TOPIC 2:OBJECTIVES & SCOPE OF

FINANCIAL STATEMENT AUDIT

References: Chapter 6

AUD390 2011

Audit Objectives & Basic Principles Governing An Audit

Auditor’s Responsibility For Detecting Fraud Management Assertions

AUD390 AUDITING DIA

ISA200: …to enable the auditor to express an opinion whether the FS are prepared, in all material respects in accordance with an identified reporting framework

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Statutory requirement under CA Act Checking on the reliability of FS Provides assurance to the users as to the

truth & fairness of FS Help owners access how well managers

have discharge their stewardship duties

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ISA200 that an audit is accordance with ISAs is designed to provide reasonable assurance that the financial statements taken as whole are free from material misstatements.

AUD390 AUDITING DIA

Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatements. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.

ISA320

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MaterialityInformation is material if its omission or

misstatement could influence the economic decision of users taken on the basis of the FS

MisstatementA mistake in financial information which

would arise from errors and fraud

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2 types of misstatements are errors & fraud Error

o Unintentional misstatement of the FSo For e.g.

1. Mistake in extending prices times quantity on sales invoice

2. Overlooking older raw materials in determining the lower of cost or market for inventory

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Fraudo Intentional misstatement of the FSo 2 types:

1. Misappropriation of assets, often called as defalcation or employee fraud E.g. a clerk taking cash at the

time a sale is made

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2. Fraudulent financial reporting, often called as management fraud E.g. intentional overstatement of

sales near the balance sheet date to increase reported earnings

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Reasonable Assurance Assurance ~ the level of certainty that the

auditor has obtained at the completion of the audit

Reasonable, but not absolute assurance ~ the auditor is not an insurer or guarantor of the correctness of the FS

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Reasons why the auditor is responsible for reasonable but not absolute assurance:1. Most audit evidence results from testing

a sample of population2. Accounting presentation contain complex

estimates, which involve uncertainty & can be affected by future events

3. Fraudulent prepared financial statements are difficult for the auditor to detect

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Financial Statements

ManagementAssertions

Audit Objectives

AuditPrograms

Audit Evidence

Audit Reports

 Preparation of financial statements Maintaining adequate accounting records

and internal control Apply appropriate accounting policies Safeguard of company’s assets Management’s responsibility for the

fairness of the representations (assertion) in the FS carries with it the privilege of determining which disclosures it considers necessary

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In Malaysia, it is become a practice for many public companies to

include a statement about management responsibilities and

relationship with the CA firms

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Implied or expressed representations by management about classes of transactions and related accounts in the financial statements

Act as criteria that management uses to record and disclose accounting information in financial statements

Refer to the definition of auditing … a comparison of information (financial statements) to established criteria (assertions established according to approved accounting standards)

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ISA500 Audit Evidence classifies assertion into 7 categories:

1. Existence2. Occurrence3. Rights and obligations4. Completeness5. Valuation or allocation6. Measurement7. Presentation and disclosure

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Concern whether assets, obligations and equities included in the balance sheet actually existed on the balance sheet date

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Concern whether recorded transactions included in the FS actually occurred during the accounting period

E.g. management asserts that recorded sales transactions represent exchanges of goods or services that actually took place

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Concern whether assets are the rights of the entity & liabilities are the obligations of the entity at a given date

E.g. management assets that assets owned by the company or that amounts capitalized or leases in the balance sheet represent the cost of the entity’s rights to leased property

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Concern whether all transactions and accounts that should be presented in the FS are included

E.g. management asserts that all sales of goods and services are recorded and included in the FS

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Concern that whether assets, liability, equity, revenue and expense accounts have been included in the FS at appropriate amount

E.g. management asserts that trade account receivable included in the balance sheet are stated at net realizable value

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Concern whether a transaction or event is recorded at that the proper amount & revenue and expense are allocated to the proper period

E.g. management asserts that property is recorded at historical cost and that such cost is systematically allocated to the appropriate accounting period through depreciation

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Concern whether components of FS are properly combined or separated, described and disclosed

E.g. management asserts that obligations classified as long-term liabilities is the balance sheet will not mature within 1 year

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1. Objectives of an audit2. Why there is a need for audit?3. State whether you agree or disagree with the following statements? Justify your

reasons.a) An auditor responsible to ensure the correctness of the financial statement of

the company.b) An auditor’s job is to ensure the correctness of the accounting records of the

company.c) An audited financial statements which has been given a “true and fair” opinion

is free from errors and misstatements.4. Distinguish between management assertions of valuation and measurement5. Match the situation to the management assertions

a) The account and transaction that should be included are included and the financial statements are completed.

b) Assets’ liabilities, equity, revenues and expenses are appropriately valued and are allocated to the proper accounting period.

c) Amount of assets shown in the financial statement are properly presented and disclosed.

d) The assets are the right of the entity and the liabilities are its obligations.e) The assets and liabilities exist and the recorded transactions have occurred.

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