Principles of Auditing cheat sheet

Key terms

Auditing

The systematic, independent examination of an entity's financial statements and underlying records, to form and express an opinion on whether they give a true and fair view.

Auditor

A suitably qualified, independent professional appointed to examine an entity's financial statements and express an opinion on them.

An audit

The specific engagement carried out: the process of gathering and evaluating evidence about an entity's financial statements to express an opinion on their fairness.

Integrity, Objectivity and independence

The auditor must be straightforward and honest (integrity), free from bias in forming judgements (objectivity), and free from any relationship or interest that could compromise, or appear to compromise, that objectivity (independence), the single most safeguarded principle in auditing.

Confidentiality

The auditor must not disclose information obtained during the audit to third parties without proper authority, nor use it for personal advantage.

Skills and competence

The auditor must possess the technical knowledge and practical experience needed to perform the audit competently, and keep that knowledge current.

Work performed by others

Where the auditor relies on work performed by an assistant, another auditor, an expert, or an internal auditor, they remain responsible for the audit opinion and must be satisfied that reliance is justified.

Documentation

The auditor must maintain proper working papers (see the chapter on audit evidence) recording the evidence obtained and conclusions reached.

Planning

The auditor must plan the audit (see the chapter on planning) so it is performed effectively and efficiently.

Audit evidence

The auditor must obtain sufficient, appropriate evidence (see the chapter on audit evidence) to support the opinion given.

Accounting system and internal control

The auditor must understand the entity's accounting system and internal controls (see the chapter on risks, errors and fraud) well enough to assess the risk of material misstatement.

Audit conclusions and reporting

The auditor must review and assess the conclusions drawn from the evidence obtained, and express a clear opinion in an audit report (see the chapter on the audit report).

Internal audit

An appraisal function established within the entity itself, reporting to management or the audit committee, evaluating the effectiveness of risk management, control and governance processes, distinct from and broader in scope than the statutory external audit.

External audit

An independent examination carried out by an auditor from outside the entity, typically required by law (the Companies Act) for the benefit of shareholders and other external users, culminating in a statutory audit opinion.

Interim audit

Audit work carried out during the financial period, before its end, easing the workload of the final audit and allowing earlier identification of issues.

Final audit

Audit work carried out after the period end, once the financial statements have been drawn up, concluding with the audit opinion.

Creditors

Rely on the audit opinion for extra confidence the entity can meet its obligations.

Investors

Rely on it when deciding whether to buy, hold or sell a stake.

Government

Tax authorities and other agencies rely on audited figures as a more credible basis for assessment and statistics.

Trading partners

Rely on it when assessing whether to continue or extend a commercial relationship.

Regulatory agencies

Rely on it to check compliance with reporting and governance requirements.

International standardisation agencies

Monitor how consistently auditing and accounting standards are applied in practice.

Journalists

Financial journalists and analysts read the audit opinion in reporting on an entity, the hinge point before the list turns to users inside the entity itself.

Owners

Rely on the audit as an independent check on how the business they own is being run.

Directors

Use the audit process itself, and its findings on internal control, to discharge their own governance responsibilities.

Managers

Use internal audit findings especially to improve operational control.

Employees

Rely on audited results, alongside other factors, in assessing job security and the entity's prospects.

Duties

The auditor's duties are:

Obligations

To comply with auditing standards (ISAs) and the professional code of ethics (see the audit principles above), and to maintain independence throughout the engagement.

Rights

The auditor's rights are:

Self-interest

The firm has a financial interest in the client, a significant fee dependency, or a loan arrangement with it.

Self-review

The firm audits work it performed itself, such as a valuation, a bookkeeping service or a system it designed.

Advocacy

The firm promotes the client's position, for example by acting for it in litigation or in raising finance.

Familiarity

Long association, a close personal relationship, or an audit team member joining the client.

Intimidation

Pressure on the team, including a threatened replacement of the firm or threatened litigation.