Auditing and Assurance Principles
What the principles paper tests
Auditing and Assurance Principles tests the conceptual foundation of the audit: objectives, ethical requirements, quality management, risk assessment, evidence, documentation, and the auditor report framework. It asks why a procedure is performed and which standard applies, not just how to compute.
Core rules
- PSA 200 requires reasonable assurance that financial statements are free from material misstatement, whether due to fraud or error.
- Audit risk = inherent risk × control risk × detection risk. Detection risk is controlled by the auditor through nature, timing, and extent of procedures.
- PSA 315 requires understanding the entity and its environment, including internal control, to identify and assess risks.
- PSA 330 requires responses to assessed risks, including substantive procedures for significant risks.
- Evidence must be sufficient and appropriate; relevance and reliability depend on source and nature.
- Documentation must be sufficient for an experienced auditor with no previous connection to the engagement.
Worked example
Acceptable audit risk is 5%, inherent risk 80%, and control risk 50%. Detection risk = 0.05 ÷ (0.80 × 0.50) = 0.125, or 12.5%. A low detection risk means the auditor needs more persuasive evidence, so procedures increase in extent or become more effective. If control risk is reduced by testing controls, planned substantive testing may decrease, but significant risks still require substantive work.
Traps
Detection risk is inverse to audit risk and to the risks of misstatement. Materiality is not a fixed percentage of profit; it is professional judgment. Professional skepticism is not assuming management is dishonest. Do not confuse quality management at firm level with engagement-level quality control.