Auditing & Assurance Services

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AC 4342 Auditing
Introduction to assurance and financial statement auditing
Discussion Question: Messier Q1-13, 14
1

References
HKICPA Members’ Handbook
Amended Preface to the Hong Kong Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements Hong Kong Framework for Assurance Engagements

Reference
Messier: Ch 1

2

CILOs and TLAs
CILOs
1 Describe the auditing profession, the regulatory, legal and reporting framework of auditing. Recognize the basic principles, objectives and ethical requirements of audit and assurance services. Identify the audit process from client acceptance, design of audit procedures and express an appropriate audit conclusion based on the audit evidence obtained. Assess risks and threats to an audit of financial statements through analytical and critical thinking. Communicate effectively in writing and verbally.

√ √

2

3

4 5


3

Specific learning outcomes
Understand the major concepts of auditing – why, what, how & limitations Differentiate the types of services offered by public practitioners assurance and nonassurance services

Describe the 3 fundamental concepts in conducting a F/S audit ( Materiality, Evidence, Audit risk ) 4

CILOs and TLAs

TLAs
1 Lectures, in-class activities and assignments, designed to assist students’ understanding and learning of auditing principles, objectives, legal and ethical requirements of audit and assurance services. Lectures, in-class activities and assignments, designed to assist students to understand and perform audit tests on financial statement account balances and formulate appropriate audit reports.



2

5

The Study of Auditing
The study of auditing is different from other accounting courses that you have taken because …

OTHER COURSES
Rules, techniques and computations to prepare and analyse financial information

AUDITING
Analytical and logical skills Much more conceptual in nature 6

The Demand for Auditing and Assurance
The development of the corporate form of business and the expanding world economy over the last 200 years have given rise to an explosion in the demand for assurance provided by auditors.

7

Why auditing is required ?
Regulatory requirements
Companies formed under Hong Kong Companies Ordinance Issuance of new shares

Economic demand (theoretical framework / agency theory)

8

Principals and Agents
A public company is a company that sells its stocks or bonds to the public, giving the public a valid interest in the proper use, or stewardship, over the company’s resources.

Agents

Principals
9

Economic Demand
Agency relationship occurs when one party, the principal, employs another party, the agent to perform a task on his behalf Agency theory - Separation of ownership & control Conflict of interests between

Agents (managers) – increase personal benefits Principals (shareholders / stockholders) – increase in the financial returns from investment => Managers put their own interests as top priority

Information asymmetry
=>Auditing helps to reduce the information risk, thus increase creditability to information reported (F/S prepared ) by managers 10

The Role of Auditing

11

Auditing – a general def’n

Extracted from American Accounting Association Committee on Basic Auditing Concepts (1973)

Is a systematic process Of objectively obtaining and evaluating evidence Regarding assertions about economic events To ascertain the degree of correspondence between those assertions and established criteria And communicating the results to interested users 12

Fundamental Concepts in Conducting a F/S Audit

Materiality Audit Risk

Evidence

13

Evidence Regarding Management Assertions
Evidence that assists the auditor in evaluating management’s financial statement assertions consists of the underlying accounting data and any additional information available to the auditor, whether originating from...
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