Introduction to Auditing
This domain tests the nature and purpose of auditing: the independent examination of financial statements, the auditor’s opinion, reasonable assurance, professional scepticism, and the limits of an audit.
Core rules
- An audit is an independent examination of financial information to express an opinion on whether it gives a true and fair view.
- The auditor provides reasonable, not absolute, assurance because of sampling, judgement, estimates and the possibility of collusion or concealment.
- Management is responsible for preparing financial statements and maintaining internal control; the auditor is responsible for the opinion.
- SA 200 requires compliance with SAs, professional scepticism, professional judgement and consideration of materiality and risk.
- Independence must exist in mind and appearance; ethical standards restrict financial interests, business relationships and conflicting roles.
Worked example
An auditor is invited to audit a company where the auditor’s spouse is the chief financial officer. Even if a technical disqualification under Section 141 is arguable, the relationship creates a clear conflict of interest and a self-interest or familiarity threat. The auditor should decline the engagement or, where safeguards are genuinely effective, obtain independent review; appearance of independence matters as much as fact.
Traps
Describing an audit as a guarantee of accuracy or fraud detection; confusing audit with investigation; and treating “true and fair” as “true and correct”.
Exam focus
Definitions, objectives, limitations, independence and the distinction between audit and investigation.