Chapter 1
The study of auditing focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of the information as well as the systems and processes responsible for recording and summarizing that information.
Important to understand that the relationship between owner and manager often results in information asymmetry between the two parties
Information asymmetry means that the manager generally has more information about the “true” financial position and results of operations of the entity than does the absentee owner.
Auditing is 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.
Systematic Process: implies there should be a well-planned and thorough approach for conducting an audit.
The assessment of internal control will be in greater depth if it is a public company because for public companies the auditor is required to report on both the company’s internal control over financial reporting and the company’s financial statements.
The auditor’s consideration of materiality is a matter of professional judgment
For a prospective new client, the auditor is required to confer with the predecessor auditor and the auditor frequently conducts background checks on top management.
If the misstatement is considered so material that it pervasively affects the interpretation of the financial statements the auditor will issue an adverse opinion indicating that the financial statements are not fairly stated and should not be relied upon.
The opinion paragraph indicates the auditor’s opinion as to whether or the financial statements are fairly presented in accordance with the criteria against which they were audited.
Scope paragraph includes:
Audit was conducted in accordance with applicable auditing standards
Emphasizes that the audit provides only reasonable assurance that the financial statements contain no material misstatements
Audit involves an examination of evidence on a test basis, an assessment of accounting principles used and significant estimates, and an overall evaluation of financial statement presentation
Asserts the auditor’s belief that the audits provide a reasonable basis for the opinion to be expressed in the report
Major Phases of the Audit
Client acceptance/continuance
Preliminary engagement activities
Plan the audit
Consider and audit internal control
Audit business process and related accounts
Complete the audit
Evaluate results and issue audit report
Attestation services occur when a practitioner is engaged to issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
Not limited to economic events or actions.
Financial statement auditing is a specialized form of an attest service.
All auditing services are attest services, and all attest services fall into the broader category of assurance services.
Assurance services can capture information, improve its quality, and enhance its usefulness for decision makers.
In most situations, the auditor is able to obtain only enough evidence