Class 1 - An Overview Of Auditing And Assurance(1)

AF4228

Auditing and

Assurance

2021/22 S1

Class 1

An Overview of Auditing

and Assurance

1

2

Learning Objectives

1.1 Define auditing, understand the purpose and objective of a

financial statement audit.

1.2 Definition of assurance engagements and the types of

assurance engagements that can be provided.

1.3 Understand the reasons giving rise to demand for assurance

and the benefits of assurance engagements.

1.4 Explain the concept of the expectation gap, and appreciate

the relationships between the auditor, the client and the public.

1.5 Understand the Hong Kong Framework for Assurance

Engagement, auditing standards and quality control standards.

1.6 Obtain an overview of other applications of the assurance

function.

Prepared by RW for AF4228 2021/22 S1

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1.1 Auditing: Definition, purpose

and objective

Auditing – Definition

•A Statement of Basic Auditing Concepts

(ASOBAC—the American Accounting Association)

defines auditing as:

‘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.’

Prepared by RW for AF4228 2021/22 S1

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1.1 Auditing: Definition, purpose

and objective (Cont)

The important parts of this definition:

•Systematic process—audits are dynamic structured activities

•Objectivity—freedom from bias

•Obtaining and evaluating evidence—allows the auditor

to determine the support for assertions or representations

•Assertions about economic actions and events—describes the

subject matter of an audit

•Degree of correspondence … established criteria —the purpose

of the audit is to determine conformity with some specified

criteria

•Communicating results—the results must be communicated to

interested parties

Prepared by RW for AF4228 2021/22 S1

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1.1 Auditing: Definition, purpose

and objective (Cont)

Purpose of an audit of financial statements (FS):

•to enhance the degree of confidence of intended users in the FS

•achieved by the expression of an opinion by the auditor on whether the

FS are prepared, in all material respects, in accordance with an

applicable financial reporting framework

In the case of most general purpose frameworks (for general

purpose FS which are released to a broad group of users), that

opinion is on whether the FS are presented fairly, in all material

respects, or give a true and fair view in accordance with the

framework

•Although the auditor’s opinion enhances the credibility of the FS, the

user cannot assume that the opinion is an assurance as to the future

viability of the entity nor the efficiency or effectiveness with which

management has conducted the affairs of the entity.

Prepared by RW for AF4228 2021/22 S1

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1.1 Auditing: Definition, purpose

and objective (Cont)

Auditing Objective (HKSA 200):

•In conducting an audit of FS, the overall objectives of the auditor are:

To obtain reasonable assurance about whether the FS as a

whole are free from material misstatement, whether due to fraud

or error, thereby enabling the auditor to express an opinion on

whether the financial statements are prepared, in all material

respects, in accordance with an applicable financial reporting

framework; and

To report on the financial statements, and communicate as

required by the HKSAs, in accordance with the auditor’s findings.

•Reasonable assurance –In the context of an audit of financial

statements, a high, but not absolute, level of assurance.

•Risk of material misstatement –The risk that the financial statements

are materially misstated prior to audit. This consists of two

components: inherent risk and control risk

Prepared by RW for AF4228 2021/22 S1

1.2 Assurance engagement

Assurance engagement – Definition

Hong Kong Framework for Assurance Engagements

defines an assurance engagement as:

‘An engagement in which a practitioner aims to

obtain sufficient appropriate evidence in order to