1. The Financial Statement
Chapter 2
The Financial Statement
Auditing Environment

2. Types of Auditors External Auditors Internal Auditors
Government Auditors
Forensic Auditors

3. Types of Services Offered by Audit Firms
Audit Services:
Financial statements audits, internal control audits, compliance audits, operational audits and forensic audits
Review Services:
Review of financial information, e.g. review of interim financial information
Other Assurance Services: Assurance other than audit and reviews of historic financial information, e.g. assurance on a entity’s reporting on its sustainability performance
Related Services:
Agreed-upon procedures regarding financial information and compilation of financial information
Other Non-Assurance Services: Tax services and management advisory services

4. Audit Firms Deloitte EY KPMG PwC Big 4 Mid-Tier National Local
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
Deloitte EY
KPMG
PwC
Mid-Tier
Baker Tilly
BDO
Crowe Horwath
Grant Thornton
Praxity
RSM
National
Local

5. Table 2–1 Selected Duties of Audit Team Members
Audit Teams
Table 2–1 Selected Duties of Audit Team Members

6. A Time of Challenge and Change
1990
2000
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 auditees.

7. A Series of Scandals Enron WorldCom Parmalat Lernout & Hauspie Ahold
Arthur Andersen

8. An Explosion of Scandals
Corporate Giants
Brokerage Firms
Stock Exchanges
Mutual Fund Managers
Accounting Firms

9. Regulation Self-regulation by the profession versus
government regulation
Stricter regulation More public oversight and stricter enforcement
International Standards on Auditing more comprehensive

10. Financial Crisis 2007-2009 Rating Agencies Banks Supervisors
Hedge Funds
Central Banks
Accounting Firms

11. 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.

12. Context of Financial Statement Auditing
The primary context with which an auditor is concerned is the industry or business of his or her auditee. In other words, the context provided by the entity’s business impacts the auditor and the audit, and is thus a primary component of the environment in which financial statement auditing is conducted.
Thought Question:
How would your concerns about the inventory account differ for a Computer Hardware Manufacturer versus a Jewelry Store?

13. A Model of Business
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.
Board of Directors
Audit Committee

14. A Model of Business Objectives Strategies Processes
(5 broad categories)
Transactions
Controls
Reports

15. A Model of Business Processes: Five Components
Financing Process
Purchasing Process
Human Resource Management Process
Inventory Management Process
Revenue Process 15

16. An Overview of Business
Figure 2-1 An Overview of Business

17. Organizations that Affect the Accounting Profession
International Federation of Accountants
IFAC
International Auditing and Assurance Standards Board (IAASB)
International Ethics Standards Board for Accountants (IESBA)
International Accounting Standards Board
IASB
International Organization of Supreme Audit Institutions
INTOSAI
International Organization of Securities Commissions IOSCO
United States
Securities and Exchange Commission (SEC)
Public Company Accounting Oversight Board (PCAOB)
Financial Accounting Standards Board (FASB)
American Institute of Certified Public Accountants (AICPA)
European Union EU
EU 8th Directive on Statutory Audits

18. IAASB Standards • International Standards on Auditing (ISAs)
International Standards on Review Engagements (ISREs)
• International Standards on Assurance Engagements (ISAEs)
• International Standards on Related Services (ISRSs)
• International Standards on Quality Control (ISQCs)

19. IAASB issues International Standards on Auditing (ISAs).
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.

20. 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

21. 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

22. 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

23. 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

24. 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

25. Specialized 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

26. Sections in ISAs Introductory material Objectives Definitions
Requirements
Application and other explanatory material

27. Ethics, Independence and the Code of Ethics
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 characterize or mark a profession or professional person. All professions operate under some type of code of ethics or code of conduct.

28. IESBA Code of Ethics for Professional Accountants
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

29. 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