2. OVERVIEW THE AUDIT PROCESS taufikurRahman@2002

3. Overview of the Audit Process

4. Knowledge of the Business and Industry Developing expectations of F/S Industry impact on information systems Evaluation of reasonableness of accounting estimates GAAP for specific industries Foundation for other value-added services

5. Management’s Assertions  Representation of economic events and transactions made by management  Categories of Management’s Assertions * Existence or Occurrence * Completeness * Rights and Obligations * Valuation or Allocation * Presentation and Disclosure –Explicit: existence & valuation –Implicit: completeness, right-obligation, disclosure

6. Management’s Assertions Existence or Occurrence deal with whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period Completeness deal with whether all transactions and accounts that should be presented in the financial statements are indeed included

7. Management’s Assertions Right and Obligations deal with whether assets are the right of the entity and liabilities are the obligations of the entity at a given date Valuation or Allocation deal with whether assets, liability, revenue and expense components have been included in the F/S at appropriate amounts

8. Management’s Assertions Presentation and Disclosure deal with whether particular components of the financial statements are properly classified, described, and disclosed

9. Materiality FASB Concepts Statements No. 2 defines materiality as “the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influence by the omission or misstatement”

10. Materiality Materiality influence the audit process –In planning the engagement, auditor should judge the scope of the audit –Guides the collection of sufficient, competent evidential matter –Guides auditor when evaluating audit findings

11. Audit Risk SAS 47 (AU 312.02) defines audit risk: the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that contain a material misstatement

12. Audit Risk Components

13. Inherent Risk (IR) the susceptibility of an assertion to a material misstatement, assuming that there are no related internal controls Control Risk (CR) that a material misstatement that could occur in an assertion will not by prevented or detected on a timely basis by entity’s internal controls Detection Risk (DR) that auditor will not detect a material misstatement that exist in an assertion Audit Risk Model AR = IR x CR x DR

14. Evidence Sufficient competent evidential matter is to be obtained through inspection, observations, inquiries, and confirmation to afford a reasonable basis for an opinion regarding the financial statements under audit (3 rd General Standard) SAS 31 (AU 326.20)  Evidential Matter states that “the amount and kinds of evidential matter required to support an informed opinion are a matter for auditor to determine in exercise professional judgment after a careful study of the circumstance in the particular case”

15. Sufficiency of Evidential Matter Materiality and Risk more evidence is needed for accounts that are material to the F/S Economic Factors evidence must be obtained within a reasonable time and at a reasonable cost Size and Characteristics of the Population the larger the population, the larger the quantity of evidence required

16. Competency of Evidential Matter The competency (reliability) of both underlying accounting data and corroborating information Relevance evidence must be pertinent to the auditor’s objective Source independent outside entity, internal control structure, direct access Timelines relates to the date to which the evidence is applicable Objectivity objective in nature is more reliable

17. Classification of Audit Procedures Procedures to Obtain an Understanding procedures to obtain an understanding of the client, its business and industry, and factors that may affect the inherent risk of misstatement in an assertion Tests of Control to provide evidence about the effectiveness of the design and operation of internal control structure policies and procedures Substantive Tests to provide evidence as to the fairness of management’s financial assertions - Analytical procedures - Tests of details of transactions - Tests of details of balances

18. Consideration of Value-Added Services Benchmarking company performance and performance measurement Business planning Risk assessment Business evaluation Information system design and reliability

19. Communication of Findings The communication on the financial statements through auditor’s report Other required communications with management –Internal controls –Significant accounting policies –Management judgments and accounting estimates Communication of other findings –Other value-added services