Auditing Basics
What is the main purpose of auditing?
To give trust and credibility to a company’s financial information.
What is an unmodified opinion?
This audit opinion is the best one a company can receive.
What is the first step an auditor takes before testing transactions?
Audit plan and risk assessment
What major ethical pressure commonly influences auditors to act against their judgement?
Threats of job loss
Corporate culture and pressure
Why is auditor independence essential to the credibility of audited financial statements?
Because independence ensures auditors remain objective and unbiased, which allows investors and the public to trust the audit opinion.
Auditing is performed by what type of qualified professional in Canada?
A CPA (Chartered Professional Accountant).
What is a qualified opinion?
This audit opinion is issued when most of the financial statements are correct, except for one specific issue.
What type of degree or education is generally required to start the CPA path?
A bachelor’s degree or equivalent post-secondary education from a recognized university.
What key organizational system could reduce unethical behaviour by giving employees a safe way to report issues?
A confidential method of whistleblowing and/or reporting unethical accounting practices.
How do auditing standards, auditor independence, and reasonable assurance work together to build trust in financial reporting?
Auditing standards guide the audit process, independence prevents bias, and reasonable assurance confirms statements are free from material misstatement, together creating reliable financial information.
What does an auditor provide at the end of an audit: absolute certainty or reasonable assurance?
Reasonable assurance.
What is an internal audit?
This type of audit is performed by employees within the company and focuses on evaluating internal controls, risks, and operational efficiency.
Give an example of a situation that could impair independence in appearance.
If an auditor owns shares in the client company they are auditing, it could impair independence in appearance.
What major accounting abuse contributed to the Enron scandal?
Recognizing revenue too early.
A company follows IFRS, has strong internal controls, and receives an unmodified audit opinion. What does this tell investors?
That the financial statements are fairly presented, follow proper standards, and can be relied on for decision-making.
Name 4 major responsibilities an auditor has during an audit.
Examples: maintain independence, assess risk, test transactions, evaluate internal controls, collect evidence, or issue the auditor’s report.
What is a major scope limitation?
This situation occurs when the auditor is unable to access important records, management is uncooperative, or evidence is missing, this often results in a disclaimer of opinion.
Why is independence critical for public trust in financial statements?
Independence ensures auditors provide unbiased and objective opinions
How is technology improving audit quality today?
Automating tasks
Reducing mistakes
Enhancing risk detection
How could weak internal controls and lack of auditor independence increase the risk of another major accounting scandal?
Weak controls allow errors or fraud to go undetected, and lack of independence prevents auditors from reporting problems honestly, misleading investors.
Explain why an auditor provides reasonable assurance rather than absolute certainty in a financial statement audit, and give two reasons why this limitation exists.
Auditors give reasonable assurance because audits are based on sampling, testing, and professional judgment, not a complete redoing of all transactions.
Limitations exist because:
Material misstatements may go undetected due to human error or fraud designed to evade detection.
Cost and time constraints prevent auditors from examining every transaction in detail.
The audit opinion reflects confidence that statements are free of material misstatement, not absolute certainty.
What are Key Audit Matters (KAM)?
This section of the auditor’s report identifies the most complex, judgment-heavy areas of the audit, such as estimates or revenue recognition, and is typically only required for public companies.
Describe the complete four‑step audit process from planning to reporting, including how audit evidence is gathered and evaluated.
Understand the client, assess risks of material misstatement, and plan audit procedures. Perform analytical procedures and tests of details to gather evidence on account balances and transactions.Summarize findings, assess materiality, and review estimates and judgments.Issue the audit report (unqualified, qualified, adverse, or disclaimer) and communicate key findings to management or the audit committee.
What is one major responsibility of the Auditor General, and what is one thing they do not audit?
The Auditor General audits the federal government’s activities. It does not audit:
Provincial/municipal governments
First nations
Explain how modern audits balance financial reporting, ethical responsibility, and emerging issues like sustainability to protect public trust.
Audits verify financial accuracy, enforce ethical independence, use technology to improve quality, and are expanding toward sustainability assurance to address risks that affect long-term financial performance and public confidence.