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The Concept of Audit and other Assurance Engagements Flipbook PDF
A. AUDIT FRAMEWORK AND REGULATIONS 1. The concept of audit and other assurance engagements 2. Statutory audits 3. The re
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A.
AUDIT FRAMEWORK AND REGULATIONS 1. 2. 3. 4.
The concept of audit and other assurance engagements Statutory audits The regulatory environment and corporate governance Professional ethics and ACCA’s Code of Ethics and Conduct
The Concept of Audit and other Assurance Engagements What is assurance and why is it important? Assurance is opinion expressed by an assurance provider on a subject matter. It is important because it enhances the degree of confidence place in the subject matter by the intended users as to the evaluation or measurement against suitable criteria. What are the features of an assurance engagement?
Subject matter The three main parties involve: o Responsible person o Assurance provider (practitioner) o Intended user The report
What are the levels of assurance? Levels of assurance: Positive or Negative assurance What is Positive Assurance? Positive assurance is where a lot of detail work has been carried out on a subject matter and therefore the assurance provider can conclude confidently, in their opinion, that the subject matter has been either properly prepared or not. Positive assurance is a high level of assurance and therefore a high level of reliance can be placed upon it. PLEASE NOTE: Positive assurance does not mean that the subject matter has been prepared well it just means that we the auditors can positively say that we did sufficient work and found that the subject matter is either good or bad. What then is Negative Assurance? Negative assurance is where a smaller amount of work has been carried out on a subject matter and no errors were discovered, they maybe errors or inaccuracies but none were discovered with the level of work. This is a much lower level of assurance and therefore less reliance should be placed on negative assurance. What are the different types of audit engagements? They are two types of assurance engagements:
Internal audit and other types of assurance services The external (or statutory) audit
Statutory Audits What are Statutory Audits? Statutory audits are a legal requirement. This is where a team of auditors independent of the company check the Financial Statements on behalf of the shareholders as to the Truth and Fairness of the figures reported, as well as, if they were prepared in accordance with the relevant accounting standards and legal framework. What do we mean by “True and Fairness” and “Material”? True; Financial Statements are factual and are free from material error, Fairness; Financial Statements are free from bias and reflect the commercial substance of the transactions that have taken place. Material; an item is material if it is important enough to affect the users of the financial statements. This could be due to the size (amount possibly in error) or nature (fraud regardless of amount). True or False: Do Auditors give a 100% guarantee that Financial Statements are true and fair? False! Financial statement are based upon historic information, therefore, auditors should be able to obtain the evidence they need to give assurance that they are correct, however, the Statutory Audit will never give a 100% guarantee that the financial statements are true and fair because of inherent limitations, such as:
The impracticality of testing ALL transactions The possibility of fraud The inherent limitations of internal control Audit work is permeated by judgment
Is it important that auditor remain independent of their client and why? Readers need to be able to trust that the reports are reliable and correct and if there are links between the auditors and the things audited, they may not trust the opinions given. It is there a requirement that auditors are independent from those they audit. External audit process:
Appointment of external auditors Determine audit/Strategy planning Gathering evidence Completion Audit report
The amount of substantive testing to be done is determined by the assessment of the company’s internal controls:
If strong controls reduced substantive testing If weak controls increased substantive testing
The final stage in the audit engagement is for the auditors to give their opinion on the financial statements through the audit report and this is addressed to the shareholders.
The Regulatory Environment and Corporate Governance Who is allowed to be an External Auditor? Individuals must go through an approval process before they are allowed to perform external audits. The approval process involves passing a set of examinations set by a Recognised Qualifying Board and by becoming a member and remaining one of a Recognised Supervisory Board. In addition, the individual must not be a director, a business partner or an employee of the client or any of its associated companies or directors. How are external auditors appointed? The company’s shareholders appoint the external auditors this may be done by the Board of Directors proposing an Audit Firm for the shareholders’ approval. Shareholders approve by passing an ordinary resolution. How are External Auditors removed? External auditor can be removed either by the Board of Directors or the Shareholders by passing an ordinary resolution. External Auditor may themselves wish to be removed and can do so by resigning. In the latter case, they have the right to speak to the shareholders explaining their reasons at a general meeting and to send a written explanation to shareholders. What legal rights do auditors have? Auditors have legal rights to:
Access all books and records of the company Access to all information and explanation Receive notice of a general meeting Attend a general meeting Speak at a general meeting To resign To circulate information to shareholders
What responsibilities do Auditors have? Auditors have a responsibility to audit the Financial Statements and express an opinion on the truth and fairness of the figures, as well as, if relevant accounting standards and legal requirements were observed. Auditors also have a responsibility to issue a statement of circumstances on resignation or removal from a client and after leaving a client to respond to any requests for information from the new incoming auditors. What is the Statement of Circumstances? This is a statement that explains the specific reasons for the resignation or removal.
What are the responsibilities of the Directors? Directors are responsible for running the company on a day-to-day basis. Their primary responsibility, as concerns auditors, is to produce financial statements showing a true and fair view. Other responsibilities include keeping accurate accounting records, giving auditors reasonable explanations, applying accounting standards correctly, selecting the appropriate accounting policies, appropriately apply the going concern basis of accounting, designing and implement appropriate accounting system and to implement internal controls to actively prevent and detect errors and fraud. PLEASE NOTE: It is directors that have the responsibility to prevent fraud, as well as, to detect it NOT the auditors. Auditors accept some responsibility for detecting fraud but not preventing it and they have a professional obligation to advise directors how best to prevent fraud.
Professional ethics and ACCA’s Code of Ethics and Conduct What is Ethics? Ethics is concern with behaviour and trying to ensure that auditors act in a professional manner and stay independent from their clients. Auditors must follow the ethical guidelines and be perceived to be doing such. What are some fundamental Ethical principles?
Professional behaviour: All members should act in a way that respects the laws and regulations of the profession.
Integrity: All members are required to act in a straightforward and honest manner in all their business and professional dealings. Competence: All members are required to maintain their professional knowledge and skills. They should act in accordance with applicable technical and professional standards when providing professional service. Confidentiality: All members are required to respect the confidentiality of their clients and not disclose any client information to third parties unless they have a professional or legal right or duty to disclose. PLEASE NOTE: Information must be disclosed if the client is suspected of money laundering, terrorism, treason, the ACCA are investigating the auditor’s work, or a court order is obtained requiring the auditor to disclose. The auditor may decide to disclose information if the client gives permission, or the auditor feels that it is in the public interest to do so. Objectivity: All members are requires to remain independent of their clients in order that their opinion is unbiased.
Assurance provider may encounter circumstances affecting their ability to comply with the ACCA’s code of Ethics. Before accepting clients, auditors must assess any ethical threats and either put in place measures to mitigate the threats or reject the appointment.
What are some Ethical threats that can affect Auditors ability to comply with the ACCA’s code of Ethics? These ethical threats are:
Self-interest threats Self-review threat Familiarity threats Advocacy threats Intimidation threats Management threats
Self-interest threats This is where the auditor put their interests above the interests of the client’s and shareholders. Examples: Auditor receive excessive gifts from clients, auditor receive a large proportion of their revenue from one client, auditors have personal or business relationships with a client, audit fees are agreed on a contingent basis, auditors and client lend each other money, auditors set their fees too low. Self-review threats This is where the auditors perform work or produce information for the client that they end up having to review themselves as part of an assurance engagement. Familiarity threats This is where the auditors develop a close relationship with the client that they become sympathetic to client’s interests or place an abnormal trust in their work. Advocacy threat This is where the auditors fail to take a balance view of their client and are perceive to be either “taking their client’s side” or are biased against their client. Intimidation threats This is where the client being in a position to put pressure on an auditor to prevent them acting objectively. Management threat This is where auditors provide services that constitute to acting as management of the client or making management decisions for the client.
Auditor must be seen to act in the best interest of their client at all times. A conflict of interest can arise when the auditors act for two companies who are in direct competition with each other and have access to confidential information.
What other matters should auditors consider before acceptance? Besides legal and ethical issues auditor should consider other matters, such as:
The client assessment Professional clearance
Client assessment considerations
Resources (time and staff) available The fee The client’s credit rating Client deadline The integrity of the client and its directors The level of audit risk Verification of the identity of the client and their source of income
Professional clearance process Ask the client for permission to speak to outgoing auditors, if no then reject appointment. Ask the outgoing auditor if they are any reasons why appointment should not be accepted, if no accept appointment. If yes, ask client if the problem can be explained away to auditor’s satisfaction, if no reject appointment, and if yes accept. Engagement letter An engagement letter is a contract that the auditor and the client must sign. The engagement letter contains the objective and scope of the audit, responsibilities of the directors and auditors, the nature of audit work, and the basis of which fees are calculated.
Fees, Address, Responsibilities, Scope, Extras, Signatures
THE END.