The general concept of audit for beginners for initial planning

1. GENERAL CONCEPTS OF AUDIT
PRESENTER:
MUHAMMD OMER IQBAL – CAF, AFA, MIPA
SYED SALAHUDDIN BOKHARI - CAF, AFA, MIPA
TRAINING SESSION

2. CONTENTS
1. AUDIT AND ASSURANCE
2. AUDIT PLAN AND STRATEGY
3. ACCEPTANCE AND CONTINUANCE OF CLIENT
4. FUNDAMENTAL PRINCIPLES OF ETHICS IN AUDIT
5. ENGAGEMENT TEAM
6. ASSERTIONS
7. AUDIT EVIDENCE
8. GOING CONCERN
8. MATERIALITY
9. AUDIT SAMPLING
10. AUDIT RISKS
RISK ASSESSMENT PROCEDURES ANDPage 2

3.  Audit is an independent examination,
AUDIT
AUDIT AND ASSURANCE
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 When such an examination is conducted with a view to express an opinion
thereon.
 Of any entity whether profit making or not, irrespective of its size & legal
structure,
 Of financial information,
ASSURANCE
 A positive declaration intended to give confidence; a promise.

4. Examples of ‘non-audit’ assurance engagements might include reports on
matters such as:
 Corporate social responsibility
 Environmental policy
 Employment policies
 Non-financial performance indicators
 Review engagements on half-yearly financial statements
 Prospective financial information
EXAMPLE OF NON-AUDIT ASSURANCE ENGAGEMENT
AUDIT AND ASSURANCE
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5. Audit-related services are engagements undertaken by an
accountant or firm of accountants, to perform such assignments as:
 Review of data
 Agreed upon Procedures
 Compliance
Other Audit Related Services
AUDIT AND ASSURANCE
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6. A REVIEW provides a low (moderate) level of assurance that the
information under review is free from any material misstatement.
The practitioner’s opinion is usually expressed in the form of
negative assurance, which is an opinion that there is nothing
obviously wrong in the information. For example, the opinion might
be: ‘Nothing has come to our attention to suggest that the
information is materially misstated’.
Other Audit Related Services
AUDIT AND ASSURANCE
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7. AGREED-UPON PROCEDURES are adopted in an engagement where
the party (client) hiring the practitioner specifies the procedures
that should be followed by the accountant in performing the
engagement.
Other Audit Related Services
AUDIT AND ASSURANCE
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8. With a COMPILATION, the accountant is engaged to prepare
information for the client, rather than audit or check the
information prepared by someone else. For example, a firm of
accountants may be asked by a client to prepare a tax computation.
No assurance is provided in a compilation engagement.
Other Audit Related Services
AUDIT AND ASSURANCE
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9. LEVEL OF ASSURANCE
AUDIT AND ASSURANCE
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10. LEVEL OF ASSURANCE
AUDIT AND ASSURANCE
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11. The objective of the auditor is to plan the audit so that the audit is
conducted effectively.
Planning the audit includes establishing the overall audit strategy for the
engagement and developing an audit plan, which includes, in particular,
planned risk assessment procedures and planned responses to the risks
of material misstatement.
AUDIT PLAN AND STRATEGY
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The nature and extent of planning activities that are necessary depend
on the size and complexity of the company, the auditor's previous
experience with the company, and changes in circumstances that occur
during the audit.

12. Client Acceptance
Refers to an audit firm's decision to begin performing audit work for a
company with which it has not been associated in the past
Continuance of Client
Refers to the decision to continue performing audit work for a company
that is an ongoing client
ACCEPTANCE AND CONTINUANCE OF CLIENT
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13. Steps Before Audit Begin
Auditor proposal and client acceptance or continuance
ACCEPTANCE AND CONTINUANCE OF CLIENT
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Confirm and communicate auditor independence
Established understanding of terms of engagement

14. Professional Competence and due care
A professional accountant has a continuing duty to maintain professional
knowledge and skill at the level required to ensure that a client or
employer receives competent professional service based on current
developments in practice, legislation and techniques.
FUNDAMENTAL PRINCIPLES OF ETHICS
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Confidentiality
A professional accountant should respect the confidentiality of
information acquired as a result of professional or business relationships
and should not disclose any such information to third parties without
proper and specific authority unless there is a legal or professional right
or duty to disclose.
Objectivity
A professional accountant should not allow bias, conflict of interest or
undue influence of others to override his or her professional or business
judgements.

15. “All personnel performing an engagement, including any experts
contracted by the firm in connection with that engagement.”
• Engagement Partner
ENGAGEMENT TEAM
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• Detailed Reviewer
• Engagement Quality Control Reviewer
• Engagement Manager
• Initial Reviewer
• Job In charge for engagement
• Auditor Expert for engagement

16. ENGAGEMENT TEAM
APT VIEW
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Audit Evidence refers to any information obtained by the auditor so
that he can draw conclusions & express opinion on the financial
statement.
AUDIT
AUDIT EVIDENCE

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TYPES OF AUDIT EVIDENCE:AUDIT
AUDIT EVIDENCE
Audit evidence could be data or information, physical or nonphysical.
For an example of audit evidence:
 Bank accounts
 Management Accounts
 Fixed Assets Register
 Payrolls Listing
 Banks Statements
 Bank confirmation
 Invoices
 Receipts
 And others documents use by businesses to support financial
transactions or events in the financial statements.

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AUDIT EVIDENCE
FEATURES OF AUDIT EVIDENCE
SUFFICIENT APPROPRIATE
REFER TO
QUANTUM
REFER TO
QUALITY

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AUDIT EVIDENCE
SUFFICIENT
Sufficiency is the measure of the quantity of audit evidence. The quantity
of audit evidence needed is affected by the following:
Risk of material misstatement (in the audit of financial statements)
or the risk associated with the control (in the audit of internal
control over financial reporting).
As the risk increases, the amount of evidence that the auditor should
obtain also increases. For example, ordinarily more evidence is
needed to respond to significant risks

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AUDIT EVIDENCE
APPROPRIATE
Measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the
auditor’s opinion is based.
The quality of audit evidence is dependent mainly on the form and
source of the evidence. Here is the detail:
 External Source
 Internal Generated data
 Obtain directly by Auditor
 Written form
 Original Form

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AUDIT EVIDENCE
Audit Procedures for Obtaining Audit Evidence
Audit procedures can be classified into the following categories:
(a) Risk assessment procedures,
(b) Further audit procedures,
 Tests of controls, and
 Substantive procedures, including tests of details
and substantive analytical procedures.

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INDENTIFYING AND ASSESSING RISK
AT PLANNING STAGE
Audit risk assessment procedures are performed to obtain an
understanding of your company and its environment, including your
company's internal control, to identify and assess the risks of
material misstatement of the financial statements, whether due to
fraud or error.

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INDENTIFYING AND ASSESSING RISK
Limitations of Internal Controls
Control
Activities
1. Segregation of
duties
2. Authorization of
transactions
3. Information
processing
4. Controls over
asset and records
Control
Environment
1.Integrity and Ethical
Values
2. Commitment to
Competence
3.Organisation Structure
4. Authority and
Responsibility
Risk
Assessment
Process
Monitoring
of Controls
Information
System

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AUDIT AND ASSURANCE
Specific Audit Procedures for Obtaining Audit Evidence
1. Inspection
2. Observation
3. Inquiry
4. Confirmation
5. Re-performance
6. Analytical Procedures
Analytical procedures consist of evaluations of financial information
made by a study of plausible relationships among both financial and
nonfinancial data. Analytical procedures also encompass the
investigation of significant differences from expected amounts.
RISK
ASSESSME
NT
PROCEDU
RES

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AUDIT AND ASSURANCE
Selecting Items for Testing to Obtain Audit Evidence
The auditor should determine the means of selecting items for testing
to obtain evidence that, in combination with other relevant evidence,
is sufficient to meet the objective of the audit procedure.
 Selecting all items;
 Selecting specific items; and
 Audit sampling.

27. In representing that the financial statements are presented fairly in conformity
with the applicable financial reporting framework, management implicitly or
explicitly makes assertions regarding the recognition, measurement,
presentation, and disclosure of the various elements of financial statements
and related disclosures.
ASSERTIONS
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Existence or occurrence – Assets or liabilities of the company exist at a
given date, and recorded transactions have occurred during a given period.
Completeness – All transactions and accounts that should be presented in
the financial statements are so included.
Valuation or allocation – Asset, liability, equity, revenue, and expense
components have been included in the financial statements at appropriate
amounts.

28. Rights and obligations – The company holds or controls rights to the assets,
and liabilities are obligations of the company at a given date.
ASSERTIONS
Continued
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Presentation and disclosure – The components of the financial statements
are properly classified, described, and disclosed.

29. The going concern assumption means that the income
statement/statement of comprehensive income and statement of
financial position are prepared on the assumption that the entity
will continue in operational existence for the foreseeable future.
GOING CONCERN
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The auditor needs to be satisfied that the going concern
assumption is appropriate to the financial statements under audit.
This will involve an investigation of the financial and operating
position of the client before the end of the reporting period. If this
review indicates that the going concern assumption may not be
appropriate, further investigation will be needed.

30. In evaluating management’s assessment the auditor
must consider the same time period. If management
looked less than 12 months into the future, the auditor
should ask management to make a re-assessment
looking at least 12 months into the future. The auditor
must also inquire if management is aware of any
relevant events or conditions beyond this time period.
GOING CONCERN
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Time Period

31. GOING CONCERN
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FACTORS THAT RAISE QUESTIONS ABOUT THE GOING CONCERN ASSUMPTION
FINANCIAL
• Negative net
Assets
• Inability to
pay credits
• Adverse
Financial
Ratio
• Inability to
renew or
repayment
of loans
OPERATING
• Liquidation of
operations
• Labour
difficulties
• Successful
competitor
emerge
• Loss of key
customers or
suppliers
OTHERS
• Non
compliance
of statutory
requirement
• Pending
legal
litigations
• Change in
the law or
regulation

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34. THE END
OF FIRST
HALF
SYED SALAHUDDIN BOKHARI - CAF, AFA, MIPA