FUNDAMENTAL AUDITING

1. FUNDAMENTAL AUDITING • Chapter 1: Control in Management • Chapter 2: Nature and functions of audit • Chapter 3: Audit Classification • Chapter 4: Main concepts to conduct an audit • Chapter 5: Auditing standards • Chapter 6: Audit methodology • Chapter 7: Audit sampling • Chapter 8: Audit process

2. Learning Objectives • Describe the nature and role of control in management • Describe the nature and functions of auditing • Identify and compare different type of auditing and auditors • Identify and assess materiality and audit risks, audit documentation • Describe the generally accepted auditing standards (GAAS) • Demonstrate application of audit method • Demonstrate application of audit sampling • Describe the audit process

3. Learning materials Required Textbooks • A. A. Arens, R. J. Elder, and M. S. Beasley. 2017. Auditing and Assurance Services (16th Edition). Prentice-Hall • Nguyen QuangQuynh and Nguyen Thi Phuong Hoa. 2018. Audit Theory. NEU publisher. Suggested Course Materials • O.R. Whittington, K. Pany, Principles of Auditing and Other Assurance Services, 19th Edition, McGraw Hill,2014, ISBN: 0078025613; • http://www.ifac.org/publications-resources/2012-handbook-international-quality-control-auditing-review-other-assurance-a • http://www.ifac.org/publications-resources/2012-handbook-code-ethics-professional-accountants • www.mof.gov.vn • www.Chinhphu.vn • www.vacpa.org.vn

4. CHAPTER 1: CONTROL IN MANAGEMENT • What is management? • What is control • Nature of control • Characteristics of Control • Process of Controlling • Factors that affect control • Historical development of auditing

5. What is management? • Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively. • Management, in common, is a process of orientation and organizing to accomplish desired objectives based on available resources in an efficient and effective manner.

6. What is control? • According to Henri Fayol “Control of an undertaking consists of seeing that everything is being carried out in accordance with the plan which has been adopted, the orders which have been given, and the principles which have been laid down. Its object is to point out mistakes in order that they may be rectified and prevented from recurring.

7. What is control? • According to EFL Breach, “Control is checking current performance against pre-determined standards contained in the plans, with a view to ensure adequate progress and satisfactory performance. • According to Harold Koontz, “Controlling is the measurement and correction of performance in order to make sure that enterprise objectives and the plans devised to attain them are accomplished.

8. Nature of control • Controlling is one of the managerial functions like planning, organizing, staffing and directing. • Controlling is an important function because it helps to check the errors and to take the corrective action so that deviation from standards are minimized and stated goals of the organization are achieved in a desired manner.

9. Characteristics of Control • Control is a continuous process • Control is a management process • Control is forward looking • Control is closely linked with planning • Control is a tool for achieving organizational activities

10. Process of Controlling • Setting performance standards. • Measurement of actual performance. • Comparing actual performance with standards. • Analyzing deviations. • Taking correcting deviations

11. Factors that affect control • Type of ownerships • Hierarchies of management • Type of operations • Economic and social conditions

12. Historical development of auditing • Prior to 1840 • In ancient times: – The ancient checking activities were found in Greece around 350 B.C. – A single public officer was appointed to find fraudulent actions (embezzlement, corruption, administrative errors,…). Examination result was used by court to fine the person who did fraudulent actions.

13. Historical development of auditing • Prior to 1840 • In Middle ages: – In 1494, “double entry book - keeping” was published by Luca Pacioli – The merchants of Florence, Genoa, Venice used auditors to help them verify the riches brought by captains of sailing ships and detect of fraud.

14. Historical development of auditing • 1840s to 1920s • The advent of the industrial revolution in the UK made vast changes in company’s scale and nature of operations • The share market during this period was unregulated and highly speculative • The time was ripe for a profession of auditing to emerge

15. Historical development of auditing • 1920s to now • The advancement of the securities market facilitated the development of auditing – In 1934, SEC required that all listed companies have financial statements audited by an independent auditor – From 1960s – 1990s, the provision of advisory services emerged as a secondary audit function.

16. Historical development of auditing - Conclusion • Prior to 1840 The audit objective in the early period was primarily designed to verify the honesty of persons charges with fiscal responsibilities • 1840s – 1920s This period prefers to period of “auditing stagnation” • 1920s to now - Audit function focuses on assessing the truth and fairness of the companies’ financial statements – Furthermore, auditing provides advisory services to audit’s client.

17. Historical development of auditing – in Vietnam • In 1991, independent auditing emerged • In 1994, Vietnamese State Audit was established • In 1996, internal audit was firstly regulated • In 2005, Vietnamese State Audit law was issued • In 2011, Vietnamese independent auditing law was issued

18. CHAPTER 2: NATURE AND FUNCTION OF AUDITING

19. Nature of auditing What is an audit? • Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. • Auditing is done by a competent, independent person.

20. Nature of auditing Five components of an audit? 1.Information (related to entity): including quantifiable and subjective information 2. Criteria: established criteria 3. Evidence gathering and evaluation 4. Competent, independent person 5. Report

21. Nature of auditing Audit of financial statements

22. Nature of auditing Distinction between accounting and auditing • What is accounting? • What is auditing? • Who is responsible for accounting or auditing? • Can an auditor do both for the same company?

23. Expression an opinion Verification Function of auditing

24. Verification • Verification is the main function of audit • Verification refers to information audit - Providing for verification of records in a sufficiently independent manner from the institution or subject being audited. • Verification can be detailed by objectives in conformity with each type of audit.

25. Verification – Objectives of an audit of Financial statements • Existence or occurrence • Completeness • Accuracy • Rights and obligations • Valuation or measurement and allocation • Presentation & disclosure

26. Verification – Objectives of an audit of Financial statements

27. Verification – Objectives of an audit of Financial statements

28. Verification – Objectives of an audit of Financial statements

29. Expression of an opinion • In public sector: government audit • Jurisdiction as judge: In Germany, State Audit may indicate in management letter or in special reports to Parliament, cases where the personal liability of civil servants is in question. • Advisory function • In private sector: internal audit & independent audit • Advisory function: financial audit, accounting & bookkeeping, tax service, management consulting,..

30. The role of auditing • Auditing can reduce information risk, and make users believe in information audited • Auditing can enhance financial management • Auditing can improve efficiency & effectiveness of the institution or subject audited

31. CHAPTER 3: CLASSIFICATION OF AUDITING

32. Content Type of audits • Financial statements audit • Compliance audit • Operational audit (performance audit) Types of auditors • Certified public accountant (CPA) • Government auditor • Internal auditor

33. Financial Statement audit • Definition: Conducted to determine whether the overall financial statements are stated in accordance with specified criteria • Example: Audit of Vinamilk’s financial statements

34. Financial Statement audit Characteristics of financial statement audit: • Object of FA is financial statements • FA can be undertaken by independent auditors, internal or government auditor • Established criteria normally are accounting standards and principles • Audit results are usually reported to outsiders of the entity being audited

35. Compliance audit • Definition: Compliance audit is to determine whether the auditee is following specific procedures or rules set down by a higher authority

36. Compliance audit Characteristics of compliance audit • CA evaluates the degree of compliance with prescribed regulations and rules of auditee • CA can be carried out by different type of auditors • Established criteria are government legislation, regulations, ordinances, directives,… • CA can improve effectiveness in management

37. Operational audit • Definition: the audit focuses on the appraisal of the effectiveness and efficiency of an activity or an operation of an organization in order to determine whether it meets management objectives and achieves other established criteria

38. Operational audit Purpose of Operational audit • Effectiveness: the degree to which the organization’s objectives are accomplished • Efficiency: the degree to which costs are reduced without reducing effectiveness

39. Operational audit Purpose of Operational audit • Effectiveness: the degree to which the organization’s objectives are accomplished • Efficiency: the degree to which costs are reduced without reducing effectiveness

40. ACTUAL INPUTS ACTUAL OUTPUTS [Efficiency] [Economy] [Effectiveness] PLANNED INPUTS PLANNED OUTPUTS The three Es (Adapted from Chambers and Rand, 2010: 16)

41. Operational audit Characteristics of operational audit • OA focuses on operations undertaken by any part of an organization. • OA is usually performed by internal and government auditor • Established criteria depend on nature and extent of specified operational audit • OA is more like management consulting than what is usually considered auditing

42. Operational audit Example

43. Type of audits Differences between operational audit and financial auditing • Object of the audit • Purpose of the audit • Established criteria • Inclusion of nonfinancial areas • Distribution of the report

44. Types of auditors • Certified public accountant (CPA) • Government auditor • Internal auditor

45. Certified public accountant (CPA) and CPA firms • CPA firms are business entities that provide auditing services and other services to meet the need and demand of their client • CPA & CPA firms are usually responsible for published financial statements of all listed companies, public companies,… • Auditors who express audit opinion on financial statements must be licensed as CPAs

46. Certified public accountant (CPA) Requirements for becoming a CPA in Vietnam • Which organization does have authority to license CPA in Vietnam? • Which requirements does a person have to meet to become a CPA in Vietnam?

47. Certified public accountant (CPA) Requirements for becoming a CPA in Vietnam

48. Positions and duties in an audit firm • Partner (10+ years) • Top level client relationships • Review of audit work • Resolve significant issues arising from the audit • Signature on audit report • Attend annual general meeting • Approval of billings to client • Ultimate responsibility for everything related to auditor’s report

49. Positions and duties in an audit firm • Manager (5 -10 years) • Close contact with client • Direct supervision of audit engagement • Detailed review of audit work • Billings to client

50. Positions and duties in an audit firm • Supervisor or senior (2 -5 years) • Direct responsibility for planning and performance of audit work • Supervision of assistants and provisions of on the job training • Review of assistants’ work • Assistant (0 – 2 years) • May plan portions of the audit • Direct responsibility for audit work on assigned segment of audit