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The Audit Function

Chapter 1

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Learning Objective 1

Describe auditing.

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Broad Definition of Auditing

Auditing is a systematic process of

objectively obtaining and evaluating

evidence regarding assertions about

economic actions and events to

ascertain the degree of correspondence

between these assertions and

established criteria and communicating

the results to interested users.

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Assertions are representations by

management that are embodied in financial

statement components, records, or systems

Example:

• The financial statements represent fair

measurements of the economic events and

business transactions that affected the

organization during a certain period of time.

Broad Definition of Auditing

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Accumulating and

Evaluating Evidence

Evidence is any information used by the auditor

to determine whether the information being

audited is stated in accordance with the

established criteria.

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Reporting

The final stage in the auditing process

is preparing the Audit Report, which

is the communication of the

auditor’s findings to users.

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Competent, Independent

Person

The auditor must be qualified to understand the

criteria used and must be competent to know

the types and amount of evidence to accumulate

to reach the proper conclusion after the

evidence has been examined.

The competence of the individual performing the

audit is of little value if he or she is biased in the

accumulation and evaluation of evidence.

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Learning Objective 2

Distinguish between

auditing and accounting.

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Distinction Between

Auditing and Accounting

Accounting is a process that generates

information in the form of financial

statements and other financial data.

Auditing is a process that evaluates

this information and produce

conclusions with respect to this

information according to the criterion

used to make the evaluation.

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Accounting and Auditing

Contrast

Accounting

Auditing

GAAP (the link)

Recording of

transactions and

preparation of

financial statements

Evaluation of

financial

statements

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Learning Objective 3

Differentiate the three

main types of audits.

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Types of Audits

Financial Statement Audit

Operational Audit

Efficiency Effectiveness

Compliance Audit

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Financial Statement Audit

Example

Information

Established

Criteria

Available

Evidence

Annual audit of PT Telkom’s

financial statements

PT Telkom's financial

statements

Generally accepted accounting

Principles (SAK)

Documents, records, and outside

sources of evidence

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Operational Audit

Example

Information

Established

Criteria

Available

Evidence

Evaluate computerized payroll system

for efficiency and effectiveness

Number of records processed, cost of

the department, and number of errors

Company standards for efficiency and

effectiveness in payroll department

Error reports, payroll records, and

payroll processing costs

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Compliance Audit

Example

Information

Established

Criteria

Available

Evidence

Determine whether bank requirements

for loan continuation have been met

Company records

Loan agreement provisions

Financial statements and

calculations by the auditor

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Learning Objective 4

Identify the primary

types of auditors.

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Types of Auditors

External Auditors

Government Auditors

Internal Auditors

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Learning Objective 5

Basic principles.

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Why Financial Statements are

Audited?

There is a potential conflict between management

and the users

Information can have substantial economic

consequences for a decision maker

Expertise is often required for preparing and verifying

information

Users of information frequently are prevented from

directly assessing the quality of information

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Limitations of an Audit

Many audit conclusions are made by examining a

sample of evidence

Some evidence supporting the financial statements

must be obtained by oral or written representations

of management

Human weaknesses such as fatigue and

carelessness

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Integrity of Auditors

To do the audit, auditors must

have a keen sense of integrity

Integrity is an independence of

attitude in conducting professional

affairs.

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Theoretical Framework

The data to be audited can be verified

Short-term conflicts may exist between

managers who prepare data and auditors

who examine the data

Auditors must have independence and

freedom from managerial constraint

An audit benefits the public

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Learning Objective 6

Explain the major steps in

the systematic process

of financial auditing.

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Summary of the

Audit Process

Phase I Plan and design

an audit approach.

Phase IV

Complete the

audit and issue

an audit report.

Phase II

Perform tests of

controls and

substantive tests

of transactions.

Phase III

Perform analytical

procedures and

tests of details

of balances.

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Summary of the Audit Process

Phase I

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Summary of the Audit Process

Phase II & Phase III

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Summary of the Audit Process

Phase IV

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Learning Objective 7

Describe the nature of CPA firms,

what they do, and their structure.

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Certified Public

Accounting Firms

The legal right to perform audits is granted

to CPA firms by regulation.

CPA firms also provide many other services to

their clients, such as tax and consulting services.

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Certified Public

Accounting Firms

There are approximately 400

CPA firms operates in Indonesia.

Most of all CPA firms have fewer

than 25 professionals in a single-office firm.

The four largest CPA firms in the world

are called the “Big Four”

international CPA firms.

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Management

Consulting

Services

Tax

Services

Accounting

and

Bookkeeping

Services

Activities of CPA Firms

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Hierarchy of a Typical

CPA Firm

Staff Level

Staff

Assistant

Senior

Auditor

Experience Typical Responsibilities

0-2 years Performs most of the

detailed audit work

2-5 years

Responsible for the audit

field work, including

supervising staff work

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Hierarchy of a Typical

CPA Firm

Staff Level

Manager

Partner

Experience Typical Responsibilities

5-10 years

Helps the plan, manages

the audit, reviews work,

and works with the client

10+ years

Reviews audit work and

makes significant audit

decision

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Tugas

Buatlah tulisan tentang perkembangan

profesi akuntan publik di Indonesia

termasuk undang-undang pemakaian

gelar akuntan.

Peraturan perundangan

Organisasi profesi

Standar profesi dan kode etik

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