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"Principles of Auditing "
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by Olabisi Shodimu
Principle of Auditing
by MUNAWAR ALI
Principles of Auditing
by garg27
by CrowdfundInsider
by opentuitionID
by http://secwatch.com
by maniknasir
by maniknasir
by maniknasir
of 36
1
HAYES - Principles
of Auditing, an
international
perspective
1
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ByRick S. HAYES
and Arnold
SCHILDERWith
Roger Dassen &
Philip Wallage
Engelstalige
samenvatting,sa
mengesteld uit
de outlines per
hoofdstuk
op www.auditing
text.com
Outline
Table of
Contents
1. International A
uditing Overview
2. The Audit Mark
et3. Ethics for Pr
ofessional Accou
ntants4. Introduc
tion to Audit Proc
ess5. Client Acce
ptance6. Internal
Control and Its C
omponents7. Au
dit Planning8. Rel
ying on Internal
Control in the Au
dit Process9. Sub
stantive Testing1
0. Completing th
e
Audit11. External
Audit Reports12.
An audit step
by
step13. Auditing
beyond 2000This
compilated
outline is free
available
onwww.pentagan
.nl
HAYES - Principles
of Auditing, an
international
perspective
2
Chapter 1:
Internatio
nal
Auditing
Overview
A.
Introduction
A. Historical
background1. An
thropologists
have found
records of
auditing
activity dating
back to early
Babylonian times
(around 3,000BC)
.2. The practice
of modern
auditing dates
back to the
beginning of the
modern corporati
on at the dawn
of theIndustrial
Revolution.3. Ma
nagement and
financial reports:
the flow of
investor funds to
the corporations
and the whole
process
ofallocation of
financial
resources
through the
securities
markets has
become
dependent to
a very
largeextent upon
reports made by
management.
Management can
scarcely be
expected to take
an impartialview
of this
process.4. The
role of an
auditor: to
provide with an
independent and
expert opinion on
the fairness of
the
financialreports.B
. The Auditor,
Corporations and
Financial Informa
tionBy the audit
process, the
auditor enhances
the usefulness
and the value
of the financial
statements, but
he alsoincreases
the credibility of
other non-
audited
information
released by
management.
i
C. Accounting
and Auditing
Standards1. Man
y countries have
issued
local auditing
standards under
which companies
are audited in
their
homecountry.2. I
nternational Acco
unting
Standards: The
International
Accounting Stand
ards Committee
(IASC)
has workedfor
over twenty
years
to harmonize
international
accounting
standards and its
pronouncements,
International
Accounting
Standards (IAS).
The IASs have
been adopted by
many countries
which do
nothave their
own national
accounting
standards or
which believe
that international
comparability is
to
bepreferred.3. Int
ernational Auditi
ng Standards:
Auditing standar
ds were required
by multinational
corporations
whichwanted a
world wide,
consistent, high
quality audit.
International
auditing
standards have
existed since
theInternational
Federation of
Accountants
(IFAC) came into
being as a result
of initiatives put
forward in
1973and
approved in
1977. Although
ISAs are not
required by
all countries, we
will use them as
the
basicstandards
throughout this
book because
they represent
the highest and
best international
representation
ofgenerally
accepted
auditing
standards.4. A
listing of the
International
Standards on
Auditing is given
llustration 1-1.D.
Audit definitions
1.
There is no
definition of
an audit, per se,
in the
International
Standards on
Auditing. The
definition given
inISA 200 states
the
objective of an
audit
ii
, The objective
on an audit
of financial
statements is to
enable
theauditor to
express an
opinion whether
the financial
statements are
prepared, in all
material
respects,
inaccordance
with an
identified financi
al reporting
framework of
other criteria.
2.
A better, more
general definition
of auditing is the
definition
put forth by the
American
AccountingAssoci
ation
iii
,
An audit is a
systematic
process of
objectively
obtaining and
evaluating
evidence
regarding asserti
ons about
economic actions
and events
to ascertain the
degree of
correspondence
between
these assertions
and established
criteria and
communicating
the results to
interested users.
a. An audit is a
systematic
approach: the
audit follows a
structured,
documented plan
(audit
plan).b. An audit
is
objectively
conducted: an
audit is an
independent,
objective and
expert examinati
on andevaluation
of
evidence.c. The a
uditor
obtains and
evaluates
evidence
. The auditor
assesses the
reliability and
sufficiency of
theinformation
contained in the
underlying
accounting
records and
other source
data.d. The
evidence
obtained and
evaluated by the
auditor regards
assertions about
economic actions
and events
. The basis of
evidence gatheri
ng objectives,
the thing that the
evidence must
prove are the
assertions
of
management.e.
The auditor
ascertains the
degree of
correspondence
between
assertions and
established
criteria
. Theaudit
program tests
most assertions
by examining the
physical
evidence of
documents,
confirmation,inqu
iry and
observation.f. Th
e
goal, or objective
, of the audit is
communicating
the results to
interested users
. The audit
isconducted with
a view of
expressing an
informed and
credible opinion,
in a written
report.
HAYES - Principles
of Auditing, an
international
perspective
3E. General
Principles
Governing an
Audit of Financial
Statements 1.
The financial
statementsaudite
d under
international
standards
iv
are the balance
sheets, income
statements
v
,and cash flow
statements
vi
and the notes
thereto. The first
International
Standard on
Auditing, ISA 1
(Subjectmatter
Number 200)
vii
, discusses the
principles
governing
an audit of
financial
statements.a. IS
A 200 (1) states
that an auditor
could comply
with the Code of
Ethics for
Professional
Accountantsissue
d by IFAC, which
is discussed later
in Chapter
3.b. ISA 200
further states
that the
auditor should
conduct an audit
in
accordance with
InternationalStan
dards on
Auditing.c. The
term scope of
an audit refers
to the audit
procedures
deemed
necessary in the
circumstances
toachieve the
objective of the
audit.d. An audit
in accordance
with ISAs is
designed to
provide
reasonable
assurance.
viii
e. There are
certain inherent
limitations in an
audit that affect
the auditors
ability to detect
materialmisstate
ments.f. The
audit of the
financial
statements does
not relieve
management of
its responsibilitie
s.
III. Types of
Audits
A. Audits of
financial stateme
nts examine
financial
statements to
determine if
they give a true
and fair view
orfairly present
the
financial stateme
nts in conformity
with specified
criteria.B. An
operational
audit
is a study of
a specific unit of
an organization
for the purpose
of measuring
itsperformance.C
.A
compliance
audit
is a review of an
organizations
procedures
performed to
determine
whether
theorganization
is following
specific
procedures, rules
, or regulations
set out by some
higher authority.
IV. Types of
Auditors
A. Internal
auditors are
employed by
individual
companies
to investigate
and appraise the
effectiveness ofc
ompany
operations
for management.
B. Independent
auditors are
certified either
by a professional
organization.
Certified auditors
are
called:1. Certifie
d Public Account
ants (CPA);2. Cha
rtered Accountan
ts (CA);3. Contad
or Pblico (CP);4.
Expert Comptabl
e;5.
Auditor;6. Other t
itles.
V. The Audit
Process Model
A. Philip Wallage
has likened
the audit
process to
the empirical
scientific cycle.
ix
B. The audit
process begins
with a clients
request for an
audit of
financial stateme
nts, is followed
by a plan ofthe
audit and tests of
evidence,
culminating in
a judgement or
opinion. In this
book we will use
a four
phasestandard
audit process
model based on
the scientific
empirical
cycle.C. Phases o
f an audit are:
-
Phase I: Client Ac
ceptance(pre-
planning),
-
HAYES - Principles
of Auditing, an
international
perspective
4
Chapter 2
- The
Audit
Market
I. Brief history
of auditing
A.
Determined by
the history of
accounting or
bookkeeping.
B.
The attitude of
profit
maximization
emerged at the
end of the
middle ages,
with the
emergence of
largemerchant
houses in Italy.
C.
Double-entry
bookkeeping was
first described
in Italy.
D.
Another
revolution: the
Industrial
Revolution which
started in Great-
Britain around
1780. This
revolutionlead to
the emergence
of large industrial
companies,
with:1. Complex
bureaucratic stru
ctures and, grad
ually.2. The
need to look for
external funds in
order to finance
further expansio
n: theseparation
between capital
provision
and managemen
t.E. In 1853, the
Society of
Accountants in
Edinburgh was
founded.
II. Theories On
The Demand
And Supply Of
Audit Services
A.
The demand for
audit services
has
been explained
by several
different
theories:
1. Policeman The
ory
a.
The most widely
held theory on
auditing until the
1940s.
b.
Auditing was
focused on
arithmetical
accuracy and on
prevention and
detection
of fraud.
c.
Inability to
explain the shift
of auditing
to 'verification of
truth and
fairness of the
financial stateme
nts'.2. Lending Cr
edibility Theorya.
Primary function
of auditing
the addition
of credibility to
the financial
statements.b. Th
e theory as such
is unable to
explain
the various
other functions
the users of
financial
statements
expectthe
auditor to
assume as part
of attestation
function.3. Moder
ator of Claimants
Theorya. Under
this theory, it is
important that all
vital participants
in an
organization
continue
to contribute.b. It
cannot
explain the other
attributes of
the attestation
function, nor
does it explain
the shift in
attention overtim
e.4. Quasi-
Judicial Theorya.
The auditor is
regarded as a
judge in the
financial informat
ion distribution
process.b. This th
eory cannot be s
ustained because
:
-
an auditor's
decisions and
decision process
are not publicly
available,
-
the doctrine of
precedence/consi
stency is not
guaranteed
in auditing,
-
an auditor's
independence
differs from a
judge's
independence
because of
thedifferent
reward systems
involved, Porter
(1990),5. Theory
of Inspired Confid
encea. Develope
d in the late
1920s by
the Dutch
professor Theodo
re
Limperg.b. addre
sses both the
demand and the
supply of
audit services.6.
Agency Theory
a.
A reputable
auditor is
appointed not
only in the
interest of third
parties, but also
in the interest
ofmanagement.
b.
A company is
viewed as the
result of more or
less formal
'contracts', in
which several
groups make
somekind of
contribution to
the company,
given a certain
'price'.
c.
Agent
'management'
has a
considerable adv
antage over the
principals
regarding
information
about
thecompany.
d.
Agency theory
can also be
used to explain
the supply side
x
of the audit
market. The
contribution of
an auditto third
parties is
basically
determined by
(1) the
probability that
the auditor will
detect errors in
the
financialstateme
nts (or other
irregularities,
such as fraud
or illegal acts)
and (2)
her willingness to
report these
errors(e.g., by
qualifying her
auditor's report),
even against the
wish of the
auditee (auditor
independence).
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