Review of Auditing and Assurance Principles Part II

REVIEW OF
AUDITING AND
ASSURANCE
PRINCIPLES
AGENDA:
1. Kahoot (Review of previous knowledge)
2. Discussion of Detailed Audit Process
KAHOOT:
Objective: To test or review previous knowledge about auditing
assurance and principles.
Directions:
1. Download “Kahoot” application or simply search in the
internet.
2. Click “Enter game pin here”.
3. Enter pin code given by the facilitator.
AGENDA:
1. Kahoot (Review of previous knowledge)
2. Discussion of Detailed Audit Process
OVERVIEW OF THE AUDIT PROCESS
1. Accepting an Engagement
2. Audit Planning
3. Considering the Internal Control
4. Performing Substantive Tests
5. Completing Audit
6. Issuing a Report
1. ACCEPTING AN ENGAGEMENT
 Make a decision of whether to accept or reject an audit
engagement.
Agreement on the terms of engagement through an
engagement letter.
2. Audit Planning
5. Completing Audit
6. Issuing a Report
2. AUDIT PLANNING
 To develop a general audit strategy and determine the
scope of audit procedures to be performed by:
a. Obtaining knowledge about the client’s business
and industry
b. Performing Preliminary Analytical Procedures
c. Assessment of Risk and Materiality
ASSESSMENT OF RISK
Audit risk
Risk that the auditor might give an inappropriate
opinion on the financial statements.
Audit risk = Inherent risk * Control risk * Detection risk

INHERENT RISK
 Susceptibility of an account balance or class of transactions
to a material misstatements assuming there were no related
internal controls.
 Assessment of risk factors:
FINANCIAL STATEMENT LEVEL ACCOUNT BALANCE LEVEL
Management’s integrity Susceptibility of accounts to theft
Management’s characteristics Complexity of calculations
Operating characteristics Complexity of underlying transactions and other

events
Industry characteristics Degree of judgment involved in determining
account balances
CONTROL RISK AND DETECTION RISK
 Control risk is the risk that a material misstatement
that could occur in an account balance will not be
prevented, detected or corrected in a timely manner by
entity’s internal control.
 Detection risk is the risk that an auditor may not
detect a material misstatement that exists in an
assertion which primarily relies on substantive testing.
QUESTION:
Q: Which of the following risks is controllable by the
external auditor?
a. Inherent risk
b. Control risk
c. Detection risk
ANSWER:
Q: Which of the following risks is controllable by the
external auditor?
a. Inherent risk
b. Control risk
c. Detection risk
USING THE AUDIT RISK MODEL
RELATING INHERENT, CONTROL AND DETECTON RISK TO AUDIT RISK
Determine the acceptable level of detection risk.

The auditor should lower the acceptable level of detection

risk by modifying the nature, timing and extent of
substantive tests.
Determine the acceptable level of detection risk.

The auditor may accept a higher level of detection risk

without sacrificing the desired audit risk.
USE OF MATERIALITY IN AUDIT
 Amount of omission or misstatement that could
influence the decision-making users on the basis of the
financial statements.
There is an inverse relationship between materiality
and the audit evidence (substantive testing).
MATERIALITY
2. Audit Planning
5. Completing Audit
6. Issuing a Report
3. CONSIDERING THE INTERNAL CONTROL

DEFINITION OF INTERNAL CONTROL
Internal control – Process designed and effected 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, effectiveness and efficiency of operations and
compliance with applicable laws and regulations. (PSA
315)
DEFINITION OF INTERNAL CONTROL
Internal control – Process designed and effected 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, effectiveness and efficiency of operations and
compliance with applicable laws and regulations. (PSA
315)
COMPONENTS OF INTERNAL CONTROL
Internal control component (CRIME):
1. Control environment
2. Risk assessment
3. Information and communications system
4. Monitoring
5. Existing control activities
STEPS IN ASSESSING CONTROL RISKS
1. Obtaining and documenting the understanding of the

internal control (Test of design and implementation)
2. Performing test of controls (Test of effectiveness)
3. Assessing and documenting the level of control risk
(High level or less than high level)
The auditor may accept a higher level of detection risk

without sacrificing the desired audit risk.
The auditor should lower the acceptable level of detection

risk by modifying the nature, timing and extend of
substantive tests.
2. Audit Planning
5. Completing Audit
6. Issuing a Report
4. SUBSTANTIVE TESTING

 Audit procedures designed to substantiate the account balances
or to detect material misstatements in the financial statements.
 Test of details or Substantive analytical procedures:
a. Test of details involved examining the actual details
making up the various accounts.
b. Substantive analytical procedures involved comparison
of financial information with auditor’s expectations to
determine reasonableness of an account.
 Audit procedures:
1. Inspection
2. Observation
3. Inquiry
4. Confirmation
5. Computation
6. Analytical procedures
2. Audit Planning
5. Completing Audit
6. Issuing a Report
5. COMPLETING THE AUDIT
1. Identifying subsequent events that may affect the financial
statement.
2. Identifying litigation and claims
3. Obtaining written management representation
4. Performing wrap-up procedures
2. Audit Planning
5. Completing Audit
6. Issuing a Report
2. Audit Planning
5. Completing Audit
6. Issuing a Report
END

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REVIEW OF

Audit risk = Inherent risk * Control risk * Detection risk

FINANCIAL STATEMENT LEVEL ACCOUNT BALANCE LEVEL

Management’s integrity Susceptibility of accounts to theft

Management’s characteristics Complexity of calculations

Operating characteristics Complexity of underlying transactions and other

Audit risk = Inherent risk * Control risk * Detection risk

Determine the acceptable level of detection risk.

Audit risk = Inherent risk * Control risk * Detection risk

The auditor should lower the acceptable level of detection

Audit risk = Inherent risk * Control risk * Detection risk

Determine the acceptable level of detection risk.

Audit risk = Inherent risk * Control risk * Detection risk

The auditor may accept a higher level of detection risk

Audit risk = Inherent risk * Control risk * Detection risk

1. Obtaining and documenting the understanding of the

Audit risk = Inherent risk * Control risk * Detection risk

The auditor may accept a higher level of detection risk

Audit risk = Inherent risk * Control risk * Detection risk

The auditor should lower the acceptable level of detection

Audit risk = Inherent risk * Control risk * Detection risk

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