Auditing principles and practices I, the auditing profession

1. AUDITING PRINCIPLES & PRACTICES I
CHAPTER 2
THE AUDITING PROFESSION

2. • Introduction
• The Regulatory Framework Governing Auditing
• International Standards on Auditing (ISA)
• Rights and Duties, Appointment, Dismissal and
Resignation of an Auditor
• Materiality and Risk Assessment

3. • Introduction
• . Auditing is a critical component of any business or
organization, providing assurance that financial
statements are accurate and reliable.
• Auditing is an essential tool for ensuring transparency
and accountability in the financial world.
• This is especially important in today's global market,
where businesses operate across borders and regulations
can vary widely from country to country.

4. • The Regulatory Framework Governing Auditing
• Auditing is a critical process that ensures financial
information is accurate and reliable.
• It is a complex process that involves examining
financial statements, records, and transactions
to identify errors, fraud, or other irregularities.
• The regulatory framework governing auditing is
designed to ensure that auditors perform their
duties with integrity, objectivity, and
independence.
• This framework includes laws, regulations, and
professional standards that provide guidance on
how audits should be conducted and what auditors
should look for.

5. • International Standards on Auditing (ISA)
• These standards cover everything from
planning and conducting an audit to
reporting the results.
• They also provide guidance on how to deal
with ethical issues that may arise during the
audit process.

6. • Professional Ethics: Fundamental Principles, Threats
and Safeguards
• Professional ethics are the principles that guide the
behavior of auditors.
• Fundamental principles of professional ethics include
integrity, objectivity, professional competence and due
care, confidentiality, and professional behavior.
• Threats to these principles can come in many forms, such
as self-interest, advocacy, familiarity, intimidation, and
self-review.
• Safeguards against these threats include education and
training, quality control, and ethical standards.

7. • Legal Liability of Auditors
• Auditors play a crucial role in ensuring the accuracy
and reliability of financial statements.
• However, with this responsibility comes legal liability.
• Auditors can be held liable for negligence, fraud, or
breach of contract.
• Negligence occurs when an auditor fails to exercise
reasonable care in conducting an audit.
• Fraud occurs when an auditor intentionally
misrepresents information or fails to detect material
misstatements.
• Breach of contract occurs when an auditor fails to
fulfill their obligations as outlined in the engagement
letter.

8. • Rights and Duties, Appointment, Dismissal and
Resignation of an Auditor
• Auditors have a number of rights and duties when it comes to
conducting an audit.
• They are responsible for obtaining sufficient evidence to
support their opinion on the financial statements, and they
must ensure that their work is conducted in accordance with
auditing standards and ethical principles.
• Auditors also have the right to access all relevant information
and records, and they can request additional information from
management or other parties if necessary.
• The appointment, dismissal, and resignation of an auditor are
also important considerations. The auditor is typically
appointed by the shareholders, and they may be dismissed
by the shareholders or by the board of directors.
• If an auditor resigns, they must provide a written statement
outlining the reasons for their resignation. This statement

9. • Materiality and Risk Assessment
• Materiality and risk assessment are two fundamental
concepts in auditing that auditors use to determine
the nature, timing, and extent of their audit
procedures.
• Materiality refers to the magnitude of an omission
or misstatement of accounting information that, in
the light of surrounding circumstances, makes it
probable that the judgment of a reasonable person
relying on the information would have been changed
or influenced.
• Risk assessment, on the other hand, involves
identifying and assessing the risks of material
misstatement in the financial statements due to
fraud or error.

10. • Audit Risk
• Audit risk is the risk that an auditor may give an
inappropriate opinion on financial statements.
• This can occur when there are material misstatements
in the financial statements that have not been detected
by the auditor.
• There are three components of audit risk: inherent
risk, control risk, and detection risk.
• Inherent risk is the risk that exists in the absence of any
controls.
• Control risk is the risk that a material misstatement will
not be prevented or detected by the entity's internal
controls.
• Detection risk is the risk that the auditor will not detect a
material misstatement that exists in the financial
statements.

11. • Materiality
• Materiality is a key concept in auditing that refers to the
significance of an item or transaction in relation to the
financial statements as a whole.
• In other words, it's about determining what information is
important enough to include in the audit report and what
can be considered immaterial.
• The auditor must use their professional judgment to
assess materiality based on various factors
• such as the size and nature of the company, the
industry it operates in, and the expectations of its
stakeholders.
• Materiality is not a precise number but rather a range,
and the auditor must consider both quantitative and
qualitative factors when making this determination.