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PREFACE

The economy of Vietnam is transforming remarkably in order to integrate into the global economy according to the commitments of Free Trade Agreements (FTA), ASEAN Economy Community (AEC), Trans-Pacific Partnership (TPP). Byfollowing free trade agreements, the investment flows from overseas (FDI) would reach Vietnam and create more job opportunities in every sector within the country, in which auditing sector is one of them. However, it also creates more job opportunities due to the commitment in freedom of movements. Besides that, requirements of integration including competence, in-depth professional knowledge, working methodology, soft skills, teamworking, face difficulties due to limitationsof Vietnamese laboursin foregn languages. Therefore, the book called “Auditing" is compiled bythe Auditing Department- Faculty of Accounting, Academy of Finance in order to meet the requirements of integrated economy, to universalise professional English based on the contents of original lectures and updated contents of the current International and Vietnamese auditing standards. The book also supplements some new research trends from professional bodies such as IAASB, IESBA, IIA, INTOSAI, AICPA, COSOin order to establish good foundation based on those global auditing standards in terms of professional diagnostic and scepticism “audit with brainstorm”. Additionally, the textbook diversifies contents regarding with risk evaluation, materiality and the use of materiality in evaluating mistakes, auditing evidences and other aspects in attempt to provide readers with the organised auditing knowledge following the trend in the global world. “Auditing” could be considered as a referred material for accountants, auditors, lecturers, students from universities, managers, and other professional organizations to meet the basic requirements of works, study and researches of auditing major at Academy ofFinance. Despite great attempts in editing as well as compiling, there might be remaining shortcomings. Authors are willing to thank for truly feedbacks from researchers, readers in order to improve the book in the next publication.

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The Academy of Finance would like to thank researchers both in and outside the Academy, including Assoc. Prof. Ph.D Nguyen Vu Viet; Assoc. Prof. Ph.D Mai Ngoc Anh, Assoc. Prof. Ph.D Le Van Lien, Ph.D Ngo Thanh Hoang, Assoc.Prof. Ph.DGiang Thi Xuyen, Assoc. Prof. Ph.D Pham Tien Hung, M.A.ACCA.CPA Nguyen Thu Hao...and experts from Deloitte Vietnam, KPMG Viet nam for their contributions in acceptance and finishing process in order to improve the quality of this book. THE AUTHORS

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ABOUT THE AUTHORS

The textbook was compiled by a group of experienced lecturers from Auditing Department – Faculty of Accounting, Academy of Finance, including: 1. Luu Duc Tuyen, Assco.Prof.Ph.D - Head of Accounting Department, AOF, Co-editor andco-compiled Part 1 2. Vu Thuy Linh, Ph.D- Vice auditing module leader, Co-editor and cocompiled Part I, II and complied part IV 3. Ngo Nhu Vinh, M.A.ACCA.CPA - Auditing lecturer, co-compiled Part II, III 4. Dinh Thi Thu Ha, M.A - Auditing lecturer, co-compiled Part II, III 5. Nguyen Minh Hien, M.A.ACCA.CPA - Manager of Educating Department, Deloitte Vietnam , co- compiled Part II, III

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CONTENT PREFACE ............................................................................................................................ i ABOUT THE AUTHORS ................................................................................................. iii CONTENT ......................................................................................................................... iv PART ONE: INTRODUCTION TO AUDITING .............................................................. 1 CHAPTER 1 ...................................................................................................................... 1 AUDITING PROFESSIONAL OVERVIEW ................................................................ 1 LEARNING OBJECTIVES ............................................................................................... 1 INTRODUCTION .............................................................................................................. 1 CONTENTS........................................................................................................................ 1

1.1.NATURE OF AUDITING ......................................................................................1 1.1.1.History, development of auditing in the world .....................................................1 1.1.2.Definition of auditing ...........................................................................................4 1.1.3.The importance of auditing in the global market economy ..................................6 1.1.4.Function of auditing ..............................................................................................8 1.2. CLASSIFICATION OF AUDITING .....................................................................9 1.2.1. Based on purpose of auditing ..............................................................................9 1.2.2. Based on forms of auditing organization ...........................................................11 1.2.3. Some other ways of classification of audit ........................................................20 1.3. THE AUDITING PROCESS ................................................................................20 REVIEW QUESTIONS AND PROBLEMS .................................................................... 21 CHAPTER 2 .................................................................................................................... 24 AUDITING STANDARDS AND PROFESSIONAL ETHICS CODE ...................... 24 LEARNING OBJECTIVES ............................................................................................. 24 INTRODUCTION ............................................................................................................ 24 CONTENT ........................................................................................................................ 24

2.1. AUDITING STANDARDS ..................................................................................24 2.1.1. Nature of auditing standards ..............................................................................24 2.1.2. Auditing Standards for Professional Practice of Independent Auditing ..........26 2.1.3. Auditing Standards for Professional Practice of Internal Auditing ...................28 2.1.4. Auditing Standards for Professional Practice of State Auditing ......................28 2.2. PROFESSIONAL ETHIC CODE ........................................................................29 2.2.1. Code of ethics for independent auditing ............................................................29 2.2.2. Code of ethics for internal auditing and state auditing ......................................30 REVIEW QUESTIONS AND PROBLEMS .................................................................... 36

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PART TWO: BASIC CONCEPTS IN AUDITING .................................................... 37

CHAPTER 3 .......................................................................................................... 37 AUDIT REPORT .................................................................................................. 37 LEARNING OBJECTIVES ............................................................................................. 37 INTRODUCTION ............................................................................................................ 37 CONTENT ........................................................................................................................ 38

3.1. NATURE OF THE AUDIT REPORT .................................................................38 3.2. FINANCIAL STATEMENT AUDIT REPORT ..................................................39 3.2.1. Content of the financial statement audit report .................................................39 3.2.2. Types of financial statement audit report ..........................................................41 3.2.3. Emphasis of matter paragraph and other matter paragraph in the auditor’s report ............................................................................................................................47 3.3.COMPLIANCE AUDIT REPORT AND PERFORMANCE AUDIT REPORT .....48 REVIEW QUESTIONS AND PROBLEMS .................................................................... 50

CHAPTER 4 .......................................................................................................... 51 FINANCIAL REPORT ASSERTIONS AND AUDIT OBJECTIVES ........... 51 LEARNING OBJECTIVES ............................................................................................. 51 INTRODUCTION ............................................................................................................ 51 CONTENT ........................................................................................................................ 51

4.1 HOW THE TRANSACTIONS AND EVENTS AFFECT THE FINANCIAL STATEMENTS' PRESENTATION ............................................................................51 4.2 MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS ...........................................................................................................52 4.3 ASSERTIONS IN THE AUDIT OF FINANCIAL STATEMENTS ...................53 4.3.1 Why do the auditors need to test financial statements assertions? .....................53 4.3.2 Types and examples ............................................................................................54 4.4 FINANCIAL STATEMENTS ASSERTIONS AND AUDIT PROCEDURES ...60 4.4.1 Understanding of risk-base approach in financial statements audit ...................60 4.4.2 Steps for audit procedures ..................................................................................61 4.4.3 Common accepted audit procedures ...................................................................62 4.5 AUDITOR'S RESPONSIBILITY AND AUDIT OBJECTIVE ............................62 4.5.1 Audit objectives ..................................................................................................62 4.5.2 Audit objectives in different phases of an audit engagement .............................63 REVIEWQUESTIONS AND PROBLEMS ..................................................................... 69

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CHAPTER 5 .......................................................................................................... 75 FRAUDS AND ERRORS, MATERIALITY AND RISKS IN AN AUDIT.....75 LEARNING OBJECTIVES ............................................................................................. 75 INTRODUCTION ............................................................................................................ 75 CONTENTS...................................................................................................................... 75

5.1. FRAUDS AND ERRORS ....................................................................................75 5.1.1. Nature of fraud and error ...................................................................................75 5.1.2. Factors affect fraud and error ............................................................................77 5.1.3. Management's responsibility for fraud and error ...............................................79 5.1.4. Auditor’s responsibility for fraud and error.......................................................79

5.2. MATERIALITY IN PLANNING AND PERFORMING AN AUDIT ..........82 5.2.1. Nature of materiality in an audit ........................................................................82 5.2.2. Application materiality in audit .........................................................................84 5.3. RISKS IN AN AUDIT ..........................................................................................88 5.3.1. Audit risk ...........................................................................................................88 5.3.2. Overview of audit risk model ............................................................................94 5.4. RELATIONSHIP AMONG MATERIALITY, RISK, AND AUDIT EVIDENCE ......................................................................................................................................97 REVIEW QUESTIONS AND PROBLEMS .................................................................... 99

CHAPTER 6 ........................................................................................................103 INTERNAL CONTROL - AN OVERVIEW ...................................................103 LEARNING OBJECTIVE .............................................................................................. 103 INTRODUCTION .......................................................................................................... 103 CONTENT ...................................................................................................................... 103

6.1. NATURE OF INTERNAL CONTROL ............................................................ 103 6.1.1. History and development of internal control .................................................. 103 6.1.2. Relationship among management, internal control and internal audit in an entity ......................................................................................................................... 106 6.2. COMPONENTS OF INTERNAL CONTROL ................................................. 106 6.2.1 Control environment ........................................................................................ 106 6.2.2 Risk assessment ............................................................................................... 108 6.2.3.Control activities .............................................................................................. 108 6.2.4. Information and Communication .................................................................... 109 6.2.5. Monitoring Activities (Controls) .................................................................... 109

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6.3. THE PROCESS OF UNDERSTANDING OF THE INTERNAL CONTROL IN AN AUDIT AND ASSESSMENT OF CONTROL RISK ....................................... 110 REVIEW QUESTIONS AND PROBLEMS .................................................................. 113

CHAPTER 7 ........................................................................................................118 AUDIT EVIDENCE ...........................................................................................118 LEARNING OBJECTIVES ........................................................................................... 118 INTRODUCTION .......................................................................................................... 118 CONTENTS.................................................................................................................... 118

7.1. NATURE OF AUDIT EVIDENCE ................................................................... 118 7.2. REQUIREMENT OF AUDIT EVIDENCE ...................................................... 119 7.2.1. Sufficiency ...................................................................................................... 119 7.2.2. Appropriateness .............................................................................................. 120 7.2.3. Audit evidence decision .................................................................................. 121 7.3. PROCEDURES FOR OBTAINING AUDIT EVIDENCE ............................... 121 7.3.1 Inspection ......................................................................................................... 123 7.3.2 Observation ...................................................................................................... 124 7.3.3 Inquiry .............................................................................................................. 125 7.3.4 Confirmation .................................................................................................... 125 7.3.5 Computation..................................................................................................... 126 7.3.6 Analytical procedures ...................................................................................... 126 REVIEW QUESTIONS AND PROBLEMS .................................................................. 127 PART THREE: AUDIT TESTS AND SAMPLING.................................................. 130

CHAPTER 8 ........................................................................................................130 AUDIT TESTS ....................................................................................................130 LEARNING OBJECTIVE .............................................................................................. 130 INTRODUCTION .......................................................................................................... 130 CONTENTS.................................................................................................................... 131

8.1. GENERAL AUDIT METHODOLOGY ........................................................... 131 8.1.1. Definition of audit methodology .................................................................... 131 8.1.2. Contents of audit methodology ....................................................................... 134 8.1.3. The important of audit methodology .............................................................. 135 8.2. AUDITS TESTS ................................................................................................ 135 8.2.1. Nature of audit tests ........................................................................................ 136 8.2.2. Risk assessment procedures ............................................................................ 136 8.2.3. Tests of controls .............................................................................................. 139

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8.2.4. Substantive tests .............................................................................................. 142 REVIEW QUESTIONS AND PROBLEMS .................................................................. 147

CHAPTER 9 ........................................................................................................149 AUDIT SAMPLING ...........................................................................................149 LEARNING OBJECTVES ............................................................................................. 149 INTRODUCTION .......................................................................................................... 149 CONTENT ...................................................................................................................... 149

9.1. THE IMPORTANT OF AUDIT SAMPLING .................................................. 149 9.2. DEFINITION OF AUDIT SAMPLING AND RELATED CONCEPTS ......... 150 9.3 SAMPLING STEPS ........................................................................................... 152 9.3.1 Step 1 - Determine Objectives ......................................................................... 153 9.3.2 Step 2 - Define the extent and composition of the population (audit scope) .. 153 9.3.3 Step 3 - Determine sample size ....................................................................... 154 9.3.4 Step 4 - Sampling method................................................................................ 155 9.3.5 Step 5 - Drawing conclusions from sampling ................................................. 157 9.4 DETERMINE WHETHER THE MISSTATEMENT IS AN ANOMALY ....... 158 9.5. SAMPLING IN TESTS OF CONTROLS ......................................................... 159 9.5.1 Planning sampl...