CAF 08: Audit and Assurance Outlines:

Chapter 2: Basic Concepts Introduction to "Sbuject Matter of Audit" and "Parties in an Audit". Premium Content
Secret Sheet for Quick Revision (For Spring 2022)
(For students of Muhammad Asif, FCA)

PART A: FINANCIAL STATEMENTS

LO 1: Financial Statements LO 2: What is meant by True and Fair LO 3: Financial Reporting Frameworks
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Complete set of F/S include: General Purpose: Special Purpose Fair presentation Compliance Applicable Financial
1. Balance Sheet. True means free from errors, and (for wide range of users) (for specific users) Framework Framework Reporting Framework
2. Income Statement Fair means free from undue bias in F/S.
3. Statement of changes in equity. Term “True and fair view” indicates that judgment
4. Cash Flow Statement. is applied in F/S. Requires compliance with Requires compliance with framework, AFRF is the framework adopted by
5. Notes to the accounts. framework, and acknowledges and does not contain management and TCWG, in preparation of
additional disclosure or departure acknowledgements (regarding F/S considering legal requirements,
to achieve fair presentation. additional disclosures or departure). nature of entity, nature of F/S, and
An example is IFRS. An example is Tax-basis Framework. purpose of F/S.
Auditor shall not accept proposed audit
engagement, if AFRF is NOT acceptable.

PART B: RESPONSIBILITIES OF PARTIES INVOLVED IN AUDIT

LO 4: Responsibilities of LO 5: Overall Objectives/ LO 6: Responsibilities Of LO 7: Essentials for Proper Conduct

Management/Premise Responsibilities of Auditor Stakeholders / Expectation Gap of Audit

1. For financial statements. 1. To obtain reasonable assurance. 1. Auditor prepares financial statements. Professional Judgment: Professional Skepticism: Independence:
2. For internal controls; 2. To issue report which includes 2. Auditor checks 100% transactions. Professional Judgment is the application of Professional skepticism is an attitude that Independence means auditor should
3. To provide information to auditor. auditor’s opinion. 3. Auditor provides absolute assurance. Cumulative Audit Knowledge, Experience and includes a questioning mind, being alert to be free to perform audit procedures
3. To communicate findings as required 4. Auditor is responsible to prevent and detect fraud. Training to reach an appropriate course of conditions which indicate misstatement, and without any bias or influence.
by ISAs. 5. Auditor is responsible to express opinion on action. critical assessment of audit evidence.
internal controls.
Examples of situations creating
Areas where Professional Judgment is applied: Advantages/Importance of Professional threat to independence:
1. Planning of audit (risk, materiality) Skepticism: 1. Financial interests
2. Performance of audit (procedures) Professional skepticism helps to avoid: 2. Business relationships
3. Reporting stage (opinion) 1. Overlooking. 3. Family and personal relationships
2. Over-generalizing. 4. Employment with audit client
3. Using inappropriate assumptions. 5. Inducements
6. Providing non-assurance services
PART C: REGULATORY ENVIRONMENT OF AUDITING

LO 8: International Federation of LO 8: International Auditing and Assurance LO 9: International Standards on Auditing

Accountants (IFAC) Standards Board (IAASB) (ISAs)
Situations causing increase in risk/professional skepticism:
1. Unusual growth or decrease of sales.
Functions/Role/Activities of IFAC: Boards of IFAC: Functions/Role/Activities of IAASB: Process of Developing and Issuing a new ISAs: Authority/Status of ISAs: 2. Management’s bonuses based on financial performance.
1. Development of standards. 1. International Auditing and Assurance 1. Develops and promotes standards 1. A subject is selected. To obtain reasonable assurance, it is compulsory for 3. Significant transactions at year end.
2. Facilitating implementation of standards. Standards Board (IAASB) for assurance and related services. 2. Exposure draft is produced, and distributed publicly. auditors to comply with all requirements of all ISAs. 4. Inconsistency between different sources of evidences
3. Promoting accountants worldwide. 2. International Ethics Standards Board 2. Facilitates in adoption and 3. Amendments made. 5. Significant related party transactions.
4. Speaking out on public interest issues. for Accountants (IESBA) implementation of standards. 4. New ISA published. Exception to follow requirements of ISA: 6. Lack of competence or integrity.
3. International Public Sector 3. Issues IAPS to help auditors in A required procedure will not be performed if it is: 7. Defective inventory.
Accounting Standards Board (IPSASB) implementing ISAs. Contents of ISAs: not relevant or 8. Closure of a factory
4. International Accounting Education 1. Introductory Material, Objectives, Definition. 9. Bankruptcy of debtor.
not practicable (in this case, auditor shall
Standards Board (IAESB) 2. Requirements. 10. Pending litigations against company
document reason and alternative procedures).
3. Application and Other Explanatory Material
(including Appendices).