The document provides an introduction to the principles of auditing. It discusses the objectives of an external audit including obtaining reasonable assurance and expressing an opinion on a company's financial statements. The development of auditing is based on the concept of agency theory, where auditors provide assurance to shareholders that a company's directors have presented financial statements that show a true and fair view. The document also outlines the key elements of an assurance engagement, differences between reasonable and limited assurance, and limitations of an audit.

1. Introduction to
principle of auditing
Chapter one
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2. CHAPTER CONTENTS
o the objective of external audit
o the development of audit and assurance
o the concepts of stewardship agency and
accountability
o the concepts of true & fair presentation and
reasonable assurance
o the objectives of an assurance engagement
o the five elements of an assurance engagement
o positive and negative assurance

3. AUDIT AND ASSURANCE
• Audit is the process and Assurance is the
product. We auditors go through the process
of testing our client’s financial reports (audit)
in order to give our client the confidence that
their report is what it seems to be (assurance).

4. AUDIT AND ASSURANCE
• This assurance process is based on a business
concept often referred to as “agency theory”.
The secondary agent (auditor) delivers
assurance to the principal (shareholder) that
the report (financial statements) provided by
the primary agent (director) is what it appears
to be (shows a true and fair view).

5. The people may need to be assured
about something
parents need assurance that schools are
suitably educating their children
diners need assurance that a restaurant is
serving food that is safe to eat
shareholders need assurance that the
published Financial Statements of a company
are not wrong
directors need assurance that the systems
inside the company they run are working

6. ASSURANCE PROVIRER AGANCIES
It is often not possible to check the situation
yourself – so you are likely need to rely on
someone else to check it for you
schools are checked by government inspectors
restaurants have health and safety checks
 Annual published Financial Statements are
checked by external (statutory) auditors
Company systems are checked by internal
auditors

7. What is assurance?
• An assurance engagement is: 'An engagement in
which a practitioner obtains sufficient
appropriate evidence in order to express a
conclusion designed to enhance the degree of
confidence of the intended users other than the
responsible party about the outcome of the
evaluation
• so the users of that information are able to make
confident decisions knowing that the risk of the
information being 'incorrect' is reduced

8. five elements of an assurance
engagement
Element Explanation
(I) Three party
involvement
Practitioner :(the reviewer of the subject
matter who provides the assurance)
Intended users: (of the information)
Responsible party :(those
responsible for preparing
the subject matter)

9. five elements of an assurance
engagement
Element Explanation
(II) Appropriate
subject
matter
The information subject to examination by the practitioner
(III) Suitable
criteria
The subject matter is evaluated against the suitable criteria

10. five elements of an assurance
engagement
Element Explanation
(IV) Sufficient
appropriate
evidence
Sufficient appropriate evidence is needed to provide a
basis for the
opinion/conclusion
(V) Written
assurance
report in an
appropriate
form
The output of the assurance engagement expressing a
conclusion/opinion about the subject matter

11. Illustration 1 – Buying a house
• Consider someone who is buying a house. There is
a risk that someone pays a large sum of money to
purchase a structurally unsafe property which needs
further expenditure to make it habitable. To reduce
this risk, it is normal for house buyers (the users) to
pay a property surveyor (the practitioner) to
perform a structural assessment of the house (the
subject matter). The surveyor would then report
back (written report) to the house buyer identifying
any structural deficiencies (measured against
building regulations/best practice and other criteria).

12. Assurance engagements
• Examples of assurance engagements include:
 Audit of financial statements
 Review of financial statements
 Systems reliability reports
Verification of social and environmental
information
Review of internal controls
Value for money audit in public sector
organizations.

13. General principles the assurance provider
must follow when performing
such engagements include
 Comply with ethical requirements.
 Apply professional skepticism and judgment.
 Perform acceptance and continuance procedures to ensure only
work of acceptable risk is accepted.
 Agree the terms of engagement.
 Comply with quality control requirements
 Plan and perform the engagement effectively.
 Obtain sufficient appropriate evidence.
 Consider the effect of subsequent events on the subject matter.
 Form a conclusion expressing either reasonable or limited
assurance as appropriate.
 The evidence should be documented to provide a record of the
basis for the assurance report.

14. Two types of assurance engagement
are permitted
• Reasonable (Positive opinion)
• Limited (Negative opinion)

15. External audit engagements
• An external audit is an example of a
reasonable assurance engagement
• ISA 200, 3
• The financial reporting framework to be
applied will vary from country to country. In
Audit & Assurance, it is assumed that
International Financial Reporting Standards
are the basis for preparing the financial
statements

16. True and fair
• True: factually correct information which
conforms with accounting standards and
relevant legislation, and agrees with the
underlying records.
• Fair: clear, impartial and unbiased
information which reflects the commercial
substance of the transactions of the entity

17. Objectives of the auditor
• Obtain reasonable assurance
• Express an opinion
• Report on (communicate) the auditor's
findings

18. Need for external audit
(1) Shareholders provide the finance and may or
may not involve in the day to day running
• Directors manage the company and prepare
financial statements
• The directors have various incentives to
manipulate the financial statements
• Hence the need for an independent review of
the financial statements is required (External
Auditor)

19. Need for external audit
(2) In most developed countries, publicly quoted
companies and large companies are required by
law to produce annual financial statements and
have them audited by an external auditor.
(3.) Companies that are not required to have a
statutory audit may choose to have an external
audit because the company's shareholders or
other influential stakeholders want one and
because of the benefits of an audit.

20. Benefits of an audit
I. Higher quality information which is more
reliable improving the reputation of the market.
II. Independent verification may be valuable to
management
III. Reduces the risk of management bias, fraud and
error by acting as a deterrent
IV. Enhances the credibility (for tax authorities or
lenders)
V. Deficiencies in the internal control system may
be highlighted by the auditor

21. Expectation gap
• Some users incorrectly believe that an audit
provides absolute assurance – that the audit
opinion is a guarantee the financial statements
are 'correct'. This and other misconceptions
about the role of an auditor are referred to as
the 'expectation gap'.

22. Examples of the expectation gap
• A belief that auditors test all transactions and
balances – they test on a sample basis
• A belief that auditors are required to detect all
fraud – auditors are required to provide
reasonable assurance that the financial
statements are free from material misstatement,
which may be caused by fraud.
• A belief that auditors are responsible for preparing
the financial statements – this is the responsibility
of management

23. Limitations of an audit
• Financial statements include subjective estimates
and other judgmental matters.
• Internal controls may be relied on
• Representations from management may have to
be relied upon as the only source of evidence in
some areas.
• Evidence is often persuasive not conclusive.
• Do not test all transactions and balances.
Auditors test on a sample basis

24. Limitations of an audit
• Auditors provide reasonable assurance which
is not absolute assurance.
• The limitations of an audit mean that it is not
possible to provide a 100% guarantee

25. Accountability, agency and
stewardship
• Accountability means that people in a
position of power can be held to account for
their actions, i.e. they can be compelled to
explain their decisions and can be criticized or
punished if they have abused their position
• Agency occurs when one party, the principal,
employs another party, the agent, to perform
a task on their behalf.

26. Accountability, agency and
stewardship
• Stewardship is the responsibility to take good
care of resources. A steward is a person
entrusted with management of another
person’s property, for example, when one
person is paid to look after another person’s
house while the owner goes abroad on
holiday. The steward is accountable for the
way he carries out his role

27. The End..
Thanks any question
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