AUDITING PRINCIPLES &

PRACTICE I
By dereje mekoya
 CONTENT OF THE COURSE
1) The Nature, Purpose, Scope of Audit and Assurance Services
2) The Auditing Profession
3) Materiality and Risk Assessment
4) Client Acceptance and Planning the Audit
5) Audit Responsibility, Objectives, Evidence and Recording the Audit
6) Internal Control
7) Audit Reports
 CHAPTER ONE
THE NATURE, PURPOSE, SCOPE OF AUDIT AND ASSURANCE SERVICES

Points to be addressed in the Standards to be referred in this

chapter chapter
 1.1 Meaning Of Audit  IAASB framework
 1.2 Assurance Services: Overview  ISA 200
 1.3 Why Audits are Conducted
 1.4 Types of Audit and Auditors
INTRODUCTION

 Managers, investors, creditors, and regulatory agencies needs reliable

information to make informed decisions about resource allocation.
 Auditing play an important role in this process by providing objective and
independent reports on the reliability of information.
 The role of audit is to provide reasonable assurance / guarantee about
the financial statements as they do not contain material misstatements or
omissions.
 The audit should be done by a competent, independent person.
 1.1 MEANING OF AUDIT

 Auditing, a staple of the accounting practice, is the process of examining the accuracy of financial
statements and a company's financial reporting.
 Auditing is the process of assessment and ascertaining of financial, operational, and strategic goals and
processes in organizations to determine whether they are in compliance with the stated principles in
addition to them being in conformity with organizational and more importantly, regulatory requirements.
 Audit is the examination or inspection of various books of accounts by an auditor followed by physical
checking of inventory to make sure that all departments are following documented system of recording
transactions. It is done to ascertain the accuracy of financial statements provided by the organization.
 It is to check and verify the accounts by an independent authority to ensure that all books of accounts are
done in a fair manner and there is no misrepresentation or fraud that is being conducted.
 Auditing encompasses both an investigating process and a reporting process.
MEANING OF AUDIT

 Audit is a work performed by an auditor to enable him/her to express an

opinion whether the financial statements are prepared, in all material
respects, in accordance with an identified financial reporting framework .

 1.2. ASSURANCE SERVICES: OVERVIEW
 “Assurance engagement” means an engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the responsible party
about the outcome of the evaluation or measurement of a subject matter against criteria.
 Assurance services are professional services that improve the quality of information for decision
makers. Individuals who are responsible for making business decisions seek assurance services to
help improve the reliability and relevance of the information.
 This service encompasses attestation service and other assurance services.
An attestation service is a type of assurance service in which the CPA firm issues a report about
the reliability of an assertion/statements that is made by another party.
Other assurance services that do not meet the formal definition of attestation services. The auditor
is not required to issue a written report. the assurance does not have to be about the reliability of
another party’s assertion about compliance with specified criteria.
 OTHER ASSURANCE SERVICE
 Most of the other assurance services that CPAs provide do not meet the formal definition of attestation services.

 The CPA or other auditor is not required to issue a written report.

 The assurance does not have to be about the reliability of another party’s assertion about compliance with
specified criteria.
 examples

1. Controls over and risks related to investments, including policies related to derivatives…
Involves: Assessing the processes in a company’s investment practices to identify risks and to determine the
effectiveness of those processes.
2. Assess risks of accumulation, distribution, and storage of digital information…
INVOLVES: Assessing security risks and related controls over data and other information stored electronically,
including the adequacy of backup and off-site storage.
NO ASSURANCE SERVICES PROVIDED
BY CPAS

 1. Accounting and bookkeeping services

2. Tax services

3. Management consulting services

 Most accounting and bookkeeping services, tax services, and
management consulting services fall outside the scope of assurance
services, although there is some common area of overlap between
consulting and assurance services.
CONT’D

While the primary purpose of an assurance service is to improve the

quality of information,

The primary purpose of a management consulting engagement is to

generate a recommendation to management.
 THE ECONOMIC DEMAND FOR AUDITING

If the bank makes the loan, it will charge a rate of interest determined primarily by three
factors:
1. Risk-free interest rate: : Is the rate the bank could earn by investing in treasury notes
for the same length of time as the business loan.
2. Business risk for the customer: : possibility that the business will not be able to repay its
loan because of economic or business conditions,
3. Information risk: Information risk reflects the possibility that the information upon
which the business risk decision was made was inaccurate.
THE ECONOMIC DEMAND FOR AUDITING
(CONT’D)
 If the bank officer is satisfied that there is minimal information risk because
a borrower’s financial statements are audited, the bank’s risk is
substantially reduced and the overall interest rate to the borrower can be
reduced.
 The reduction of information risk can have a significant effect on the
borrower’s ability to obtain capital at a reasonable cost.
IMPORTANT OF AUDIT FOR ORGANIZATION

 “Why do organizations request an audit?" (Section C)

Among the reasons the majors are the following:

1. Control Mechanism

 Audits whether internally or externally performed are valued as important

control mechanisms for accountability, the overall need for
monitoring/supervise activities, for credibility/ trustworthiness for
reported and unreported information.
IMPORTANT OF AUDIT FOR ORGANIZATION

2. Conflict of Interest
 The agency relationship that exists between an owner and manager
produces a natural conflict of interest because of the information
asymmetry that exists between the manager and the absentee owner.
 Information asymmetry means that the manager generally has
more information about the "true" financial position and results of
operations of the entity than the absentee owner does.
 IMPORTANT OF AUDIT FOR ORGANIZATION

3. Consequences
 Accounting provides information for economic decision-making.
 This Information is used for decisions that have serious and substantial economic consequences.
 Thus, the need for an audit is verifying the accuracy of information before they are used in decisions.
4. Remoteness of information
 Because of the separateness of the management from the owners; information is prepared in a place far
from the user.
 The user is prevented from directly assessing the quality of information he/she obtains.
 Thus, the need for auditor services is to assess the information on the users' behalf.
5. Regulatory Requirements
 Many business laws, memorandum of association and regulatory
agencies acts make audits annual requirements to be complied/act in
accordance with for renewal of license or authorize. For example the
security exchange commission (SEC) in the US; the Commercial Code of
Ethiopia (1966), and latter the Public Financial Regulation of Procl 163/1999 in
Ethiopia make the filing of audited financial statements annually.
1.3. WHY AUDITS ARE CONDUCTED

 Benefits (important) of Being Audited

Determine adequacy of internal controls.
Promote best practices for controls.
Ensure compliance with policies and regulations.
Identify operational inefficiencies and waste.
Review IT projects, systems, and technology.
Provide objective insight.
Assess efficient and responsible use of resources.
BENEFITS(IMPORTANT) OF AUDIT

 You must conduct audits regularly to understand different aspects of your

business.
 Audits can help catch issues early on before they snowball into big mistakes.
If you don’t conduct audits, you may find yourself reviewing inaccurate
information, which can impact your business later.
 Audits can help you:
Find financial problems
Catch errors
Boost your business’s bottom line
Stay organized
Make better business decisions
 THE ECONOMIC DEMAND FOR AUDITING

 If the bank makes the loan, it will charge a rate of interest determined primarily
by three factors:
1. Risk-free interest rate: Is the rate the bank could earn by investing in treasury
notes for the same length of time as the business loan.
2. Business risk for the customer: possibility that the business will not be able to
repay its loan because of economic or business conditions,
3. Information risk :reflects the possibility that the information upon which the
business risk decision was made was inaccurate.
 A likely cause of the information risk is the possibility of inaccurate financial
statements.
 THE ECONOMIC DEMAND FOR AUDITING
(CONT’D)
 Auditing has no effect on either the risk-free interest rate or business risk,
 But it can have a significant effect on information risk.
 If the bank officer is satisfied that there is minimal information risk
because a borrower’s financial statements are audited, the bank’s risk
is substantially reduced and the overall interest rate to the borrower can
be reduced.
 The reduction of information risk can have a significant effect on the
borrower’s ability to obtain capital at a reasonable cost.
1.4 TYPES OF AUDIT

Employe Intern
e Benefit Financial
Plan al Audit
Audits audit
Forens
External
ic
Audit Aud audit

Governm
it
ent or Pay
IRS
audits Strategic audit
audit,
operational
and IT audit
 TYPES OF AUDIT (CONT’D)

1. FINANCIAL AUDIT
 Financial auditing is the process of examining an organization’s (or individual’s) financial records to determine if they are
accurate and in accordance with any applicable rules (including accepted accounting standards), regulations, and laws.
 are the most popular followed by operational and strategic audits and in addition to the emerging practice of IT
(Information Technology) audits.
 are also the first point of evaluation as to whether the companies are stating the truth and whether they are hiding or
covering up some aspect that can be uncovered and revealed in a forensic audit.
 Three Main Types of Financial Audits are:
1. An internal audit is typically done in-house, focusing on process assessments, control assessments, the safety of
assets, and legal compliance. It is designed to improve an organization’s operations and add value to the company.
2. An external audit is carried out by an independent party, such as a tax agency or the IRS, following standards that differ
from the company’s.
3. An Internal Revenue Service (IRS) tax Audits: performs routine audits to verify a taxpayer’s specific transactions and
returns. to make sure your company did not overpay or underpay taxes.
 TYPES OF AUDIT (CONT’D)

2. INTERNAL AUDITS (IA)

 Internal audits refer to the audits done by employees and stakeholders within the organizations with a
view to evaluate and assess whether the organization is following the internal processes, norms,
rules, and regulations in addition to determining whether it is in compliance with the regulatory norms.
 IA are sometimes the first checkpoints for organizations to determine whether their books of
accounts, operational processes, and IT infrastructure and security protocols are in order with
both the internal objectives, strategic imperatives, and external regulatory requirements.
 Internal audits are not accorded more importance over external audits is b/c they are being performed
by employees and individuals within the organizations, the apparent lack of objectivity and
thoroughness apart from a tendency to “cover things up” means that often, external audits are
considered more trustworthy.
 Types of Internal audits include compliance audits, operational audits, financial audits, and
an information technology audits.
 REASONS YOU MAY CONDUCT AN
INTERNAL AUDIT
 some common reasons include to:
Propose improvements
Monitor effectiveness
Make sure your business is compliant with laws and regulations
Review and verify financial information
Evaluate risk management policies and procedures
Examine operation processes
 TYPES OF AUDIT (CONT’D0
3. EXTERNAL AUDITS

 External audits are done by independent and third party agencies and companies that are especially
tasked with assessing and evaluating an organizations’ compliance with the regulatory norms.
 Further, some organizations also hire external auditors to “hold a mirror to themselves” in the sense that
any deficiencies and irregularities can be found that are otherwise not “visible” to the senior leadership
and management during the course of conducting the everyday operational business.
 Moreover, external audits are also mandatory due to regulatory and compliance reasons as well as due
to the shareholder requirements which mandate that external audits need to be done annually, quarterly,
and half yearly to be presented in the Annual General Meetings, and meetings of the Board of Directors.
 In addition, external audits might also be required in case of contingencies wherein the regulators who
suspect that “something is amiss” in the companies might mandate those companies to be audited by
independent and third party auditors to ascertain the “true picture” of the finances and operational details
of those companies.
 TYPES OF AUDIT
4. STRATEGIC, OPERATIONAL, AND IT AUDITS
 This audits that have become popular in recent years mainly due to the
increasing complexity of organizational processes as well as the IT
infrastructure and the fast paced external marketplace which needs an
evaluation of whether the organizations are aligning their internal
processes and strategies with that of the external strategic drivers and
imperatives.
 IT audits are being sought to assess and evaluate the readiness of the
organizations’ IT infrastructure and systems and IT processes to meet
the stated goals and objectives in addition to being able to withstand IT
risks and security breaches.
 TYPES OF AUDIT
 A forensic audit assesses and evaluates a person’s or company’s financial information to obtain facts to
support a legal case. It is used to uncover criminal behavior such as fraud or embezzlement.
 Pay audits allow you to identify pay discrepancies among your employees. A pay audit can help you spot
unequal pay at your company. During a pay audit, analyze things like disparities due to race, religion, age, and
gender. Pay audits can also help you ensure workers are paid fairly based on your business’s industry and
location.
 A payroll audit examines your business’s payroll processes to ensure they are accurate. When conducting
payroll audits, look at different payroll factors, such as pay rates, wages, tax withholdings, and employee
information. It is typically internal. Conducting internal payroll audits helps prevent possible external audits in
the future. Businesses should conduct internal payroll audits annually to check for errors in their payroll
processes and remain compliant.
 A compliance audit examines your business’s policies and procedures to see if they comply with internal or external
standards. It can help determine whether or not your business is compliant with paying workers’ compensation or
shareholder distributions. And, they can help determine if your business is compliant with IRS regulations.
TYPES OF OPERATIONAL AUDIT

 Operational audits are similar to internal audits. An operational

audit analyzes your company’s goals, planning processes,
procedures, and operation results. Generally, operational audits
are conducted internally. However, an operational audit can be
external. The goal of an operational audit is to fully evaluate your
business’s operations and determine ways to improve them.
Evaluate effectiveness and efficiency of performance.
 Product Audits can examine your products for defects and other concerns.
 Integrated audits are comprehensive audits that merge the above categories
into one larger audit.
1.5 TYPES OF AUDITORS

 Audit can be done internally by employees or heads of a particular

department and externally by an outside firm or an independent auditor.
 They my:
 Internal Auditors.
External Auditors.
Government auditors
Forensic auditors
Tax Auditors.
Financial Auditors.
Operational Auditors.
Compliance Auditors
Other types of auditor
INTERNATIONAL AUDITING AND ASSURANCE STANDARDS BOARD
(2021)
 STRUCTURE OF PRONOUNCEMENT ISSUED BY THE
IAASB
IESBA Code of Ethics for Professional Accountants (including
International Independence Standards)
Engagements Governed by the Standards of the IAASB
 ISQCs 1–99 International Standards on Quality Control
International Framework for Assurance Engagements
 Audits and Reviews of Historical Financial Information
 ISAs 100–999 International Standards on Auditing
 ISREs 2000–2699 International Standards on Review Engagements
 Other Assurance Engagements
 ISAEs 3000-3699 International Standards on Assurance Engagements
Related Services
 ISRS 4000–4699 International Standards on Related Services
 CHAPTER TWO
2. THE AUDITING PROFESSION

Points to be addressed in the chapter Standards to be referred in the chapter

2.1. The Regulatory Framework  ISA 200

Governing Auditing
 ISA 250
2.2. International Standards on
Auditing (ISA)
2.3. Professional Ethics:
Fundamental Principles, Threats and
Safeguards
2.4. Legal Liability of Auditors
2.5. Rights and Duties, Appointment,
Dismissal and Resignation of an Auditor
 AUDITING STANDARDS

Auditing standards are general guidelines to aid auditors in fulfilling their

professional responsibilities in the audit of historical FSs.

They include consideration of professional qualities such as competence

(know how) & independence, reporting requirements, and evidence.
 GENERALLY ACCEPTED AUDIT STANDARD
which were developed by the AICPA.
Standards on qualifications and conduct
1. Adequate technical training and proficiency
2. Independence in mental attitude
3. Due professional care

About field work Standards

4. Adequate & Proper planning and supervision
5. Sufficient understanding of the entity, its environment, and its internal control
6. Sufficient competent evidence

 Reporting Standards
 1. Whether statements were prepared in accordance with GAAP
 2. Circumstances when GAAP not consistently followed
 3.Adequacy of informative disclosures
 4. Expression of opinion on financial statements
PROFESSIONAL QUALIFICATION
REQUIREMENTS

• A professional accountant should perform professional services

with due care, competence and diligence and has a continuing
duty to maintain professional knowledge and skill at a level
required to ensure that a client or employer receives the advantage
of competent professional service based on up-to-date
development in practice, legislation and techniques.
Professional Ethics: Fundamental
Principles, Threats and Safeguards
 All recognized professions have developed codes of professional ethics.
 Professional ethics refer to the basic principles of right action for the member of
a profession.
 Professional ethics may be regarded as a mixture of moral and practical concepts.
 Thus the professional ethics of an accountant would signify his behavior towards
his fellows in the profession and other professions and towards members of the
public.
Professional Ethics: Fundamental Principles,
Threats and Safeguards

- Integrity: - An accountant should be straightforward, honest and sincere

in his approach to his professional work.
- Objectivity: - An accountant should be fair and should not allow bias to
override his objectivity.
- Independence: - When in public practice, an accountant should both be
and appear to be free of any interest which might be regarded, whatever
its actual effect, as being incompatible with integrity and objectivity.
Professional Ethics: Fundamental Principles,
Threats and Safeguards

- Confidentiality: - A professional accountant should respect the confidentiality of

information acquired in the course of his work and should not disclose any such
information to a third party without specific authority or unless there is a legal or
professional duty to disclose.
- Technical standards: - An accountant should carry out his professional work in accordance
with the technical and professional standards relevant to that work.

- Professional competence: - An accountant has a duty to maintain his level of

competence throughout his professional career. He should only undertake works,
which he or his firm can expect to complete with professional competence.
 Professional Ethics: Fundamental Principles,
Threats and Safeguards
- Ethical behavior: - An accountant should conduct himself with a good reputation of the
profession and refrain from any conduct, which might bring discredit to the profession.

- Contingent fess: - The AICPA code of professional conduct prohibits a CPA firm from
rendering any professional services on a contingent fee basis.
- Responsibilities to colleagues: - The auditor should promote cooperation and good
relations with other members of the profession.
- Advertising: - The advertising should not be false or misleading,” should not contravene “professional
good taste,” should not make “unfavorable reflection on the competence or integrity of the profession,”
and should not” involve a statement the contents of which” cannot be substantiated.
LEGAL RESPONSIBILITY AND
LIABILITY OF AUDITORS

 The auditor is responsible for his report.

 The auditor then has certain duties to fulfill to the users of the financial statements
that he reports on.
 Responsibilities impose liabilities if things go wrong.
LEGAL RESPONSIBILITY AND
LIABILITY OF AUDITORS
Liable for what?
• The CPA can be sued under the following legal concepts.
(i) Prudent man concept: - The auditor is responsible for exercising due professional
care, and he is subject to lawsuit if he fails to do so.
(ii) Liable for acts of others: - The partners are jointly liable for civil actions against a
partner.
(iii)Lack of privileged communication: - CPAs do not have the right under common law
to withhold information from the courts on the grounds that the information is
privileged.
AUDITOR RESPONSIBILITIES WITH
RESPECT TO FINANCIAL STATEMENTS

Expression of an opinion
 Reasonable assurance (word/ declaration) that material
misstatements are absent:
 Includes errors (faults/mistakes), fraud/fake and other
irregularities
 Plan and perform the audit in accordance with GAAS
 STRUCTURE OF PRONOUNCEMENT
ISSUED BY THE IAASB
IESBA Code of Ethics for Professional Accountants (including
International Independence Standards)
Engagements Governed by the Standards of the IAASB
 ISQCs 1–99 International Standards on Quality Control
International Framework for Assurance Engagements
 Audits and Reviews of Historical Financial Information
 ISAs 100–999 International Standards on Auditing
 ISREs 2000–2699 International Standards on Review Engagements
 Other Assurance Engagements
 ISAEs 3000-3699 International Standards on Assurance Engagements
Related Services
 ISRS 4000–4699 International Standards on Related Services
 THE AUTHORITY ATTACHING TO INTERNATIONAL
STANDARDS ISSUED BY THE IAASB

1. International Standards on Auditing (ISAs) are to be applied in the audit of historical

financial information.
2. International Standards on Review Engagements (ISREs) are to be applied in the
review of historical financial information.
3. International Standards on Assurance Engagements (ISAEs) are to be applied in
assurance engagements other than audits or reviews of historical financial information.
4. International Standards on Related Services (ISRSs) are to be applied to compilation
engagements, engagements to apply agreed upon procedures to information and other
related services engagements as specified by the IAASB.
5. ISAs, ISREs, ISAEs, and ISRSs are collectively referred to as the IAASB’s Engagement
Standards.
6. International Standards on Quality Control (ISQCs) are to be applied for all services
falling under the IAASB’s Engagement Standards.
 2.2. INTERNATIONAL STANDARDS ON AUDITING (ISA)
 AUDITS OF HISTORICAL FINANCIAL INFORMATION
 200–299 General Principles and Responsibilities
 300–499 Risk Assessment and Response to Assessed Risks
 500–599 Audit Evidence
 600–699 Using the Work of Others
 700–799 Audit Conclusions and Reporting
 800–899 Specialized Areas
 International audit practice Note
Section I—Background Information about Financial Instruments
Section II—Audit Considerations Relating to Financial Instruments
Professional Skepticism
Planning Considerations
Assessing and Responding to the Risks of Material Misstatement
Valuation of Financial Instruments
Rights and Duties, Appointment, Dismissal
and Resignation of an Auditor
 Assignment I
.

 END OF CHAPTER TWO

 CHAPTER THREE
3. MATERIALITY AND RISK ASSESSMENT

 Points to be addressed  Standards for reference

 3.1. Audit Risk  ISA 320
 3.2. Materiality  ISA 330
 A. COMPONENTS OF AUDIT RISK

Audit risk —The risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated. Audit risk is a function of the risks of
material misstatement and detection risk.
 Audit Risk (AR); Misstatement that remains undetected by the auditor. Caught by
auditor.
A. Inherent Risk (IR): Susceptibility of an assertion to material misstatement assuming
no related internal controls.
B. Control Risk (CR) Risk of misstatements not being detected by system of internal
control. Caught by internal controls.
C. Detection risk —The risk that the procedures performed by the auditor to reduce
audit risk to an acceptably low level will not detect a misstatement that exists and that
could be material, either individually or when aggregated with other misstatements. Risk
B. ACCEPTABLE AUDIT RISK

The following factors mean that audit risk should be

kept lower:
1. Reliance by External Users
2. Likelihood of Financial Failure
3. Integrity of Management
1. RELIANCE BY EXTERNAL USERS

When external users place heavy emphasis on the financial statements,

acceptable audit risk should be kept low.
The following generally results in more users of the financial statements:
Larger clients
Publicly held corporations
Extensive use of liabilities
2. LIKELIHOOD OF FINANCIAL FAILURE

There is a greater chance of having to defend the quality of the audit when
there is a financial failure. Failure indicators include:
Shortage of funds
Declining net income or continued losses
Risky industries such as technology
Management lacking competency to deal with financial difficulties
3. INTEGRITY OF MANAGEMENT

If a client has questionable integrity, the auditor is likely to assess

acceptable audit risk lower. Indications of integrity problems include:
Frequent disagreements with prior auditors, the IRS, and/or SEC
Frequent turnover of key financial and internal audit personnel
Ongoing conflicts with labor unions and employees
C. INHERENT RISK

1. Nature of the Client’s Business

2. Results of Previous Audits
3. Initial vs. Repeat Engagement
4. Related Parties
5. No-routine Transactions
6. Judgment Required
7. Make-up of the Population
1. NATURE OF THE CLIENT’S BUSINESS

 Inherent risk is likely to vary from business to business for accounts such as
inventory, accounts and loans receivable, and property, plant, and
equipment.
 The nature of the business should have little effect on cash, notes payable,
and mortgages payable.

2. Results of Previous Audits

 Misstatements found in the previous year’s audit have a high likelihood of
occurring again.
 Many types of misstatements are systematic in nature, and organizations
are slow in making changes to eliminate them.
 3. INITIAL VS. REPEAT ENGAGEMENT
 Most auditors use a larger inherent risk for initial audits than for repeat
engagements in which no material misstatements had been found.

 4. Related Parties
 Examples of related party transactions are those between parent and subsidiary
companies, and management or owners and the company.
 Increases inherent risk because there is a greater likelihood of misstatement.

 5. Non-routine Transactions
 Transactions that are unusual for the client are more likely to be recorded
incorrectly.
 Examples include fire losses, major property acquisitions, etc.
6. JUDGMENT NEEDED

 Many account balances require estimates and a great deal of management judgment
including:
 Uncollectible accounts receivable
 Obsolete inventory
 Warranty liabilities

7. Make-up of the Population

 Accounts receivable where most accounts are significantly overdue
 Transactions with related parties
 Disbursements made payable to cash
 Inventory with a slow turnover
D. CONTROL RISK

 There are two basic phases to an auditor’s evaluation of control risk:

 Obtain an understanding of internal control.
 This phase applies to all audits.
 Test the internal controls for effectiveness.
 This phase only applies when the auditor chooses to assess control risk at below
the maximum.

 E. Planned Detection Risk

 The auditor can reduce planned detection risk by performing more substantive
testing.
 Detection risk decreased by increasing audit evidence
 BUSINESS RISK

 Business risk—A risk resulting from

significant conditions, events, circumstances,
actions or inactions that could adversely affect
an entity’s ability to achieve its objectives and
execute its strategies, or from the setting of
inappropriate objectives and strategies.
TYPES OF MISSTATEMENTS:

Error: unintentional/chance misstatement

Fraud and other irregularities: intentional

Theft of assets, often employee fraud

Fraudulent financial reporting, often management fraud

Computer fraud and so on….

BIASES AND MOTIVES OF THE
PROVIDER
If information is provided by someone whose goals are
inconsistent with those of the decision maker, the information may
be biased in favor of the provider.
The reason can be honest optimism about future events or an
intentional emphasis designed to influence users. In either case,
the result is a misstatement of information.
For example, when a borrower provides financial statements to a
lender, there is considerable likelihood that the borrower will bias
the statements to increase the chance of obtaining a loan.
The misstatement could be incorrect dollar amounts or inadequate
or incomplete Disclosures of information.
BIASES AND MOTIVES OF THE
PROVIDER

 Voluminous Data:
 As organizations become larger, so does the volume of their exchange
transactions. This increases the likelihood that improperly recorded information is
included in the records—perhaps buried in a large amount of other information.
 User Verifies Information
 The user may go to the business premises to examine records and obtain
information about the reliability of the statements. Normally, this is impractical
because of cost. In addition, it is economically inefficient for all users to verify the
information individually.
 CHAPTER FOUR
4. CLIENT ACCEPTANCE AND PLANNING THE AUDIT

 Points to be addressed  Standards for reference

 4.1. Client Acceptance and  ISA 210
Continuance  ISA 300
 4.2. Planning the Audit  ISA 315
 4.3. Appointment, Remuneration,  ISA 320
and Removal of Auditors
 ISA 330
 ISA 520
(ASSIGNMENT TWO)
 ISA 550