What is an audit on financial statements?

Audit is an assurance service and is conducted by external (independent) auditor. Auditor is required to comply with applicable Standard on Auditing (eg. Vietnamese standard on auditing - VSAs, International standard on auditing – ISAs) in order to obtain reasonable assurance about whether financial statements as a whole are free from material misstatement, whether due to fraud or error [ISA 200.5]

What is a reasonable assurance?

Reasonable assurance is a high level of assurance but not absolute. Reasonable assurance indicates that “high enough” misstatements (either errors or fraud) are identified, evaluated and solved by the auditor in compliance with applicable standard auditing.

Reasonable insurance does not mean “all” misstatements are entirely eliminated from financial statements. This understanding is really important for users to correctly understand scopes and nature of an audit.

What is materiality and material misstatement?

Audit works are planned, carried out and evaluated by strictly adhering to Materiality. In simple words, materiality means a level (an amount) by which a financial information is considered as important or non-important for user of financial statements.

In [ISA 200.6], it is clearly defined that:

“The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements. In general, misstatements, including omissions, are considered to be material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.”

Therefore, materiality is used in all stages of an audit. Materiality is considered in both qualitative and quantitative aspects, separated or in aggregation. How to evaluate materiality is highly depended on experiences and judgment of the practicing auditor. To ensure consistence in quality of all audits and to protect user of audit result, auditing standards are promulgated by statutory regulators and introduced by professional bodies to require all audits to comply with an integrated and concreted standards such as ISAs, VSAs etc. This is the main purposes of auditing standards.

What is required for a user of audit results?

In most auditing standards, it is required that user of audit report must possess appropriate and sufficient knowledge of an audit and audit approach to understand audit results properly.

Result of an audit?

The ultimate result of an audit is to express auditor’s opinion on whether the financial statements are presented fairly in all material aspects, in accordance with an applicable financial reporting standard.

References

- ISA 200 – Overall objectives of the independent auditor and the conduct of an audit in accordance with international standard on auditing