Auditing Fundamentals: An Overview
Page 1: Introduction to Auditing
Auditing is a systematic and independent examination of financial information of any
entity, whether profit-oriented or not, and irrespective of its size or legal form, when
such an examination is conducted with a view to expressing an opinion thereon.
Key Objectives of an Audit:
• To express an opinion on whether the financial statements are presented fairly,
in all material respects, in accordance with an applicable financial reporting
framework.
• To detect fraud and errors, although this is not the primary objective.
• To ensure compliance with laws and regulations.
Types of Audits:
• Financial Statement Audit: Examination of financial statements to express an
opinion on their fairness.
• Internal Audit: An independent, objective assurance and consulting activity
designed to add value and improve an organization's operations.
• Government Audit: Audits conducted by government agencies to ensure
accountability and compliance.
• Compliance Audit: Examination to determine whether an entity is following
specific procedures or rules set by another level of management or governmental
body.
Page 2: The Audit Process and Planning
The audit process is a structured approach auditors follow to conduct an examination. It
typically involves several phases:
1. Audit Planning:
• Risk Assessment: Understanding the client's business, industry, and internal
control system to identify areas of potential misstatement.
• Materiality: Determining the significance of an omission or misstatement that
could influence the economic decisions of users.
• Audit Strategy: Developing an overall approach to the audit, including the
nature, timing, and extent of audit procedures.
• Audit Program: A detailed plan outlining the specific audit procedures to be
performed.
2. Risk Response:
• Designing and performing further audit procedures (tests of controls and
substantive procedures) in response to the assessed risks.
3. Audit Evidence:
• Gathering sufficient appropriate audit evidence to support the audit opinion.
4. Reporting:
• Formulating an opinion and issuing an audit report.
Page 3: Audit Procedures and Evidence
Audit procedures are the methods and techniques used by auditors to obtain audit
evidence. The nature, timing, and extent of these procedures depend on the risks
assessed.
Common Audit Procedures:
• Inspection: Examining records or documents.
• Observation: Watching a process or procedure being performed by others.
• Inquiry: Seeking information from knowledgeable persons within or outside the
entity.
• Confirmation: Obtaining direct representation of facts or opinions from a third
party.
• Recalculation: Checking the mathematical accuracy of documents or records.
• Reperformance: Independently executing procedures or controls that were
originally performed by the client.
• Analytical Procedures: Evaluating financial information through the analysis of
plausible relationships among both financial and non-financial data.
Sufficiency and Appropriateness of Audit Evidence:
• Sufficiency: Refers to the quantity of audit evidence.
• Appropriateness: Refers to the quality of audit evidence, including its relevance
and reliability.
Page 4: Internal Controls and Fraud Detection
Internal Control:
Internal control refers to the policies and procedures designed to provide reasonable
assurance regarding the achievement of objectives in the following categories:
• Reliability of financial reporting.
• Effectiveness and efficiency of operations.
• Compliance with applicable laws and regulations.
Auditors assess the client's internal control system to determine the extent to which they
can rely on it. A strong internal control system reduces the risk of material
misstatement.
Fraud Detection:
While the primary objective of an audit is not fraud detection, auditors are required to
obtain reasonable assurance that the financial statements are free from material
misstatement, whether caused by error or fraud. Auditors must:
• Maintain professional skepticism.
• Perform risk assessment procedures to identify risks of material misstatement
due to fraud.
• Respond to identified risks with appropriate audit procedures.
• Communicate identified fraud or suspected fraud to appropriate levels of
management and governance.
Page 5: Audit Reporting and Ethics
Audit Reports:
The culmination of the audit process is the issuance of an audit report, which expresses
the auditor's opinion on the financial statements. Types of audit opinions include:
• Unqualified Opinion (Clean Opinion): The financial statements are presented
fairly, in all material respects. This is the most desirable outcome.
• Qualified Opinion: The financial statements are presented fairly, except for a
specific material misstatement or scope limitation.
• Adverse Opinion: The financial statements are not presented fairly and are
materially misstated.
• Disclaimer of Opinion: The auditor is unable to express an opinion due to a
significant scope limitation.
Professional Ethics and Responsibilities:
Auditors are bound by a strict code of professional ethics. Key principles include:
• Integrity: To be straightforward and honest in all professional and business
relationships.
• Objectivity: To not allow bias, conflict of interest, or the undue influence of
others to override professional or business judgments.
• Professional Competence and Due Care: To maintain professional knowledge
and skill at a level required to ensure that a client or employer receives
competent professional service based on current knowledge and legislation.
• Confidentiality: To respect the confidentiality of information acquired as a result
of professional and business relationships.
• Professional Behavior: To comply with relevant laws and regulations and avoid
any conduct that brings the profession into disrepute.
