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Unit 10: Government and Independent Financial Audit: Comparison

9. Conducting audit work in accordance with …………………….. is a matter of personal and Notes
organizational responsibility.

10.4 Government Financial Audit

A Government Financial Audit, or more accurately, an audit of financial statements, is the
verification of the financial statements of a legal entity, with a view to express an audit opinion.
The audit opinion is intended to provide reasonable assurance, but not absolute 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. The purpose of an audit is provide
and objective independent examination of the financial statements, which increases the value
and credibility of the financial statements produced by management, thus increase user confidence
in the financial statement, reduce investor risk and consequently reduce the cost of capital of the
preparer of the financial statements.
The government spends a lot of public money every year, so it must find a way to ensure
responsible and honest use of public resources. Financial audit of a government agency that uses
public resources accomplishes this goal. Such audits assess whether the information in the
agency’s financial records is fairly presented.

10.4.1 Field Work Standards for Government Financial Audits

The GAGAS also sets the approach that auditors must follow. These standards are typical around
the globe. Auditors must plan their work to meet audit objectives and also must document their
planning. GAGAS also requires that auditors set significance or immateriality levels to decide
the scope and extent of their audit work. This should be done in conjunction with audit risk
perceptions. Auditors must have sufficient and appropriate audit evidence to provide opinions
and reasonable assurance that the audit evidence supports the findings.

For financial audits, GAGAS incorporate the AICPA field work and reporting standards and the
related Statements on Auditing Standards (SAS) unless specifically excluded or modified by
GAGAS. Under AICPA standards and GAGAS, auditors must plan and perform the audit to
obtain sufficient appropriate audit evidence so that audit risk will be limited to a low level that
is, in their professional judgment, appropriate for expressing an opinion on the financial
statements. The high, but not absolute, level of assurance that is intended to be obtained by
auditors is expressed in the auditor’s report as obtaining reasonable assurance about whether
the financial statements are free of material misstatement (whether caused by error or fraud).
Absolute assurance is not attainable because of the nature of audit evidence and the characteristics
of fraud. Therefore, an audit conducted in accordance with generally accepted auditing standards
may not detect a material misstatement.
The three AICPA generally accepted standards of field work are as follows:

1. The auditor must adequately plan the work and must properly supervise any assistants.
2. The auditor must obtain a sufficient understanding of the entity and its environment,
including its internal control, to assess the risk of material misstatement of the financial
statements whether due to error or fraud, and to design the nature, timing, and extent of
further audit procedures.
3. The auditor must obtain sufficient appropriate audit evidence by performing audit
procedures to afford a reasonable basis for an opinion regarding the financial statements
under audit.

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