Basic Auditing Principles
Module 2 - Basic Auditing Principles
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Basic Auditing Principles
What is Auditing?
In your groups take 10 minutes to write a paragraph of how you would explain to
your grandmother (who knows nothing about auditing) what it is you will be doing
for the next three years.
In other words, explain to her what an auditor is, what an auditor does and what
is the purpose of an audit?
Remember your grandmother doesn’t have a business degree, don’t give
definitions or use technical terms.
One person per group will be asked to read their explanation to the rest of the
trainees.
Module 2 - Basic Auditing Principles
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Basic Auditing Principles
What is Auditing?
The ISA 200.3 definition of the purpose of an audit is:
• To enhance the degree of confidence of intended users in the financial
statements through an expression of opinion by the auditor on whether the
financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework.
• In the case of most general purpose frameworks, that opinion is on whether the
financial statements are presented fairly, in all material respects, or give a
true and fair view in accordance with the framework. An audit conducted in
accordance with the ISAs and relevant ethical requirements enables the auditor
to form that opinion.
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Basic Auditing Principles
What is Auditing?
Module 2 - Basic Auditing Principles
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Basic Auditing Principles
What is Auditing?
Outcome of this module:
As new employees to BDO it is important
you understand what an audit is, the
objectives of an audit and that an audit is
performed in accordance with the
International Standards on Auditing
(“ISAs”).
As auditors beginning your career with
BDO, the concepts you are introduced to
in this section are applicable to you
throughout your career.
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Basic Auditing Principles
What is Auditing?
Questions?
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Basic Auditing Principles
What is Auditing?
Terms to be discussed:
• Risk driven audit approach
• Reasonable assurance
• “R values” aka “R factors”
• Materiality
• Assertions
• Audit Procedures & some acronyms
• BDO Audit Manual
• BDO Audit Approach
• Documentation
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Basic Auditing Principles
What is Auditing?
Terms to be discussed:
• Risk driven audit approach
• Reasonable assurance
• “R values” aka “R factors”
• Materiality
• Assertions
• Audit Procedures & some acronyms
• BDO Audit Manual
• BDO Audit Approach
• Documentation
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Basic Auditing Principles
What is Auditing?
Risk driven audit approach:
…new
behaviors
New way of
thinking…
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Basic Auditing Principles
What is Auditing?
Three stage Approach to audit risk:
Potential Risk of Material
Misstatement (RMM)
IDENTIFY
Mainly in Is it a Significant, Elevated, Moderate,
planning Low Risk or no Risk of Material
stage of Misstatement?
the audit
but can
ASSESS
identify THROUGH AUDIT PROCEDURES
risks
throughout
Audit RESPOND
NO RISK NO PROCEDURE
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Basic Auditing Principles
What is Auditing?
Terms to be discussed:
• Risk driven audit approach
• Reasonable assurance
• “R values” aka “R factors”
• Materiality
• Assertions
• Audit Procedures & some acronyms
• BDO Audit Manual
• BDO Audit Approach
• Documentation
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Basic Auditing Principles
What is Auditing?
Reasonable assurance:
• In the context of an audit of financial statements, a high, but not absolute
level of assurance.
• ISAs require the auditor to obtain reasonable assurance that the financial
statements as a whole are free from material misstatement, whether due to
fraud or error.
• Reasonable assurance is a high level of assurance.
• Requires sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level and thereby enables us to draw reasonable conclusions on
which to base our audit opinion
• When designing and performing audit procedures, we shall consider the
relevance and reliability of the information to be used as audit evidence,
including information obtained from an external information source with
corroboration where relevant.
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Basic Auditing Principles
What is Auditing?
Questions?
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Basic Auditing Principles
What is Auditing?
Terms to be discussed:
• Risk driven audit approach
• Reasonable assurance
• “R values” aka “R factors”
• Materiality
• Assertions
• Audit Procedures & some acronyms
• BDO Audit Manual
• BDO Audit Approach
• Documentation
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Basic Auditing Principles
What is Auditing?
“R values” aka “R factors”:
• Audit Risk has the relationship:
Audit Risk(AR) = Inherent Risk(IR) x Control Risk(CR) x Detection Risk(DR)
• Inherent Risk and Control Risk are not under the control of the auditor. The
higher these risks are, the more work we have to perform (Detection Risk) in
order to achieve an acceptable level of Audit risk.
• Inherent Risk and Control Risk are together known as Risk of material
misstatement (RMM).
• At a client we will identify risks and, together with the control environment
around the risk, we will decide if the RMM is Significant, Elevated, Moderate
or Low.
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AUDIT RISK
Audit risk
Inherent Control Detection
risk risk risk
Risk of material misstatement Residual Risk
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Basic Auditing Principles
What is Auditing?
“R values” aka “R factors”:
• At BDO we have converted the level of work to be done in relation to RMM to a
“R value” aka “R factor”.
• When assessing a risk, we assess a risk as either significant, elevated, moderate
or low and the R-factors for each of these are as follows:
• - Significant risk = R-factor of 3
• - Elevated risk = R-factor of 2.5
• - Moderate risk = R-factor of 2
• - Low risk = R-factor of 1
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Basic Auditing Principles
What is Auditing?
“R values” aka “R factors”:
So how do I use this R factor?
There are mainly 2 ways:
Firstly – Some audit work is of better quality than others. Certain low quality
procedures will only for example give you a R value of 1. Then you will need to do
more work to get to a 2, 2.5 or 3.
For example if you test revenue of a cell phone company by multiplying the
number of subscribers with and average call rate and duration, you will get some
audit evidence but it will be of a low quality (0.5 or maybe 1) and you would have
to do more work in order to get to a level 2, 2.5 or 3.
Secondly – Whenever you work out a sample size, part of the calculation takes the
R value into consideration. So higher R values lead to larger sample sizes.
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Basic Auditing Principles
What is Auditing?
Terms to be discussed:
• Risk driven audit approach
• Reasonable assurance
• “R values” aka “R factors”
• Materiality
• Assertions
• Audit Procedures & some acronyms
• BDO Audit Manual
• BDO Audit Approach
• Documentation
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Basic Auditing Principles
What is Auditing?
Materiality:
• As previously discussed, we now know that we can not test everything at a
client (Reasonable Assurance)
• We use the risk associated with a client in combination of our knowledge of the
client to calculate Materiality
• Materiality takes account of the magnitude of a misstatement and also the
nature of a misstatement
• Misstatements of relatively small amounts can have a material impact on the
financial statements, depending on the circumstances
• Our appreciation of what is material is fundamental to the whole audit process
from beginning to end
• We also consider if an entity is asset based, revenue based or a Non-Profit when
we determine materiality
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Basic Auditing Principles
What is Auditing?
Materiality:
Materiality 100 000 Influences economic decisions of users. This is used for scoping
Performance Used to assess risk, calculate sample size and perform our
75 000
Materiality audit.
Accumulate audit misstatements over this amount.
Clearly Trivial 1 000 Only use this amount once you started testing, don’t use it to
determine what to test!
Figures used for example purposes only
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Basic Auditing Principles
What is Auditing?
Terms to be discussed:
• Risk driven audit approach
• Reasonable assurance
• “R values” aka “R factors”
• Materiality
• Assertions
• Audit Procedures & some acronyms
• BDO Audit Manual
• BDO Audit Approach
• Documentation
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Basic Auditing Principles
What is Auditing?
Assertions
C A
Completeness
•
v
• Existence E
• Accuracy P
• Valuation
• Presentation
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Basic Auditing Principles
What is Auditing?
ISA Assertions
Balances Presentation &
Transactions
Completeness Disclosure
Completeness
Existence Occurrence
Occurrence
Rights & obligations Completeness
Cut-off
Valuations Accuracy & Valuation
Classification
Classification &
Accuracy Understandability
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Basic Auditing Principles
What is Auditing?
Comparison of BDO Assertions to the ISA’s
BDO Assertion Also addresses
Completeness
Occurrence
Existence
Rights & obligations
Cut-off
Accuracy
Classification
Valuation
Presentation (all P&D assertions per ISA’s)
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Basic Auditing Principles
What is Auditing?
Questions?
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Basic Auditing Principles
What is Auditing?
Terms to be discussed:
• Risk driven audit approach
• Reasonable assurance
• “R values” aka “R factors”
• Materiality
• Assertions
• Audit Procedures & some acronyms
• BDO Audit Manual
• BDO Audit Approach
• Documentation
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Basic Auditing Principles
What is Auditing?
Audit Procedures:
• From university you should know that audit work can either be Test of Controls
or Substantive Procedures.
• Substantive Procedures can further be divided into Substantive Analytical
Procedures (SAPs) or Test of Detail(OSPs).
• At BDO Test of Detail is known as Other Substantive Procedures or more
commonly as an OSP.
• There are three kinds of OSPs, but you will learn more about them later.
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Basic Auditing Principles
What is Auditing?
BDO Audit jargon
Common terms used Description
RMM Risk of Material Misstatement
PM Performance Materiality
OSPs Other Substantive Procedures
SAPs Substantive Analytical Procedures
TOC Test of Control
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Basic Auditing Principles
What is Auditing?
BDO Audit jargon
Common terms used Description
ETD Engagement Team Discussion
AFS Annual Financial Statements
Financial Statement Area (What we
FSA
audit together e.g. PPE or Equity)
IPE Information Produced by the Entity
Supplemental Substantive
SSPs
Procedures
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Basic Auditing Principles
What is Auditing?
BDO Audit jargon
Common terms used Description
BDO audit software “Audit Process
APT
Tool”
IDEA Our sampling software
DAT Data Analytic Test
PAR Preliminary Analytical Review
AIC Auditor in Charge
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Basic Auditing Principles
What is Auditing?
Terms to be discussed:
• Risk driven audit approach
• Reasonable assurance
• “R values” aka “R factors”
• Materiality
• Assertions
• Audit Procedures & acronyms
• BDO Audit Manual
• BDO Audit Approach
• Documentation
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Basic Auditing Principles
What is Auditing?
BDO Audit Manual:
Why are there things we learn now that is different from university?
The ISAs are a set of standards we must adhere to in order to audit correctly. But
there are some cases where the ISAs are not specific (for example sample
sizes). Most audit firms have created their own audit manuals that staff then
have to follow. This manual (at BDO known as the BDO Audit Manual) will give
more specific guidance and some explanation, as well as how BDO interprets
some of the unclear aspects of the ISAs.
If you comply with the BDO Audit Manual you will comply with the ISAs.
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Basic Auditing Principles
What is Auditing?
BDO Audit Manual on SharePoint
Module 2 - Basic Auditing Principles
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Basic Auditing Principles
What is Auditing?
Terms to be discussed:
• Risk driven audit approach
• Reasonable assurance
• “R values” aka “R factors”
• Materiality
• Assertions
• Audit Procedures and some acronyms
• BDO Audit Manual
• BDO Audit Approach
• Documentation
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Basic Auditing Principles
What is Auditing?
BDO Audit Approach:
The ISAs are not always organised is the same sequence we would perform and
audit, so when BDO created the BDO Audit Manual and our audit software
(APT), we created an audit process and aligned the BDO Audit manual
chapters and APT sections to these.
This aligns the information with the flow of an audit engagement.
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Basic Auditing Principles
What is Auditing?
BDO Audit Approach:
Scoping
Planning
Obtain evidence
Completion
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Basic Auditing Principles
What is Auditing?
Questions?
Module 2 - Basic Auditing Principles
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Basic Auditing Principles
What is Auditing?
Terms to be discussed:
• Risk driven audit approach
• Reasonable assurance
• “R values” aka “R factors”
• Materiality
• Assertions
• Audit Procedures & some acronyms
• BDO Audit Manual
• BDO Audit Approach
• Documentation
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Basic Auditing Principles
What is Auditing?
Documentation:
….if it is not documented
then it is not done….
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Basic Auditing Principles
What is Auditing?
Documentation: The Audit Trail
Documentation
Working
paper
Financial
Leadsheet Statements
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Trial Balance (TB)
Documentation
What do we need to document?
Identify the
preparer &
reviewer
(including
date) Objective of
test,
procedure,
Attach
conclusion
evidence i.e.
internally/
external Details of
work
performed
Referencing
& tickmarks
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INTRODUCTION TO INDUCTION
Final Key reminders
• If an audit section is not material and no risks have been raised on a particular
audit section, you do not need to perform any additional work on that section.
However, always consider performing Supplemental substantive procedures
(SSPs) FSAs which are material or immaterial, but no risks have been raised etc.
• The main sections of the audit file include 1. Identifying risk, 2. Assessing risk,
3. Responding to risk. These are not new concepts, and you should be familiar
with them from your studies.
• You will be provided with a set of annual financial statements (All Star Films
Proprietary Limited) which you are to print out and utilise as a reference point
throughout the training to visualise where the audit sections you are responsible
for end up on a set of annual financial statements.
Module 1 - Introduction
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Basic Auditing Principles
What is Auditing?
Documentation Exercise:
You have been asked to test Operating Expenses.
You were given a sample by your AIC and asked to:
• Agree transactions amounts to the GL
• Agree transaction amounts to supporting
documentation
• Assess if the expenses were correctly classified as
operating expenses
You produced the following working paper, in your group
see how many mistakes you can find on the working
paper and write them down on paper. Include your
team name on the paper.
You have 20 minutes to complete this exercise.
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Basic Auditing Principles
What is Auditing?
Questions?
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