Audit, Internal Control and Assurance
Core Concepts
Auditing ensures financial statements are free from material misstatement. Key areas:
- ISA standards: risk assessment, audit evidence, materiality, going concern.
- Internal control: COSO framework (control environment, risk assessment, control activities, information & communication, monitoring).
- Audit procedures: inspection, observation, inquiry, confirmation, recalculation, re-performance, analytical procedures.
- Audit report: unmodified, qualified, adverse, disclaimer.
- Ethics: independence, objectivity, confidentiality.
Common Traps
- Materiality is a matter of professional judgment; it is not just a fixed percentage.
- Audit risk = inherent risk × control risk × detection risk.
- Internal control weaknesses do not necessarily mean material misstatement; they increase risk.
- Going concern assessment covers at least 12 months from the date of the financial statements.
- Auditor's report modifications depend on the nature and pervasiveness of the issue.
Worked Example
An auditor discovers that inventory is overstated by BGN 50,000, while materiality is BGN 100,000. This is not material individually, but if it is part of a pattern of misstatements, it could be material in aggregate. Rule of thumb: Assess misstatements both individually and in aggregate, considering qualitative factors.