Chapter 1: Nature, Purpose and Scope of Audit

Audit Independent examination of & expression of opinion on the fs, by an duly appointed auditor

Auditor Engagement partner or the audit firm

Objective Provide a reasonable assurance, an opinion, to the users that the fs is fairly presents the company financial condition and are free from material misstatement.

Reason

Rspsblty AUDITOR DIRECTOR

- Ensure appropriate working relationship with directors (contractual relationship)

- Plan and perform the audit in accordance to ISA.

- Obtain sufficient appropriate audit evidence before form opinion.

- Report weaknesses in the system using mgmt letter.

- 2Ps = preparing & presenting the fs that are true & fair, based on IFRS.

- Maintain internal control relevant to the preparation of fs.

- Apply appropriate a/cing policies. - Making reasonable a/cing estimates.

Opinion - Not guarantee nor certify that fs are correct. - Give reasonable assurance that the fs show a true and fair presentation of the cos result and

position, free of bias and manupulation and comply with relavant national legislation. - True = info is factual, not false and conformsw with required standard and law. - Fair = infor is clear, free from bias and discrimination & in compliance with expected standard

and rules. A/c reflectsthe commercials substance.

Benefit - Easier to obtain financing from external parties. - Enter and trade in capital market. - Control and operational improvements. - Limited co= provide reliance tos/h, ensure director fulfill statutory obligation - Partnership= reduces disputes, provide NAS - Sole trader= facilities future mergers, NAS

Inherent Limitation

- Sampling = not pratical to test 100% of transactions, so the sample may not be representative. - Evidence = persuasive not conclusive, based on judgements and estimates. - Inherent limitation of int. control = operated by human- human error/ collusion & fraud. - Subjectivity = fs include estimate & judgement, so auditor require to use judgement to assess

whether fs are true and fair. - Historic info = audit report issued some time after y/e, fs may be out of date. - Audit report format = format determined by ISA, terminology may not be understood by non-

accountant. Despire these limitations, an audit adds credibility to the fs.

Expectation Gap

Gap between the expectation of users of assurance reports and the firms legal responsibility.

Assurance Assurance engagement = practitioner expresses a conclusion designed to enhance the degree of

condidence of the intended users other than the responsible party abt the outcome of the evaluation or measurement of a subject matter against criteria.

Element of assurance engagement Criteria - used to compare with suject matter Report- assurance report is the opinion given by practitioner to the intended users & reponsible party Evidence - sufficient appropriate evidencegathered in order to give the assurance level Subject matter- data that responsible party has preparred which requried verification Three parties relationship practitioner, responsible party, intended users

Level of Assurance

Assurance Type Assurance Level Opinion Example Report

Audit/ Reasonable engagement

High, but not absolute

Positive Statutoty audit (external audit)

In our opinion the fs are properly prepared... and give a true & fair view...

Review/ Limited engagement

Moderate (forecasts are based on assumptions which are subject to uncertainty)

Negative Review of financial information (cash flow forecast)

Nothing has come to our attention that causes us to believe that subject matter are not in accordance with the criteria

Agreed-upon procedures

none none Examination of SOFP

Compilation none none Preparation of fs & tax returns

Types of Audits

Overview of

Audit Procedure

Preliminary engagement activities (client acceptance/continuance & engagement term)

Obtain understanding of the entity

Establish materiality and assess risk

Set overall audit strategy and develop audit plan

Perform TOC and SP

Overall review of the audit

Evaluate result

Issue audit report