The Auditor has higher qualification, higher competency, higher

accounting knowledge and culture than the accountant.

Auditor's knowledge of interpretation of international standards is higher
than the accountant's.
Definition of auditing.
Auditors spend great time of their auditing mission accumulating evidence
to support their opinions. (Accumulating and evaluating evidence)
Auditors rely on auditing standards (criteria) to report their opinions.
(Information) when the auditor engages to audit a financial statement,
that F.S. is the information.
If we're required to assess the efficiency and effectiveness of the
registration process of Islamic university (subjective information), the
information would be the system output such as registered classes, repot
cards (grades) and certificates.
Assessing the efficiency and effectiveness of a system means checking on
how well is the system working to achieve its goals.
Assessing the efficiency and effectiveness of a system is of no relation to
the accounting records.
The purpose of the previous system is to facilitate the registration process
and save the efforts and time of students, if this purpose isn't achieved,
the system is not efficient.

Efficiency: the system achieves the entity's goal of having this system.
Efficiency is directly related to the designing of the system.
For example: fire alarm system, suppose the alarm is designed to go off
(beeps) after 5 minutes of the fire, is it efficient?
To decide whether the system is efficient or inefficient, we have to
determine the entity's goal of having this system which in this case is
saving the entity's assets.
So, after 5 minutes of fire, the assets would be already damaged and
therefore the fire alarm system is inefficient.

Effectiveness: the system is operating as designed regardless of its

efficiency.
If the fire alarm system actually works after 5 minutes (as designed) it's an
effective system but not efficient for the reason mentioned before.

If the fire alarm goes off immediately (although it's designed to go off after
5 minutes), the system is ineffective (not working as designed) but it's
efficient because it achieves the entity's goal of saving the assets.
If we edit the system design to go off immediately, and it does go off
immediately, it's effective and efficient.
If it goes off after 30 seconds, it's not effective but still efficient.
Another example: University guards' uniform is a design (part of internal
control)
If the design is proper, all guards have the same uniform with suitable
sizes, the system is efficient (entity's goal of uniformly dressed guards is
achieved).
If one of the guards is wearing jeans, the system is ineffective (system not
working as designed).
Both of efficiency and effectiveness are subjective information. There's no
correct design or operation but there's reasonable design and operation.

Lack of segregation of duties is a high risk for firms.

To be able to segregate duties, the entity needs resources (staff).

Back to the definition of audit!!

Information maybe subjective, objective, electronic, soft, hard, financial
statements (when the audit mission is auditing financial information).
Criteria: standards, procedures
Accountant is required to record economic events according to standards
Standards are guidance for accountant to translate the occurring
economic events into financial information.
Auditor's task is making sure that economic events are translated to
financial information according to the criteria.
The accountant applies the criteria while the auditor assures the criteria
have been applied properly.
When we engage in auditing financial statements, it's easy to determine
the applied criteria.

How can we determine the appropriate criteria for auditing subjective

information (ex. Efficiency and effectiveness of Islamic University
registration process)?
Rules, regulations, criteria and standards used by the Islamic university to
make this system.
Assume we have engaged to assess the efficiency and effectiveness of the
internal control over bank reconciliation.
Bank reconciliation is prepared by accountant, reviewed by chief
accountant and approved by financial manager.
Assume you're an internal auditor at Paltel and you noticed the general
manager signs the bank reconciliation, so you decide to use this step to
assess efficiency and effectiveness for IUG system. Will the system be
effective (working as designed)?
No, because the general manager at IUG is not a part of the bank
reconciliation cycle.
So, we can't use the standards used to assess Paltel's on the IUG's.
Usually, for subjective information, the criteria determination is between
the auditor and the entity itself.*
Using the term "audit" is related to IFRS (or GAAP for U.S., Canada and
Australia) being the criteria -Auditing of financial statements-.
Using the term "assess" is related to the rules and regulations set by the
entity to design the system subject to assessment.*

When do we consider the financial statements fairly stated?

If the entity follows the appropriate criteria, the financial statements are
stated in accordance with established framework. (Fairly stated)
In audit, it is NOT accepted to express an opinion about the correctness or
accuracy of financial statements (correct/not correct, accurate/inaccurate).
Opinion has to be regarding the fairness of financial statements.
Objective information is based on facts and evidence (right and wrong)
Subjective information depends on judgment, experience and knowledge
which defer among people.
Financial statements include both objective information (Economic events)
and subjective information (provision for doubtful accounts, judgment
used to determine the market price of investment portfolio, provision on
obsolescence items in inventory)

For the subjective information, it's not accepted for the auditor to say this
is correct or not.
Auditing standards represent guidance for auditors to perform the auditing
mission.
According to auditing standards, the auditor is required to assess the
reasonability of subjective information (not correctness).
So, when assessing provisions, we determine reasonability according to
the assumption used by the entity to create that provision.

Reports (supported by evidence) for all cases inform the readers of

financial statements about the degree of correspondence between
information and established criteria.

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Most users of financial statements have no knowledge about what is the

audit?
The auditor's title is CPA; this causes confusion because the word "audit"
in not found in "Certified Public Accountant"
The auditing firms' title is "Certified Public Accounting Firms"

Discussion: on the different between auditing

and accounting
Objective aspect:
The accounting objective is to provide the user of useful information to be
used for decision making.
Accounting is a source of information.
The Auditing objective is to examine the accuracy of the information
generated by the accounting.

Hiring aspect:
Accountant is hired by the Firm's executive management.

Board of directors hires only the significant positions such as: CEO, CFO
and the internal auditor.
The Entity's owners (shareholders) hire the auditor (CPA firm); to audit the
financial statements of the entity, at the assembly meeting.
Applied law gives the entity owners the authority to select the auditor.
Selecting the auditor is a sensitive affair therefore there are specific
instructions in the applied law regarding how to select the auditor.

Subordination aspect:
The accountant is an employee of the entity; his responsibility is to
execute the orders given to him by the executive management.
The auditor responsibility is to perform the audit mission in accordance
with pre-determined standards (IFRS, GAAP or an established framework)
Auditor's power is gained from his employer (owners) therefore he can't be
influenced by the management.

Work timing aspect:

Accountant's working period starts at the beginning of the fiscal year and
ends with it.
Auditor starts working after the accountant is done.
Firms determine the dates for starting their fiscal years depending on their
nature of business (seasons); making sure that the fiscal years include all
the seasons (high season and offseason) to avoid overstating and
understating of figures in the financial statements.
CPAFs' fiscal year is 01/07/XXXX-30/06/XXXX because their season usually
starts after 31/12.
15/02 is the date of initial disclosure for listed companies. (Unaudited
financial statements)
31/03 is deadline of final disclosure for listed companies.
Unlisted companies and NGOs have until 30/04
NGOs are public -not governmental-entities owned by the government,
and therefore are monitored and controlled by the Ministry of Internal
Affairs.
In a case of liquidating assets of an NGO, custody of assets belongs to the
government.

Standards used Aspects:

The Accounting standards represent guidance used by the accountant to

record/translate economic events into financial information.
Auditors use the auditing standards as a guidance to perform the auditing
mission.
Auditors use the applied accounting standards (IFRS) to examine the
degree of correspondence between the recorded information and the
standards (criteria).
Auditors determine the appropriate accounting treatments based on their
expertise.

Qualification Aspect:
A person has to maintain general qualifications to be an accountant, such
as graduating from the accounting department.
Qualifications of the auditor are determined by different sources like GAAS,
company's law and other related laws.
GAAS: Generally Accepted Auditing Standards, issued by AICPA.
AICPA: American Institute of Certified Public Accountants
Company's law is applied to all companies, listed and not listed, public and
private, profit and non-profit.
Company's law: there are 2 companies' laws in Palestine.
1929 Gaza Company's law (British), 2012 Company's law (not approved by
the president)
1967 West Bank Company's law (Jordanian)
Corporate and Business Registrar Department at the Ministry of Finance is
responsible for monitoring companies' operations.
Company's law is responsible for regulating companies' legal actions such
as initiation and liquidation, distribution of profits, general assembly
meeting and more.
Other related laws: Banking sector is subject to a higher degree of
supervision (Banking law).
1) Company's law
2) Banking law, and
3) Monetary Authority instructions
Are applied on banks

They also determine the banks' auditors' qualifications.

Insurance companies are subject to company's law, Insurance law and
Capital Market Authority instructions.

Main purpose of accounting is to provide useful information for the users

to be used for decision making.

We translate economic events into financial information through standards

(criteria).

Criteria depend on the nature of the engagement (nature of information

being audited or assessed, subjective or objective).
Criteria used to create the system are the same used to assess it.

Why does the auditor make the unaudited financial

statements/information a trustable source of information?
Ex. Assume the Arab Bank intended to provide X company with a100000$
loan.
How does the Arab bank determine the interest?
3 factors: 1- Risk-free interest rate 2- Business risk 3- information risk
Risk-free interest rate: the rate the bank would earn if it invested the
same amount in treasury bonds for the same period.
Assume this rate is 10%, what is the minimum rate the bank should
accept? 10%
Bonds are risk-free because they're usually due by the government,
meaning that there is a guarantee of repayments, there's no risk of
uncollectable.
Business risk: the entity may fail to achieve its goals.
Main part of business risk is financial risk; the entity may fail to repay its
obligations as they become due.

This depends on the management style, reputation of the entity, financial

position, competitive status and others.
Bank decided to set a rate of 2%.
Information risk: generated when we provide the user with inaccurate
information.
Assume we provide the Arab bank with unaudited financial statements;
this will cause the interest rate to increase because it's not trustable
information.
Bank decided to set a rate of 6%.

Total interest rate is 18%. If the financial statements provided are audited,
information risk interest rate could drop to 2%, making the total interest
rate 14%.
The main purpose of the audit is to reduce the information risk.

Why does the auditor have significant influence on information risk but not
on risk-free or business risk?
Because both risk-free and business risk interest rates are beyond the
auditor's control.
Risk-free is due from government.
Business risk is based on the situation of the entity.

According to AIS, investments are three types:

1%-19% investment portfolio, categorized either A) available for sale, B)
trading or C) held to maturity.
IFRS-9 changed their titles to:
A) Financial assets through comprehensive income
B) Financial assets through profit and loss
C) Amortized cost

20%-49% investment in associate, Investor Company claims its share

from investee using one of two accounting methods: equity method
(frequently used) and cost reference (no longer used except for specific
cases).

50%-100% the investee becomes a subsidiary. Financial statements of

the investee are consolidated with the parent's.

IFRS approves these percentages, but control has more importance over
the percentage acquired, therefore if you own 17% plus control you have
to register an investment in associate.
25% with no control stays the same.
49% plus control is registered a subsidiary.
Control is achieved when the investor company is able to change and
influence decisions of the investee.
Assume we engage in auditing the financial statements of X Company for
the year 2016.
2015 financial statements showed an investment of 25% categorized as
available for sale.
We change it to Investment in Associate and perform the necessary
adjustments to be able to proceed with auditing the financial statements
of the following year 2016.
The court is the only party that has the right to question the auditor.

CPA firms provide assurance and non-assurance services.

Services provided by CPA firms are not limited to auditing services.
Assurance Services definition
Main purpose of assurance services is to improve the quality of
information.
We obtain raw material information (input of assurance process), auditors
then perform tasks (review, audit, assessment of efficiency and
effectiveness) to generate quality information (output).
Main part of assurance services is attestation services.
Attestation services definition
By default, management asserts that the information (input) provided to
the auditor is prepared in accordance with criteria.
Management (BoD) is authorized to prepare financial statements by law
and international standards.

Why not give the authority to the auditor?

Management has an overall view of the entity, and is responsible for all
entity operations as well as results.
Auditor's knowledge of the entity is limited to the information provided to
him during the auditing mission.