ACW 250 – AUDITING

An Overview of Audit Objective

and the Financial Statement
Auditing Process
 Objective of An Audit of Financial
Statements

The objective of an audit of financial

statement is to enable the auditor to
express an opinion whether the
financial statements are prepared, in all
material aspects, in accordance with an
identified reporting framework.

(ISA 200)
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 Steps to Meet Audit Objective

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 Steps to Meet Audit Objective

4 Perform the necessary tests

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 Steps to Meet Audit Objectives

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 Management’s Responsibilities

AI 200 - while the auditor is responsible for

forming and expressing an opinion on the
financial statement, the responsibility for
preparing and presenting the financial
statement is that of the management of the
entity.

The audit of the FS does not relieve

management of its responsibilities.

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 Management’s Responsibilities
• Management is responsible for the financial

statements and for internal control.

• The Sarbanes-Oxley Act increases
management’s responsibility for the financial
statements.
• It requires the CEO and the CFO of public
companies to certify the quarterly and annual
financial statements submitted to the SEC.
• The Sarbanes-Oxley Act provides for criminal
penalties for anyone who knowingly falsely
certifies the financial statements (e.g., 20 years
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 The Auditor’s Responsibility for
Detecting Errors and Fraud
AI 200

The auditor has a responsibility to plan and perform

the audit to obtain reasonable assurance whether
the financial statements are free from material
misstatement, whether caused by error or fraud.
The auditor has no
Because of the nature of audit responsibility to plan and
evidence and the characteristics of perform the audit to obtain
fraud, the auditor is able to obtain reasonable assurance that
reasonable, but not absolute misstatements, whether
assurance that material caused by errors or fraud, that
misstatements are detected. are not material to the financial
statements will be detected.
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 Auditor’s Responsibilities for Discovering
Illegal Acts
The auditor is also responsible to plan and perform the
audit with professional skepticism to provide a
reasonable assurance whether the entity is complying
with laws and regulations.
Professional skepticism consists of two primary
components (“attitude”):
– A questioning mind
– A critical assessment of the audit evidence
A related concept – Auditors must also exercise
“professional judgement” in their work
– Apply relevant training, knowledge and experience in
making informed decisions during an audit
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 2

Steps to Meet Audit Objective

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 2

Business Processes approach

Audits are performed by dividing the financial

statements (or Trial Balance) into smaller
segments or components (Business Process
Approach).

Trial Balance
- the primary focus of every audit.
- used to prepare the financial statements

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 2

Business Processes approach

 Keep closely related types (or classes) of

transactions and account balances in the
same segment (e.g. sales, sales return, cash
receipts & charge-offs of uncollectible
accounts are categorized under Revenue
Process).
Makes audit more manageable
Easier for assignment of tasks among team
members

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 2

A Model of Business Processes: Five

Components

Financing Purchasing
Process Process

Human Resource
Management
Process

Inventory
Revenue
Management
Process
Process

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A Model of Business Processes: Five
Components
 The Financing Process
 obtains capital through borrowings or equity
 invests in land, buildings, equipment etc.
 repays lenders and provide returns to
shareholders

 The Purchasing Process

 acquisition and payment for goods and services
to support sale of own goods or services
 Ex: finished goods / inventory, office supplies,
utilities etc.
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 2
A Model of Business Processes: Five
Components
 The Human Resource Management Process
 personnel matters (hiring, training, evaluating,
promoting, compensating, terminating etc.)
 main transaction - payroll

 The Inventory Management Process

 the cost accounting transactions to properly
accumulate and allocate costs to inventory

 The Revenue Process

 sales and collection (cash or receivable)
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 2

Relationships Among Business

Processes

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 2

Steps to Meet Audit Objective

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 2

Management Assertions

Financial statements issued by management

contain implicit and explicit assertions:

 Implied or expressed representation by

management about classes of transactions
and the related accounts in the FS.

 Directly related to approved accounting

standards and are part of criteria that
management uses to record & disclose
accounting information in FS.
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 5

Table 1-2 Summary of Management

Assertions by Category

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 5

Table 1-2 Summary of Management

Assertions by Category

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 2

Steps to Meet Audit Objective

4 Perform the necessary tests

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 Accounting process of an entity

An auditor needs to understand thoroughly the

client’s accounting process in order to do a
proper and meaningful audit
At a high level, the accounting process of a
business entity consists of:
internal control,
individual transactions, and
account balances
Relationship among Internal Control,
individual transactions and account
balances
A company implements internal controls as a
safeguard to ensure appropriate capturing and
recording of individual transactions.
These individual transactions are then collected into
ending account balances.
Ending account balances are then used to prepare the
financial statements.
Relationship among Internal Control, individual
transactions and account balances
To audit the financial statements:
 The auditor can obtain evidence from all three steps of the accounting
process.
 For instance, an auditor can directly test the account balance (ex. by bank
statement confirmation and reconciliation). This evidence is usually the
highest-quality but costliest evidence.
 Or the auditor can obtain indirect information by testing the individual
transactions that make up an account balance. While an auditor will not have
the resources to test each individual transaction, she or he can use sampling
and project her or his findings onto the entire population of transactions.
 The least direct method of obtaining evidence is to evaluate and test the
company’s internal control to ensure that transactions are being properly
handled.

Auditors usually rely on a combination of evidence

from all three areas.
 Transaction and Balance Test - An
To test the re
Example of the AR…
asonablenes
s
Test of Control (Sales Transaction)
Accounts Receivable (in thousands)
Make sure sales recording system
Beginning balance $ 17,521
is good
Sales $144,328 $137,087 Cash receipts

Sales returns
$ 1,242 and allowances

Test Charge-off of
of De
AR b ta $ 3,323 uncollectible
alanc ils of The accounts
e

T ra n s ac t ions
Ending balance $ 20,197 Test of Deta
ils o f
Send AR confirmation Check individual bills, B/L, (documents)
 2

Steps to Meet Audit Objectives

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 2

Issue the Audit Report

The Auditor’s Standard Report with an Unmodified Opinion

December 2021

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 2

Issue the Audit Report

31 December 2021,

15 February 2022

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Types of Audit Reports

Issued for either a material scope

Qualified limitation or departure from FRS
(the “except for” report).

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