Nature auditing and assurance engagement

>Assurance services to enhance the intended users’ confidence by evaluating the subject matter against the criteria.

>Same as other type of assurance services, auditing service also includes elements of: a three-party relationship, an appropriate subject matter, suitable criteria, sufficient appropriate evidence and a written assurance report.

>The objective of an independent audit is designed to provide “reasonable assurance” that the financial statements, taken as a whole, are free from material misstatements and are fairly presented.

>Auditing is a systematic approach of objectively evaluating evidence on whether the financial statements are presented in a true and fair view; and then communicating the results to the interested users.

>The major steps of auditing process include client acceptance and planning; testing of controls, transactions and balances; and audit completion and reporting.

Demands for auditing and assurance services

>The agency relationships in an organisation between shareholders (who is the principal) and managers (who is the agent) are not necessarily harmonious; indeed, agency theory is concerned about the causes and implications of the conflict of interests between agent and principal. The conflicting interests of managers and shareholders gives rise to information risks.

>Users of financial information demand reliable information for making economic decisions in investment, lending, resources allocation and so on. However, there is the risk that financial statements are misleading to the users because of conflicting interests between information users (for example, shareholders) and information provider (management of the reporting entity), and also the accessibility and complexity of information.

>One way to minimize information risks is that the auditors review the financial statements and report whether they are presented in a true and fair view.

>The benefits of auditing are reducing agency risk and information risk, ensuring that management discharges its responsibilities properly, and enhancing the credibility of financial information.

Types of audit

>Internal and external audit

1 the scope, objectives and qualifications of external audit and internal audit are fixed by statute and by management, respectively.

2 external auditors and internal auditors report to and are appointed/dismissed by shareholders and management, respectively.

3 external auditors and internal auditors are employees of the CPA firm and of the company, respectively.

>Financial, operational and compliance audit focus on reviewing the financial statements, control effectiveness and operational efficiencies, compliance with rules and regulations, respectively.