LECTURE 1:

INTERNATIONAL AUDITING OVERVIEW

Learning objectives
After studying this lecture, students should be able to:
 Relate some of the early history of auditing.
 Name the standards set by International Auditing and Assurance
Standards Board.
 Understand the basic definition of auditing in an international
context.
 Differentiate the different types of audits.
 Distinguish between the types of auditors
 Name and categorise the key management assertions.
 Give the components of the audit process model.
 Describe how international accountancy firms are organised and
the responsibilities of auditors at the various levels of the
organisation
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 1.1. AUDITING THROUGH WORLD HISTORY

 Scribes (Accountants) of Ancient Times

 Auditors existed in ancient China and Egypt.

 They were supervisors of the accounts of the Chinese
Emperor (King) and the Egyptian Pharaoh.
 The government accounting system of the Zhao (1046–221
BC) dynasty in China included an elaborate budgetary
process and audits of all government departments.

 In Egypt (3000 BC): Egyptian Pharaohs were very severe

with their auditors. Each royal storehouse used two
auditors. One counted the goods when they came in the
door and the second counted the goods after they were
stored.
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1.1. AUDITING THROUGH WORLD HISTORY (cont.)

 Profit Maximisation and Double Entry

 The attitude of profit maximisation emerged at the end of the
Middle Ages, with the emergence of large merchant houses
in Italy. The system of double entry bookkeeping was first
described in Italy in 1494.
 Modern auditing has its roots in the formation of the modern
corporation at the beginning of the Industrial Revolution..
 In 1853, the Society of Accountants was founded in
Edinburgh.
 Several other institutes emerged in Great Britain, merging in
1880 into the Institute of Chartered Accountants in England
and Wales (ICAEW).
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 1.1. AUDITING THROUGH WORLD HISTORY (cont.)

 Economic Conditions for Audit Reports

 Companies across the world experienced growth in technology,
improvement in communications and transportation, and the exploitation
of expanding worldwide markets.
 The result has been the growth of sophisticated securities markets and
credit-granting institutions serving the financial needs of large national,
and increasingly international, corporations.
 The flow of investor funds to the corporations and the whole process of
allocation of financial resources through the securities markets have
become dependent to a very large extent on financial reports made by
company management.
 One of the most important characteristics of these corporations is the fact
that their ownership is almost totally separated from their management
=> Auditing developments
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1.2. THE IMPORTANCE OF AUDITING
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 Investors and creditors may have different objectives than
caying:
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management
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=> Investors and creditors must depend on fair reporting of the
financial statements.
 To give them confidence in the financial statements, an
auditor provides an independent and expert opinion on the
fairness of the reports, called an audit opinion.
 By the audit process, the auditor enhances the usefulness
and the value of the financial statements, but he also
increases the credibility of other non-audited information
released by management.

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 1.2. THE IMPORTANCE OF AUDITING

 Currently:
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Audit of annual report, financial statements, notes

 Future audit:
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• Audit of director’s report on corporate governance
(including effectiveness of internal control systems,
going concern, and adherence to best practice), and
presumably an environmental management report.
• Auditing is spreading to audit of non-financial, textual
and electronic data such as emails, phone messages,
social media, human resources, intellectual capital,
brand valuation and management, and other intangibles.
• Audit of more and more prospective information 7

1.3. INTERNATIONAL ACCOUNTING AND AUDITING STANDARDS

1.3.1. International Financial Reporting Standards

 International Financial Reporting Standards (IFRS) are the

standards that are applied for financial accounting.
 IFRS were formerly called International on Accounting
Standards (IAS)
 The International Accounting Standards Board (IASB) has
accounting standard setting responsibilities for IFRS.
 The European Union (EU) has agreed to apply most of the
IFRS from 2005.

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 1.3. INTERNATIONAL ACCOUNTING AND AUDITING STANDARDS

1.3.2. Auditing Standards Become International

Advantages of International Auditing Standards

 worldwide foam can

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 increases confidence in non-domestic investment

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 consistent
 international investors comprehend financial statements
from different countries
 high quality
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 Non-national standards encourage better quality, less
political influence

1.3. INTERNATIONAL ACCOUNTING AND AUDITING STANDARDS

International Auditing and Assurance Standards Board

(IAASB) issues:
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 International Standards on Auditing (ISAs) as the standards to be

I
-

applied by auditors in reporting on e

historical financial
n
information.
-

 International Standards on Assurance Engagements E (ISAEs) as the

standards to be applied by practitioners in assurance engagements
-
-

dealing with -
information other than historical financial information
 International Standards on Quality ControlE
(ISQCs) as the
standards
-to be applied for all services falling under the Standards of
-
the IAASB, and
 International Standards on Related ServicesE
-
(ISRSs) as the
standards to be applied on related services, as it considers appropriate
 International Standards on Review Engagements E (ISREs) as the
standards to be applied to the review of historical financial
- -
information.
-
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 1.4. AUDIT DEFINITION

“An audit is a systematic process of objectively obtaining

and evaluating evidence regarding- assertions about s di bien
economic actions and events to ascertain the degree of
correspondence between these assertions and established Management's far be
sud:
criteria and communicating the results to interested users.”

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1.4. AUDIT DEFINITION

Components of the Audit Definition

 An audit is a systematic approach:

The audit follows a structured, documented plan
(audit plan).
 An audit is conducted objectively:
An audit is an independent, objective and expert
examination and evaluation of evidence. Auditors are fair
and do not allow bias to override their objectivity. They
maintain an impartial attitude.

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 1.4. AUDIT DEFINITION

Components of the Audit Definition (cont.)

 The auditor obtains and evaluates evidence:
The auditor assesses the reliability and sufficiency of the
information contained in the underlying accounting records and
other source data by:
 studying and evaluating accounting systems and internal
controls; and
 carrying out such other tests, inquiries and other verification
procedures of accounting transactions and account balances.
Assertions are representations by management, explicit or
otherwise, that are embodied in the financial statements.

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1.4. AUDIT DEFINITION

Components of the Audit Definition (cont.)

 The auditor ascertains the degree of correspondence

between assertions and established criteria:
The audit programme tests most assertions by
examining the physical evidence of documents, confirmation,
inquiry, and observation. The auditor examines the evidence for
the assertion presentation and disclosure to determine if the
accounts are described in accordance with the applicable
financial reporting framework, such as IFRS, local standards or
regulations and laws.

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 1.4. AUDIT DEFINITION

Components of the Audit Definition (cont.)

 The goal, or objective, of the audit is communicating the

results to interested users: The audit is conducted with the
aim of expressing an informed and credible opinion in a
written report.

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1.5. General Principles Governing an Audit of Financial

Statements

 Requirements of a Financial Statement Audit

• An auditor is required to comply with relevant ethical

requirements - Code of Ethics for Professional
Accountants issued by IFAC.
• An auditor should conduct an audit in accordance with
International Standards on Auditing.

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 1.5. General Principles Governing an Audit of Financial
Statements (cont.)

 Objective of a Financial Statement Audit

the overall objectives of the auditor are:

• to obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatement, whether due to fraud or error; and
• to report on the financial statements, and communicate as
required by the ISAs, in accordance with the auditor’s
findings.

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1.5. General Principles Governing an Audit of Financial

Statements (cont.)

 Purpose of a Financial Statement Audit

The purpose of an audit is to enhance the degree of

confidence of intended users in the financial statements.

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 1.5. General Principles Governing an Audit of Financial
Statements (cont.)

 Purpose of a Financial Statement Audit

The purpose of an audit is to enhance the degree of

confidence of intended users in the financial statements.

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1.5. General Principles Governing an Audit of Financial

Statements (cont.)

 Limitations of the Audit

-

There are certain inherent limitations in an audit that affect

the auditor’s ability to detect material misstatements.
These limitations result from:
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• the use of testing,

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• the inherent limitations of any accounting and internal

- -
control system
-

• the fact that most audit evidence is persuasive rather than

conclusive.
-

-
• the work performed by an auditor to form an opinion is
permeated by judgement.
-

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=> an audit is no guarantee that the financial statements are
free of material misstatement. 20

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 1.6. TYPES OF AUDIT

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1.6. TYPES OF AUDIT (Con.t)

 Audits ofE
Financial Statements

 Audits of financial statements examine financial

-

statements to determine if they give a true and fair

-

view or fairly present the financial statements in

conformity with specified criteria.
 The criteria may be IFRS, or GAAP in the USA

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 1.6. TYPES OF AUDIT (Con.t)

E
Operational Audits
• Operational audits review all or part of the organisation’s
operating procedures to evaluate effectiveness and efficiency
of the operation.
+ Effectiveness is a measure of whether an organisation
- -

achieves its goals and objectives.

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-

output resources to achieve its goals.

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input
• Operational reviews may not be limited to accounting. They
may include the evaluation of organisational structure,
marketing, production methods, computer operations or
whatever area the organisation feels evaluation is needed.
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1.6. TYPES OF AUDIT (Con.t)

 Operational Audits (cont.)

• Recommendations are normally made to management for

improving operations.

• Because the criteria for effectiveness and efficiency are

not as clearly established as accepted accounting
principles and laws, an operational audit tends to require
-

more subjective judgement than audits of financial

-
statements or compliance audits.

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 1.6. TYPES OF AUDIT (Con.t)

 Compliance Audits
• A compliance audit is a review of an organisation’s procedures
to determine whether the organisation is following specific
procedures, rules or regulations set out by some higher
authority.
• A compliance audit measures the compliance of an entity with
established criteria.
• The performance of a compliance audit is dependent upon the
existence of verifiable data and of recognised criteria or
standards, such as established laws and regulations, or an
organisation’s policies and procedures.
• Results of compliance audits are generally reported to
management within the organisational unit being audited.
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1.6. TYPES OF AUDIT (Con.t)

Each of these types of audit has a specialist auditor

o Independent auditor is mainly concerned with financial
statement audits,
o Internal auditor concentrates on operational audits, and
o Governmental auditor is most likely to determine
compliance.
However, given information technology developments, the
different processes are becoming more and more integrated,
and as a consequence the split between these categories may
become theoretical.

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 1.7. TYPES OF AUDITOR

Independent
Internal Governmental
external
auditors auditors
auditors

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1.7. TYPES OF AUDITOR

 Internal Auditors

• Internal auditors are employed by individual companies

to investigate and appraise the effectiveness of company
operations for management. Much of their attention is
often given to the appraisal of internal controls.
• A large part of their work consists of operational audits;
in addition, they may conduct compliance audits.

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1.7. TYPES OF AUDITOR

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 Internal Auditors (cont.)

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• Internal auditors have two primary effects on a financial

statement audit:
o Their existence and work may affect the nature,
timing and extent of audit procedures.
o External auditors may use internal auditors to provide
direct assistance in performing the audit. If this is the
case the external auditor must assess internal auditor
competence (education, experience, professional
certification, etc.) and objectivity (organisational
status within the company).

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 1.7. TYPES OF AUDITOR

 Independent External Auditor

• Independent auditors have primary responsibility to the

performance of the audit function on financial
statements.
• Independent auditors are typically certified either by a
professional organization or a government agency.

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1.7. TYPES OF AUDITOR

 Independent External Auditor

Certification of the Auditor

 Certified Public Accountant (CPA)
(E.g. In USA, Australia, Japan, Korea, Malaysia, Malawi, Myanmar,
Philippines, Singapore,…)
 Chartered Accountant (CA)
(E.g. In Canada, the UK, New Zealand, Hungary, India, Jamaica,…)
 Contador Público (CP)
(E.g. Argentina, Brazil, Chile, Columbia…)
 Other titles
(E.g. Licensed Accountant (LA) in Iraq, Sworn Financial Advisor
(SFA) in Turkey…)

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 1.7. TYPES OF AUDITOR

3
 Governmental auditors
• Governmental auditors take both the functions of internal
and external auditor.
• Governmental auditors maintain and examine records of
government agencies and of private businesses or
-

individuals performing activities subject to government

[Link] regulations or taxation.
• Auditors employed through the government ensure
go revenues are received and spent according to laws and
regulations.
• They detect embezzlement and fraud, analyze agency
accounting controls, and evaluate risk management.
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Choose the best response.

Operational audits generally have been conducted by internal
auditors and governmental audit agencies but may be
performed by certified public accountants.
A primary purpose of an operational audit is to provide
- -

(1) a means of assurance that internal accounting controls are

functioning as planned.

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(2) a measure of management performance in meeting
organizational goals.
(3) the results of internal examinations of financial and
accounting matters to a company’s top-level management.
(4) aid to the independent auditor, who is conducting the
audit of the financial statements.

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 Choose the best response.
Which of the following best describes the operational audit?
(1) It requires the constant review by internal auditors of the
administrative controls as they relate to the operations of
the company.
(2) It concentrates on implementing financial and accounting
control in a newly organized company.
(3) It focuses on verifying the fair presentation of a
company’s results of operations.
(4) It concentrates on seeking aspects of operations in which
waste could be reduced by the introduction of controls.

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Choose the best response.

Compliance auditing often extends beyond audits leading to
the expression of opinions on the fairness of financial
presentation and includes audits of efficiency, economy,
effectiveness, as well as
(1) accuracy.
(2) adherence to specific rules or procedures.
(3) evaluation.
(4) internal control

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 1.8. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

 The audit starts with the financial statements prepared by the

client and the claims or “assertions” that the client makes about
these numbers.
 It is the auditor's job to validate management's assertions. In
order to do so, the auditor will identify audit objectives, which
can be regarded as the auditor's counterpart of management
assertions.

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1.8. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

 Management assertions

Management assertions are

implied or expressed
representations by
management about classes of
transactions and related
accounts in the financial
statements.

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 1.8. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

Assertions may fall into the following categories:

 Assertions about Aclasses of transactions and events,

and related disclosures, for the period under audit
-
 Assertions about account balances, and related
disclosures, at the period end

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1.8. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

 Assertions about classes of transactions and events,

and related disclosures:
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• Occurrence—transactions and events that have been
recorded or disclosed have occurred, and such transactions
and events pertain to the entity.
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• Completeness—all transactions and events that should have
been recorded have been recorded, and all related
disclosures that should have been included in the financial
statements have been included.
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• Accuracy—amounts and other data relating to recorded
transactions and events have been recorded appropriately,
and related disclosures have been appropriately measured
and described.
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 1.8. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

Assertions about classes of transactions and events, and

related disclosures (Cont.)
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• Cutoff—transactions and events have been recorded in the
correct accounting period.
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• Classification—transactions and events have been
recorded in the proper accounts.
• Presentation—transactions and events are appropriately
aggregated or disaggregated and clearly described, and
related disclosures are relevant and understandable in the
context of the requirements of the applicable financial
reporting framework.

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1.8. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES *

Assertions about account balances, and related disclosures:
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• Existence—assets, liabilities and equity interests exist.
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• Rights and obligations—the entity holds or controls the
rights to assets, and liabilities are the obligations of the
entity.
• Completeness—all assets, liabilities and equity interests
that should have been recorded have been recorded, and
all related disclosures that should have been included in
the financial statements have been included.

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 1.8. MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES

Assertions about account balances, and related

disclosures (Cont.)
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• Accuracy, valuation and allocation—assets, liabilities and
equity interests have been included in the FSs at appropriate
amounts and any resulting valuation or allocation adjustments
have been appropriately recorded, and related disclosures have
been appropriately measured and described.
• Classification—assets, liabilities and equity interests have
been recorded in the proper accounts.
• Presentation—assets, liabilities and equity interests are
appropriately aggregated or disaggregated and clearly
described, and related disclosures are relevant and
understandable in the context of the requirements of the
applicable financial reporting framework. 43

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Management Assertions for

Each Category of Assertions
Transactions and Events Account Balances
Occurrence Existence
Completeness Completeness
Accuracy Accuracy, valuation and
allocation
Cutoff
Classification Classification
Rights and obligations
Presentation Presentation

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 For example, we have some misstatements:

Accuracy 1. Over-stating $400 of cost of goods sold due to incorrect application of

method of calculating inventory price.
completenes 2. Omitting a sale transaction with $200 cost of goods sold and $300 of
sales.
classification3. Recording $200 of inventory into fixed assets account.
cut off 4. On 28/12/2022, the company signed a contract to sell goods to
customer and delivered goods to customer on 3/1/2023. However,
accountant recorded this transaction in accounting book of Year 2022.
5. Accountant record a sale transaction to a fictitious customer to
increase sales and profit of financial year.

Require: Identify each of above misstatements will violate which

management assertion?
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1.9. AUDIT PROCESS MODEL

 Phase I - Client Acceptance Pre andit


I Phase II - Planning
·

67  Phase III - Testing and Evidence

8 Phase IV - Evaluation and Judgment

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 Phase I - Client Acceptance
Objective: The client acceptance phase of the audit plan, Phase
I, involves deciding whether to accept a new client or
-
continue with an existing one. ! Khach hay
Procedures:
(1) Evaluate the client's background and reasons for the audit.
(2) Determine whether the auditor is able to meet the ethical
requirements regarding the client.
(3) Determine need for other professionals. them andit my

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(4) Communicate with predecessor auditor;

-

(5) Prepare client proposal.

(6) Select staff to perform the audit, and chan team andit
(7) Obtain an engagement letter.
dong 47

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Phase II Planning the audit

Objective: Determine the amount and type of evidence and
- -

review required to give the auditor assurance that there is

no material misstatement of the financial statements.
Procedures
(1) Perform audit procedures to understand the entity and its
environment, including the entity’s internal control;
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(2) Assess the risks of material misstatements of the financial
-

statements.
(3) Determine materiality; and
(4) Prepare the planning memorandum and audit program,
containing the auditor’s response to the identified risks.

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 Phase III Testing and Evidence

 Objective: Test for evidence supporting internal controls

and the fairness of the financial statements.
 Procedures:
(1) Tests of controls;
(2) Substantive tests of transactions;
(3) Analytical procedures;
(4) Tests of details of balances.

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Phase IV, Evaluation and Reporting

Objective: Complete the audit procedures and issue an opinion.

Procedures:
(1) Evaluate governance evidence;
(2) Perform procedures to identify subsequent events;
(3) Review financial statements and other report material;
(4) Perform wrap-up procedures;
(5) Prepare Matters of Attention for Partners;
(6) Report to the board of directors; and
(7) Prepare Audit report.

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 1.10. INTERNATIONAL PUBLIC ACCOUNTANCY FIRMS

“The Big Four”:

• Deloitte;
-

• Price Waterhouse Coopers - PWC;

• Ernst & Young; Ex-
• KPMG
-

Audit Staff
o Staff Accountants (or Junior Assistants then Senior)
o Senior Accountants (or Supervisor)
o Managers
o Partners/Directors

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