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
-

Opinion

AUDITOR
DIRECTOR
Ensure appropriate working relationship
- 2Ps = preparing & presenting the fs that
with directors (contractual relationship)
are true & fair, based on IFRS.
Plan and perform the audit in accordance
- Maintain internal control relevant to the
to ISA.
preparation of fs.
Obtain sufficient appropriate audit
- Apply appropriate a/cing policies.
evidence before form opinion.
- Making reasonable a/cing estimates.
Report weaknesses in the system using
mgmt letter.
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.

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
Sampling = not pratical to test 100% of transactions, so the sample may not be representative.
Inherent
Evidence = persuasive not conclusive, based on judgements and estimates.
Limitation
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- Historic info = audit report issued some time after y/e, fs may be out of date.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 nonaccountant.
Despire these limitations, an audit adds credibility to the fs.
Expectation Gap between the expectation of users of assurance reports and the firms legal responsibility.

Benefit

Gap

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
Assurance Type
Assurance Level
Opinion
Example
Report
Level of
Audit/
Reasonable
High,
but
not
Positive
Statutoty
audit
In
our
opinion
the fs are
Assurance
engagement
absolute
(external audit) properly prepared... and
give a true & fair view...
Review/
Limited Moderate
Negative Review
of Nothing has come to our
engagement
(forecasts
are
financial
attention that causes us to
based
on
information
believe that subject matter
assumptions
(cash
flow are not in accordance with
which are subject
forecast)
the criteria
to uncertainty)
Agreed-upon
none
none
Examination of
procedures
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