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Auditing Theory Module
Auditing Theory Module
Auditing Theory
Review
A Course Module for Students
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Auditing Theory
Review
A Course Module for Students
Prepared by:
Angeli B. Baclea-an, CPA
[email protected]
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BCC VISION
Burauen Community College shall emerge as the
premier local public educational institution in
Eastern Visayas which is responsive to the needs of
the community, and develops students to meet the
economic, social, and environmental challenges as
active participants in shaping the world of the
future.
BCC MISSION
Burauen Community College offers holistic, and
outcomes-based experiential learning to develop
the youth to be responsible individuals with
integrity and service as agents of equality. It will
serve as a venue for the development of individuals
in the areas of academics, research, community
extension, and innovative technology.
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Auditing Theory Review
A Course Module for Students
© 2021
ALL RIGHTS RESERVED. No part of this publication All rights are reserved. No part of
this publication may be reproduced, stored in a retrieval system or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without prior permission of the institution.
This module contains information obtained from highly regarded resources. A wide
variety of references are listed. Reasonable efforts have been made to publish reliable
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For students who want to purchase additional copies of this module, you may
send your request to [email protected] or you may visit the institution
for an in-person request.
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TABLE OF CONTENTS
Preface vi
Prelims
FUNDAMENTALS OF ASSURANCE AND
Module 1 9-21
AUDITING SERVICES
Nature and objective of assurance engagements 10
Elements of assurance engagements 11-13
Types of assurance engagements 13-14
Nature and objective of auditing 15
Factors that affects the need for auditing 15
Theoretical framework of auditing 16
Types of Audit 16
Assessment 17-21
THE RISK-BASED AUDIT 22-31
Module 2 23
Management Assertions 24
Overview of the audit process 25
Preliminary Activities 26
Agreeing on the terms of the engagement 27-31
Assessment
32-41
Module 3 PLANNING THE AUDIT
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Assessment 38-41
References 42
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Preface
The remaining chapters will focus on the discussion of the steps in the
audit process, starting with client acceptance, up to the preparation of
the audit report.
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COURSE OUTLINE
Auditing Theory Review
PRELIMS
I. Fundamentals of Auditing and Assurance Services
A. Introduction to assurance engagements
B. Introduction to auditing
II. Introduction to the audit process
A. Overview of the audit process
B. Assertions
III. Pre-engagement considerations
A. Pre-engagement considerations
B. Engagement letter and its contents
IV. Audit Planning
A. Understanding the Entity & its Environment
B. Performing analytical procedures8
C. Fraud risk factors
D. Concept of materiality
E. Assessment of Audit Risk
F. Audit plan, audit strategy and audit program
MIDTERMS
FINALS
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PART I: PRELIMS
Fundamentals of Assurance
and Auditing Services
CONTENTS
1.1 Introduction to
Assurance Services
1.2 Introduction to
Auditing
OUTCOME/S
LO1. Discuss and explain
the basic concepts and
principles of audit and
assurance.
LO2. Explain how The demand for a dependable financial
financial statement information has essentially evolved throughout
audit affects the the years. Many decision makers rely a lot upon
decision making information provided by others. This need of
process of various various users for more reliable information has
users. increased the demands for the work of
accountants.
2. Subject Matter
The subject matter, and subject matter information, of an assurance
engagement can take in many forms, such as, but not limited to the following:
Subject Matter/
Subject Matter Descriptions Examples
Information
Financial Subject matter information historical or
performance or may be the recognition, prospective financial
conditions measurement, position, financial
presentation and disclosure performance and
represented in financial cash flows
statements.
3. Suitable Criteria
Criteria are the benchmarks used to evaluate or measure the subject matter
including, where relevant, benchmarks for presentation and disclosure. Sited
below are some of the suitable criteria commonly used in assurance
engagements:
(d) Neutrality: neutral criteria contribute to conclusions that are free from
bias.
5. Written Report
The practitioner expresses a conclusion that provides a level of assurance as
to whether the subject matter conforms in all material respects with
identified suitable criteria. The conclusion is documented through a written
report.
As to the Structure
Assurance Engagements
Attestation Engagements
Exhibit 1.2
The relationship among
Audit Engagements assurance, attestation, and
audit engagements
INTRODUCTION TO AUDITING
Financial Consequence
Information Risk
Remoteness
Expertise
Types of Audit
1. As to assertion or data:
A. Financial Statements Audit
B. Operational Audit
C. Compliance Audit
2. As to types of auditor
A. External Audit
B. Internal Audit
C. Government Audit
Comparisons among the types of audit
Operational Compliance
Differences Financial Audit
Audit Audit
ASSESSMENT
CONTENTS
2.1 Overview of the Audit
Process
2.2 Preliminary Activities
OUTCOME/S
LO1. Be able to create a
concept map showing
the flow of each step in
the audit process
LO2. Come up with a
The audit of financial statements
sample engagement generally begins with the financial
letter with all necessary statements prepared by the entity’s
contents. management. Without these financial
statements, there would be no audit to
OBJECTIVES perform. A general approach to auditing
2.1 Identify various financial statements would require
management assertions consideration of financial statements
2.2 Discuss the activities assertions, audit procedures, and audit
considered during the evidence.
preliminary stage of the
audit process. In the conduct of the audit, the auditor
2.3 Define engagement follows a series of steps, known as the
letter and enumerate its audit process. This process is initiated by
contents. performing preliminary activities. The
preliminary activities, also known as pre-
RELEVANT engagement activities, include procedures
PRONOUNCEMENT: regarding acceptance or continuance of
PSA 210: Agreeing on the client relationship, evaluating compliance
Terms of the Engagement with ethical requirements, including
independence, and establishing
PSA 210: Agreeing on the understanding of the terms of the
Terms of engagement.
A CPA firm needs to establish policies and procedures for deciding whether to
accept or continue a client in order to minimize the likelihood of association
with a client whose management lacks integrity. The reputation of a client’s
management could reflect on the reliability on representations.
A. Confidentiality
B. Objectivity
C. Professional Behavior
ASSESSMENT
Pronouncements:
PSA 300: Planning an Audit
of Financial Statement
This enables the auditor to identify and understand the events, transactions,
and practices that, in the auditor’s judgment, may have significant effect on
the financial statements. Obtaining knowledge of the entity and its
environment includes understanding of the following: (Code: INOMIn)
Audit Risk (AR) = Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR)
Risks Relationship
Materiality Views
PSA 320 now clearly requires the auditor to determine three different levels of
materiality, as follows:
B. Performance materiality
It means the amount or amounts set by the auditor at less than the
overall materiality to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality for the financial statements as a
whole.
There is an inverse relationship between materiality and the level of audit risk,
that is the higher the materiality level, the lower the audit risk and vice versa.
Overall Audit Strategy – sets the scope, timing, and direction of the
audit and guide the development of a more detailed audit plan.
Audit Plan – more detailed than the audit strategy. It sets the nature,
timing and extent of audit procedures to be performed by engagement team
members in order to obtain sufficient appropriate audit evidence to reduce risk
to an acceptably low level.
ASSESSMENT
Gleim I.N., Hillison W.A. (Eleventh Edition) AUDITING & SYSTEMS Exam
Questions and Explanations
Louwers T.J., Blay A.D., Sinason D.H., Strawser J.R., Thibodeau J.C.
(Seventh Edition). Auditing & Assurance Services