Essential Concepts in Auditing, Control, and Financial Reporting

Core Concepts in Auditing and Management Control

Understanding Deviations and Their Causes

Deviations consist of comparing actual data with expected data when both causes are coincident. Causes of deviations may include:

• Errors in environmental forecasts.
• Errors in the method used.
• Issues within the means-relationship chain.

Authorization as Internal Control

Authorization is a key object of internal control. It ensures compliance with the approval provided by the management of an organization when carrying out transactions.

Purposes of Management Control

The ultimate goal of management control is the efficient use of resources to achieve organizational objectives. Other essential purposes include:

• Informing: Providing data for proper decision-making.
• Coordinating: Managing activities effectively.
• Evaluating: Assessing achievements and performance.
• Motivation: Encouraging and assisting those responsible for reaching goals.

Audit Evidence and Testing Methods

Defining the Quantity of Audit Evidence

The quantity of evidence refers to the level of audit evidence the auditor must obtain to draw reasonable conclusions regarding the financial statements.

Methods for Obtaining Audit Evidence

Three primary methods are used to obtain audit evidence:

1. Inspection

   Involves reviewing the coherence and consistency of accounting records, documents, and tangible assets.

2. Observation

   Involves examining a process or procedure being performed by others.

3. Confirmation

   Consists of corroborating, usually in writing, the information contained in the accounting records with external parties.

Substantive Tests vs. Compliance Tests

There are distinct differences between these two types of audit tests:

• Compliance Testing: Performed to check the operation of internal control, ensuring its existence, effectiveness, and continuity.
• Substantive Testing: Focused on obtaining audit evidence regarding the reasonableness of the audited financial information (e.g., balances and disclosures).

What is Physical Evidence?

Physical evidence is used to prove the existence of assets, including their quantity and quality. Examples of physical evidence include:

• Inventory counts.
• Cash counts.

Types of Sampling in Auditing

Auditors utilize different sampling techniques:

Subjective Sampling

Performed at the discretion of the auditor, based on professional opinion, to determine the sample selection method and amplitude.

Statistical Sampling

Applies techniques of mathematical statistics to reduce subjectivity and increase the security and accuracy of the audit conclusions.

The Concept of Materiality

Materiality is defined by the extent or nature of an error in the financial information (either individually or as a whole) that, in light of surrounding circumstances, makes it likely that the judgment of a reasonable person would have been influenced and affected his decision as a result of the error.