Audit & Assurance Principles

The fundamental principles of auditing and assurance services provide a framework to ensure the quality, reliability, and integrity of the audit process. These principles, outlined by professional bodies, such as the International Auditing and Assurance Standards Board (IAASB) and the Financial Reporting Council (FRC) in the UK, can be broadly categorized into ethical principles and performance principles.

Updated 8 May, 2026.

Ethical Principles

The ethical principles foster foundation of auditors’ professionalism and behavior:

Integrity: Auditors must be straightforward and honest in all professional and business relationships. This involves fair dealing and truthfulness.

Objectivity: Auditors should exercise professional judgment without bias, conflict of interest, or undue influence from others. Independence, both in mind and appearance, is crucial for impartial conclusions.
Professional Competence and Due Care: Auditors must attain and maintain the necessary knowledge, skills, and experience to provide a competent professional service. They must act diligently and apply sound judgment and a questioning mind (professional skepticism) throughout the audit process.
Confidentiality: Information acquired during professional relationships must be protected and not disclosed to third parties without proper authority, except when a legal or professional duty to disclose exists.
Professional Behavior: Auditors must comply with relevant laws and regulations and avoid any conduct that might discredit the profession.

Performance and Reporting Principles

These principles guide the actual execution and communication of the audit work:

Planning and Supervision: The audit work must be adequately planned, and assistants (if any) must be properly supervised to ensure an efficient and effective process.
Risk Assessment: Auditors must obtain a sufficient understanding of the entity’s environment, including its internal controls, to assess the risks of material misstatement in the financial statements.
Sufficient Appropriate Evidence: Conclusions must be supported by adequate and reliable audit evidence obtained through inspection, observation, inquiries, and external confirmations. The evidence gathered should provide a reasonable basis for an opinion.
Materiality: Auditors apply the concept of materiality to determine the significance of errors or omissions. A matter is material if its omission or misstatement could reasonably be expected to influence the economic decisions of users of the financial statements.
Reporting: The auditor’s report must clearly state their opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (e.g., GAAP or IFRS).

Objectives of Audit

Expression of Opinion

An expression of opinion in auditing involves an auditor formally issuing a conclusive report on whether an organization’s financial statements are fairly presented in accordance with applicable reporting standards. The auditor forms this opinion subsequent to conducting audit procedures to obtain rational assurance that the statements are free from material misstatement, which can be either unmodified (clean) or modified (qualified, adverse, or disclaimer of opinion).

Errors and Frauds

Errors are termed intentional mistakes in financial reporting, while fraud constitutes intentional deception for financial gain. Errors can stem from human mistake, system malfunctions, or lack of awareness, and are often accidental, whereas fraud is an intentional act, such as theft or fabricating financial data. Auditors have a duty to plan their audits to provide rational assurance that financial statements are free of material misstatements, whether from error or fraud.

The auditor’s performance judicially assessed by applying the following tests:

Whether the auditor has executed rational care and expertise in implementing his or her work;
Whether the errors and frauds were such as could have been detected in the ordinary course of scrutinizing without the aid of any special efforts;
Whether the auditor had any grounds to suspect the existence of the errors and frauds; and
Whether the error or fraud was so intensely laid that the same could not have been detected by the application of normal audit procedures.

Self-Revealing Errors:

These are such errors the existence of which becomes clear in the process of compilation of accounts. A few examples of such errors are shown hereunder:

Omission to post a part of a journal entry to the ledger Trial balance is thrown out of agreement.
Wrong totaling of the Purchase Register.
A failure to record in the cash book amounts paid into or withdrawn from the bank.
An error in recording amount received from X in the account of Y.

Misappropriation of Assets:

Its involves the theft of an entity’s assets. Misappropriation can be achieved in many ways (such as embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for goods and services not received); it is usually accompanied by false or misleading records or documents so as to conceal that truth that the assets are missing.

Defalcation of cash:

Defalcation of cash has been found to perpetrate holistically the following measures:

By inflating cash payments. Examples of inflation of payments:

Making payments against fictitious vouchers.
Making payments against vouchers, the amounts whereof have been inflated.
Manipulating totals of wages rolls either by including therein names of dummy workers or by inflating them in any other way.
Casting a larger totals for petty cash expenditure and adjusting the excess in the totals of the detailed columns such that cross totals reveals reconciliation.

By suppressing cash receipts: Few tactics of how receipts are suppressed are:

Teeming and Lading: Amount received from a customer being misappropriated; as well as to prevent its detection the money received from another customer after being credited to the account of the customer who has paid earlier. By the same token, moneys received from the customer who has paid thereafter being credited to the account of the second customer and such a practice is continued so that no one account is outstanding for payment for any length of time, which may result to management either send out a statement or account to him or communicate with him.
Adjusting unauthorized or fictitious, rebates, allowances, discounts, etc. customer’s accounts and misappropriating amount paid by them.
Writing off as debts in with regard to such balances against which cash has already been received but has been misappropriated.
Not accounting for miscellaneous receipts, for example sale of scrap, quarters allotted to the employees, and so on.
Writing down asset values in totality, selling them thereafter and misappropriating the proceeds.

By casting wrong totals in the cash book:

Misappropriation of Goods: Fraud related to misappropriation of goods is till considerably difficult to detect; for this management has to depend on varied measures of control.
Manipulation of Accounts: Detection of manipulation of accounts with a aim of presenting a false state of affairs is a task necessitating immense tact and intelligence because generally management personnel in higher management cadre are linked with this kind of fraud and this is perpetrated in methodical manner. This kind of fraud is generally committed: (i) to avoid incidence of income tax or other taxes; (ii) for declaring a dividend when there are inadequate profits; (iii) to withheld declaration of dividend even when there sufficient profit (this is usually done to manipulate the value of shares in stock market to make it feasible foe selected people to acquire shares at a lower cost); and (iv) for receiving higher remuneration where managerial remuneration is payable by reference to profits.

There are many ways of committing this kind of fraud. Some of the methods are stated below:

Inflating or suppressing purchases and expenses.
Inflating or suppressing sales and other items of income.
Inflating or deflating the value of closing stock.
Failing to adjust outstanding liabilities or prepaid expenses.
Charging items of capital expenditure to revenue or by capitalizing revenue expenses.

Audit Procedures to Obtain Audit Evidence

Inspection: Examining records, documents, or tangible assets to find evidence. For example, inspecting an asset to confirm its existence.
Observation: Watching a process or procedure being performed by others. For example, observing the client’s inventory counting process.
Inquiry: Seeking information from knowledgeable persons both inside and outside the company. For example, asking management for explanations about a financial transaction.
Confirmation: Obtaining and evaluating a direct written response from a third party. For example, confirming a bank account balance with the bank.
Recalculation: Independently checking the mathematical accuracy of documents or records. For example, recalculating depreciation expense.
Reperformance: Independently executing the client’s original procedures or controls. For example, re-performing a bank reconciliation.
Analytical Procedures: Analyzing information by looking for relationships between financial and non-financial data. For example, comparing current-year financial information to the prior year to identify trends or anomalies.