Unit 13

AUDITING

Overview
In this unit, students will be learned about the role of auditing as well as basic auditors’
works.

Learning objectives
After this unit, students should be able to:
>> Understand the role of auditing
>> Know about basic auditors’ works and their responsibility

Think and discuss

1. What does an auditor do?
2. Why do we need auditing?

1. SPECIAL
2.
3.
4.

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 1. SPECIAL TERMS

Match the words or expressions in column A with their definition in column B.

You can look it up for more detailed explanations in the specialist dictionary.

Column A Column B
A. study of a specific unit of an organization for the
1. business risk
purpose of measuring its performance
2. information B. intentional acts that cause misstatement of financial
risk statements
3. financial C. unintentional misstatements or omissions of amounts
audit or disclosure in financial statements
4. compliance D. the professional opinion of an acountant regarding
audit the results of an audit
E. auditors must fulfill responsibilities in all cases
5. operational
where such requirements are relevant, MUST, SHALL,
audit
is required
F. the risk associated with a company's survival and
6. fraud
profitability
G. written by the external auditors, declares that the
7. error annual financial statements present a true and fair view
of the company’s situation
H. an independent evaluation to ensure that an
organization is following external laws, rules, and
8. audit opinion
regulations or internal guidelines, such as corporate
bylaws, controls, and policies and procedures
I. an audit of the financial accounting information of an
9. unconditional
entity to determine whether statements have been
responsibility
prepared according to GAAP
J. the risk that information used to assess business risk
10. audit report
is not accurate

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2. READING

READING 1

Reading text 1: Auditing and do exercise 2.1 below

AUDITING
Auditing is an accounting function that involves the review and evaluation of
financial records. It is done by someone other than the person who entered the transactions
in the records.
Internal audit
Many corporations, especially the larger ones with complex operations, maintain a
continuous internal audit by their own accounting. They continuously review operating
procedures and financial records and report to management on the current state of the
company's fiscal affairs. These accountants also report on any deviations from standard
operating procedures: that is, the company's established methods for carrying on its
operating and recording functions. The internal auditors also make suggestions to
management for improvements in the standard operating procedures. Finally, they check
the accounting records in regard to completeness and accuracy, making sure that all
irregularities are corrected. Overall, the internal auditors seek to ensure that the various
departments of the company follow the policies and procedures established by the
management.
External audit
Independent auditing is done by accountants who are not employees of the
organization whose books they examine. The independent auditor is almost always a CPA.
His or her clients are generally the owners of the business or their representatives, the board
of directors.
Independent auditors review the business's operating activities; they also examine
financial statements, accounting records, and supporting business papers, usually known
collectively as evidential matters. They do this in order to determine the accuracy,
authenticity, and completeness of the records, all of which are part of the concept that is
expressed as fairness in accounting terminology. The accountant's judgment or opinion on
the fairness of the records is contained in a document sent to the client upon completion of
the audit. It consists of a letter addressed to the client that contains both a scope paragraph
and an opinion paragraph.
Operational audit
An operational audit is the review of any part of an organization’s operating
procedures and method for the purpose of evaluating efficiency and effectiveness. At the
completion of an operational audit, recommendations to management for improving
operations are normally expected. Because of the many different areas in which operational

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effectiveness can be evaluated, it is impossible to characterize the conduct of typical
operation audits. In one organization, the auditor may evaluate the relevancy to acquire
new fixed assets, while in a different organization the auditor might evaluate the efficiency
of the paper flow in processing sales. In operational auditing, the reviews are not limited
to accounting. They can include the evaluation of organization structure, computer
operations, production methods, marketing, and any other area in which the auditors are
usually more concerned with making recommendations for improving performance than
with reporting on the effectiveness of existing performance.
Compliance audit
The purpose of a compliance audit is to determine whether the auditor is following
specific procedures or rules set down by some higher authority. In the audit of
governmental units such as school boards, there is increased compliance auditing due to
extensive regulation by higher government authorities. In virtually every private and non-
for-profit organization, there are prescribed policies, contractual agreements, and legal
requirements that may call for compliance auditing. When an organization wants to
determine whether individuals or organizations that are obligated to follow its requirements
are actually complying, the auditor is employed by the organization issuing the
requirements. An example is the auditing of taxpayers for compliance with the federal tax
laws- the auditor is employed by the government to audit the taxpayers’ tax returns.
Audit of financial statements
An audit of financial statements is conducted to determine whether the overall
financial statements - the quantifiable information being verified- are stated in accordance
with specified criteria. Normally, criteria are generally accepted accounting principles,
although it is also possible to conduct audit of financial statements prepared using some
other basis of accounting appropriate for the organization. The financial statements most
commonly included are the statements of financial position or balance sheet, income
statement, cash flow statement and accompanying footnotes. The assumption underlying
an audit of financial statements is that they will be used by different groups for different
purposes. For example, a general audit of a business may provide sufficient information
for a banker considering a loan to the company, but a corporation considering a merger
with that business may also wish to know the replacement cost of fixed assets and other
information relevant to the decision. The corporation may use its own auditors to get the
additional information.
The owner of a business may keep his or her own books of account and feel no need
to have them examined by an auditor. Nowadays, however, it is generally accepted that
every business should be audited. Auditors help the business set up a reliable accounting
system. They can also ensure that all transactions have been actually and properly recorded.
They can also discover whether nonexistent transactions have been entered on the books.
Even in a small business, mistakes in the books of accounts can lead to a business failure.
Management must act upon the information in the financial records; the auditor ensures
that this information is accurate, adequate, and accessible.

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 (Source: Bich Van & Trong Thuy. 2001. The Language of Accounting in English,
Hanoi: Thong Ke Publisher)

2.1 Answer the following questions

1. What does the auditing function of accounting involve?

2. What are the various functions of internal auditors? What do they try to ensure?
3. Who carries out an independent audit?
4. Who are usually the clients of an independent audit?
5. What does the independent auditor review?
6. What does the independent seek to determine?
7. How is an independent auditor’s opinion expressed to his or her client?
8. What is the function of operational audits?
9. What is the purpose of compliance audits?
10. How is auditing useful to a business?

READING 2

Reading text 2: The role and function of external auditors and do exercises
2.2, 2.3 below
THE ROLE AND FUNCTION OF EXTERNAL AUDITORS
Financial statements are used for a variety of purposes and decisions. For example,
financial statements are used by owners to evaluate management's stewardship, by
investors for making decisions about whether to buy or sell securities, by credit rating
services for making decisions about the creditworthiness of entities, and by bankers for
making decisions about whether to lend money. Effective use of financial statements
requires that the reader understand the roles of those responsible for preparing and auditing
financial statements.
Financial statements are representations of management. When using management's
statements, the reader must recognize that the preparation of these statements requires
management to accounting estimates and judgments, as well as to determine from among
several alternative accounting principles and methods appropriate within the framework of
generally accepted accounting standards.
In contrast, the auditor's responsibility is to express an opinion on whether
management has fairly presented the information in the financial statements. In an audit,
the financial statements are evaluated by the auditor, who is objective and knowledgeable
about auditing, accounting, and financial reporting matters.
During the audit, the auditor collects evidence to obtain reasonable assurance that

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the amounts and disclosures in the financial statements are free of material misstatement.
However, the characteristics of evaluating evidence on a test basis, the fact that accounting
estimates are inherently imprecise, and the difficulties associated with detecting
misstatements hidden by collusion and careful forgery, prevent the auditor from finding
every error or irregularity that may affect a user's decision.
The auditor also evaluates whether audit evidence raises doubt about the ability of
the client to continue as a going concern in the foreseeable future. However, readers should
recognize that future business performance is uncertain, and an auditor cannot guarantee
business success.
Through the audit process, the auditor adds credibility to management's financial
statements, which allows owners, investors, bankers, and other creditors to use them with
greater confidence.
The auditor expresses his assurance on the financial statements in an auditor's
report. The report, which contains standard words and phrases that have a specific meaning,
conveys the auditor's opinion related to whether the financial statements fairly present the
entity's financial position and results of operations. If the auditor has reservations about
amounts or results of operations. If the auditor has reservations about amounts or
disclosures in the statements, he modifies the report to describe the reservations.
The auditor's report and management's financial statements are only useful to those
who make the effort to understand them.
(Source: http://wenku.baidu.com)

2.2 Answer the following questions

1. What do investors use financial statements for?

2. What is the auditor responsible for?
3. Who evaluates the financial statements?
4. How can the auditor add credibility to management’s financial statement?
5. To whom is the auditor’s report useful?

2.3 According to text 2 which of the following sentences are true (T) or false (F)

1. Management is represented by financial statements.

2. The preparation of management's statements requires it to choose the
most appropriate accounting principles and methods.
3. The difficulties related to detecting misstatement hidden by collusion
and careful forgery help the auditor find any errors.
4. An auditor is able to judge business success.
5. The report expresses the auditor's opinion about the financial position
and results of operations.

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3. LISTENING

3.1 You are going to listen to the conservation between two colleagues from
an auditing firm. Listen carefully and fill in the gaps.

Heidi: Have you seen the latest?

Philip: What's that? About Megacorp PLC
Heidi: Yeah. And it's not the only one. Every week there's a new scandal. It's going to
change how we do our job.
Philip: How? Our role is only to give an (1) ………. based on estimates. We can’t review
every little thing in detail.
Heidi: Oh, come on. Investors expect financial information to be (2) ………. And I think
it's fair enough. If they find out that, I don't know, that assets have been overstated by
50%, then they're going to be annoyed. I would be, too.
Philip: We don't (3) ………. anything.
Heidi: But we're expected to find these things. That's what we're paid to do.
Philip: Hang on a minute. Our job is to (4) ………. the information provided to us by the
management of a company. We have to assume that they're being (5) ………. We're not
police officers.
Heidi: But ...
Philip: Let me finish. Look, there are (6) ………. mechanisms to deal with people who
commit (7) ………. The auditing profession has it's own (8) ………. and investors trust
this. It's tried and tested.
Heidi: All I'm saying is that investors have a right to (9) ………. on the financial
information they read, and we're paid to (10) ………. exactly that. (11) ………. may not be
enough. And the trend is …
Philip: I agree that it's a bit strange that we're paid by the same people who we (12) ……….,
but it's always been this way and I don't see how that can be changed, do you?

3.2 Listen again and answer the following questions

1. What is Heidi worried about?
2. What does Philip think?
3. What does Heidi think investors should get?

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4. VOCABULARY EXERCISES

4.1 Choose the best answer given to the sentence

1. The purpose of an audit is to gather and evaluate evidence in order to form an
opinion on the.................. of a company's financial statements.
A rationality B realization
C. reliability D. responsibility
2. The audit................. is usually no more than a page in length and is attached to the
financial statements.
A. report B. response
C. result D. review
3. Auditors are not responsible for the................. of the financial statements of a
company.
A. evaluation B. examination
C. position D. preparation
4. In the financial statements, the company implicitly states that all items, account
balances and transactions are................. valid, complete and accurate.
A. essentially B. generally
C. materially D. precisely
5. An error in... ... is committed when the financial statements include an item that
should not be included.
A. accuracy B. auditing
C. completeness D. validity
6. An error in.................. is committed when the financial statements do not include
an item which should be included.
A. accuracy B. auditing
C. completeness D. validity
7. An error in................. is committed when the financial statements include incorrect
information about an item that should be included.
A. accuracy B. auditing
C. completeness D. validity
8. One of the principal goals of the auditor is to add.................. to this assertion.
A. credentials B. credibility
C. creditworthiness D. credulity
9. Audit risk is the risk that the auditor expresses an inappropriate audit opinion when
the financial statements are significantly.............

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 A. misstated B. overstated
C. restated D. understated
10. In addition to the financial statements, the auditor also examines the company's
internal ......... procedures for effectiveness.
A. coherence B. command
C. control D. correspondence

4.2 Complete the paragraph with the corret words from the box. You will
not use all the words

independent accounts auditors appointed auditing

methods accountants financial report manager

The traditional definition of auditing is a review and an evaluation of (1) ……………

records by a second set of accountants. An internal is a control by a company's own (2)
……………, checking to completeness, exactness and reliability. Among other things,
internal auditors are looking for departures from a firm's established (3) …………… for
recording business transactions. In most countries, the law requires all firms to have their
(4)
…………… audited by an outside company. An (5) …………… audit is thus a review
of financial statements and accounting records by an accountant not belonging to the firm.
The (6) …………… have to judge whether the accounts give what in Britain is known as a
“true and fair view” and in the US as a "fair presentation” of the company's (corporation's)
financial position. Auditors are (7) …………… by a company's most senior executives and
advisors, whose choice has to be approved by the owners of the company's equity at the
company's yearly assembly. Auditors write an official audit (8) …………… They may also
address a “management letter” to the directors, outlining inadequacies and recommending
improved operating procedures.

Complete the table with words and related forms. Then complete the
4.3
sentences below with the correct forms of words from the table.

Verb Noun Adjective

(1)
…………… accurate
(2)
…………… compliance
(3) (4)
recommend …………… ……………
(5)
…………… record
(6)
…………… examination

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 a. I’m an internal auditor, I ………. the company’s accounts, to make sure that they
are ………., and that they ………. with company policies and general accounting
principles.
b. If the control systems aren’t adequate, I make ………. concerning changes.
c. The external auditors check to see if transactions are being ……….correctly.

4.4 Complete the following paragraph with the correct form of the word in
parentheses.

Ideally, a business should use as many internal controls as are consistent with (1)
…………… (EFFICIENCY) operation. Many companies employ their own (2)
…………… (ACCOUNT) to maintain an internal audit. They (3) ……………
(CONTINUE) review operating procedures and financial records and report to (4)
…………… (MANAGE) on the current state of the company's fiscal affairs. These
accounts also report on any (5) …………… (DEVIATE) from standard procedures; that is,
the company's (6) …………… (ESTABLISH) methods for carrying on its operating and
recording functions. The internal (7) …………… (AUDIT) also make suggestions to
management for (8) …………… (IMPROVE) in the standard operating procedures.

4.5 Read the following description of auditing. Choose the best word (A, B,
C or D) to fill each gap.

Auditing is a related but separate discipline to accountancy of which there are two
sub-disciplines; internal and external auditing. External auditing is the process (1) ……….
an external auditor is appointed (2) ………. Outside the organisation to examine its financial
statements and accounting records in (3) ………. to ensure that the records show a true and
fair (4) ………. of the statements and the accountant's compliance to accounting standards
(5)
………. - as Generally Accepted Accounting Principles (GAAP) or International
Financial Reporting Standards (IFRS) in all material respects. The auditors of a limited
company are (6) ………. by the shareholders. Internal auditing aims (7) ……….provide
information for the management of a business entity, and is (8) ………. undertaken by
auditors who are employed by the company, and in some (9) ………. by consultants or
external service providers. The auditor's report is usually (10) ………. brief and indicates
that the financial statements have been audited and also gives the auditor's (11) ……….
about them. The report is attached to the main financial statements published by a company
as a (12) ………. requirement.

1 A. in B. by C. whereby D. which
2 A. by B. through C. via D. from

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 3 A. order B. case C. particular D. addition
4 A. record B. view C. opinion D. report
5 A. referred B. by C. called D. such
6 A. specified B. employed C. appointed D. identified
7 A. at B. to C. for D. on
8 A. usually B. seldom C. always D. never
9 A. places B. firms C. cases D. exceptions
10 A. sightly B. remarkably C. very D. quite
11 A. report B. opinion C. assessment D. results
12 A. voluntary B. comprehensive C. statutory D. official

5. SPEAKING

5.1 Individual work

Based on the information in the two texts above, answer the following
questions with your own words
1. What is auditing?
2. What do independent auditors do?

5.2 Pair work or group work

Work with your partner(s) and discuss the following situation.
The owner of a small appliance store, an individual proprietor, wants to keep and
review his books by himself. He has, however, had some doubts about his ability to do this
with complete accuracy. He wonders if the help of a CPA to audit his books is worth the
fee.

6. WRITING

6.1 Rearrange the following words to make complete sentences

1. generally/nowadays/be/is/accepted/it/that/business/every/should/audited.
………………………………………………………………………………………
2. can/system/business/auditors/set up/a/the/reliable/help/accounting/.
………………………………………………………………………………………
3. the/act/financial/upon/information/must/in/the/records/management/the/.

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 ………………………………………………………………………………………
4. that/the auditor/this/and/is/accurate,/information/adequate,/accessible/
ensures/.
………………………………………………………………………………………
5. on/the/accountants/report/from/standard/operating/deviations/
procedures/also/any/.
………………………………………………………………………………………

6.2 Complete the following sentences using the given words.

1. Auditors/can/also/ensure/that/all/transactions/been actual/and/proper/ record/.

………………………………………………………………………………………
2. Auditors/can/discover/whether/nonexistent/transaction/have/enter/on/book/.
………………………………………………………………………………………
3. The owner/business /may/ keep / own/ books/ of/ account/ and/ feel/ no
need/have/them/ examine/ an auditor.
………………………………………………………………………………………
4. many/ companies/ employ/ their own accountants/ maintain/ internal audit.
………………………………………………………………………………………
5. Even/small/business, /mistakes/books/account/can/lead/business/failure/.
………………………………………………………………………………………

6.3 Translate the following sentences into Vietnamese

1. The purpose of auditing is for an independent third party to examine the financial
statements of an entity.
………………………………………………………………………………………
……………………………………………………………………………………………...
2. The basic objectives with which auditing is done are: verification of accounts
and statements, detection of errors or frauds and prevention of errors or frauds.
………………………………………………………………………………………
……………………………………………………………………………………………...
3. The audit opinion is intended to provide reasonable assurance that the financial
statements are presented fairly, in all material respects, and/or give a true and fair view in
accordance with the financial reporting framework.
………………………………………………………………………………………
……………………………………………………………………………………………...

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 4. Financial audits are typically performed by firms of practicing accountants who
are experts in financial reporting.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. Many organizations separately employ or hire internal auditors, who do not attest
to financial reports but focus mainly on the internal controls of the organization.
………………………………………………………………………………………
……………………………………………………………………………………………...

6.4 Translate the following sentences into English

1. Nếu kế toán là quá trình cung cấp thông tin về các báo cáo tài chính của công ty
thì kiểm toán là công việc kiểm tra, xác minh tính trung thực và hợp lý của các báo cáo đó.
………………………………………………………………………………………
……………………………………………………………………………………………..
2. Một cuộc kiểm toán độc lập có thể là kiểm toán hoạt động, kiểm toán tuân thủ
hay kiểm toán tài chính.
………………………………………………………………………………………
……………………………………………………………………………………………..
3. Kiểm toán nội bộ chịu trách nhiệm phát hiện sai sót trong hoạt động kinh doanh
và tư vấn cho ban giám đốc về việc kiểm soát rủi ro.
………………………………………………………………………………………
……………………………………………………………………………………………..
4. Kiểm toán nội bộ đóng một vai trò quan trọng trong hoạt động của doanh nghiệp,
tuy nhiên, nhiều chủ doanh nghiệp chưa đánh giá cao vai trò, nhiệm vụ của kiểm toán nội
bộ trong hoạt động kinh doanh.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. Bằng các phân tích, kiểm tra, đánh giá quy trình hoạt động của các phòng ban,
kiểm toán nội bộ đưa ra những lời tư vấn giúp công ty hoạt động hiệu quả hơn.
………………………………………………………………………………………
……………………………………………………………………………………………...

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