AUDITING

: an introduction

Quantum Consulting
New Comers Training
13 March 2008

ACCOUNTING SERVICE vs AUDITING

Transaction
.

Document
.

Journal
Voucher

General
Ledger

Accounting Flow: Upward

Auditing Flow

Listings &
Schedules

: Backward

Income
Statement

Balance
Sheet

Trial
Balance

ACCOUNTING SERVICE vs AUDITING

ACCOUNTING
SERVICE

AUDITING

No Licensed Signed
Report

Licensed Signed Report

PSAK standard

PSAK standard
SPAP standard
BAPEPAM std

No Determined
Procedure

Determined Procedure

Proper Evidence

Sufficient Persuasive
Evidence

True

Fairness

RISK BASED AUDIT - Risk

INHERENT RISK
CONTROL RISK
DETECTION RISK
AUDIT RISK

AR = IR x CR x DR

RISK BASED AUDIT

Materiality

RISK BASED AUDIT

Materiality

AUDIT MATERIALITY
PM Planing Materiality
TE Tolerable Error
SAD Summary of Audit Differences

RISK BASED AUDIT Materiality

PM is our preliminary estimate of materiality made during

planning, and is used in developing the overall scope of
our audit procedures.

TE is a percentage of PM and allows us to take PM to

the level of the individual account or group of accounts

As a team, we also set a Summary of Audit Differences

(SAD) nominal amount. Differences above this amount
are included as audit differences on the SAD, and we
strongly encourage the client to record the adjustment.

If a difference is below this amount, it is not included on

the SAD.

RISK BASED AUDIT PM

5% - 10%

Pretax Income

For continuing operations

0,5% - 1%

Sales

If operating results at or near break even, or

fluctuates between net profits and net losses
from year to year, or persistent operating
losses, but operating losses is an appropriate
basis for PM.

1% - 2%

Gross Margin

If operating results at or near break even, or

fluctuates between net profits and net losses
from year to year, or persistent operating
losses, but operating losses is an appropriate
basis for PM.

1% - 5%

Shareholders
Equity

When operating results are so poor that

liquidity or solvency are more critical
concerns, or when financial statement user
focus more on equity rather than on results of
operations.

2%-5%

EBITDA

For Companies with publicly traded debt, but

not publicly traded shares, or when analysts
focus on EBITDA.

RISK BASED AUDIT TE

50%

Planning
Materiality

General Rules

75%

Planning
Materiality

When we expect all gross audit differences

(recorded and unrecorded) for the whole audit
to be 25% or less of PM. TE higher than 50%
is revaluated when errors are found

RISK BASED AUDIT SAD

5%

Tolerable Error

General Rules

Post all errors to SAD

DATA PROCESS

DATA PROCESS - brief

Routine

data processes

Purchase & Account Payable (debit side)

Cost of Good Sold & Inventory (credit side)

Non-routine

Physical counting

Accounting

data processes
Estimate

Allowance for obsolesces & slow-moving

MANAGEMENT ASSERTIONS
Assertions

Existence

Completeness

Valuation

Right & Obligation

Presentation & Disclosures

7 CONTROL OBJECTIVES
Real
Recorded
Valuation
Timeliness
Completeness
Summarization
Presentation

& Disclosures

7 CONTROL OBJECTIVES
Example
Control
Objectives

Possible Error Cash Receipts

Real

Debits to cash accounts are not represented by

actual cash receipts.

Recorded

Actual cash receipts are not recorded.

Valuation

Recorded cash receipts do not agree with the

amount deposited.

Timeliness

Current cash receipts are recorded in

subsequent period.

Timeliness

Subsequent cash receipts are recorded in the

current period.

Completeness

All cash receipts are not debited to cash

accounts.

Completeness

Debits to cash accounts are not for cash

receipts.

Summarizatio
n

Cash receipts register is not correctly totaled

Presentation
& Disclosures

Totals in cash receipts register not correctly

posted to general ledger

Presentation
& Disclosures

Cash receipts information is not correctly

posted to the
cash receipts register.

AUDIT APPROACH

Transactions Approach

Balance Approach

BALANCE APPROACH Testing

Test

of Transactions
Subtantive Test of Transaction
Test

of Details of Balances

BALANCE APPROACH Sections

A Permanent
B Control
C Cash & Banks
D Time Deposits
E Receivables
F Inventory
G Prepayments &
Advances
H Investment
I Intercompany
J Other Assets

K Fixed Assets
L Intangible Assets
N Accounts Payables
O Taxations
P Accruals
Q Loan
S Commitments &
Contigencies
T Equity
U1 Revenue
U2 Expenses
V Subsequent Event

THANK YOU