A100 V12cn Slides - Eng

A100 Introduction to
Auditing and Deloitte

Audit Approach.
Objectives Session 1
You will be able to:
Describe what an audit is and its elements.
Describe why an audit is performed.
Describe the key principles and purpose of an audit.
Describe why an auditor should be independent of an entity when

conducting an audit.
Describe and identify how the financial statement audit is governed by

the Deloitte Audit Approach.
A100 Introduction to Auditing and Deloitte Audit Approach
2012 Deloitte Touche Tohmatsu. All rights reserved.
What is an Audit?
It begins
with a three
party
relationship.
Entity
Professional
Accountant
Data
Systems &
Processes
Evaluate/Measure
Subject Matter
Behavior
Express an opinion /
conclusion on level of
assurance about subject matter
Against
suitable
criteria
presented fairly,
in all material respects
or true and fair view
User of Subject
Matter
2
Presented fairly, in all material

respects or true and fair view
Accounting Principles are appropriate.
Financial Statements (F/S) and Related Notes are informative.
Information is classified and summarized in a reasonable manner.
The F/S include financial information on:

Financial Position
Results of Operation
Changes in Financial Position
Why is an audit performed?
May be
required by
law or
regulation
Examples:
EU Statutory
Audit; SEC
reporting
requirements
Shareholders or
governing
bodies request
the audit to
obtain
assurance on
reliability of
financial
statements
Requested
by specific
parties
interested in
the financial
statements
Examples:
creditors,
potential
creditors,
government
agencies
What is a financial statement audit?

Entity
AUDIT
APPROACH
Data
Systems &
Processes
Professional
Accountant
Evaluate/Measure
Subject Matter
Against suitable
criteria
Behavior
Express an opinion / conclusion

on level of assurance about
subject matter
User of Subject
Matter
5
DTT Audit ApproachAuditSystem/2
Audit Some Key Principles
Fair presentation
Material misstatement
Risk based approach
Management integrity
Independence
Describe the major activities of the Deloitte Audit Approach.
Understand the key activities of the Deloitte Audit Approach performed

by the Assistant.
Audit Approach Preliminary Activities

Preconditions for an audit <DAAM 1310>
Obtaining agreement with Management about
certain matters (preconditions) that are within the
control of the Entity and which are to be present
in order for us to accept the proposed audit
engagement.
Acceptance and continuance decision <DAAM
1300>
Evaluating the acceptability of prospective audit
engagements and assessing the related
engagement risks.
Agree the terms of the audit engagement
<DAAM 1400>
Recording the agreed terms of the audit
engagement (e.g. objective and scope of audit,
management and our responsibilities, expected
financial reporting framework, form and content
of any reports to be issued).
Audit Approach Planning the audit

Determine materiality <DAAM 2220>
This is for the purposes of assessing the risks of
material misstatement and determining the nature,
timing, and extent of further audit procedures.
Obtain understanding of the Entity and its

environment, including the Entitys Internal
Control <DAAM 2300 and 2400 series and 2700>
This include Entitys application of accounting
policies, its objectives and strategies,
measurement and review of its financial
performance, internal control relevant to the audit,
and performing preliminary analytical procedures.
10
Materiality and Performance Materiality (PM)
Materiality
PM
Total anticipated uncorrected
misstatements
Materiality
amount used as a
Single
basis for determining audit
scope
Performance Materiality
Based on materiality but
less than materiality
Reduce to an appropriately
low level the probability
that total aggregate of
uncorrected misstatements
exceeds materiality for the
financial statements as a
whole
Audit Approach Planning the audit (Contd)

Identify material classes of transactions,
account balances, and disclosure in the
financial statements <DAAM 2250>
Determining, using professional judgment and
considering both qualitative and quantitative
factors, what classes of transactions, account
balances, and disclosures are material.
Material account balances, classes of
transactions, and disclosure
12
Reasonable possibility that it could

contain misstatement that, individually
or when aggregated, would have
material effect on financial
statements, considering the potential
for both overstatement and
understatement.
Identify and assess the risks of material

misstatement <DAAM 2800>, including any
that are assessed as significant <DAAM 2810>
Identifying and assessing the risks of material
misstatement at the financial statement level
and assertion level, determining whether any
risks are significant, and obtaining an
understanding of the Entitys controls relevant
to significant risks.
Essential for audit partner to be

involved wherever judgments are
required, including making decisions
as to what is material.
Risk of Material Misstatement
What can go
wrong?
Risk that the financial statements are materially misstated prior to

audit.
We identify all Risks of Material Misstatement (ROMM), including:
Risks at the financial statement level
Risks at the assertion level
The identification of ROMM is an iterative process; we continue to
identify risks and/or change our initial assessment as we continue to
plan and perform the audit.
13
Process for identifying and responding to ROMMs
Identify material
COT/AB/Ds in
financial
statements by
considering both
qualitative and
quantitative factors
Material
COT/AB/Ds
14
ROMMS
Identify risks based
on our understanding
of material
COT/AB/Ds
At assertion or
financial statement
level?
Is it a fraud risk? Or
significant risk?
Understand
controls to
respond to risk?
Any controls
identified to
address the risk?
Plan to rely on
controls?
Procedures
Plan test of
control and
substantive
procedures
Perform planned
audit procedures
and document
work done
Controls
Audit Approach Plan and perform audit procedures

Design and implement overall responses to
address the assessed risks of material
misstatement at the financial statement level
<DAAM 2820>
Designing and implementing appropriate overall
responses (e.g., incorporating additional
elements of unpredictability in the selection of
further audit procedures to be performed) to
address the assessed risks of material
misstatement at the financial statement level.
Primarily carried out by the field

senior and the assistants
Design and perform audit procedures

responsive to the risks of material
misstatement at the assertion level <DAAM
G275>
Determining whether the further audit
procedures responsive to the assessed risks of
material misstatement at the assertion level
should include performing tests of controls in
addition to the substantive audit procedures,
and determining the nature, timing, and extent
of the further audit procedures.
15
Audit Approach Conclude and report on the audit

Perform concluding analytical procedures
<DAAM 6500>
Performing analytical procedures near end of
audit that assist us when forming an overall
conclusion as to whether the financial
statements are consistent with our
understanding of the Entity.
Evaluate the sufficiency and appropriateness
of audit evidence <DAAM 7450>
Evaluating, before conclusion of audit, whether
the assessments of risks at the assertion level
remain appropriate and whether sufficient
appropriate audit evidence has been obtained.
Evaluate misstatements identified during the
audit <DAAM 7210 and 7220>
Evaluating whether the scope of our audit is
sufficient and the effect of uncorrected
misstatements on the financial statements.
16
Audit Approach Conclude and report on the audit (Contd)

Perform subsequent events review <DAAM 7100>
Obtaining sufficient appropriate audit evidence that all
events occurring between date of financial statements
and date of audit report that require adjustment of, or
disclosure in, financial statements have been identified.
Obtain written representations <DAAM 7400>
Obtaining written representations from Management in
order to confirm certain matters or to support other audit
evidence.
Form an opinion and report on the financial
statements <DAAM 7500 and 7610>
Preparing audit summary memorandum forming an
opinion as to whether the financial statements are
prepared, in all material respects, in accordance with the
applicable financial reporting framework, and preparing
an appropriately worded audit report.
Communication <DAAM 8320, 8340, 8350 and 8360>
Communicating significant matters (e.g., fraud,
deficiencies in internal control, etc.) identified during
audit with Management, those charged with
governance and regulatory enforcement
authorities, as appropriate.
17
Audit Approach Pervasive activities

Pervasive activities are a continuous process
and an integral part of the audit approach:
Continuous focus on audit quality
Manage the audit engagement
Prepare and control audit documentation
Review audit documentation
Assess and manage risk
18
Identify the assertions relevant to:

Classes of transactions and events for the period under audit
Account balances at the period end
19
Presentation and disclosure

Determine where to make selections from based on the risks of
material misstatement that have been identified and the related
assertions.
Describe how to create high quality documents to evidence your audit
work.
10
Assertions
Assertions about
classes of
transactions
20
Assertions about
account balances
Occurence
Existence
Completeness
Accuracy
Rights and
obligation
Cutoff
Completeness
Classification
Valuatoin and
allocation
Assertions about
presentation and
disclosure
Occurrence and rights

and obligations
Completeness
Classification and
understandability
Accuracy and
valuation
Assertion about Classes of Transactions

Examples on Payroll Transaction
There are employees who have worked for
the entity and that are not included in payroll
(e.g., payments under the counter or
administrative failure to include them),
resulting in payroll being understated
Salary payments are made to employees not
working for the entity (e.g., terminated or
fictitious employees), resulting in payroll
being overstated
Occurrence
Time and attendance records do not

appropriately reflect the time worked, resulting
in payroll being misstated
Accuracy
Payroll is incorrectly included in other expense

accounts, resulting in payroll being understated
Classification
Salary payments are recorded in the wrong

period, resulting in payroll being misstated
21
Completeness
Cutoff
11
Assertion about Account Balances

Examples on Property, Plant and Equipment
22
PPE items are old, obsolete, damaged, or

not usable and have not been written down
to their recoverable value
Valuation and
allocation
The entity no longer having the right to PPE

that was previously correctly recorded
Rights and obligation
PPE acquisitions, for which the entity takes

ownership, are not recorded
Completeness
PPE that have been disposed of are not removed

from the fixed asset register
Existence
Assertion about Presentation and Disclosure examples
The captions in the financial statements

result in amounts being presented in a
misleading way
Classification and
understandability
Please refer to Practice Aid Assertions (March 2010) in

Fictitious
or unauthorized
your
Participant
folderdisclosures
for moreare
examples of assertions
Occurrence and
included in the financial statements and
rights
disclosures
contingent liabilities
for
regarding
theofrecognition,
measurement,
presentation
andand
which the entity no longer has an
obligations
obligation
for various elements of financial statements and
disclosure
of the
23
Input into the financialrelated

statements
reflects
disclosures
amounts in excess or less than appropriate
amounts.
Accuracy and
valuation
Disclosures that are intentionally omitted from

the financial statements
Completeness
12
Making Selections Selection from general ledger to

source
Items
selected
to test
GL
Supporting
Documents
(Invoices,
receipts, etc.)
24
Making Selections - Selection from independent source

to general ledger
Reciprocal or
independent
source
Items
selected
to test
GL
25
13
Making Selections - examples
Selection from general ledger to source
There is a risk that relate to the occurrence assertion:

Sales invoices may have been posted more than once due to system
error.
26
Making Selections - examples
Selection from independent source to general

ledger
There is a risk that relate to the completeness assertion:

Sales of glasses in November may not have been entered into the system
and therefore not included in the financial statements as there was a
power outage in November which resulted in the main system refusing
connection to other systems such as the retail outlet computer system.
27
14
Audit evidence
Do we need to verify authentication of evidence?
We are not trained or expected to be authentication experts.
However, we should be skeptical and alert for suspicious items.
When suspicious, we should discuss with Field Senior and Manager.
You should not be satisfied with less-than-persuasive evidence.
28
Audit evidence
Audit evidence can be classified in two ways:
By its nature documentary or oral.
By its source:
Auditor-generated evidence.
External (third-party) evidence.
Information produced by the entity. This information becomes audit
evidence if we use it in performing audit procedures.
29
15
Audit evidence
What is an appropriate level of professional skepticism?
Always maintain attitude of professional skepticism.
Neither assume management is dishonest nor assume unquestioned

honesty.
Objectively evaluate evidence.
Do not be satisfied with less-than-persuasive audit evidence.
Consider the reasonableness of all information given by corroborating it

with different evident sources.
30
Audit evidence
How can you, as an Assistant, apply professional
skepticism?
Be inquisitive and skeptical.
Always verify received information.
Remain skeptical and alert for suspicious items.
Discuss with your Field Senior or Manager if you are not sure about the
response you have received.
ASSISTANTS ARE THE EYES AND EARS OF THE FIELD SENIOR

AND AUDIT MANAGER.
31
16
Audit documentation
The auditor should prepare the audit documentation that is sufficient to

enable an experienced auditor, having no previous connection with the
audit, to understand:
The nature, timing, and extent of the audit procedures performed to
comply with our policies, applicable professional standards, and
regulatory and legal requirements.
The results of the audit procedures performed and audit evidence
obtained.
Significant matters arising during the audit and conclusions reached
thereon.
If it is NOT documented,
it is NOT done!
32
Audit documentation Contd
Each working paper should document:

Nature of preparer and reviewer
Audit purpose
Audit procedures and results, and
References and tickmarks to supporting work (if appropriate)
33
17
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A100 Introduction to

Auditing and Deloitte

You will be able to:

Describe what an audit is and its elements.

Describe why an audit is performed.

Describe the key principles and purpose of an audit.

Describe why an auditor should be independent of an entity when

Describe and identify how the financial statement audit is governed by

A100 Introduction to Auditing and Deloitte Audit Approach

2012 Deloitte Touche Tohmatsu. All rights reserved.

A100 Introduction to Auditing and Deloitte Audit Approach

2012 Deloitte Touche Tohmatsu. All rights reserved.

Presented fairly, in all material

Accounting Principles are appropriate.

Financial Statements (F/S) and Related Notes are informative.

Information is classified and summarized in a reasonable manner.

The F/S include financial information on:

A100 Introduction to Auditing and Deloitte Audit Approach

2012 Deloitte Touche Tohmatsu. All rights reserved.

Why is an audit performed?

2012 Deloitte Touche Tohmatsu. All rights reserved.

A100 Introduction to Auditing and Deloitte Audit Approach

What is a financial statement audit?

Express an opinion / conclusion

A100 Introduction to Auditing and Deloitte Audit Approach

2012 Deloitte Touche Tohmatsu. All rights reserved.

DTT Audit ApproachAuditSystem/2

A100 Introduction to Auditing and Deloitte Audit Approach

2012 Deloitte Touche Tohmatsu. All rights reserved.

Audit Some Key Principles

Risk based approach

A100 Introduction to Auditing and Deloitte Audit Approach

2012 Deloitte Touche Tohmatsu. All rights reserved.

You will be able to:

Describe the major activities of the Deloitte Audit Approach.

Understand the key activities of the Deloitte Audit Approach performed

2012 Deloitte Touche Tohmatsu. All rights reserved.

A100 Introduction to Auditing and Deloitte Audit Approach

Audit Approach Preliminary Activities

A100 Introduction to Auditing and Deloitte Audit Approach

2012 Deloitte Touche Tohmatsu. All rights reserved.

Audit Approach Planning the audit

Obtain understanding of the Entity and its

2012 Deloitte Touche Tohmatsu. All rights reserved.

A100 Introduction to Auditing and Deloitte Audit Approach

Materiality and Performance Materiality (PM)

2012 Deloitte Touche Tohmatsu. All rights reserved.

Audit Approach Planning the audit (Contd)

Reasonable possibility that it could

Identify and assess the risks of material

Essential for audit partner to be

Risk of Material Misstatement

2012 Deloitte Touche Tohmatsu. All rights reserved.

Risk that the financial statements are materially misstated prior to

A100 Introduction to Auditing and Deloitte Audit Approach

2012 Deloitte Touche Tohmatsu. All rights reserved.

Process for identifying and responding to ROMMs

A100 Introduction to Auditing and Deloitte Audit Approach

2012 Deloitte Touche Tohmatsu. All rights reserved.

Audit Approach Plan and perform audit procedures

Primarily carried out by the field

Design and perform audit procedures