Fundamentals of Auditing
Purpose and nature of audit
An audit of financial statements expresses an opinion on whether the statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. Candidates must distinguish reasonable assurance from absolute assurance, and understand that an audit is not a guarantee against fraud or error. Know the three-party relationship (auditor, responsible party, intended users), the concepts of materiality, audit risk, and professional scepticism.
Framework and standards
Understand the structure of the engagement: ethical requirements, acceptance and continuance, planning, risk assessment, evidence gathering, evaluation, and reporting. Know the difference between the audit opinion and management's responsibility for the statements. Be clear on the distinction between an audit, a review (limited assurance), and agreed-upon procedures (no assurance).
Traps in questions
Common distractors confuse the auditor's responsibility with management's, or imply the auditor detects all fraud. Others blur reasonable assurance with guarantee, or misstate that an audit tests every transaction. Watch for wording about 'certifying' accounts, which is not the auditor's role.
Rule of thumb
If an answer suggests the auditor guarantees accuracy, prepares the statements, or provides absolute assurance, it is almost certainly wrong. The auditor obtains sufficient appropriate evidence to reduce audit risk to an acceptably low level, not to eliminate it.
Worked example
A question asks who is responsible for preventing and detecting fraud. The correct answer is those charged with governance and management, through internal controls; the auditor's responsibility is to obtain reasonable assurance the statements are free from material misstatement, whether due to fraud or error.