1. AUDITING AND THE PROFESSION OF AUDITOR

2. What is Auditing? Facts/ Events Standards/ Criteria Report Auditing Ther process of testing the conformity among facts/events/report with the underlying standards or criteria

3. Why Auditing is Needed? 1.The possible existence conflict of interest among the interested parties. 2.The possible existence if the facts/events not conform with the underlying standard/criteria. 3.The possible existence if the report not conform with the facts/events being reported. 4.The users of information/report suffering loss due the misleading information/report. 5.The interested parties do not have any competency to do auditing by themselves.

4. The Basic Requirements of Auditing 1.The standards or criteria to measure or to tests the audit objects 2.The availability of supporting data or corroborating data or information to tests the conformity of facts/events/reports with the underlying standards or criteria.

5. The Types of Auditing 1.Financial Statements Audit  the underlying standards/criteria is Financial Accounting Standards. 2.Compliance Audit  the underlying standards/criteria is management’s policies or procedures. 3.Operational Audit/management Audit, the underlying standards/criteria is standards operational performance.

6. The Form of Audit Report 1.Financial Statements Audit  Auditor Opinion, written in audit report. 2.Compliance Audit  the notes, the comments, or the suggestion regarding the level of conformity between the rules and the implementation, written in auditor’s report. 3.Operational Audit/management Audit, the notes regarding the operating performance, i.e. sub-standards, standards, or above standards.

7. Types of Audit Nature of AssertionsEstablished CriteriaNature of Auditor’s Report Financial Statements Audit Financial statement data Generally accepted accounting principles Opinion on fairness of financial statements Compliance Audit Claims or data pertaining to adherence to policies, laws, regulations, etc. Management’s policies, laws, regulations, or other third-party requirements. Summary of findings or assurance regarding degree of compliance. Operational Audit Operational or performance data. Objectives set, either by managements or enabling legislation. Efficiency and effectiveness observed; recommendations for improvement. Summary: the Types of Audit

8. Management Financial Statements: Income Statements Retained Earning Balance Sheet Cash Flow Statements Disclosures to the FS Investors/Potential Investors Creditor/potential creditors Government Others The Users of Financial Statements: FS Audit to tests the fairness of the FINANCIAL STATEMENTS The Main Roles of Financial Statements Audit

9. BUSINESS ACTIVITIES SOURCE DOCUMENTS ACCOUNTING RECORDS FINANCIAL STATEMENTS: Income statement Balance Sheet Retained Earning Cash flow statement INTERNAL CONTROL STRUCTURE (ICS) (POLICIES, PROCEDURES, DOCUMENTS, HRM, IT, ORG. CULTURE ) FINANCIAL STATEMENT AUDIT AUDIT TO PROVE THE FAIRNESS OF THE FINANCIAL STATEMENTS AND TO SUPPORT AUDITOR’S OPINION TO THE FINANCIAL STATEMENT Financing cycle Expenditure cycle Conversion cycle HRM/Payroll cycle Revenue cycle Investment cycle Cash Balance ARE THEY PRESENTED FAIRLY IN ACCORDANCE WITH GAAP? Overview of the Financial Statements Audit

10. The Definition of Auditing 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.

11. ACCOUNTING GUIDED BY GAAP RESPONSIBILITY OF MANAGEMENT AUDITING GUIDED BY GAAS RESPONSIBILITY OF AUDITOR Analyze events and transactions Measure and record transaction data Classify and summarize recorded data Prepare financial statements per GAAP Obtain and evaluate evidence concerning the financial statements Verify statements are presented fairly in conformity with GAAP Express opinion in audit report Deliver audit report to client Distribute financial statements and auditor’s report to stockholders in annual report The Relationship Between Accounting and Auditing

12. Obtain evidential matter through audit procedures Procedures to understand ICS Test of controls Substantive tests: Analytical procedures Detail of transactions Detail of balances Dual Purpose Test Evaluate for sufficiency and competence Reasonable? Express unqualified, qualified, or adverse opinion as appropriate Disclaim, qualify or adverse opinion as appropriate Concurrent test of control YesNo The Auditing Process

13. The Profession of Independent Auditor 1.They work under CPA firm. 2.CPA firm is a practice unit for the independent auditor to provide their services. The organization form of CPA firm must conform with form permitted by law or regulation. 3.To set up CPA firm, someone must obtain certification as an auditor independent, i.e. they have to past the CPA examination.

14. The Services of Accounting Firm 1.Attest services, such as financial statements audit, compliance audit, and operational audit. 2.Non-attest services, such as bookkeeping, tax, and consulting.

15. The Types of Auditor 1.Independent Auditors, are usually CPAs as individual practitioners or members of CPA firms who render professional auditing services to clients. 2.Internal Auditors, are employees of the organizations they audit. The objective is to assist the management to effectively discharge their responsibilities. 3.Government Auditors, are auditors which are employed by various governmental agency.

16. The Assumption in Auditing Supporting/corroborating data are available and verifiable. Data are verifiable when two or more qualified individuals, working independently of one another, reach essentially similar conclusions from an examination of the data. The primarily concerned to verifiability is the availability of evidence.

17. Principles in Examining Evidences 1.Validity, means that evidences are authentic, true, sound, and well- grounded 2.Appropriateness of the accounting treatment, means that evidences are conform with established accounting standard.

18. The Need of Financial Statements Audit 1.Conflict of interest 2.Consequence 3.Complexity 4.Remoteness

19. 1.Conflict of interest a. Among users and management, in a senses that financial statement and accompanying data may be intentionally biased in management’s favor. b. Among the different classes of users financial statements, such as creditors and stockholders. Users of financial statements seek assurance from independent auditors that the information both (1) free from management bias and (2) neutral with respect to the various user groups. The Need of Financial Statements Audit

20. 2.Consequence Published financial statements represent an important and, in some cases, the only source of information used in making significant investment, lending, and other decisions. 3.Complexity Both subject matter of accounting and the process of preparing financial statements have become increasingly complex. As level of complexity increases, so does the risk of misinterpretations and unintentional errors. The Need of Financial Statements Audit

21. 4.Remoteness Distance, time, and cost make it impractical to seek direct access to the underlying accounting records to perform their own verifications of financial assertions. The Need of Financial Statements Audit

22. Auditing Standards GENERAL STANDARDS 1.The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor. 2.In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. 3.Due professional care is to be exercised in the performance of the audit and the preparation of the report.

23. Auditing Standards STANDARDS OF FIELD WORK 1.The work is to be adequately planned, and assistants, if any, are to be properly supervised. 2.A sufficient understanding of the internal control structure (ICS) is to be obtained to plan the audit and to determine the nature, timing, and the extent of tests to be performed. 3.Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.

24. STANDARDS OF REPORTING 1.The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles. 2.The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. Auditing Standards

25. 3.Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. 4.The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefor should be stated. In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking. Auditing Standards

26. TESTS OF CONTROLSSUBSTANTIVE TESTS TypesConcurrent Additional Analytical procedures, tests of details of transactions, tests of details of balances. PurposeDetermine effectiveness of design and operation of internal control structure policies and procedures. Determine fairness of significant financial statement assertions. Nature of test measurement Frequency of deviations from control structure policies and procedures Monetary errors in transactions and balances Appicable audit procedures Inquiring, observing, inspecting, reperforming, and computer-assisted audit techniques Same as tests of controls, plus analytical procedures, counting, confirming, tracing, and vouching. TimingPrimarily interim workPrimarily at or near balance sheet date Audit risk component Control riskDetection risk Primary field work standard SecondThird Required by GAAS NoYes Summary of Audit Tests

27. COMBINED ASSESSED LEVELS OF INHERENT AND CONTROL RISK MaximumHighModerateLow SUBSTANTIVE TESTS NATURE TIMING EXTENT Less Effective Interim Smaller sample More Effective Year-end Larger sample RELATIONSHIP AMONG AUDIT RISK COMPONENTS AND THE NATURE, TIMING, AND EXTENT OF SUBSTANTIVE TESTS ACCEPTABLE LEVEL OF DETECTION RISK Very LowLowModerateHigh