Chapter 2

The Financial
Statement
Auditing
Environment

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 LO# 1

Types of Auditors

External/Independent
Internal Auditors
Auditors

Government
Forensic Auditors
Auditors

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 Types of Auditors
 External/Independent Auditors

• May practice as sole proprietor or as a member of a

CPA/audit firm
• Are not the employees of the entities being audited
• Provide a range of both assurance and non-
assurance services to their clients
 Types of Auditors
 Internal Auditors

• Are the employees of the entities being audited

• Conduct financial, internal control, compliance,
operational and forensic audits within their
organization
• Provide assurance and consulting services to their
entities
 Types of Auditors
 Government Auditors

• Are employed by government agencies

• Tax officers, State Auditors, Government Inspectors,
…
 Types of Auditors
 Forensic Auditors

• Are employed by corporations, government

agencies, public accounting firms, and consulting
and investigating firms
• Specially trained in detecting, investigating, and
deterring frauds and white-collar crime
 LO# 1

Types of Audits

Financial Internal Control

Statement Audit Audit

Compliance Audit Operational Audit

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 Types of Audits
 Financial Statement Audit

To obtain reasonable assurance about whether the

financial report as a whole is free from material
misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether
the financial report is prepared, in all material
respects, in accordance with an applicable financial
reporting framework
 Types of Audits
 Internal Control Audit

• Required by public companies after the issuance of

SOX 2002 (Sarbanes Oxley Act)
• Provide an opinion on the effectiveness of internal
control
• An integrated audit of internal control and financial
statements
 Types of Audits
 Compliance Audit

Determine the extent to which rules, policies, laws,

covenants, or government regulations are followed by
the entities being audited
e.g., examination of tax returns of individuals or
companies by the tax authorities
 Types of Audits
 Operational Audit

• A systematic review of part or all of an

organization’s activities to evaluate whether
resources are being used effectively and efficiently
• Assess performance, identify area for improvement,
and develop recommendations
 LO# 2

Types of Audit, Attest, and

Assurance Services
Audit Services:
Internal Control Audits, Compliance Audits, Operational
Audits, Forensic Audits
Attest Services:
Reporting on nature and quantity of inventory stored in a
client’s warehouse so that the client can obtain a bank loan
Assurance Services:
Auditing is a specialized form of assurance service
Non-assurance Services:
Tax Preparation and Planning Services, Management
Advisory Services, Compilation and Review Services
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 LO# 3

Public Accounting Firms

Public accounting firms range in size from a single proprietor
to thousands of owners (or “partners”) and thousands of
professional and administrative staff employees.

Big 4 Mid-Tier Regional Local

PwC Grant Thornton

EY BDO Seidman
RSM McGladrey
Deloitte
KPMG
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Certified Public Accountant (CPA)

Qualification
Experience

Certificate

A CPA
14
 Certified Public Accountant (CPA)

An auditor must meet the following standards (Article 14 - Law on

Independent Audit):
a) Having full capacity for civil acts;
b) Having good professional ethics, sense of responsibility,
integrity, honesty, and objectivity;
c) Having degree of university or higher in finance, banking,
accounting, auditing disciplines or other disciplines as
prescribed by the Ministry of Finance;
d) Having an auditor’s certificate in accordance with
regulations the Ministry of Finance (Vietnam CPA).

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 Certified Public Accountant (CPA)
Conditions for the candidates: (Circular No 129/2012/TT-BTC )
- Professionally ethical, honest, upright, and law-abiding;
- Having the Bachelor’s degree or higher in finance, banking,
accounting, audit;
- Having worked in finance or accounting for at least 60 months from
the month of graduation written on the higher education graduation
decision at the time of exam registration; or having worked as an
audit assistant in an audit firm for at least 48 months from the month
of graduation written on the higher education graduation decision at
the time of exam registration;
- Completely and correctly submit the exam application and fee as
prescribed.

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 Certified Public Accountant (CPA)
Candidates for Audit practitioner certificates must take the
tests on 7 subjects:
1. Economic legislation and the Law on Enterprises;
2. Advanced finance and financial management;
3. Advanced tax and tax administration;
4. Advanced managerial and financial accounting;
5. Advanced audit and assurance services;
6. Advanced financial analysis;
7. Foreign languages: English, Russian, French, Chinese,or
German.
The candidates that pass all 7 subjects, and the total mark (except
of foreign language subjects) is 38 or more, are considered
passed.

17
 5. Auditor, Audit firms and Professional
bodies
b. Audit firms
Partner

Manager

Senior

Staff/Assistant

Career Path
18
 LO# 3

Audit Teams

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 LO# 4

Government Regulation
In 2002, Congress passed the
Sarbanes-Oxley Public Company
Accounting Reform and Investor
Protection Act.

In 2010, Congress passed the Dodd-

Frank Wall Street Reform and
Consumer Protection Act.

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 LO# 5

Society’s Expectations and the

Auditor’s Responsibilities
The auditor has a responsibility to plan and
perform the audit to obtain reasonable
assurance about whether the financial
statements are free of material
misstatement, whether caused by error or
fraud.
Because of the nature of audit evidence and the
characteristics of fraud, the auditor is able to obtain
reasonable, but not absolute, assurance that material
misstatements are detected.

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 LO# 6

Context of Financial Statement

Auditing
The primary context with which an auditor is concerned is the industry or
business of his or her audit client. In other words, the context provided by the
client’s business impacts the auditor and the audit, and is thus a primary
component of the environment in which financial statement auditing is
conducted.

Thought Question:
How would your concerns about the
inventory account differ for a Computer
Hardware Manufacturer and a Jewelry
Store?
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 LO# 7

A Model of Business
Business organizations exist to create value for their
stakeholders. Due to the way resources are invested and
managed in the modern business world, a system of
corporate governance is necessary, through which
managers are overseen and supervised.

Board of Directors

Audit
Committee

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 LO# 8

An Overview of Business
Figure 2-1 An Overview of Business

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 LO# 9

Organizations That Affect the

Public Accounting Profession in US
Public Company
Securities and Exchange
Accounting Oversight
Commission (SEC)
Board (PCAOB)

American Institute of
Financial Accounting
Certified Public
Standards Board (FASB)
Accountants (AICPA)

International Auditing and

International Accounting
Assurance Standards
Standards Board (IASB)
Board (IAASB)

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 Organizations That Affect the LO# 9

Public Accounting Profession in

Vietnam
State Securities
Commission (SSC)

Vietnam Association of
Ministry of Finance Certified Public
Accountants (VACPA)

International Accounting
Standards Board (IASB)

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 LO# 10,11

Auditing Standards
Auditing standards serve as
guidelines for and measures of
the quality of the auditor’s
performance.

Auditing
PCAOB Standards IAASB
Board

Public Nonpublic > 100

Companies Companies Countries
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 LO# 10,11

GAAS - PCAOB

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 LO# 10,11

Principles Underlying an Audit -

ASB
Purpose:
To express an opinion on the financial statements prepared by management,
whose responsibility is to prepare the financial statements and to provide the
auditor with information necessary to conduct the audit
Responsibilities:
Have competence and capability; comply with ethical requirements; maintain
professional skepticism; exercise professional judgment

Performance:
Sufficient appropriate audit evidence supporting reasonable (not absolute)
assurance that the financial statements are free of material misstatement

Reporting:
Express an opinion, in the form of a written report, based on an evaluation of the
audit evidence obtained; or state that an opinion cannot be expressed

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 LO# 12

Statements on Auditing Standards

(SAS)—Interpretations of GAAS

GAAS and SAS are considered to be minimum

standards of performance for auditors.

PCAOB adopted, on an
interim basis, GAAS and
SAS existing in 2003.
Standards issued by
PCAOB are called
Auditing Standards (AS). 2-30
 LO# 13

Ethics, Independence, and the

Code of Professional Conduct
Code of
Professional
Conduct

Principles

Rules of Conduct

Interpretations
of the Rules
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End of Chapter 2

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