Chapter 1

An Introduction
to Assurance and
Financial
Statement
Auditing
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The Study of Auditing
The study of auditing is different from other
accounting courses that you have taken because …

OTHER COURSES AUDITING

Rules, techniques Analytical and

and computations logical skills
to prepare and
analyse financial Much more
information conceptual in
nature

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The Demand for Auditing and
Assurance

The development of the corporate form

of business and the expanding world
economy over the last 200 years have
given rise to an explosion in the
demand for assurance provided by
auditors.

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Principals and Agents
A public company is a company that sells its
stocks or bonds to the public, giving the
public a valid interest in the proper use, or
stewardship, over the company’s resources.

Stockholder
Managers
s

Agents Principals

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 The Role of Auditing
Figure 1-1 Overview of the Principal-Agent Relationship Leading to the
Demand for Auditing

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 The Role of Auditing

Table 1-2 Summary of Management Assertions by Category

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The Role of Auditing

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Auditing and Assurance
Defined

Auditing Assurance

A systematic process of objectively

obtaining and evaluating evidence
regarding assertions about economic
actions and events to ascertain the
degree of correspondence between
those assertions and established
criteria and communicating the results
to interested users.

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 Auditing and Assurance
Defined

Auditing Assurance

An engagement in which a practitioner

expresses a conclusion designed to
enhance the degree of confidence of
the intended users other than the
responsible party about the outcome of
the evaluation or measurement of a
subject matter against criteria.

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Overview of the Financial
Statement Audit Process

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Fundamental Concepts in Conducting
a Financial Statement Audit

Audit
Risk

Materiality Evidence

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 Materiality

Misstatements, including omissions,

are considered to be material if
they, individually or in the
aggregate, could reasonably be
expected to influence the economic
decisions of users taken on the
basis of the financial statements.

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 Audit Risk
Audit risk is the risk that the auditor expresses an
inappropriate audit opinion when the financial
statements are materially misstated.

The auditor’s report with Reasonable assurance

an unmodified opinion implies some risk that a
states that the audit material misstatement
provides only reasonable could be present in the
assurance that the financial statements and
financial statements do the auditor will fail to
not contain material detect it.
misstatements.
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 Evidence Regarding
Management Assertions
Evidence that assists the auditor in evaluating
management’s financial statement assertions
consists of the underlying accounting data and any
additional information available to the auditor,
whether originating from the client or externally.

Reliability – Can the

Relevance – Is the
information be relied upon
information related to
to signal the true state of
the specific assertion
the specific assertion being
being tested?
tested?

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Sampling: Inferences Based on
Limited Observations

Auditors use a sampling approach to examine a

subset of the transactions based on previous audits,
an understanding of the company’s internal control
system, or knowledge of the company’s industry.

It would be too costly

for the auditor to
examine every
transaction.

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Major Phases of the Audit
• Client acceptance/continuance
• Preliminary engagement activities
• Plan the audit
• Consider internal control
• Audit business processes and related
account (e.g. revenue generation)
• Complete the audit
• Evaluate results and issue audit report
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Issue the Audit Report

The auditor’s report is the main product

or output of the audit.
The audit report with an unmodified
(‘clean’) opinion is the most common
type of report issued.

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 Issue the Audit Report
The Auditor’s Standard Report with an Unmodified Opinion

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Issue the Audit Report

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Issue the Audit Report
The title line of the audit report includes the word
‘Independent’, and usually, the report is
addressed to the stockholders of the company.
The audit report includes an introductory
paragraph, a management’s responsibility
paragraph, an auditor’s responsibility
paragraph, and an auditor’s opinion paragraph.
The audit report is signed and dated.

Unmodified Qualified Adverse

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Issue the Audit Report

The auditor may issue a modified opinion.

Suppose an auditee’s financial statements
contain a misstatement that the auditor
considers material and the client refuses to
correct the misstatement. The auditor will
likely qualify the opinion, explaining that the
financial statements are fairly stated except for
the misstatement identified by the auditor.

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Issue the Audit Report
The auditor may issue an adverse opinion.
Suppose a client’s financial statements contain a
material misstatement and the auditor
considers the significance of the effect on the
financial statements of the material
misstatement pervasive. Given such a
situation, the auditor will issue an adverse
opinion, indicating that the financial
statements are not fairly stated and should not
be relied upon.
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 Auditing Demands Logic,
Reasoning and Resourcefulness

An auditor needs to understand more than just the

accounting concepts and techniques.
Auditing is a fundamentally logical process of thinking
and reasoning – so use your common sense and
reasoning skills!
As you learn new auditing concepts, take some time to
understand the underlying logic and how the
concepts interrelate with other concepts.
Being a good auditor sometimes requires imagination
and innovation.

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