Auditing Principles and Practices I

 Understand The Nature, Purpose, and Scope of Audit and Assurance Services(Und)1

Audit and assurance services are provided by auditors and accountants to provide independent and
objective assessments of an organization's financial statements, internal controls, and business operations.

 The nature of audit and assurance services involves the following characteristics:

1. Independence: It is essential that auditors remain independent and objective throughout the audit
process to ensure that their opinions are unbiased and free from any conflicts of interest

2. Professional skepticism: Auditors must maintain a skeptical attitude and approach when
conducting an audit to ensure that they identify and evaluate any potential risks and issues that
could impact the fairness of the financial statements.

3. Professional judgment: Auditors must exercise professional judgment when evaluating the
financial statements and internal controls to ensure that they are in compliance with the
applicable accounting standards.

4. Evidence-based: Auditors must obtain sufficient and appropriate audit evidence to support their
findings and conclusions.

 The purpose of audit and assurance services is to provide reasonable assurance to stakeholders
that the financial statements are free from material misstatements and are presented fairly in
accordance with the applicable accounting standards. The stakeholders who rely on audit and
assurance services include shareholders, lenders, creditors, investors, and the general public.

 The scope of audit and assurance services can vary depending on the specific engagement and the
needs of the stakeholders. Generally, the scope of an audit engagement includes the following:

1. Evaluation of internal controls: Auditors must evaluate the effectiveness of the organization's
internal controls to ensure that they are adequate to prevent or detect material misstatements in
the financial statements.

2. Review of financial statements: Auditors must review the financial statements to ensure that they
are in compliance with the applicable accounting standards and are free from material
misstatements.

3. Communication with management: Auditors must communicate with management to gain an

understanding of the organization's operations, internal controls, and financial reporting
processes.

4. Reporting: Auditors must provide an independent opinion on the fairness of the financial
statements and any issues or risks identified during the audit process.

 Examine the historical development & Evolution of Auditing, Define the

terminologies associated with auditing(affective)2
 Auditing has a long and rich history that dates back to ancient civilizations. The word "audit"
comes from the Latin word "audire," which means "to hear." In ancient times, audits were
conducted by government officials to ensure that taxes were being collected correctly.

Over time, the role of auditing expanded to include other areas, such as verifying the accuracy of
financial records and ensuring that businesses were operating in compliance with regulations. The
development of the modern corporation in the 19th and 20th centuries also led to an increased
demand for auditing services.

Today, auditing is an essential component of the financial reporting process. Auditors and
accountants provide independent and objective assessments of an organization's financial
statements, internal controls, and business operations.

 Here are some of the key terminologies associated with auditing:

1. Audit: An audit is an independent examination of an organization's financial statements, internal

controls, and business operations.

2. Auditor: An auditor is a professional who performs audits.

3. Assurance: Assurance refers to the level of confidence that an auditor has in the financial
statements and other information being audited.

4. Materiality: Materiality refers to the significance of an item or transaction in the financial

statements. An item or transaction is considered material if its omission or misstatement could
influence the economic decisions of users of the financial statements.

5. Internal control: Internal control refers to the policies, procedures, and processes that an
organization uses to ensure that it achieves its objectives and that its financial reporting is
reliable.

6. Audit evidence: Audit evidence refers to the information and documentation that an auditor uses
to support their findings and conclusions.

7. Audit report: An audit report is the document that an auditor issues at the end of an audit
engagement. The report summarizes the auditor's findings and conclusions.

8. Compliance audit: A compliance audit is an audit that focuses on whether an organization is

complying with laws, regulations, and other requirements.

9. Performance audit: A performance audit is an audit that focuses on whether an organization is

achieving its objectives efficiently and effectively.

10. Audit risk: Audit risk refers to the risk that an auditor will issue an incorrect opinion on the
financial statements.
  Understand the concept of client acceptance and planning the audit(und)1

 Client acceptance is the process of evaluating a potential or existing client to determine whether
an auditor should accept or continue an engagement with that client. The purpose of client
acceptance is to assess the risks associated with the engagement and to ensure that the auditor has
the necessary skills, resources, and independence to perform the engagement.

 When planning an audit, the auditor must assess the risks associated with the engagement and
develop an audit plan that addresses those risks. The audit plan should be based on a thorough
understanding of the client's business and the environment in which it operates.

The planning process typically includes the following steps:

1. Understanding the client's business: The auditor must gain a thorough understanding of the client's
business, including its industry, products, services, and operations.

2. Identifying the risks: The auditor must identify the risks associated with the engagement, including the
risks of material misstatement in the financial statements.

3. Developing the audit plan: The auditor must develop an audit plan that addresses the identified risks.
The audit plan should include the nature, timing, and extent of the audit procedures to be performed.

4. Assessing the internal control environment: The auditor must evaluate the effectiveness of the client's
internal control environment. This may involve testing the design and implementation of the control
procedures.

5. Determining the materiality level: The auditor must determine the level of materiality for the
engagement. Materiality is the level at which a misstatement in the financial statements would be
considered significant.

6. Developing the audit budget: The auditor must develop a budget for the engagement that takes into
account the scope of the audit procedures to be performed and the resources required.

 Define audit responsibility & Evidence, perform audit operations(remember)1

 Audit Responsibility: The auditor has a responsibility to conduct the audit in accordance with
the applicable auditing standards and to provide an independent opinion on the financial
statements. The auditor must exercise professional judgment throughout the audit process and be
guided by the principles of integrity, objectivity, professional competence, confidentiality, and
professional behavior.

 Audit evidence refers to the information and documentation that an auditor uses to support their
findings and conclusions. The auditor must obtain sufficient and appropriate audit evidence to
support their opinion on the financial statements. Audit evidence can be obtained through a
variety of methods, including inspection, observation, inquiry, and confirmation.
  Performing Audit Operations:

The process of performing audit operations involves the following steps:

1. Obtaining documentation: The auditor must obtain and review relevant documentation, such as
financial statements, contracts, invoices, and bank statements.

2. Conducting interviews: The auditor must interview key personnel to gain an understanding of the
business operations and to identify potential risks.

3. Performing tests: The auditor must perform tests to obtain sufficient and appropriate audit evidence.
This may involve testing the accuracy and completeness of transactions, verifying account balances, and
testing the effectiveness of internal controls.

4. Evaluating the internal control environment: The auditor must evaluate the effectiveness of the client's
internal control environment. This may involve testing the design and implementation of the control
procedures.

5. Communicating with management: The auditor must communicate with management throughout the
audit process to identify potential risks and to obtain additional information and documentation.

 Recognize and be guided by the social, professional, and ethical issues involved in auditing
and preparation of financial statements(affective)1

 Auditors must recognize and be guided by the social, professional, and ethical issues
involved in auditing and preparation of financial statements to ensure that they provide
high-quality audit and assurance services that are in the public interest.

- Auditors can help to ensure that their work is conducted with integrity, objectivity, and
independence, and that it serves the public interest.

Some of the key social, professional, and ethical issues that auditors must consider include:

1. Independence: Auditors must maintain independence in both fact and appearance from the clients they
are auditing. This means that auditors should not have any financial or personal interests that could
compromise their objectivity or integrity.

2. Confidentiality: Auditors must maintain the confidentiality of the information they obtain during the
audit process. This means that auditors should not disclose any confidential information to third parties
without the client's consent.

3. Professional skepticism: Auditors must maintain a skeptical attitude throughout the audit process and
should not accept management's assertions without sufficient and appropriate audit evidence.

4. Materiality: Auditors must consider the materiality of the financial statement items they are auditing.
This means that auditors should focus their efforts on those areas that are most likely to have a material
impact on the financial statements.
5. Fraud: Auditors must be alert to the possibility of fraud and should design their audit procedures to
detect and respond to fraud risks.

6. Professional competence: Auditors must possess the necessary knowledge, skills, and experience to
perform the audit engagement effectively.

7. Public interest: Auditors must recognize that their work has a significant impact on the public interest
and should strive to provide high-quality audit and assurance services that promote transparency,
accountability, and good governance.

 Preparation of financial statement In an audit, the auditor is responsible for obtaining

reasonable assurance that the financial statements are free from material misstatement,
whether due to fraud or error. The auditor's responsibility in relation to the financial
statements is to express an opinion on whether the financial statements are presented
fairly, in all material respects, in accordance with the applicable financial reporting
framework.

- The auditor achieves this by examining the underlying transactions and supporting records that
form the basis of the financial statements. The auditor also evaluates the overall presentation of
the financial statements, including the disclosures.

- The auditor's work involves planning the audit, obtaining sufficient and appropriate audit
evidence, evaluating the internal control environment, and providing an independent opinion. The
auditor must also consider the key social, professional, and ethical issues that are involved in
auditing and preparation of financial statements, such as independence, confidentiality,
professional skepticism, materiality, fraud, professional competence, and public interest.

Auditing Principles and Practices Il

 Define Audit sampling, Perform audit sampling for substantive and control tests(app &
psycho)2

 Audit sampling is the process of selecting a subset of data from a larger population of
data to obtain sufficient and appropriate audit evidence. Audit sampling is used by
auditors to evaluate the financial information and internal control system of an
organization. Audit sampling can be used for both substantive testing and control testing.

Substantive testing involves testing the details of transactions, balances or disclosures, and control testing
involves testing the effectiveness of internal control over financial reporting.

 To perform audit sampling for substantive testing: the auditor selects a sample of
items from the population and performs detailed testing procedures to obtain evidence
about the accuracy, completeness, and validity of the items selected. The auditor then
uses the results of the sample to draw conclusions about the population as a whole.

 To perform audit sampling for control testing: the auditor selects a sample of
transactions and tests the effectiveness of the controls that are designed to prevent or
 detect errors or fraud. The auditor then uses the results of the sample to evaluate the
operating effectiveness of the internal control system.

The steps involved in performing audit sampling for substantive and control tests are as follows:

1. Define the population: The auditor defines the population of items that will be subject to audit
sampling.

2. Determine the sample size: The auditor determines the sample size based on factors such as the level of
risk, the materiality of the items, and the desired level of confidence.

3. Select the sample: The auditor selects a sample of items from the population using a random or
systematic sampling method.

4. Perform testing procedures: The auditor performs detailed testing procedures on the items selected to
obtain evidence about their accuracy, completeness, and validity.

5. Evaluate the results: The auditor evaluates the results of the sample and draws conclusions about the
population as a whole.

6. Document the findings: The auditor documents the findings of the audit sampling in the audit working
papers and communicates the results to management.

 Understand the concept of Audit of sale & collection cycle(und)2

 The sales and collection cycle is one of the most important cycles in an organization's accounting
system. The sales and collection cycle involves the sale of goods or services to customers and the
collection of cash from those customers.

Overall, the audit of the sales and collection cycle is important because it helps to ensure that the
organization's financial statements are accurate and free from material misstatement.

The audit of the sales and collection cycle is an important part of the overall audit process and involves
several steps:

1. Planning the audit: The auditor should obtain an understanding of the sales and collection cycle and
identify the key risks associated with the cycle.

2. Evaluating internal controls: The auditor should evaluate the effectiveness of the organization's
internal controls over the sales and collection cycle. This includes controls over credit approval, sales
order processing, shipping, billing, and cash receipts.

3. Testing sales transactions: The auditor should test a sample of sales transactions to ensure that they
are properly authorized, recorded, and classified.

4. Testing accounts receivable: The auditor should test a sample of accounts receivable to ensure that
they are properly valued and that any allowances for doubtful accounts are reasonable.
5. Testing cash receipts: The auditor should test a sample of cash receipts to ensure that they are
properly recorded and deposited.

6. Substantive analytical procedures: The auditor should perform substantive analytical procedures to
identify any unusual trends or fluctuations in sales and accounts receivable.

7. Completing the audit: The auditor should evaluate the results of their testing and issue an audit
report.

 Make substantive tests and tests of controls audit for acquistion and warehouse
cycle(app)2

 Substantive tests for acquisitions and warehouse cycle:

1. Testing completeness of acquisitions: The auditor should obtain a sample of purchase orders and trace
them to the receiving reports and vendor invoices to ensure that all acquisitions are recorded

2. Testing accuracy of acquisitions: The auditor should obtain a sample of vendor invoices and compare
them to the purchase orders and receiving reports to ensure that the amounts are accurate.

3. Testing valuation of inventory: The auditor should obtain a sample of inventory records and compare
them to the physical inventory counts to ensure that the inventory is properly valued.

4. Testing cutoff of inventory: The auditor should obtain a sample of inventory transactions and ensure
that they are recorded in the correct period.

5. Testing existence of inventory: The auditor should perform a physical inventory count to ensure that
the inventory actually exists.

 Tests of controls for acquisitions and warehouse cycle:

1. Testing approval of acquisitions: The auditor should obtain a sample of purchase orders and ensure
that they are properly authorized.

2. Testing segregation of duties: The auditor should ensure that the acquisitions are approved by
someone other than the person who processes the payments.

3. Testing completeness of inventory counts: The auditor should ensure that all inventory is included in
the physical inventory count.

4. Testing accuracy of inventory counts: The auditor should ensure that the physical inventory counts
are accurate.

5. Testing cutoff of inventory counts: The auditor should ensure that the physical inventory count is
conducted at the end of the period.

Overall, substantive tests and tests of controls are important because they help the auditor to obtain
sufficient and appropriate audit evidence to support their audit opinion. The auditor should tailor their
audit procedures to the specific risks associated with the acquisition and warehouse cycle.