Slide- of subject - Auditing- Cô- Hương -Đặng

www.trungtamtinhoc.edu.vn
ACADEMY OF FINANCE
ACADEMY OF FINANCE
AUDITING

RULES FOR CLASS
RULES FOR CLASS

• Chapter 1: “Auditing Professional Overview”
• Chapter 2: “Auditing standards and professional ethics code”
• Chapter 3: “Audit report”
• Chapter 4: “Financial report assertions and audit objectives”
• Chapter 5: “Fraud and error, Materiality and Risks in an audit”
• Chapter 6: “Internal control- an overview”
• Chapter 7: “Audit Evidence”
• Chapter 8: “Audit Tests
• Chapter 9: “Audit Sampling”
• Chapter 10: “Audit in an EDP system”
• Chapter 11: “Organization of the audit process”.
AUDITING

MATERIAL REFERENCES
MATERIAL REFERENCES

Chapter 1
AUDITING PROFESSIONAL OVERVIEW
Chapter 1
AUDITING PROFESSIONAL OVERVIEW
1.1. Nature of auditing
1.2. Classification of auditing
1.3. The auditing process

1.1.1. History, development of auditing
- In the world:
+ The historical researchers said that Audit appeared in Roma ancient times in the Third
Century Before Christ. The origin of Audit came from Roma. The term “audit” is derived
from the Latin term “auditing” which means “to hear”.
+ In the early days (classical period), auditors used to listen to accountants read the
report after that they confirmed the result.
+ Although Audit came out into society over 2000 years, it also developed strongly from
the middle of the 19th
century.
+ In the 1930s of the 20th
century with the bankruptcy of numerous financial
organizations and the economic crisis in the world => revealed its weakness => and a
requirement of independent checking.
+ The Big Four: KPMG; E&Y; Deloitte and PwC.

1.1.1. History, development of auditing
- In Vietnam:
After 1986, Vietnam’s economy transferred from the planned economy
to a socialist-oriented market economy.
In 1991, the independent audit was established.
In 1994, the state audit was established
In 1997, the internal audit was established.

1.1.2. Definition of auditing
In Viet Nam as well as overall the world, there are many understandable
ways to Audit.
The popular acceptable term is as follows:
“Auditing is a process in which independent and
competent auditors collect and evaluate of evidence
about audited information to determine and report on
the degree of correspondence between the information
and established criteria”.

According to the definition of auditing:
Who implement the auditing?
How many kinds of auditors in the market economy?
What do they audit?
What is the kind of audited information?
- The first, financial information.
- The second, operational information.
- The third, compliant information.

 A process: includes 3 phases: Planning, implementing and completing.
 independent and competent auditors:
+ Independence in fact: maintains an unbiased attitude, follows the auditing
standards and obeys the law.
+ Independence in appearance: shouldn’t be influenced by the client‘s interest
and close relationships.
+ Competence: qualification, skills, ethics and factors needed to effectively
manage and confirm the correctness of a company’s accounting procedures.
 Collect and evaluate of evidence: Evidence is any information or document
which is used by auditor to analyze, measure and draw conclusion based on it.
Evidence must be sufficient and appropriate.

 Audited information (= audit subject): Audited information can be
financial or non-financial information.
- First, it is financial information that is presented on FSs
- Second, it is operational information
- Third, it is compliance information.
 Established criteria: Ex: in FSs audit, established standards include:
Accounting standards; Regulations, and law.
 Reporting (=give an opinion):
It shows the auditor’s opinion about the degree of correspondence
between the information and established criteria.

1 - 12
Competent, Independent Auditor
Competent, Independent Auditor
Judgment and Experience
Evaluation of Evidence
Competence
Proper Conclusion
Independence

1.1.3. The importance of auditing in the global market economy
1.1.3. The importance of auditing in the global market economy
 Who is interested in accounting information in the market economy?
 What are the causes of information risk?
(1) The big gap between the users and supplier of information and
adjustment of information which may benefit the supplier.
(2) The great volume of information
(3) The increased complexity of information and economic activities.
(4) Incorrect treatment of information.

1 - 14
Reducing Information Risk
Reducing Information Risk
 User verifies information by himself/herself.
 User shares information risk with management or supplier
of information
 User uses audited financial FSs provided by independent auditors.

1.1.4. Function of auditing
1.1.4. Function of auditing
Auditing has 2 main functions as follows:
- Firstly, examination and confirmation (or verification function)
- Secondly, consultancy functions
What is the difference between modern and traditional audit functions?
- Traditional audit function: Confirmation & assurance (in the past and
present)
- Modern audit function: Recommendation & consultation (in the future).

1 - 16
Relationships Among Auditors, Clients, and External Users
Relationships Among Auditors, Clients, and External Users
Auditor
Client
External
Users
Client or audit
committee hires
auditor
Auditor issues
report relied
upon by users to reduce
information risk
Provides capital
Client provides financial
statements to users

1 - 17
Assurance Services
Assurance Services
Historical
Financial
Statements
1. Audit 3. Review
3. Review
2. Internal
Control over
Financial
Reporting
4. Information
4. Information
Technology
Technology
5. Other

1.2. Classifications of auditing
1.2. Classifications of auditing
(1) Based on the purpose of auditing: performance audit, compliance
audit, and financial statement audit.
(2) Based on the form of auditing organization: state audit, internal
audit, and independent audit.
(3) Based on the auditing party’s relationship: internal audit and
external audit.
(4) Based on the legal liability of audited object: compulsory and
voluntary audit.
(5) Based on auditing time: pre-audit and post-audit.

1.2.1. Based on purpose of auditing
1.2.1.1. Performance audit (or Operational audit or Management audit)
+ Definition: Performance audit is conducted to evaluate the economy,
effectiveness and efficiency of the organization's operations (3E).
+ Purpose: to evaluate the economy, effectiveness, and efficiency of the
organization's operations and consulting.
+ Subject matters: subject of performance audit can be various and
diversified.
+ Auditors: 3 types of auditors
+ Function: consultation
+ Report sent to: managers to inform them about audited results and
recommend to improve business performance.

1.2.1.2. Compliance audit
+ Purpose: to consider and evaluate the audited firms comply the rules and
regulation set by some higher authorities and make recommendation.
+ Subject matters: the fact of compliance the regulations and law of
competent state agencies and audited business.
+ Standards: the regulations and law of competent state agencies and audited
business.
+ Auditors: 3 types of auditors
+ Function: Confirmation & recommendation
+ Report sent to: users as the business or business managers with audited
results, not to serve general users.

1.2.1.3. Financial statement audit
Purpose: to determine whether the overall the information being verified in
the financial statements are stated in accordance with specified criteria.
Subject matters: FSs (such as: balance sheet, income statement, cash flow
statement and notes) or interpretation of financial statements of businesses.
Standards: accounting standards, law regulations and other related rules.
Auditors: 3 types of auditors
Function: confirmation & consultation
Report sent to: audit result will be reported to the entity who hires the
auditing firm.

1.2.2. Based on forms of auditing organization
1.2.2. Based on forms of auditing organization
There are three types of audits:

1.2.2.1 The independent audit
The function and role of independent audit organization
+ The independent audit organization plays role as an independent party
(third party) presenting examination and confirmation function, and
gives an opinion about the true and fair view of audited information.
+ The user information has reliance basis to give his decision suitably.
+ The result of audit also helps audited entity to see themselves
objectively
+ In addition, the audit consultation in the management letter will help
top of management to give the necessary adjustment in business as
well as management task.

Certified Public Accounting Firms
Certified Public Accounting Firms
 Big Four international firms
 National firms
 Regional and large local firms
 Small local firms

Staff Assistants
Hierarchy of a Typical
CPA Firm
Hierarchy of a Typical
CPA Firm
Seniors and
In-charge Auditors
Managers
Partners
Breadth of Experience
10+ years
5-10
2-5
0-2

Assurance, Attestation, and Non-assurance Services
Assurance, Attestation, and Non-assurance Services

1.2.2.2. The state audit
1.2.2.2. The state audit
The role: State Audit organization plays a role as a management
tool of the State, especially in the expenditure State budget. It helps
to improve and strengthen the management of State agencies, or
organizations in compliance with law and other regulations such as
the business law, the added value tax law, the environment protect
law, and accounting law...
Operation of state audit organization:
Audit State organizations can perform many kinds of audits such as
financial statement audit, performance audit and compliance audit.

1.2.2.3. The internal audit
The role:
Internal audit organization plays role as manageable tool of top of
management in the enterprise. It serves for governance activity of
firm itself, particularly the elements of assurance, risk, and control.
Activity of internal audit organization
Internal audit organization may carry out performance audit,
compliance audit, and financial statement audit.

The specific objectives of internal auditing include:
- Assisting Board of Management(BOM) and Executives in performing
supervisory function for the process of information report;
- Evaluating the effectiveness of risk management and internal control
systems, proposing recommendation with BOM and Executives to
improve entity's operations;
- Assessing compliance with related laws and regulations to protect the
existence and reputation of the entity;
- Helping to lift the entity's position by improving risk management and
internal control systems in enterprise.

Review questions- Chapter 1
Q1. The level of assurance provided by an external audit is absolute.
Is this statement true or false?
A. True
B. False
Q2. Independent audit firms only conduct audit financial statements.
Is this statement true or false?
A. True
B. False

Q3. Which of the following internal audit assignments is described
below?
The examination of the economy, efficiency, and effectiveness of
activities and processes.
A. Financial audit
B. Value for money audit
C. Regulatory compliance audit
D. IT audit

Q4. Which two of the following characteristics apply to internal audit?
(1) The purpose is to improve the company's operations.
(2) Reports to shareholders on whether the financial statements give a
true and fair view of affairs.
(3) Auditors may be employees of the company.
(4) Evidence is collected in accordance with relevant ISAs.
A. (1) and (3).
B. (2) and (4)
C. (1) and (4)
D. (2) and (3)

Q5. The level of assurance provided by an assurance engagement will
depend on the type of engagement. Which of the following type of
engagemeent will give the level of reasonable assurance?
A.Review of financial information
B.Report on profit and cashflow forcast
C.Internal audit reviews
D.Statutory audit

Q6. Which of the following is TRUE regarding audit?
A.An audit gives the reader reasonable assurance of the truth and fairness of
the financial statements
B.Audit report guarantees that the financial statements are correct
C.Audit gives an absolute assurance that the accounts are free from material
misstatement

Chapter 2
Auditing standards and professional ethics code
ACADEMY OF FINANCE
ACADEMY OF FINANCE
AUDITING

Chapter 2
AUDITING STANDARDS AND PROFESSIONAL ETHICS CODE
Chapter 2
AUDITING STANDARDS AND PROFESSIONAL ETHICS CODE
2.1. AUDITING STANDARDS
2.2. PROFESSIONAL ETHICS CODE

2.1.1. Nature of auditing standards
+ Definition of auditing standards
“Auditing standards are general guidelines, and regulations of basic
principles, and procedures to aid auditors in fulfilling their professional
responsibilities in the audit”.
+ Importance of auditing standards
+ The relationship between national and international auditing
standards
+ The content and legal form of standards for auditing

2.1.2. Auditing standards for professional practice of independent auditing
International auditing standards for independent auditing are divided
into 2 groups:
(1)Ethical standards;
(2) Professional standards.
For global scale, IFAC and IAASB (*) are responsible for issuing the
international auditing standards (IAASB belongs to IFAC).

2.2. PROFESSIONAL ETHIC CODE
2.2.1. Code of ethics for independent auditing
There are 5 code of ethics requirements as follow:
(1)Integrity: the auditor should be honest and straightforward.
(2)Objectivity: the auditor should not allow bias or conflicts of interest.
(3)Confidentiality: the auditor should not disclose information acquired
(4)Professional competence and due care: The auditor has enough
knowledge and skills to perform an audit and act diligently during the audit.
(5)Professional behavior: the auditor should comply with laws and
regulations.

2.2.2. Code of ethics for independent auditing
Threats that impair the objectivity of the auditor
Self-interest
Self-review
Advocacy
Familiarity
 Intimidation

2.2.2. Threats to independence
and objectivity
Self-interest
•Financial Interests
•Close business relationships
•Employment with assurance client
•Partner on client board
•Family and personal relationships
•Gifts and hospitality
•Loans and guarentees
•Overdue fees
•% or contingent fees
•High % of fees
•Lowballing
•Recruitment
Self-review threat
•Recent service with assurance client
•General other services
•Preparing accounting records and
financial statements
•Valuation services
•Tax services
•Internal audit services
•Corporate finance
•Other services
Advocacy threat
•Representing the client
•Promoting the client
•Negociating on behalf of
the client
Familiarity threat
•Personal relationships
•Long association
•Empoyment with the client
•Recent service with the
client
Intimidation threat
•Litigation
•Close business
relationships
•Family and personal
relationships

Q1. Which of the following are recognised threats to independence and
objectivity as identified in ACCA's Code of Ethics and Conduct?
(1) Familiarity
(2) Self-interest
(3) Integrity
(4) Advocacy
A. (1), (2), (3) and (4)
B. (1), (2) and (4)
C. (2), (3) and (4)
D. (2) and (4) only

Q2. Which TWO of the following are fundamental principles as stated
in the ACCA’s Code of Ethics and Conduct: (1) Objectivity; (2)
Independence; (3) Confidentiality; (4) Professional skepticism
v(1) and (4)
v(1) and (2)
v(2) and (3)
v(1) and (3)

Q3. Auditors must compliance the accounting standards when they perform
the audit. Is this statement true or false?
A.True
B.False

Q4. “Auditor should not allow bias, conflicts of interest or undue
influence of others to override professional or business judgements”.
Which of the following principles of ACCA’s code of ethics does this
statement mention to?
A.Integrity
B.Objectivity
C.Professional competence and due care
D.Confidentiality
E.Professional behaviour

Q5. AA & Co is the statutory auditor of Blue Co, a public interest
entity. Which of the following services is AA & Co prohibited from
providing to Blue Co under any circumstances?
A Provision of bookkeeping services
B Assistance in the resolution of tax disputes
C Internal audit services
D Valuation services where the valuation will have a material effect on the
financial statements.

Chapter 3
Audit report
ACADEMY OF FINANCE
ACADEMY OF FINANCE
AUDITING

www.trungtamtinhoc.edu.vn 49
3.2
3.3
3.1
FINANCIAL
STATEMENT
AUDIT
REPORT
COMPLIANCE
AUDIT REPORT
AND
PERFORMANCE
AUDIT REPORT
CHAPTER 3: AUDIT REPORT
NATURE OF
THE AUDIT
REPORT

3.1. NATURE OF THE AUDIT REPORT
3.1. NATURE OF THE AUDIT REPORT
+ Definition of the audit report
The audit report is a written document prepared and issued by the
auditor and audit organization to express their opinion on the audited
information of the entity being audited.
+ Questions:
-The form of the audit report?
-Who issues audit reports?
-The purpose of the audit report?
-Which information is the audited information?

3.2. FINANCIAL STATEMENT AUDIT REPORT
3.2. FINANCIAL STATEMENT AUDIT REPORT

3.2.1. Content of the financial statement audit
report
3.2.1. Content of the financial statement audit
report
According to ACCA, the audit report includes the following basic elements:
1. Title,
2. Addressee,
3. Auditor’s opinion,
4. Basic for opinion,
5. Going concern,
6. Key audit matter,
7. Other information,
8. Responsibilities for the FSs,
9. Auditor’s responsibilities for the
audit of the FSs,
10. Name of the engagement partner,
11. Auditor’s signature,
12. Auditor’s address and date of the
report.

3.2.1. Content of the financial statement audit report
3.2.1. Content of the financial statement audit report
In Vietnam, the audit report of independent auditors includes the following
basic elements: title, addressee, introductory paragraph, management’s
responsibility for the financial statements, auditor’s responsibility, opinion
paragraph, other reporting responsibilities, auditor’s signature, date of the
report, and auditor’s address.
What is the main difference between ACCA’s audit report and Vietnam’s
audit report?

3.2.2. Types of FSs audit report
There are basically two types of audit report:
(1)Unmodified audit report
(2) Modified audit report
But there are 4 types of audit opinion

Nature of circumstances
Immaterial
Material but
not pervasive
Material and pervasive
Financial statements are
materially misstated
unmodified
opinion QUALIFIED
OPINION
ADVERSE OPINION
Auditor is unable to
obtain sufficient
appropriate audit
evidence
unmodified
opinion QUALIFIED
OPINION
DISCLAIMER OPINION

3.2.3. Emphasis of matter paragraph and other matter
paragraphs in the auditor’s report
3.2.3. Emphasis of matter paragraph and other matter
paragraphs in the auditor’s report
 Emphasis of matter paragraphs (EOM)
EOM use to draw readers’ attention to a matter already presented or
disclosed in the FSs that the auditor feels is fundamental to their
understanding if the auditor has obtained sufficient appropriate
audit evidence that the matter is not materially misstated.
 Other matter paragraph (OM)
OM refers to a matter other than those presented or disclosed in the
FSs that in the auditor’s judgment, is relevant to users’
understanding of the audit, the auditor’s responsibilities, or the
auditor’s report.

Q1. ISA 700 Forming an opinion and reporting on financial statements
sets out the basic elements of an auditor's report. Which of the following
is not included in an unmodified auditor's report?
A.Auditors' responsibilities
B.Management's responsibility for the financial statements
C.Audit opinion
D.Deficiencies of internal controls

Q2. The auditor of Blue Co has completed the audit and has concluded
that sufficient appropriate evidence has been obtained, which confirms
that the financial statements are not materially misstated. Which form
of audit opinion will the auditor issue?
A.Qualified opinion
B.Unmodified opinion
C.A disclaimer of opinion
D.Adverse opinion

Q3. The statement of financial position of R Co includes a material
amount of $100,000 in respect of costs capitalised in the year as
development expenditure. The auditor has concluded that these costs
are research expenditure. If the auditor is to issue an unmodified
opinion which financial statements will require adjustment?
A.Statement of profit or loss only
B.Statement of financial position only
C.Statement of financial position and statement of profit or loss
D.Neither the statement of financial position nor the statement of profit or
loss

Chapter 4
FINANCIAL REPORT ASSERTIONS AND
AUDIT OBJECTIVES
ACADEMY OF FINANCE
ACADEMY OF FINANCE
AUDITING

Chapter 4
FINANCIAL REPORT ASSERTIONS AND AUDIT OBJECTIVES
Chapter 4
FINANCIAL REPORT ASSERTIONS AND AUDIT OBJECTIVES
4.1. How the transactions and events affect the financial
statement’ presentation
4.2. Management’s responsibility for the FSs
4.3. Assertions in the audit for financial statements
4.4. Financial statements assertions and audit procedures
4.5. Auditor’s responsibility and audit objective

4.1. How the transactions and events affect the
financial statement’ presentation
4.1. How the transactions and events affect the
financial statement’ presentation
The elements of FSs are aware of:
- In the case of the statement of financial position (or Balance sheet): assets,
liabilities and ownership interest
- In the case of the profit and loss account and any other statement of
financial performance- gains and losses.
- Contributions from owners and distributions to owners.

“Management of the company is responsible for preparing
the financial statements, which give a true and fair view of
the financial position of the company and of its results and
cash flows for the year in accordance with GAAP
standards, accounting regime for enterprises and legal
regulations relating to financial reporting”.

In preparing these FSs, the company is required to:
1)Select suitable accounting policies and then apply them consistently;
2)Make judgments and estimates that are reasonable and prudent;
3)State whether applicable accounting principles have been followed,
subject to any material departures disclosed and explained in the FSs;
4)Design and implement an effective internal control system for the
purpose of properly preparing and presenting the FSs to minimize
errors and fraud.
5)Prepare the FSs on a going concern basis.

Definition of Assertions: Assertions are the implicit or explicit claims and
representations made by the management responsible for the preparation
of financial statements regarding the appropriateness of the various
elements of financial statements and disclosures.
Example 1: On Balance sheet, inventory balance: $10.000
1)What do you think about this balance? What cases can happen?
2)On paper, they cost $10.000 but in fact, do they really exist?
3)Does the entity have rights with these inventories?
4)Are they evaluated correctly?
5)Are they recorded correctly in the happening time?
6)Are they presented correctly on the report?

Financial statement assertions
Financial statement assertions

Particular assertions
(Table 4.1; 4.2 and 4.3- Auditing Book)
Particular assertions
(Table 4.1; 4.2 and 4.3- Auditing Book)
Transactions and Events Account Balances Presentation and Disclosure
Occurrence Existence Occurrence
Completeness Completeness Completeness
Accuracy Valuation and
allocation
Accuracy and
valuation
Classification Classification
Cut-off
Rights and
obligations

Occurrence
Recorded transactions
exist
Completeness
Existing transactions
are recorded
Accuracy Recorded transactions
are stated at the correct amounts
Cut-off
Transactions are recorded
in the proper period
Classification
Transactions are properly
classified.

Existence Amounts included exist
Completeness Existing amounts are
included
Valuation Amounts have been valued
appropriately
Rights and
obligations
Assets must be owned; Liabilities
represent the obligations of the
entity

4.4. Financial statements assertions and audit
procedures
4.4. Financial statements assertions and audit
procedures

4.4.2. Steps for audit procedures
4.4.2. Steps for audit procedures

4.4.3. Common accepted audit procedures
4.4.3. Common accepted audit procedures
The auditor can obtain audit evidence through the following
procedures :
1)Inspection
2)Observation
3)Inquiry= Enquiry
4)External confirmation
5)Recalculation
6)Re-performance
7)Analytical procedures

Auditor’s responsibility
Audit objectives
+ Overall audit objective
+ Specific audit objective

Overall objectives of the Auditor
Overall objectives of the Auditor
Obtain
reasonable
assurance
Free from
material
misstatements
Financial
statements

©2012 Prentice Hall Business Publishing,
©2012 Prentice Hall Business Publishing, Auditing 14/e,
Auditing 14/e, Arens/Elder/Beasley
Arens/Elder/Beasley 6 -
6 - 76
76
Professional
Skepticism
Material
misstatements
Errors vs. Fraud
Reasonable
Assurance
Auditor’s Responsibilities
Auditor’s Responsibilities
Fraudulent
reporting
vs.
theft of assets

Q1. Which of the following is not a responsibility of the
auditor?
A. To provide an opinion on the truth and fairness of the FSs
B. To conduct an audit in accordance with ISA;
C. To express an opinion on the company’s going concern status.

Q2. Which of the following assertions is NOT used by auditor about
account balances at the period end?
A.Existence
B.Completeness
C.Right and obligation
D.Cut-off

Q3. Which of the following assertions is NOT used by auditor about
class of transaction
A.Occurrence
B.Completeness
C.Right and obligation
D.Accuracy

Chapter 5
FRAUD AND ERROR, MATERIALITY AND
RISKS IN AN AUDIT
ACADEMY OF FINANCE
ACADEMY OF FINANCE
AUDITING

Chapter 5
Chapter 5

5.1. FRAUD AND ERROR
5.1. FRAUD AND ERROR
5.1.1. Nature of fraud and error
5.1.2. Factors affect fraud and error
5.1.3. Management's responsibility for fraud and error
5.1.4. Auditor’s responsibility for fraud and error

Definition
Fraud refers to an intentional act by one or more individuals among
management, those charged with governance, employees, or third
parties, involving the use of deception to obtain an unjust or
illegal advantage.
 From the above definition, please let me know:
1. Who makes fraud?
2. What are their purposes?
3. What is the behavior nature?
4. What are the results?

Intentional misstatements
Intentional misstatements

 Definition
The error refers to unintentional mistakes in FSs which results in a
misrepresentation of FSs.
 From the above definition, please let me know:
1. Who makes an error?
2. What are their purposes?
3. What is the behavior nature?
4. What are the results?

Through an audit, the auditor and
the audit firm have responsibility
for the detection and assessment
of their effects on the financial
statements.
Through an audit, the auditor and
the audit firm have responsibility
for the detection and assessment
of their effects on the financial
statements.
1
Besides, the auditor
and the audit firm
have responsibility for
reporting (announce)
of fraud and error.
2
The auditor
and the audit
firm are not
and cannot be
held
responsible for
the prevention
of fraud and
error in the
client entity.
The auditor
and the audit
firm are not
and cannot be
held
responsible for
the prevention
of fraud and
error in the
client entity.
3

5.2. MATERIALITY IN PLANNING AND PERFORMING AN AUDIT
5.2. MATERIALITY IN PLANNING AND PERFORMING AN AUDIT
5.2.1. Nature of materiality in an audit
 Definition: Materiality is a term that denotes the importance of
information of disclosure in the FSs.
Information to be material if omitted or misstated could influence
decisions that users make on the basis of the financial information.
 Setting up an appropriate materiality level is to help the auditor determine
the nature, timing, and extent of audit procedures.
Auditors must view and determine the material level in 3 phases of the FSs
audit, from planning the audit to evaluating the results of audit testing when
formulating the audit opinion.

Definition
Definition
 Materiality: An expression of the relative significance or
importance of a particular matter in the context of financial
statements as a whole
 Performance materiality: The amount or amounts set by the
auditor at less than materiality for the financial statements as a
whole to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements exceeds materiality
for the financial statements as a whole.
 Tolerable misstatement is the maximum misstatement that an
auditor is prepared to accept in a class of transactions or balances
in the financial statements.

Used criteria to calculate materiality level
Used criteria to calculate materiality level
ISA 320
Materiality in planning and performing an audit
Planing Materiality Performance Materiality
5% Profit before tax
0.5%-1% Revenue
1%-2% Total asset
PM<M

Materiality
Materiality
Auditor’s responsibility = determine whether
financial statements are materially misstated.
Auditor will bring material misstatements to the
client’s attention so corrections can be made.

Steps in applying Materiality
Steps in applying Materiality

5.3. RISKS IN AN AUDIT
5.3. RISKS IN AN AUDIT

5.3.1. Audit risk
5.3.1. Audit risk
 Audit risk is the risk that the auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated.
 Some examples of inappropriate audit opinion include the following:
+ Issuing an unqualified audit report where a qualification is reasonably
justified.
+ Issuing a qualified audit opinion where no qualification is necessary;
+ Failing to emphasize a significant mater in the audit report;
+ Providing an opinion on financial statements where no such opinion may
be reasonably given due to a significant limitation of scope in the
performance of the audit.

Components of audit risk
Components of audit risk

5.3.1.1. The risk of material misstatement
 The risk of material misstatement (ROMM) is the risk that the
financial statements are materially misstated prior to the audit. It
means that these risks exist independently of the audit. The
auditor has no direct control over this risk. Its level is a function
of the auditee and its environment. Consequently, it is sometimes
referred to as auditee risk.
ROMM consists of two components: inherent risk and control
risk
+ The risk of material at the financial statement level
+ The risk of material at the assertion level

 Inherent risk
Inherent risk is the susceptibility of an account balance or class of
transactions to misstatement that could be material individually or when
aggregated with misstatement in other balances or classes, assuming
that there were no related internal controls.
 Control risk
Control risk is the risk that a material misstatement, could occur in an
account balance on class of transactions and that could be material
individually or when aggregated with misstatement in other balances or
classes, will not be prevented or detected and corrected on a timely
basis by the accounting and internal control systems.

5.3.1.2. Detection risk
5.3.1.2. Detection risk
 Detection risk (DR) is the risk that misstatement exists in an
account balance or class of transactions that could be material
individually or when aggregated with misstatements in other
balances or classes that the auditor and the audit firm failed to
detect.
 Key factors influence DR:
+ The auditing scope
+The auditing method
+ Auditor’s professional, skills and experience.

5.3.2. Overview of audit risk model
Audit Risk Model for Planning
5.3.2. Overview of audit risk model
Audit Risk Model for Planning
PDR = AAR ÷ (IR × CR)
where: PDR = Planned detection risk
AAR = Acceptable audit risk
IR = Inherent risk
CR = Control risk

Audit Risk Model and understanding the client’s business
and industry
Audit Risk Model and understanding the client’s business
and industry

Illustration of Differing Evidence Among Cycles
Illustration of Differing Evidence Among Cycles
Sales and
collection
cycle
Acquisition
and payment
cycle
Payroll and
personnel
cycle
Inherent
risk
A Medium
Medium High
High Low
Low
Control
risk
B Medium
Medium Low
Low Low
Low
Acceptable
audit risk
C Low
Low Low
Low Low
Low
Planned
detection risk
D Medium
Medium Medium
Medium High
High

5.3.1.2. Overview of audit risk model
5.3.1.2. Overview of audit risk model
On the other way, we have an audit risk model as follows:
AR= RMM x DR
AR: Audit risk
RMM: Risk of material misstatement
DR: Detection risk
The audit risk model is used for planning purposes formula follows:
AAR= RMM x PDR
PDR = AAR/RMM
Where: AAR: Acceptable audit risk
PDR: Planned detection risk
RMM: Risk of material misstatement

Relationships of Risk to Evidence
Relationships of Risk to Evidence
Acceptable
audit risk
Inherent
risk
Control
risk
Planned
detection
risk
Amount of
evidence
required
Situation
High
High
Low
Low
Low
Low
Medium
Medium
High
High
Low
Low
Low
Low
High
High
Medium
Medium
Low
Low
Low
Low
Low
Low
High
High
Medium
Medium
Medium
Medium
High
High
Medium
Medium
Low
Low
Medium
Medium
Medium
Medium
Low
Low
Medium
Medium
High
High
Medium
Medium
Medium
Medium
1
2
3
4
5

Q1. 'Audit risk' represents the risk that the auditor will give an inappropriate
opinion on the financial statements when the financial statements are
materially misstated. Which of the following categories of risk can be
controlled by the auditor?
Category of risk: (1) Control risk ; (2) Detection risk; (3) Sampling risk
A. (1) and (2)
B. (2) only
C. (1) and (3)
D. (2) and (3).

Q2. What are the two elements of the risk of material misstatement at the
assertion level?
A. Inherent risk and detection risk
B. Audit risk and detection risk
C. Inherent risk and control risk
D. Detection risk and control risk

Q3. Which of the following statements about materiality is correct?
(1) Information is material if its omission or misstatement could influence the
economic decisions of users of the financial statements.
(2) Materiality is based on the auditor's experience and judgment.
(3) Materiality is always based on revenue.
(4) Materiality should only be calculated at the planning stage of the audit.
A. (1), (2) and (3)
B. (1), (3) and (4)
C. (1) and (2).
D. (1), (2), (3) and (4)

Chapter 6
INTERNAL CONTROL- AN OVERVIEW
ACADEMY OF FINANCE
ACADEMY OF FINANCE
AUDITING

Chapter 6
Chapter 6
6.1. NATURE OF INTERNAL CONTROL
6.2. COMPONENTS OF INTERNAL CONTROL
6.3. THE PROCESS OF UNDERSTANDING OF THE
INTERNAL CONTROL IN AN AUDIT AND ASSESSMENT
OF CONTROL RISK

 Definition: Internal control is the process designed,
implemented and maintained by those charged with governance,
management and other personnel to provide reasonable
assurance about the achievement of the entity’s objectives with
regard to:
• Reliability of financial reporting;
• Efficiency/effectiveness of operations;
• Compliance with applicable laws and regulations.

 Management responsibility for internal control
Management is responsible for establishing and maintaining the entity’s internal
control.
+ In the case of achieving information objectives, management is responsible for
the preparation of financial statements in accordance with applicable accounting
frameworks such as generally accepted accounting standards, laws, and
regulations relating to financial statements. This means internal control has
gained reasonable assurance about the reliability of financial reporting.
+ In other cases of achieving operational and compliant objectives, management
has a duty on building and exercising resources and activities based on control
requirements and procedures in order to get their targets. However, management
designs and operates internal control after considering both the costs and
benefits of the controls.

 Inherent limitation of internal control
1)The cost of control not outweighing their benefits
2)The potential for human error
3)Collusion between employees
4) The possibility of controls being bypassed or overridden by
management
5)Controls being designed to cope with routine and not non-
routine transactions.

6.1.2. Relationship among management, internal
control and internal audit in an entity
6.1.2. Relationship among management, internal
control and internal audit in an entity
+ Management in an organization is a process of using
resources effectively to achieve targets.
+ Internal control is a part of the management process and
it has an impact on elements of that process.
+ Internal auditing is a continuous process that occurs in
parallel with management activities and is an important
function of management. It helps managers to achieve their
goals in management and operation.

6.2.1. The control environment
6.2.1. The control environment
 Definition: control environment means the understanding, attitude,
awareness and actions of members of the boards of management and
directors regarding the ICS and its importance in the entity.
 Subcomponent of control environment:
• Communication and enforcement of integrity and ethical values
• Commitment to competence
• Participation by those charged with governance
• Management’s philosophy and operating style
• Organizational structure
• Assignment of authority and responsibility
• Human resource policies and practices.

6.2.2. Risk assessment
6.2.2. Risk assessment
 The auditor should obtain an understanding of whether the
entity has a process for:
• Identify business risks relevant to financial reporting
objectives
• Estimating the significance of the risk
• Assessing the likelihood of their occurrence
• Deciding on actions to address those risks.

6.2.3. Control activities
6.2.3. Control activities
 Definition: Control activities are policies and procedures in
addition to the control environment which are established to
achieve the entity’s specific objectives.
 Specific control activities can be summarized into the following 5
types:
• Authorization
• Performance review
• Information processing
• Physical controls
• Segregation of duties.

6.2.4. Information and communication
6.2.4. Information and communication
The information system relevant to financial reporting is a
component of IC that includes a financial reporting system
and consists of the procedures and records established to
initiate, record, process, and report entity transactions (as
well as events and conditions) and to maintain
accountability for the related assets, liabilities, and equity.

6.2.5. Monitoring of controls
6.2.5. Monitoring of controls
Monitoring of controls is a process to assess the
effectiveness of internal control performance over time.
It includes:
-assessing the design and operation of controls on a timely
basis and;
- taking necessary corrective actions modified for changes
in conditions.

6.3. THE PROCESS OF UNDERSTANDING OF THE INTERNAL CONTROL IN AN
AUDIT AND ASSESSMENT OF CONTROL RISK
6.3. THE PROCESS OF UNDERSTANDING OF THE INTERNAL CONTROL IN AN
AUDIT AND ASSESSMENT OF CONTROL RISK

Chapter 7
AUDIT EVIDENCE
ACADEMY OF FINANCE
ACADEMY OF FINANCE
AUDITING

www.trungtamtinhoc.edu.vn 122
7.2
7.3
7.1
REQUIREMENT
OF
AUDIT
EVIDENCE
PROCEDURES
FOR
OBTAINING
AUDIT
EVIDENCE
CHAPTER 7: AUDIT EVIDENCE
NATURE OF
AUDIT
EVIDENCE

7.1. NATURE OF AUDIT EVIDENCE
7.1. NATURE OF AUDIT EVIDENCE
Definition: Audit evidence (AE) means the documentation, information
which is obtained by the auditor in connection with the audit and on which
the audit opinion is based.
Classification of AE: AE can be classified in 2 ways:
(1) By its nature: documentary or oral
(2) By its source:
+ Auditor-generated evidence
+ External evidence (third party)
+ Information produced by the entity.

7.2. REQUIREMENT OF AUDIT EVIDENCE
7.2. REQUIREMENT OF AUDIT EVIDENCE
2 requirements of the AE:
(1)Appropriateness:
Appropriateness of evidence is the measure of the quantity of audit evidence.
It include: the reliability (from sources) and the relevance (with the audit
objective).
+ Reliability of Evidence: refers to the degree to which evidence can be
believable or worthy of trust.
+ Relevance of Evidence: Evidence must pertain to or be relevant to the
audit objective that the auditor is testing before it can be appropriate.
(2) Sufficiency:
Sufficiency is the measure of the quantity of evidence obtained.

Six Characteristics of Reliable Evidence
Six Characteristics of Reliable Evidence
1. Independence of provider
2. Effectiveness of client’s
internal controls
3. Auditor’s direct knowledge
4. Qualification of individuals
providing the information
5. Degree of objectivity
6. Timeliness

7.3. PROCEDURES FOR OBTAINING AUDIT EVIDENCE
7.3. PROCEDURES FOR OBTAINING AUDIT EVIDENCE
Documentation
Analytical
procedures
Confirmation
Physical
Examination
Inquiry
Observation
Reperformance
Recalculation
PROCEDURES

Physical Examination
Physical Examination
It is the inspection or count by the auditor of
a tangible asset.
This type of evidence is most often associated with
inventory and cash.

Confirmations
Confirmations
United States Auditor must confirm
accounts receivable
Auditors control the mailing
and receipt of replies
Electronic confirmations
are permitted
International Confirmations are not required
Auditing Standards Requirements

Analytical Procedures
Analytical Procedures
 Understand the client’s industry and business
 Assess the entity’s ability to continue as a
going concern
 Indicate the presence of possible misstatements
in the financial statements
 Reduce detailed audit tests

Inquiries of the Client
Inquiries of the Client
It is the obtaining of written or oral information from the client
in response to questions from the auditor.

Recalculation
Recalculation
It involves rechecking a sample of calculations made by the client.

Reperformance
Reperformance
It is the auditor’s independent test of the client’s accounting
procedures or controls that were originally done.

Observation
Observation
 Use one’s senses to assess
client activities.
 Tour plant to obtain a general
impression of client’s facilities.
 Observation is rarely sufficient
by itself.
 Often need to corroborate
with another kind of evidence.

Chapter 8
Audit tests
ACADEMY OF FINANCE
ACADEMY OF FINANCE
AUDITING

CHAPTER 8: AUDIT TESTS
CHAPTER 8: AUDIT TESTS

8.1. AUDIT METHODOLOGY
8.1.1. Definition of audit methodology
Definition: Audit methodology consists of measures, manners, and
procedures applied in the audit to complete the purpose of the audit.
Audit methodology= audit approach
Nowadays, there are 2 typical audit approaches:
(1)the systems-based approach;
(2) the risk-based approach.
The importance of audit methodology: The appropriate auditing methods
are significant tools to improve the quality and effectiveness of the
auditing process. On the other hand, the auditing process is a condition to
establish auditing methods scientifically and effectively.

8.1.2. Contents of audit methodology
The audit method applied in the audit process is an overall application of
collecting methods such as inspection, comparison, calculation, examination,
review, analysis, supervision, investigation, verification, interview, inquiry,
confirmation, etc…
There are two auditing methods: substantive auditing method (basic testing -
checking audit data from the accounting system) and test of control
(assessment and evaluation policies, principles, and control procedures from
the internal control system).

8.1.2. Contents of audit methodology
 The application of audit method is implemented over 5 steps:
• Step 1: The auditor based on the logical relationship between the account balance and a class
of transactions on the financial statement chooses material items (choosing research topic),
because of the auditor’s opinions about the materiality, timing, and cost audit.
• Step 2: The auditor based on the chosen topic gives assumptions on the possible mistakes and
chooses the most possible assumption (according to his/her experience and logic).
• Step 3: Based on optional supposing in step 2, the auditor collects evidence to prove the
supposing.
• Step 4: The auditor analyzes and evaluates the evidence to confirm assumptions. He/she may
collect more evidence to prove it.
• Step 5: Auditor comments in the audit reports about the proven supposing. Following the steps
in the general auditing method helps the auditor eliminate the audit risks, leading the audit
work to the right direction, increasing effectiveness and saving.

8.2. AUDIT TESTS
8.2. AUDIT TESTS
8.2.1. Nature of audit tests
Audit tests are procedures applied to a sample within a population. The
purpose of an audit test is to assure that no material exceptions are included
in the sample. The results of these tests are to allow the auditor to collect
sufficient appropriate audit evidence to be able to conclude with reasonable
assurance that the financial statements are free of material misstatement.
In developing an overall audit plan, auditors use three types of audit tests to
determine whether financial statements are fairly stated. Those are:
+ risk assessment procedures;
+ test of control and;
+ Test detailed of transaction and account balance.

8.2. AUDIT TESTS
8.2. AUDIT TESTS
8.2.1. Risk assessment procedures
Risk assessment procedures are performed to assess the risk of material misstatement
at the financial statement and assertion level by obtaining an understanding of the
entity and its environment, including the entity’s internal control.
The auditor’s understanding includes knowledge about the following
categories:
+ Industry, regulatory, and other external factors;
+ Nature of the entity;
+ Objectives and strategies and related business risk;
+ Measurement and review of the entity’s financial performance;
+ Internal control;

Procedures to assess risk
Procedures to assess risk

8.2. AUDIT TESTS
8.2. AUDIT TESTS
8.2.3. Test of controls
Definition: Tests of controls are performed to obtain audit evidence about
the effectiveness of the accounting and the internal control.
Characteristics: Most assessments, evaluations, and inspections depend on
the client’s control principles and procedures.
Applying condition:
Test of control cannot be applied in all audits. The auditor shall design and
perform tests of controls to obtain sufficient appropriate audit evidence as to
the operating effectiveness of relevant controls.

8.2. AUDIT TESTS
8.2. AUDIT TESTS
There are 2 techniques to be applied to the method:
(1)Walk-through test
+ Walk-through test is a test that is applied for the same transactions from
the beginning to the end of the system in order to evaluate the steps of
control applied in the audit client’s system.
+ The walk-through test is normally applied to one or a few transactions and
follows that transaction through the entire process.
Three commonly used methods of documenting the understanding of internal
controls are narratives, flowcharts, and internal control questionnaires.
(2) Test detailed of controls

8.2. AUDIT TESTS
8.2. AUDIT TESTS
(2) Test detailed of controls
Tests detailed of controls are performed to obtain audit evidence about the
effectiveness of control procedures and principles throughout all, or at least
most, of the period under audit. The result of this method is used to determine
the content and scope of substantive tests.
The procedures to test detailed of control include:
•Make inquiries of client personnel;
•Observe control-related activities;
•Reperform client procedures;
•Inspection/examine documents.

Objectives of tests of control
Objectives of tests of control
(1)To obtain evidence on whether the controls operated in
accordance with the auditor’s understanding and as documented
during the risk assessment process;
(2) To confirm whether the controls functioned effectively
throughout the period of intended reliance.
=> Auditors need to consider the nature, timing and extend of tests
of controls.

8.2. AUDIT TESTS
8.2. AUDIT TESTS
8.2.4. Substantive tests
Definition: Substantive tests are designed and applied to collect sufficient
competent audit evidence that is provided and processed by the accounting system.
Characteristics: All of the auditor’s experiences, analyses, and evaluations are
based on figures, information in the financial statement, and a supplement of the
accounting system. Substantive tests are only relevant to monetary value.
The purpose of substantive tests: to collect audit evidence to detect material
misstatements in the financial statements.
Applying condition: applied in all of the audits, however, scope and level
depend on the effectiveness of internal controls. When the internal control is
sufficient, for high-quality auditing, the auditor has to collaborate closely
between substantive tests and tests of control.

8.2. AUDIT TESTS
8.2. AUDIT TESTS
2 techniques to be applied for the method:
(1) Analytical procedures
+ Analytical procedures are defined as an evaluation of figures and
information on financial statements through analysis of plausible
relationships among financial and nonfinancial data.
+ Analytical procedures may be performed at any three times during an
audit, including the planning, implementing, and completing phases.
+ Types of analytical procedures commonly used: trend analysis and ratio
analysis.

8.2. AUDIT TESTS
8.2. AUDIT TESTS
2 techniques to be applied for the method:
(2) Test of detail of transactions, account balances, and disclosure
Test detail of transactions, account balances, and disclosure is to
evaluate the client’s recording of transactions by verifying the
dollar amounts of transactions (called substantive tests of the
transaction) and test for monetary misstatements in the account
balances in the financial statements (called tests of details of
balances and disclosure).

Contents of substantive tests of transaction
Contents of substantive tests of transaction
The purpose of substantive tests of transactions is to satisfy transaction-
related audit objectives. These objectives include:
•Occurrence: Transactions and events that have been recorded have occurred
and pertain to the entity.
•Completeness: All transactions and events that should have been recorded
have been recorded.
•Accuracy: Amount and other data relating to recorded transactions and
events have been recorded appropriately.
•Cut-off: Transactions and events have been recorded in the correct
accounting period.
•Classification: Transactions and events have been recorded in the proper
account.

Contents of tests of details of balances
Contents of tests of details of balances
The purpose of tests of details of balances is to meet balance-related audit
objectives. These objectives include:
Existence: Assets, liabilities, and equity exist;
Right and Obligations: the entity holds or controls the right to assets and
liabilities are obligations of the entity;
Completeness: all assets, liabilities, and equity that should have been
recorded have been recorded;
Valuation and allocation: Assets, liabilities, and equity interests are
included in the financial statement at appropriate amounts, and any resulting
valuation or allocation adjustments are appropriately recorded.

Contents of tests of details of presentation and disclosure
Contents of tests of details of presentation and disclosure
The purpose of tests of details of presentation and disclosure is to meet these
objectives, including:
Occurrence, and rights and obligations: Disclosed events, transactions, and
other matters have occurred and pertain to the entity;
Completeness: All disclosures that should have been included in the
financial statements have been included.
Classification and understandability: Financial information is
appropriately presented and described ,and disclosure are clearly expressed.
Accuracy and valuation: Financial and other information are disclosed
fairly and at appropriate amounts.

Chapter 9
Audit Sampling
ACADEMY OF FINANCE
ACADEMY OF FINANCE
AUDITING

Chapter 9
AUDIT SAMPLING
Chapter 9
AUDIT SAMPLING
9.1. THE IMPORTANCE OF AUDIT SAMPLING
9.2. DEFINITION OF AUDIT SAMPLING AND RELATED CONCEPTS
9.3. SAMPLING STEPS
9.4. DETERMINE WHETHER THE MISSTATEMENT IS AN ANOMALY
9.5. SAMPLING IN TESTS OF CONTROLS
9.6. SAMPLING IN SUBSTANTIVE TESTS OF DETAILS

1) The auditor may over-audit by taking samples that are too large
and waste time and resources or under-audit by taking samples
that are too small and end up not detecting numerous
nonconformities.
2) The use of sampling is widely adopted in auditing because it
offers the opportunity for the auditor to obtain the minimum
amount of audit evidence, which is both sufficient and
appropriate, in order to form valid conclusions on the
population.
3) Audit sampling is also widely known to reduce the risk of the
WPs at the review stage of the audit.

- A sample is a small part of anything, intended as representative of the
whole. It may not be practical to examine all available data. For example,
records may be too numerous or dispersed, or may be too time consuming
or costly.
- Audit sampling (sampling) – The application of audit procedures to less
than 100% of items within a population of audit relevance such that all
sampling units have a chance of selection in order to provide the auditor
with a reasonable basis on which to draw conclusions about the entire
population.
- Population– The entire set of data from which a sample is selected and
about which the auditor wishes to draw conclusions.

- “Sample risk - The risk that the auditor’s conclusion based on a sample
may be different from the conclusion if the entire population were subjected
to the same audit procedure.”
- “Non-Sampling risk- The risk that the auditor reaches an erroneous
conclusion for any reason not related to sampling risk”
- Statistical samplings an approach to sampling that has the following two
characteristics: Random selection of the sample items; and the use of
probability theory to evaluate the sample result, including measurement of
sampling risks
- Non-statistical samplings an approach to sampling that does not have two
above mentioned characteristics and are not considered as statics sampling.

9.5.1 Planning samples
9.5.2 Sample selection
9.5.3 Performance and evaluation

Planning samples
Planning samples
• Auditors should consider the following issues when performing
planning samples:
• The relationship of the sample to the objective of the test of
controls.
• The maximum rate of deviations from prescribed controls that
would support his planned assessed level of control risk.
• The auditor's allowable risk of assessing control risk is too low.
• Characteristics of the population, that is, the items comprising
the account balance or class of transactions of interest.

9.5.1 Planning samples
9.5.2 Sample selection
9.5.3 Performance and evaluation

Planning samples
Planning samples
Auditors should consider the following issues when perform
planning samples:
•The relationship of the sample to the relevant audit objective
•Preliminary judgments about materiality levels.
•The auditor's allowable risk of incorrect acceptance.
•Characteristics of the population, that is, the items comprising the
account balance or class of transactions of interest.

Chapter 11
ORGANISATION OF THE AUDIT PROCESS
ACADEMY OF FINANCE
ACADEMY OF FINANCE
AUDITING

Chapter 11
Chapter 11
11.1. PREPLAN THE AUDIT
11.2. AUDIT PLANNING
11.3. AUDIT IMPLEMENTING
11.4. AUDIT COMPLETING
11.5. FOLLOW UPAND MONITOR OF AUDIT QUALITY

When audit firm receive an offer letter, an audit
organization must decide whether to accept or continue
doing the audit for the entity, obtain an engagement letter
and select staff for the engagement.

11.1.1 Audit engagement acceptance
11.1.1 Audit engagement acceptance
The auditors and audit firm must research some information
about the client before signing an audit contract as follow:
+ The prospective client’s standing in the business community,
financial stability,…
+ Indentify client’s reasons for audit;
+ Consider the client’s requirement for the audit such as: audit
objectives, scopes, timing…in conformity with the professional
standards;
+ …

11.1.2 Select staff and facilities for the engagement
11.1.2 Select staff and facilities for the engagement
The number and quality of audit staff needed on an engagement
depends on the complexity and extent of audit work anticipated.
Staff should have experiences at several levels, and a good
understanding of the entity’s industry as well as financial
statements.
After partner or manager selected staffs for the audit, the
members of the audit team must prepare facilities for the
engagement such as: documents, working papers, fees,
transportations, and related other things.

Three Main Reasons for Planning
Three Main Reasons for Planning
1. To obtain sufficient appropriate evidence
for the circumstances
2.To help keep audit costs reasonable
3.To avoid misunderstanding with the client

Initial Audit Planning
Initial Audit Planning
1. Client acceptance and continuance
2. Identify the client’s reasons for the audit
3. Obtain an understanding with the client
4. Develop overall audit strategy

Client Acceptance and Continuance
Client Acceptance and Continuance
New client investigations
If previously audited, the new auditor is
required to communicate with the
predecessor auditor
Client permission required
Continuing clients
Annual evaluations on whether to continue
based on issues, fees, and client integrity

Identify Reasons for the Audit
Identify Reasons for the Audit
Two major factors affecting acceptable risk
Likely statement users
Intended uses of the statements
Likely to accumulate more evidence for
companies that are
Publicly held
Have extreme indebtedness
Likely to be sold

Obtaining an Understanding of the Client
Obtaining an Understanding of the Client
Engagement terms should be understood
between CPA and client.
Standards require an engagement letter
describing:
objectives
responsibilities of auditor and management
schedules and fees
Informs client that auditor cannot guarantee
all acts of fraud will be discovered.

Understanding of the Client’s Business and Industry
Understanding of the Client’s Business and Industry
Client business risk is the risk that the client
will fail to meet its objectives.
 Information technology
Global operations
Human capital

Business Operations and Processes
Business Operations and Processes
Factors the auditor should understand:
 Major sources of revenue
 Key customers and suppliers
 Sources of financing
 Information about related parties

Industry and External Environment
Industry and External Environment
Reasons for obtaining an understanding of the
client’s industry and external environment:
1. Risks associated with specific industries
2. Inherent risks common to all clients in
certain industries
3. Unique accounting requirements

Phases of the Audit Process
Phases of the Audit Process
I. Plan and design an audit approach.
II. Perform tests of controls and
substantive tests of transactions.
III.Perform analytical procedures and
tests of details of balances.
IV.Complete the audit and issue an
audit report.

Summary of the Audit Process: Phase I
Accept client and perform initial planning
Understand the client’s business and industry
Assess client’s business risk
Perform preliminary analytical procedures

Set materiality and assess acceptable
audit risk and inherent risk
Understand internal control and assess control risk
Gather information to assess fraud risks
Develop overall audit plan and audit program

Summary of the Audit Process: Phase II
Summary of the Audit Process: Phase II
Perform substantive tests of transactions
No
Yes
Perform tests of controls
Assess likelihood of misstatements in
financial statements
Plan to reduce assessed
level of control risk?

Summary of the Audit Process: Phase III
Summary of the Audit Process: Phase III
Perform analytical procedures
Perform tests of key items
Perform additional tests
of details of balances
Low Medium
High or
unknown

Summary of the Audit Process: Phase IV
Summary of the Audit Process: Phase IV
Perform additional tests for
presentation and disclosure
Accumulate final evidence
Evaluate results
Issue audit report
Communicate with audit
committee and management

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