The Financial Statement Auditing Environment
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© The McGraw-Hill Companies, 2010 The Financial Statement Auditing Environment Chapter Two
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Chapter Two. The Financial Statement Auditing Environment. A Time of Challenge and Change. 1990. 1990. 2000. - PowerPoint PPT Presentation
Transcript of The Financial Statement Auditing Environment
© The McGraw-Hill Companies, 2010
The Financial Statement
Auditing Environment
Chapter Two
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A Time of Challenge and Change
1990
During the economic boom of the late 1990s and the early 2000s, accounting firms aggressively sought opportunities
to market a variety of high-margin non-audit services to their audit
clients.
1990 2000
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A Time of Challenge and Change
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A Series of Scandals
EnronWorldCom
Parmalat
Lernout & Hauspie
Ahold
Arthur Andersen
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Regulation
Self-regulation by the profession versus
government regulation
Stricter regulation and more public oversight
International Standards on Auditing more comprehensive
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Auditors’ Legal Liability
Threat of legal liability: Main deterrent to auditor’s
misconduct
Legal doctrines:•Joint and several liability
•Proportional liability•Liability caps
Litigation exposure and audit markets:•Concentration
•Barriers to entry•Liability reforms
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International Federation of Accountants (IFAC)
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International Organisations that Affect the Accounting Profession
International Federation of Accountants
IFAC
International Accounting Standards Board
IASB
International Organization of
Securities Commissions
IOSCO
International Organization of Supreme Audit
Institutions
INTOSAI
European Union
EUEU 8th Directive on Statutory
Audits
United StatesSecurities and Exchange Commission
(SEC)Public Company Accounting Oversight
Board (PCAOB)Financial Accounting Standards Board
(FASB)American Institute of Certified Public
Accountants (AICPA)
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International Auditing and Assurance Standards Board (IAASB): Standards
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Auditing Standards Auditing standards serve as
guidelines for and measures of the quality of the auditor’s
performance.
IFAC members
IAASB issues International
Standards on Auditing (ISAs).
ISAs are considered to be minimum standards of performance for auditors.
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General Principles and Responsibilities
• ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing
• ISA 210 Agreeing the Terms of Audit Engagements• ISA 220 Quality Control for an Audit of Financial Statements• ISA 230 Audit Documentation• ISA 240 The Auditor’s Responsibilities Relating to Fraud in an
Audit of Financial Statements• ISA 250 Consideration of Laws and Regulations in an Audit of
Financial Statements• ISA 260 Communication with Those Charged with
Governance• ISA 265 Communicating Deficiencies in Internal Control to
Those Charged with Governance and Management
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Risk Assessment and Response to Assessed Risks
• ISA 300 Planning an Audit of Financial Statements• ISA 315 Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment
• ISA 320 Materiality in Planning and Performing an Audit• ISA 330 The Auditor’s Responses to Assessed Risks• ISA 402 Audit Considerations Relating to an Entity Using a
Service Organization• ISA 450 Evaluation of Misstatements Identified during the
Audit
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Audit Evidence
• ISA 500 Audit Evidence • ISA 501 Audit Evidence – Specific Considerations for
Selected Items• ISA 505 External Confirmations • ISA 510 Initial Engagements – Opening Balances• ISA 520 Analytical Procedures • ISA 530 Audit Sampling• ISA 540 Auditing Accounting Estimates, Including Fair
Value Accounting Estimates, and Related Disclosures• ISA 550 Related Parties • ISA 560 Subsequent Events • ISA 570 Going Concern • ISA 580 Written Representations
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Using Work of Others
• ISA 600 Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)
• ISA 610 Using the Work of Internal Auditors• ISA 620 Using the Work of an Auditor’s Expert
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Audit Conclusions and Reporting
• ISA 700 Forming an Opinion and Reporting on Financial Statements
• ISA 705 Modifications to the Opinion in the Independent Auditor’s Report
• ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
• ISA 710 Comparative Information – Corresponding Figures and Comparative Financial Statements
• ISA 720 The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements
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Specialised Areas
• ISA 800 Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
• ISA 805 Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement
• ISA 810 Engagements to Report on Summary Financial Statements
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Sections in ISAs
•Introductory material
•Objectives
•Definitions
•Requirements
•Application and other explanatory material
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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.
The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether
caused by errors or fraud, that are not material to the financial
statements will be detected.
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Ethics, Independence, and IFAC Code of Ethics for Professional Accountants
Ethics refers to a system or code of conduct based on moral duties and obligations that
indicates how we should behave.
Professionalism refers to the conduct, aims, or qualities that characterise or mark a profession or professional person. All
professions operate under some type of code of ethics or code of conduct.
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Ethics, Independence, and IFAC Code of Ethics for Professional Accountants
IFAC Code of Ethics
Conceptual Framework Approach
Principles•Integrity
•Objectivity•Professional competence
and due care•Confidentiality
• Professional behaviour
Application to specific situations, including situations
that threaten independence of
mind or independence in
appearance
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Audit Firms
Audit firms range in size from a single proprietor to thousands of owners (or “partners”) and thousands of professional and administrative staff employees.
Big 4
PwC
Deloitte
EY
KPMG
Mid-TierBDO
Grant Thornton
RSM
Praxity
Baker Tilly
Crowe Horwath
National Local
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Annual Global Revenue of Major Audit Network Firms
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Audit Teams
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Types of Services Offered by Audit Firms
Assurance Services: Audit of financial statements, review of financial information, and other assurance services (e.g. assurance on a entity’s reporting on sustainability performance)
Related Services: Agreed-upon procedures regarding financial information and compilation of financial information
Other Services: Tax services, advisory services, accounting services and specialised services (e.g. forensic audit)
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Global Practice Mix of Services by Major Audit Network Firms (Revenue)
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Types of Auditors
External Auditors Internal Auditors
Government Auditors
Forensic Auditors
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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.
How would your concerns about the inventory account differ for a Computer Hardware Manufacturer and a Jewellery Store?
What assertions would you be most concerned about and why?
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A Model of Business
Board of Directors
Audit
Committee
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.
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A Model of Business
Objectives Strategies
Processes (5 broad
categories)
Controls Transactions
Reports
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A Model of Business Processes: Five Components
Financing Process
Purchasing Process
Human Resource
Management Process
Inventory Management
ProcessRevenue Process
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An Overview of Business
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Management Assertions
Financial statements issued by management contain explicit and implicit
assertions.
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Management Assertions – An Example with Inventory
Which specific assertion from the relevant category is being described in the three examples below?
Account Balances
Management asserts that the entity owns the
inventory represented in the inventory account.
Presentation & Disclosure
Management asserts that the
financial statements
properly classify and present the
inventory.
Transactions
Management asserts that transactions
related to inventory actually
occurred.
Occurrence Rights and Obligations Classification
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End of Chapter 2
