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Chapter 2: Introduction to Auditing and Financial Statement Audit

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Ergieson Adriano

on 1 July 2013

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Transcript of Chapter 2: Introduction to Auditing and Financial Statement Audit

Limitations of a Financial Statement Audit
Introduction to Auditing and Financial Statement Audit
Chapter 2
Primitive Auditing
User Verifies Information
User Shares Information Risk with Management
User are Provided with Audited Financial Statement
The Philosophy of an Audit and Notion of Accountability, Stewardship and Agency
Stewardship or Agency Theory
Motivational Theory
Information Theory
Insurance Theory
Four Conditions
PSA (Philippine Standards on Auditing)
These standards contain the basic principles and essential procedures which the auditor should follow.

Professional Skepticism
means the auditor makes a critical assessment with a questioning mind.
Definition of Auditing
Origin and History of Auditing
Reducing Information Risk
Demand for financial statement audits
A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users.
Types of Audits
Objective of a Financial Statement Audit
The objective of a financial statement audit is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects in accordance with an identified financial reporting framework.
General Principles of a Financial Statement Audit

Professional competence and due care
Professional behavior
Technical standards
Scope of a Financial Statement Audit
The term “scope of an audit” refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit.
Complexity of transactions
Remoteness of information
Biases and motives of the provider
Information Risk
is the risk that the information used to assess business risk is not accurate or misleading.

Ma. Alyzza SJ. Lapitan
Earl Jenine V. Sarmiento
User Verifies Information
The user may go to business premises to examine books of accounts and other accounting records in order to obtain information about the reliability of the financial statements.
User Shares Information Risk with Management
Management is responsible for providing reliable information to users. If users rely on inaccurate financial statements and as a result incur financial loss, they may have a basis for a lawsuit against management.
Users Are Provided with Audited Financial Statements
The most reasonable and common way for users to obtain reliable information is to have it audited. Decision makers can then use the audited information on the assumption that it is reasonably complete, accurate, and unbiased.
Ergieson B. Adriano
Kamille P. Valdez
Economic Limitations
Reasonable cost
Reasonable length of time
Other Significant Limitations
Alternative accounting principles
Accounting estimates
Limitations of a Financial Statement Audit
Responsibility for the Financial Statements
Types of Auditors
External or independent auditors
Internal auditors
Government auditors
Stewardship or Agency Theory
implies that the manager (as well as the owners or investors) wants the credibility an audit adds to the financial statement assertions.
Motivational Theory
preparers of financial statements know that their assertions will be subjected to an audit; thus, financial statements will be brought more in line with accounting standards.
Information Theory
an assurance service is a means of improving the quality of information; also valued as a means of improving financial and non-financial data for internal decision making; also states that investors benefit through the increased confidence of external users of the information.
Insurance theory
states that demand for assurance occurs from those who may suffer loss when things go wrong.
Economic Benefits of a Financial Statement Audit
Access to Capital Markets
Lower Cost of Capital
Deterrent to Inefficiency and Fraud
Control and Operational Improvements
Access to Capital Markets
public companies must satisfy statutory audit requirements under the securities acts in order to register securities and have them traded on securities markets.
Lower Cost of Capital
companies often engages auditor to have their financial statement audited in order to obtain bank loans with more favorable terms.
Deterrent to Inefficiency and Fraud
the fact that financial statement assertions are to be verified reduces the likelihood that management will engage in fraudulent financial reporting.
Control and Operational Improvements
the independent auditor often makes suggestions to improve internal control, to evaluate management's assessments to business risks, to recommend improved performance measures and to make recommendations to achieve greater operational efficiencies within the client's organization.
Julie Ann Marie C. Chua
Auditing in Ancient Egypt and Babylonia
Auditing in Ancient Greece and Rome
Auditing in Medieval Period
Auditing During the Industrial Revolution
Early Auditing in United States of America
Distinction between Accounting and Auditing
Thank you for listening.
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