Chapter 1: Introduction and Overview of Audit and Assurance
1.1 Auditing and Assurance Defined
assurance engagement performed by an auditor or consultant to enhance the reliability of the subject matter
accountability relationship situation in which one party is answerable to another for the subject matter
an assurance practitioner may be an auditor working in public practice providing assurance on financial statements or a
consultant providing assurance about environment disclosures
for a financial statement audit, the company is the accountable party, its shareholders are the users, and the subject
matter is the financial statements
1.1.1 Auditing and assurance terms defined
applicable financial The financial framework chosen by management to prepare a companys financial statements. An applicable
reporting framework framework for a private enterprise could be Accounting Standards for Private Enterprises (ASPE), or it could
be International Financial Reporting Standards (IFRS).
assertions Statements made by management regarding the recognition, measurement, and presentation and disclosure of
items in the financial statements.
audit evidence Information used by the auditor to support the audit opinion.
audit file The file where the evidence and documentation of the work performed is kept as a permanent record to support
the opinion issued.
audit plan The list or description of audit procedures to be performed.
audit risk The risk that the auditor may express an inappropriate opinion. This means the auditor may indicate that the
financial statements are not materially misstated when in fact they are.
financial statements A structured representation of historical financial information, including the related notes.
independent auditors The auditors formal expression of opinion on whether the financial statements are in accordance with the
report applicable financial reporting framework.
internal control The processes implemented and maintained by management to help the entity achieve its objective.
material An amount or disclosure that is significant enough to make a difference to the user. The concept of materiality
is one of the reasons why an audit never provides 100% assurance.
materiality The maximum amount of misstatement or omission the auditor can tolerate and still issue an unmodified or
clean audit opinion.
sufficient and The quantity (sufficiency) and quality (appropriateness) of the evidence collected by the auditor.
unmodified opinion The auditor concludes that the financial statements are fairly presented.
working papers Paper or electronic documentation of the audit created by the audit team as evidence of the work completed.
1.2 Different Assurance Services
common types of assurance engagements are financial statement audits, compliance audits, operational audits,
comprehensive audits, and internal audits
1.2.1 Financial statement audits
financial statement audit an audit that provides reasonable assurance about whether the financial statements are
prepared in all material respects in accordance with the financial reporting framework
to do this, the auditor methodically gathers evidence to corroborate the financial information presented by management
at the end of the audit engagement, the auditor issues a report indicating whether the financial information is fairly
presented in accordance with the financial reporting framework
listed entity an entity whose shares, stock, or debt are listed on a stock exchange
it is the auditors responsibility to form an opinion on the fair presentation of the financial statements
fair presentation the consistent and faithful application of accounting standards when preparing the statements
Limitations of a financial statement audit
the limitations of an audit result from the nature of financial reporting, the nature of audit procedures, and the need for
the audit to be conducted within a reasonable period of time and at a reasonable cost (CAS 200)
the nature of financial reporting refers to the use of judgment when preparing financial statements, because of the
subjectivity required when arriving at accounting estimates
the nature of audit procedures refers to the reliance on evidence provided by the client and its management
the timeliness and cost of a financial statement audit refers to the pressure an auditor faces to complete the audit
within a certain time frame at a reasonable cost1.2.2 Compliance audits
compliance audit an audit to determine whether the entity has conformed with regulations, rules, or processes
an example is a tax audit, which is used to determine whether an individual or company has completed a tax return in
accordance with the Income Tax Act
within an organization, management may specify that certain processes be followed when completing a function
1.2.3 Operational audits
operational audits an assessment of the economy, efficiency, and effectiveness of an organizations operations
economy refers to the cost of outputs, including wages and materials
efficiency refers to the relationship between inputs and outputs; specifically, efficiency refers to the use of the
minimum amount of inputs to achieve a given output
effectiveness refers to the achievement of certain goals or the production of a certain level of outputs
operational audits are generally conducted by an organizations internal auditors, or they may be outsourced
operational audits are sometimes referred to as value for money audits, performance audits, or efficiency audits
1.2.4 Comprehensive audits
comprehensive audit an audit that encompasses a range of audit and audit-related activities, such as a financial
statement audit, operational audit, and compliance audit
comprehensive audits are most commonly occur in the public sector, where compliance with various regulations is
examined as part of the financial statement audit
1.2.5 Internal audits
internal audit an independent service within an entity that generally evaluates and improves risk management,
internal control procedures, and elements of the governance process
is typically conducted by employees of the organization being audited, but can be outsourced to an external audit firm
as such, the function is determined by those charged with governance and management within the organization
while the functions of internal audits vary widely from one organization to another, they are often concerned with
evaluating and improving risk management, internal control procedures,