AN AUDIT OF
FINANCIAL STATEMENTS
The
auditor`s expression on whether the financial statements are prepared, with
respect to all material, according to Applicable Financial Reporting Framework
(AFRP).
FINANCIAL
STATEMENT PREPARATION
The preparation of the financial
statements requires the following thing:
=> Identification
of Applicable Financial Reporting Framework includes
=> The
preparation of financial statements according to the applicable framework
=> All the
necessary explanations and descriptions of the applied framework in the
preparation of the financial statements.
DEFINING THE
PREMISE
The term
premise means accepting and acknowledging the responsibility for the
preparation of the financial statements by management and those charged with
governance. This premise includes:
=> The
preparation of financial statements according to the Applicable Financial
Reporting Framework
=> Designing
and implementing the Internal controls to validate the preparation of Financial
Statements
To provide
access to the auditor with the following:
=> Unrestricted
access to all relevant information
=> Unrestricted
access to extra information that auditors thinks necessary in the execution of
an audit
=> Unrestricted
access s to the people within an institution or entity that the auditor thinks
necessary for the purpose of obtaining information relevant to an audit.
Key Takeaway Points
=> Audit expresses an opinion on the financial statement whether it is giving a true and fair view or not.
=> Auditor has to conduct
an audit in accordance with the applicable relevant auditing standards and is
expected to have in-depth knowledge of the auditing standards while doing an
audit.
=> The audit shall apply
appropriate professional judgment where required while doing an audit.
=> Professional judgment
comes from qualification, relevant experience, and knowledge of various
accounting and auditing standards.
=> The auditor shall
maintain the attitude of professional skepticism while doing an audit.
=> Professional
skepticism means the ability of a questioning mind and being alert to
conditions and circumstances that can cause significant misstatements in the
financial records/financial statements.
=> Audit risk is the risk
when the auditor expresses an incorrect audit opinion on the financial
statements.
=> Inherent risk is the
risk that restricts the ability of an auditor to obtain relevant audit evidence
while conducting an audit of financial statements.
=> Detection risk is the
risk that the procedures performed by an auditor to detect misstatement are
failed in the detection of misstatement.
=> Control risk is the risk that the designed and implemented controls failed to correct and detect a misstatement in the financial statements/ financial records on a timely basis.
OVERALL
OBJECTIVES OF THE AUDITOR
As per ISA
200, the auditor’s overall objective regarding the audit of financial
statements includes:
=> To obtain
appropriate and reasonable assurance about the financial statements.
=> To issue an
audit report on the financial statements.
OBTAINING
THE APPROPRIATE/REASONABLE ASSURANCE
Appropriate
or reasonable assurance is a high but not an absolute level of assurance which
means that the auditor cannot guarantee that the financial statements being
audited are completely true and fair. The reason is that the audit has certain
fundamental limitations which result in audit evidence on which the auditor
extracts conclusion and basis opinion as convincing instead of
incontrovertible.
SUFFICIENT
APPROPRIATE AUDIT EVIDENCE AND AUDIT RISK
Sufficiency
refers to the quantity of audit evidence while appropriateness refers to the
quality of audit evidence. As per ISA 200, the auditor shall obtain sufficient
appropriate audit evidence for obtaining reasonable assurance to minimize audit
risk to an acceptable low level.
ETHICAL
REQUIREMENTS IN AN AUDIT OF FINANCIAL STATEMENTS
The auditor
shall follow the appropriate and relevant ethical requirements while conducting
an audit of financial statements.
PROFESSIONAL
SKEPTICISM
Professional
skepticism refers to the attitude and ability to question the mind and be
attentive to conditions and events that may point out possible
misstatements due to faulty conditions and a censorious assessment of audit
evidence. This skepticism includes being attentive to conditions and events
like:
=> The audit
evidence obtained as opposed to the other obtained audit evidence means
the oral responses are different from what is obtained in the document form.
=> Information
that raised significant doubts on the credibility and authenticity of documents
obtained as audit evidence.
=> Situation
and circumstances indicate the possibility of actual or suspected fraud.
=> To other
situations that raise significant doubts in the mind of an auditor while doing
an audit.
PROFESSIONAL
JUDGMENT
Where
required an auditor shall apply professional judgment in the conduct of the
audit and the professional judgment comes from appropriate training,
experience, and knowledge gained while working in a certain industry, also
knowledge and information provided by relevant auditing, accounting, and
ethical standards. The auditor shall determine the best professional judgment
according to the circumstances and will apply it. Professional judgment is
necessary when making decisions about:
=> In
determining the materiality and audit risk.
=> The nature,
timing, and limitations of the procedure of audit.
=> Assessing
whether enough appropriate audit evidence has been obtained.
=> Evaluating
management`s judgments and responses.
=> Formulating
and reaching toward a conclusion that is based on the audit evidence obtained.
INHERENT
LIMITATIONS OF AN AUDIT
There are
always attached inherent limitations to an audit. Therefore, an auditor
cannot obtain absolute assurance about the financial statements because he
cannot minimize the audit risk and is not expected to do so. The audit`s
inherent limitations arise from the following events and circumstances:
=> The nature
of the audit procedure performed.
=> The nature
of financial reporting in practice.
=> To determine
and examine whether enough appropriate audit evidence has been obtained or not.
=> Evaluating
management`s judgments and responses.
=> The need to
conduct the audit within affordable price and suitable time.
=> The chances
of actual or suspected fraud in the financial record.
=> The
evaluation of the related parties' transactions and relationship with
management.
=> Going concern
issue.
AUDIT RISK
Audit risk
is the risk when the auditor expresses the wrong conclusion on the financial
statements. For example to express an unmodified audit opinion on the financial
statements when it's materially misstated and to express modified audit opinion
when the financial statements present true and fair view. Audit risk is
composed of the following components:
Audit risk = Risk of
material misstatement X
Detection risk (Inherent risk X Control risk)
INHERENT
RISK
Chance of an
assertion to a misstatement that could materialize before contemplation of any
associated control.
CONTROL RISK
The risk is
that the internal controls fail to detect and correct a material misstatement
that exists in the financial records.
DETECTION
RISK
The
detection risk is the risk when the audit procedures performed failed to detect
and identify a misstatement in the financial records and such misstatements
could be either material individually or collectively with other misstatements.
CONDUCT OF
AN AUDIT ACCORDING TO ISAS
The auditor
should conduct the audit as per the requirements of the relevant standards to
auditing. In executing an audit of the financial statement the auditor shall
comply with the following steps:
=> Follow all
the ISAs relevant to an audit.
=> It is
necessary for the auditor to have in-depth knowledge of the relevant auditing
standards.
=> Follow and
comply with all the relevant ethical requirements in conducting the audit.