Chapter Two. The Financial Statement Auditing Environment. A Time of Challenge and Change . 1990. 1990. 2000.
The Financial Statement
During the economic boom of the late 1990s and the early 2000s, accounting firms aggressively sought opportunities to market a variety of high-margin non-audit servicesto their audit clients.
Lernout & Hauspie
Self-regulation by the profession
Stricter regulation and more public oversight
International Standards on Auditing more comprehensive
Threat of legal liability:
Main deterrent to auditor’s misconduct
International Federation of Accountants
International Accounting Standards Board
International Organization of Securities Commissions IOSCO
International Organization of Supreme Audit Institutions
EU 8th Directive on Statutory Audits
Securities and Exchange Commission (SEC)
Public Company Accounting Oversight Board (PCAOB)
Financial Accounting Standards Board (FASB)
American Institute of Certified Public Accountants (AICPA)
IAASB issues International Standards on Auditing (ISAs).
Auditing standards serve as guidelinesfor and measures of the quality of the auditor’s performance.
ISAs are considered to be minimum standards of performance for auditors.
The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.
Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected.
The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements will be detected.
Ethics refers to a system or code of conduct based on moral duties and obligations that indicates how we should behave.
Professionalism refers to the conduct, aims, or qualities that characterise or mark a profession or professional person. All professions operate under some type of code of ethics or code of conduct.
Application to specific situations, including situations that threaten independence of
mind orindependence in appearance
IFAC Code of Ethics
Audit firms range in size from a single proprietor to thousands of owners (or “partners”) and thousands of professional and administrative staff employees.
Audit of financial statements, review of financial information, and other assurance services (e.g. assurance on a entity’s reporting on sustainability performance)
Related Services: Agreed-upon procedures regarding financial information and compilation of financial information
Other Services:Tax services, advisory services, accounting services and specialised services (e.g. forensic audit)
The primary context with which an auditor is concerned is the industry or businessof his or her audit client. In other words, the context provided by the client’s business impacts the auditor and the audit, and is thus a primary component of the environment in which financial statement auditing is conducted.
How would your concerns about the inventory account differ for a Computer Hardware Manufacturerand a Jewellery Store?
What assertions would you be most concerned about and why?
Business organizations exist to create value for their stakeholders. Due to the way resources are invested and managed in the modern business world, a system of corporate governanceis necessary, through which managers are overseen and supervised.
Board of Directors
(5 broad categories)
Human Resource Management Process
Inventory Management Process
Financial statements issued by management contain explicit and implicit assertions.
Presentation & Disclosure
Management asserts that the financial statements properly classify and presentthe inventory.
Management asserts that the entity owns the inventory represented in theinventory account.
Management asserts that transactionsrelated to inventory actually occurred.
Which specific assertion from the relevant category is being described in the three examples below?
Rights and Obligations