Advanced Auditing
Lecture 1 – Audit demand
Give a keyword that describes an auditor
- Independent
- Evidence
- Risk
- Materiality
- Regulation → highly regulated industry
Audit
Why – what – how
- WHY: improve information quality → historical information but also future
information (50%/50% in FS), but it also must have some sort of quantifiable
statement
o Key issues: assessments about future are hard to make
- WHAT: obtain sufficient and appropriate evidence
- HOW: regulated context → independent professional, professional standards
(ISAs/ISAEs/ISREs/ISRSs) and ethical standards
Assurance (why?/what?)
The AICPA definition:
Independent professional services that improve the quality of information for users.
The IFAC definition:
An engagement in which a practitioner aims to obtain sufficient, appropriate evidence in
order to express a conclusion designed to enhance the degree of confidence of the intended
users. Other than the responsible party about the subject matter information.
If you audit a company, what do you want to know?
- What the users of the FS are → overview of intended users
What is an audit?
Opinion by an independent auditor on whether financial statements are in all material
aspects present fairly in accordance with GAAP
- GAAP: IFRS, RJ (Raad voor de Jaarverslaggeving), USGAAP, DAS (ESG: CSRD/EFRAG)
- GAAS: General Accepted Auditing Standards
Regulated context (GAAP)
Financial reporting
- Public firms: IFRS
- Private firms and non-for-profit: RJ
ESG Reporting
- Public and large private firms: EFRAG
- Other firms: ISSB, SDG
,Regulated context GAAS (how?)
ISAs (COS) – financial statements
- Dutch standards follow the same rules
- 200 – 299 General
principles and responsibilities
- 300 – 499 Risk assessment
and response to risk
- 500 – 599 Audit evidence
- 600 – 699 Using the work
of others
- 700 – 799 Audit
conclusions and reporting
- 800 – 899 Specialized
Areas
,Auditor reporting
Financial statements
- Positive statements → full and fair view
ESG reports
- Review report
In which dimension do you think differs an audit from a review?
- Evidence → big difference between audit and review
- For audit you need more evidence → that statement is positive
- You need sufficient and appropriate evidence to make an assumption
Audit regulation in The Netherlands
Individual auditors
- Audit alert and practice statements
- NVCOS
- ViO
- Code of ethics
- WAB
Audit firms
- NVKS
- VAO
- BTA
- WTA → Wet Toezicht Accountantsorganisatie
- WAB
Audit demand
Economics of audit demand
Demand by outside intervention
- NOW → need to be audited
- Based on regulation → exogenous
, Exogenous audit demand
- Decrease → smaller companies
- Increase → NOW, need to be audited (for certain size)
CSRD
- Review
Economics of audit demand
Demand by within the economy
- Voluntary audit
Endogenous audit demand
- Agency relation: Transfer of decision-making power
- Agency theory: Conflicts of interests ... due to differences in incentives and
information asymmetry
- Moral Hazard: agent actions not observed yet incentivized (work hard / shirk)
- Adverse selection: principle cannot observe the quality of the firm (lemon)
Endogenous?
- Endogenous: Independent audit reduces incentive problems of the manager and
should exist in earliest firms [JM1976]
- Exogenous: Audit textbooks: recent product of government intervention (e.g.,
created by securities acts) → intervention or codified
- Audit/auditing started as endogenous choice
Lecture 1 – Audit demand
Give a keyword that describes an auditor
- Independent
- Evidence
- Risk
- Materiality
- Regulation → highly regulated industry
Audit
Why – what – how
- WHY: improve information quality → historical information but also future
information (50%/50% in FS), but it also must have some sort of quantifiable
statement
o Key issues: assessments about future are hard to make
- WHAT: obtain sufficient and appropriate evidence
- HOW: regulated context → independent professional, professional standards
(ISAs/ISAEs/ISREs/ISRSs) and ethical standards
Assurance (why?/what?)
The AICPA definition:
Independent professional services that improve the quality of information for users.
The IFAC definition:
An engagement in which a practitioner aims to obtain sufficient, appropriate evidence in
order to express a conclusion designed to enhance the degree of confidence of the intended
users. Other than the responsible party about the subject matter information.
If you audit a company, what do you want to know?
- What the users of the FS are → overview of intended users
What is an audit?
Opinion by an independent auditor on whether financial statements are in all material
aspects present fairly in accordance with GAAP
- GAAP: IFRS, RJ (Raad voor de Jaarverslaggeving), USGAAP, DAS (ESG: CSRD/EFRAG)
- GAAS: General Accepted Auditing Standards
Regulated context (GAAP)
Financial reporting
- Public firms: IFRS
- Private firms and non-for-profit: RJ
ESG Reporting
- Public and large private firms: EFRAG
- Other firms: ISSB, SDG
,Regulated context GAAS (how?)
ISAs (COS) – financial statements
- Dutch standards follow the same rules
- 200 – 299 General
principles and responsibilities
- 300 – 499 Risk assessment
and response to risk
- 500 – 599 Audit evidence
- 600 – 699 Using the work
of others
- 700 – 799 Audit
conclusions and reporting
- 800 – 899 Specialized
Areas
,Auditor reporting
Financial statements
- Positive statements → full and fair view
ESG reports
- Review report
In which dimension do you think differs an audit from a review?
- Evidence → big difference between audit and review
- For audit you need more evidence → that statement is positive
- You need sufficient and appropriate evidence to make an assumption
Audit regulation in The Netherlands
Individual auditors
- Audit alert and practice statements
- NVCOS
- ViO
- Code of ethics
- WAB
Audit firms
- NVKS
- VAO
- BTA
- WTA → Wet Toezicht Accountantsorganisatie
- WAB
Audit demand
Economics of audit demand
Demand by outside intervention
- NOW → need to be audited
- Based on regulation → exogenous
, Exogenous audit demand
- Decrease → smaller companies
- Increase → NOW, need to be audited (for certain size)
CSRD
- Review
Economics of audit demand
Demand by within the economy
- Voluntary audit
Endogenous audit demand
- Agency relation: Transfer of decision-making power
- Agency theory: Conflicts of interests ... due to differences in incentives and
information asymmetry
- Moral Hazard: agent actions not observed yet incentivized (work hard / shirk)
- Adverse selection: principle cannot observe the quality of the firm (lemon)
Endogenous?
- Endogenous: Independent audit reduces incentive problems of the manager and
should exist in earliest firms [JM1976]
- Exogenous: Audit textbooks: recent product of government intervention (e.g.,
created by securities acts) → intervention or codified
- Audit/auditing started as endogenous choice
