The Basics of Auditing

This an introduction to the concepts of Auditing. There are several books covering this large subject in great detail. Have a look in our books section. Auditing is about collecting evidence and providing an opinion. For instance that the Financial Statements are presented in a true and fair way.

A good source of information is the YouTube Channel  “Roger CPA Review” which provides short and informative videos on the subject. A selection of these is included here.
The purpose of an audit is to give an independent opinion of for instance managements financial statements. This is done with a reasonable level of assurance. As a result not 100% assurance is needed because it would take too long and cost too much.
  • Different types of Audits.
  • Internal audits vs External audits.
  • CPA = Certified Public Auditor.
  • Financial statements includes for instance the balance sheet.
  • Providing an independent opinion.
  • The subject of Audit Evidence.

U   understandability & Classification
P   presentation & disclosure
E   existence or occurrence
R   rights and obligations
C   completeness and cutoff
V   valuation, allocation & accuracy

 

Quick-map of an Financial Statement Audit

Audit Process Map
The next steps of an audit engagement include:
  • Deciding to accept a client.
  • Making sure there is independence in fact and appearance.
  • Assessing Audit Risk: Inherent Risk, Control Risk, Detection Risk.
  • Consider materiality – what’s important and what is not.
 Please find 10 Steps for Planning an Audit.
  • Ratio Analyses
  • Analytical Procedures
  • “BRAINSTOPS”
  • Nature of the Engagement
  • Materiality
  • Specialist
B  Basic Discussions with the Client
R  Review of Audit Documentation
A  Ask about Recent Developments
I  Interim Information
N  Non-Audit Personnel
S  Staffing
T  Timing
O  Outside Assistance
P  Pronouncements
S  Scheduling with the Client
 The subject of Internal Controls includes:
  • Design
  • Implementation

Control Environment
Risk Assessment
A  Control Activities
Info and communication
Monitoring

 The subject of this clip is Audit Evidence. A vital part of any audit.
  • Collecting Audit Evidence
  • Nature of evidence: the source, the form, relevant, reliable.
  • Sampling.
  • Professional skepticism.
  • Final Due Diligence. 
  • Issuing the Report.
  • Stakeholders of the audit.
How much do you know about bonds? Want to understand more?
  • Different types of Bonds.
  • Borrowing agreement (Debt=Bonds, Equity=Stocks).
  • Government or Corporate.
  • The concept of Present Value.
  • Terminology.
  • Market value.
  • Coupons.

Profit and Loss Statement – Example

Balance Sheet Statement – Example

Assets
Assets are resources owned by the company. Some examples of assets are cash, accounts receivable. property and equipment.

Liabilities
Liabilities are claims against the company from other parties. This means that it shows what a company owns. Examples of liabilities are accounts payable or technical provisions.

Equity
represents the difference between assets and liabilities. This is the company’s own capital, what would be left if they stopped the business and sold everything. Examples of Equity is share capital and retained earnings.

Assets – Liabilities = Equity

A company may have a lot of assets but if they are the wrong types of assets for their business they may face a liquidity problem.

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