18/09/2014

CHAPTER 1: INTRODUCTION TO
AUDITING

DEFINITION

By the audit process, the auditor enhances the

usefulness and value of the financial statements,
and also increases the credibility of other nonfinancial information released by management.
ISA 200 states the objective of an audit of
financial statements is to enable the auditor to
express an opinion whether the financial
statements are prepared, in all material respects,
in accordance with an identified financial
reporting framework and give a true and fair view
of the financial situation of the company.

DEFINITION
An auditor should comply with the
Code of Ethics for Professional
Accountants issued by IFAC (cf.
chapter 2).
An auditor should conduct an audit in
accordance with the International
Standards on Auditing.

Every country has local Auditing Standards

that are more and more inspired by the ISA

WHO APPOINTS AN EXTERNAL AUDITOR?

Legally obliged (according to the

Belgian law)

When two of the following criteria are

fullfilled:

Number of employees > 50

Total revenues > 7,300,000 euro
Total assets > 3,650,000 euro

Or as soon as the company has more than

100 employees

On a voluntary basis (in Belgium,

between 4,500 and 6,000 companies)

ADVANTAGES OF AN EXTERNAL
AUDIT

Increased quality of the financial statements

Increases confidence on behalf of external shareholders
(existing and potential new)
Increased confidence on behalf of banks (easier access
to bank loans and/or lower interest rates)
Increased confidence on behalf of suppliers, customers
and even employees
Recommendations on how to improve the financial
accounting system or the internal control system
Could help to improve the performance of the company
Allows to learn about other companies

INTERNATIONAL AUDITING
STANDARDS

Worldwide

Consistent

Increases confidence in non-domestic

investment
International investors comprehend
financial statements from different
countries

High quality

Non-national standards encourage better

quality, less political influence

SOME GENERAL PRINCIPLES IN

AUDITING

Certain inherent limitations in an audit affect

the auditors ability to detect material
misstatements
Test and sampling
Internal control
Audit evidence
Audit process permeated by judgment

Management is responsible for the financial

statements, accounting, and internal control.

DOES AUDITING MEAN FINDING

FRAUD

NO!
ISA 240: the responsibility for the prevention and
detection of fraud and error rests with both those
charged with the governance and the management.
ISA 210: states that when planning and performing audit
procedures and in evaluating and reporting the results,
auditors should consider the risk of misstatements in
financial statements resulting from fraud.
In planning the audit, the auditor must assess the risk
that material fraud or error has occurred.
The professional regulations in some countries require
the auditor to inform members of the audit committee
or board of directors

INTERNAL VERSUS EXTERNAL

AUDITORS

Internal auditors are employed by

individual companies to investigate and
appraise the effectiveness of company
operations for management.
Independent external auditors are
typically certified either by a
professional organization or
government agency and are only
focused on the quality of the financial
statements.

PROFESSIONAL TITLES

Certified Public Accountant (CPA)

Chartered Accountant (CA)
Rviseur dentreprises

AUDIT PROCES

Phase
Phase
Phase
Phase

I - Client Acceptance
II - Planning
III - Testing and Evidence
IV - Evaluation and Judgment

AUDIT MARKET

The Big Four:

Deloitte, PricewaterhouseCoopers, Ernst &
Young, KPMG

Second tier: BDO, Grant Thornton,

Mazars, PKF, RSM
Small audit firms (up to five external
auditors)
Independent external auditors (working
alone)

AUDIT FEES

Important determinants of audit fees

are:
the

size of the auditee and the

geographical dispersion;
the size of the audit firm (Big Four firms
seem to demand a fee premium);
the quality of the auditee's internal control
system;
the type of fee contract (fixed fee versus
variable fee).

STRUCTURE OF AN AUDIT FIRM