Auditing and Assurance Principles: Framework, Ethics, and Risk
The conceptual foundation
Understand the purpose of an audit: to obtain reasonable assurance about whether financial statements are free from material misstatement, enhancing the confidence of intended users. Know the inherent limitations of an audit (judgment, sampling, evidence being persuasive rather than conclusive) and the distinction between reasonable and limited assurance.
Ethics and quality management
Apply the fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. Independence in mind and appearance is required for audits. Know the threats (self-interest, self-review, advocacy, familiarity, intimidation) and the safeguards, including the conceptual framework approach of identifying, evaluating, and addressing threats.
Risk and evidence
Master audit risk: AR = IR x CR x DR. Inherent and control risk are risks of material misstatement, assessed at the entity level; detection risk is controlled by the auditor through the nature, timing, and extent of procedures. Higher assessed risk means lower acceptable detection risk and more substantive testing. Know the assertions for classes of transactions and account balances, and match procedures to assertions: inspection, observation, inquiry, confirmation, recalculation, reperformance, and analytical procedures.
Traps
- Saying the auditor guarantees the absence of fraud; the auditor provides reasonable, not absolute, assurance.
- Confusing the direction of detection risk: it moves inversely with substantive testing.
- Treating inquiry alone as sufficient for a significant risk.
- Mixing up the assertion of valuation with existence.
Rule of thumb
If assessed risk of material misstatement is high, detection risk must be set low, so perform more reliable procedures, closer to period end, on larger samples.