In auditing or auditing, the basic principle of assessment or judgment is the auditor’s policy in providing an opinion on information found throughout the audit process, which refers to ideas, notions or estimates about events that occur at the audit object. The results issued by an auditor must be able to provide correct information and evidence, so that the audit assessment submitted will be correct or appropriate.
Understanding the Basic Principles of Assessment
According to the Financial Services Authority (OJK), the basic principle of assessment is an opinion based on facts or evidence that have been found in order to pay attention to several implied things.
For example, the basic principles of assessment can be illustrated by testing the quality of the internal control system for audits based on the auditor’s assessment in certain situations.
In the audit process, the basic principles of assessment are defined as an auditor’s policy in providing an opinion regarding the information found during the audit process. Usually, the opinion is in the form of an idea, notion or estimate of the audit object.
Apart from that, an auditor must also provide information based on facts and truth, because it can influence the audit assessment whether it is in accordance with the facts or not. Therefore, an auditor must have a trustworthy nature, so as not to complicate the audit process which requires opinions based on existing facts.
Functions of Basic Principles of Assessment (Judgement)
In every matter related to financial bookkeeping, it must have its own main function. Like the basic principles of assessment which have a function as judgment.
Judgment is necessary because the audit was not carried out on all the evidence. This evidence is used to express an opinion on the audited financial report, so it can be said that money judgment also determines the results of the audit.
If the audit does not run smoothly, it will have an impact on a company. An auditor can be said to be qualified if he has fulfilled various provisions and standards that apply to auditing. Therefore, it is very important for companies to have quality auditors, because the financial bookkeeping process is very influential on the audit process.
The objective of an audit is to obtain sufficient confidence that the financial reports prepared by management are true and fair or prepared based on financial reporting framework standards and free from material misstatement.
Based on ISA 200, these basic principles of professional assessment are required to create the following conditions:
- Before starting an audit, the auditor needs to apply professional judgment in deciding audit materials and risks.
- To prepare an appropriate audit plan according to the circumstances, auditors need professional judgment. Audit scope, timing and audit procedures require basic principles of judgment and skepticism from the auditor.
- In deciding the adequacy and appropriateness of audit evidence, if it is insufficient the auditor can evaluate new procedures and actions for the audit using the basic principles of his assessment.
- Accounting for bad debts requires consideration from management.
- An auditor uses the basic principles of his assessment, so he must be able to find out whether there is fraud or error that occurred behind the decision.
- Basic principles of assessment are needed when auditors make conclusions and judgments regarding audit evidence.
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Matters that Influence the Basic Principles of Assessment
The following are several things that can influence the basic principles of assessment, including:
1. Auditor Experience
The auditor’s experience is the combined accumulation of everything obtained from everything he has done. Experience can provide an opportunity for someone to do a job better than before. With more experience, they become more skilled at doing their work.
Apart from that, experience also makes an auditor have a better chance of doing their job compared to those who have no experience. This experience will make an auditor more skilled in carrying out his work.
2. Auditor Knowledge
Apart from that, the company must have a qualified auditor as explained previously. In detecting an error, an auditor must be supported by knowledge of what and how the error occurred.
In general, an auditor must have some knowledge so that the audit process runs smoothly regarding General Auditing , Functional Areas , Computer Auditing , Accounting Issues , Specific Industries , General World Knowledge (general knowledge) and Problem Solving Knowledge .
3. Obedience Pressure
In this case, compliance pressure is defined as pressure received by junior auditors from senior auditors or superiors and the entity being examined to carry out actions that deviate from ethical and professionalism standards. Pressure from superiors and the entity being examined can also have negative effects such as loss of professionalism and loss of public trust and social credibility.
As a result of pressure from senior auditors or superiors, feelings of trust in each other can be lost, as well as loss of social credibility. This will make the working atmosphere for junior auditors uncomfortable and they will be reluctant to ask questions when they make a mistake.
4. Task Complexity
While working, it is not uncommon for an auditor to find work that is difficult to understand and seems unstructured. This will affect the assessment, and it is feared that it will produce less than optimal results at the end of the audit. This is where the auditor’s experience and knowledge must be relied upon.
In this problem, the auditor’s experience and knowledge play an important role in being able to complete the work properly and correctly without any errors. That is the reason why knowledge and experience greatly influence the basic principles of assessment.
The more factors that support an auditor, the better the auditor’s assessment. Or the more experience the auditor has, the better the assessment will be prepared, so it is important for auditors to understand the basics of auditing.
An audit is the collection and examination of evidence related to information to determine and create a report regarding the level of conformity between the information and established criteria. The audit must also be carried out by someone who is competent and independent.
Accounting Principles in Assessing Basic Principles of Valuation
An auditor in assessing the valuation principles is also in accordance with accounting principles, as follows:
1. Cost Principles
Most assets and liabilities are reported at cost. However, the use of the historical cost principle to record the acquisition of assets ignores the impact of changes in value. The FASB and IFRS are now beginning to believe that information presented on a fair market value basis will be more relevant to users of financial statements than historical cost.
Measurement using fair value will provide a better picture of the value of assets and liabilities and provide a basis for assessing future cash flow prospects.
2. Revenue Principles
Net profit is defined as ” the excess of income compared to expenses, added or subtracted by the company’s profits or losses originating from sales and exchanges or replacement of other assets “. This means that net profit comes from income, expense, profit and loss transactions.
The FASB’s conceptual framework identifies two criteria that should be considered in determining when revenue should be recognized, namely, realized or realizable and earned or incurred.
Revenue recognition generally occurs at the point of sale. However, it could also be that the production process is still ongoing, for example for long-term construction contracts or often called the percentage of project completion method or proportional performance method, the end of production when demand and prices for the products produced are guaranteed, for example certain types of metal products or agricultural products, or even when cash is received, for example for sales using the installment method.
3. Matching Principles
The exact amount of income and expenses in the right period can be recorded using the cash basis and accrual basis options. Cash basis will report income and expenses in the income statement in the period in which cash is received for income or cash is paid for expenses. The amount of net profit or net loss resulting from the difference between income and expenses will reflect the net amount of cash generated (for net income ) or the net amount of cash spent (for net loss ).
Meanwhile, for the accrual basis, income and expenses will be reported in profit or loss in the period in which the income and expenses occur, without regard to cash inflows or cash outflows.
With the accrual basis, expenses related to the creation of income must be reported in the same period in which the income is also recognized. The accounting concept that supports reporting income and related expenses in the same period is called the matching concept .
Types of Audit
Generally, examination or auditing is carried out on financial reports, various bookkeeping records and supporting evidence prepared by the management of a company. Therefore, audits can be grouped into 3 (three) types, namely operational audits , compliance audits and financial statement audits .
1. Operational Audit (Operational Audit)
In this type of audit, the audit is focused on examining the efficiency and effectiveness of the company’s operations. Evidence collected related to company operations will be compared with the standards or policies set by the company. The results of the audit carried out are in the form of recommendations that will be submitted to the company.
2. Compliance Audit
Implementation of a compliance audit is aimed at determining the level of auditor compliance with established rules, procedures or regulations. The results of this compliance audit will be reported to management as the main party related to the company’s level of compliance with procedures and regulations.
3. Financial Report Audit (Financial Statement Audit)
In carrying out financial report audits, auditors focus on determining the level of fairness and level of conformity between financial reports and applicable accounting standards such as PSAK, IFRS, and GAAP.
In addition, the level of fairness of financial reports is determined based on evidence collected by the auditor. The results of the audit on the level of fairness of the financial statements are stated in the audit report which contains the auditor’s audit opinion.
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Audit Objectives in Carrying Out the Basic Principles of Assessment
In implementing the assessment basis. Audits also have specific purposes that can be classified as follows:
1. Completeness
To ensure that all transactions have been recorded or are actually in the journal, they must be entered.
2. Accuracy
To ensure existing transactions and estimated balances have been recorded based on the correct amounts, calculated correctly, classified and recorded appropriately.
3. Existence
To ensure that all recorded assets and liabilities have an existence or occurrence on a certain date, the recorded transactions must actually have occurred and not be fictitious.
4. Assessment (Valuation)
To ensure that generally accepted accounting principles have been applied correctly.
5. Classification
To ensure that transactions included in the journal are classified appropriately. If it is related to balances, then the figures entered in the client list have been classified appropriately.
6. Accuracy
To ensure that all transactions are recorded on the correct date, the details in the account balance match the general ledger figures. Apart from that, the total balance has been done correctly.
7. Separate Limits (Cut – off)
To ensure that transactions close to the balance sheet date are recorded in the correct period. Transactions that are most likely to be misstated are transactions that are recorded near the end of an accounting period.
8. Disclosure
To ensure that account balances and related disclosure requirements are fairly presented in the financial statements and explained fairly in the body and footnotes of those reports.
In making judgments about the existence of material misstatements, the auditor is responsible for applying the judgment of relevant training, knowledge and experience in making an informed decision about the appropriate course of action in the circumstances of the audit engagement. In addition, auditors are also responsible for fulfilling their duties diligently and carefully.
Auditor Principles
The principles related to the auditor’s responsibilities in auditing emphasize important personal qualities. Therefore, an auditor must have the following things:
1. Appropriate Competencies and Abilities
Auditors are responsible for having the right competency and ability to carry out audits. Therefore, to have this competition, auditors must go through formal education in auditing and accounting, practical experience and continuing professional education. Court cases clearly demonstrate that auditors must have technical qualifications and experience in the industries in which their clients are involved.
2. Comply with Ethics
IAPI outlines ethical requirements for public accountants who practice in KAP or work in companies as part of management. Audit codes and standards emphasize the need for independence in audit engagements.
Apart from that, the most important thing is the requirement for KAP to follow several practices, thereby increasing the independence of all personnel. For example, there are established procedures regarding larger audits when there is a dispute between management and the auditor.
3. Maintain Professional Skepticism and Professional Judgment
Auditors are responsible for maintaining professional skepticism and exercising professional judgment throughout planning and audit work. Skepticism is an attitude that includes a questioning mind, alertness to conditions that may indicate possible misstatements due to fraud or error and critical assessment of audit evidence.
So, auditors must remain alert to the possibility of material misstatements whether due to fraud or errors during audit planning and performance.
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Closing
So, those are the basic principles of assessment that can be understood, grameds. So, auditors need to pay attention to the basic principles of assessment and don’t forget to pay attention to things that can influence judgment so that the auditor’s process can run without any problems. Hopefully this article inspires you!