All right, so let's look at overall audit objectives. Why
does an auditor perform an audit? What
is the objective of it? And so the main standard that
we are looking at here is ISA 200.
So those are the learning objectives that we will be looking at.
Now we have short videos that are very important
for you to watch and so we have those four
videos there, will be good for you to review that.
That forms part of the resources that we prepare and are
available to you.
So the first thing that this standard looks at is the objective
of an audit. And the objective of
an audit is to obtain reasonable assurance. So
the reason why the auditor does
an audit, the reason why users of financial statements want
an audit of financial statements is
because they are after some level of confidence regarding
those financial statements. And so what the auditor issues
is a is is an assurance. What we
refer to as a reasonable assurance. And basically what the
auditor says is the financials are materially correct.
Now that term material or materially
will become very useful in the audit of
financial statements. So it's a concept that you will
need to understand. Now I have worked
for both EY and KPMG and so
I will be discussing how this materiality threshold
is actually set and why
it is important.
Now the auditor will also need to issue an
opinion, what we are referring to as a report. That is the
end goal of an audit. It's
a very very important part of an audit because without that then
that means that there was no reason to do their
audit. What the users are after, what stakeholders are
after is the audit opinion or the audit conclusion
and that is included in the audit report.
So this reasonable assurance is regarding whether the
financial statements are free from material
misstatement. So if for example
the company has said that it has assets worth two
billion dollars.
When the auditor performs the audit if the auditor finds out
there the assets are probably a billion
dollars not two billion as management are saying,
then that means that the financials are not free from
material misstatements. It means that the financials are
actually materially mistated. So what
the users want is the auditor to confirm whether
the numbers that they see, whether the key elements of the financial
statements that they see are free from material
misstatement.
And so the auditor performs an audit to enable that
practitioner to express an opinion.
Now the report will be regarding the financial
statements. So remember module 2
is looking at the audit of historical financial
information. So the subject matter
information here is the financial statements.
And the auditor obviously needs to communicate this to those
charged with governance to management and the like in
accordance with the applicable ISA's.
So this is a letter from KPMG and
this clearly explains what
the responsibility of
an auditor is. So let's look at this letter.
So this this letter is coming from,
it's coming from KPMG.
And you can see it's addressed to the audit committee
of British Columbia investment
and also to the CEO.
And so what you can see here is the
auditors are actually explaining that why this
letter this letter is called is referred to as an engagement
letter. It's the letter that sets the terms
of the audit and so you will find that an auditor
will always have to have a signed engagement letter
before starting an audit. And so
it's a very key element of the planning process.
And so you can see here. The auditor is saying the purpose of
this letter is to outline the terms of our
engagement to audit the consolidated financial statements.
So without this letter the
auditor should not start performing their audit. So
what does this letter say?
It sets out the auditors responsibility and it
says our function as auditors of the entity is to
express an opinion on whether the entities
financial statements
prepared by management with oversight of
those charged with governance, so the directors is in
all material respects in accordance with the applicable
financial reporting framework. In this case,
it could be the Australian Accounting Standards if the
organisation is in Australia.
The auditor is also saying that our responsibility is
also to report on those financial statements. So
that is very very important. That
is the end goal and the auditor always keeps
that in sight. What is the objective of this audit?
Because if the auditor doesn't keep that in mind the auditor
can perform irrelevant work in the
in the in their audits.
Now I have a quiz for you here, which of the following statements
relate to the objectives of an audit in terms of
ISA 200?
Now we have four options there,
will be great if you can select one and then I
will share the answer with you.
So the correct answer there is three and four.
Now which of the following statements relates to the objective of an audit?
I've just shown you an engagement letter and the engagement letter clearly
outlines the objective of an audit.
Three says collecting sufficient evidence to
be able to express an opinion.
And number four talks about reporting on those
financial statements.
Now what auditing standards would you use for the
audit of a small business?
So this will require you to have gone through your study guide.
What do you think the answer is here?
So what we are saying is all ISA's.
Now interestingly regardless of the size of
the entity all ISA's are applicable.
So it doesn't matter the size of the entity that is being audited
all ISA's must be applied.