specific type of inquiry that involves obtaining representations from independent third parties about account balances and transactions or events.
Confirmations are controlled by the auditor in that the auditor selects the parties to be contacted, prepares and mails the confirmation requests, and receives the responses directly from the third parties. Examples include bank confirmations of the amount on deposit or of a loan outstanding, or confirmations of the amount on deposit or of a loan outstanding, or a confirmation from a customer regarding the existence balance at a certain date.
6. Analytical Procedures
Analytical procedure consists of evaluations of financial information made by a study of meaningful relationships among data, to help highlight unusual fluctuations that could the result of errors or fraudulent omissions or overstatements. Scanning may also be considered an analytical procedure, as the auditor uses professional judgment to search for large, significant, or unusual items in the accounting records.
Reperformance occurs when an auditor independently performs procedures or controls that where originally performed as part of an entity's internal control.
Reconciliation substantiates the existence and valuation of account. It involved comparing financial amount from two independent sources for agreement, such as reconciling the physical inventory count with the perpetual inventory records. Other examples include recording the cash balance per the books with the balance per bank, and reconciling lead schedules to general ledger amounts. (Eric A1-32)
Observation occurs when an auditor looks at a process or procedures performed by others. For example, at the beginning of an audit, the auditor may tour the client's facilities to gain an understanding of the client's business, or the auditor may observe the client's employees taking a physical inventory to obtain firsthand knowledge regarding ending inventory.
Note that while observation provides the auditor with direct personnel knowledge. The evidence provided applies only the point in time during which the observation occurred. The auditor should also be aware that a process or procedure may be performed differently when the client is aware that the auditor is observing.
As with vouching, tracing is directional testing. However, tracing is looking for coverage in the opposite direction from vouching. Tracing starts with source documents and traces forward to provide assurance that the event is being given proper recognition in the books and records. The objective of tracing is to gather evidence regarding possible understatement errors (the completeness assertion).
11. Subsequent Event Review
The auditor is required to perform certain procedures for the period after the balance sheet date up to the date of the auditor's report. Evidence not available at the close of the period often becomes available before the auditors complete their fieldwork and write their report. For example, the bankruptcy of the auditor's client's customer shortly probably deteriorated before year-end. The settlement of a pending lawsuit constitutes evidence that a real (rather than a contingent) liability may have existed at year-end. Decreases in long-term dept occurring after year-end may indicate that such dept should be reported as a current liability on the balance sheet. Evidence becoming available after the balance sheet date should be used in making judgments about the valuation of assets and liabilities on the balance sheet date. (Eric A1-33)
The concept of auditing is seen as something relating to verifying the accounts or checking on workers and making sure that assets exist and are protected by contingency plans. So auditing may be associated with periodic reviews made by external checkers-something to be suffered in silence. One thing for sure is that auditing is regarded as nothing at all to do with managing. It is something that is "done" to managers. (Why Auditing)
So auditing is important and useful for stakeholders (i.e. shareholders, bankers, investors etc) that have an interest in public corporations. Stakeholders require an assurance on management behaviors and assertions that they make in financial reports. This is the primary function of external auditors; that is to provide credibility to the financial information that stakeholders need to make sound business decisions. Stakeholders do not need any type of information; they specifically need error free reliable information. (Why auditing is important).