Auditing College Essay Example

between them. That is, the manager generally has more information about the "true" financial position and results of operations of the entity than the absentee owner does. If both parties seek to maximise their own self-interest, it is likely that the manager will not act in the best interest of the owner and may manipulate the information provided to the owner accordingly. 1-4 Independence is an important standard for auditors.

If an auditor is not independent of the client, users may lose confidence in the auditor’s ability to report truthfully on the financial statements, and the auditor’s work loses its value. From an agency perspective, if the principal (owner) knows that the auditor is not independent, the owner will not trust the auditor’s work. Thus, the agent will not hire the auditor because the auditor’s report will not be effective in reducing information risk from the perspective of the owner. 1-5 Management makes assertions about components of the financial statements. The independent auditor's work consists of searching for and evaluating evidence concerning assertions. The auditor develops audit objectives that relate to management's assertions. By segregating the 1

Solutions Manual to accompany Auditing and Assurance Services in Malaysia 3E assertions into more specific audit objectives, the auditor is better able to design audit procedures for obtaining sufficient appropriate evidence to test management assertions. 1-6 Assurance engagement is an independent professional service in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. The conclusion is intended to enhance

the degree of confidence that intended users can have about the subject matter information.

Assurance engagements thus improve the quality of information, or its context, for decision makers. Auditing (broadly defined) is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. Auditing is a form of assurance engagements. In an audit engagement, the subject matter is the financial statements of the entity and the auditor’s conclusion in the form of an opinion enhances the credibility of the financial statements which are the responsibility of the management or directors of the company. -7 Materiality can be defined as the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. Audit risk is defined as the risk that the auditor may unknowingly issue an inappropriate opinion on financial statements that are materially misstated. The concept of materiality is reflected in the wording of the auditor's standard audit report through the phrase "the financial statements present give a true and fair view. " This is the manner in which the auditor communicates the notion of materiality to the users of the auditor's report.

The auditor's standard report states that the audit provides only reasonable assurance that the financial statements do not contain material misstatement. The term "reasonable assurance" implies that there is some risk that a material misstatement could

be present in the financial statements and the auditor will fail to detect it. 1-8 Relevance refers to whether the evidence relates to the specific audit objective being tested. If the auditor relies on evidence that relates to a different audit objective from the one being tested, an incorrect conclusion may be reached about a management assertion. Reliability refers to the truthfulness of the evidence; that is, the type of evidence usually signals the true state of the assertion or audit objective tested. -9 On most audits, it is not feasible or cost-effective to audit all transactions. For example, in a small business, the auditor might be able to examine all transactions that occurred during the period. However, it is unlikely that the owner of the business could afford to pay for such an extensive audit. For a large organisation, the sheer volume of transactions prevents the auditor from examining every transaction.