AUDITING
Prepared by:
Edem E. Welbeck
Learning Objectives
At the end of the session, students should be able to ;
•Explain the need for auditing
•Define auditing and differentiate auditing from other assurance services
•Identify and explain the various types of audit and auditors
•Describe services provided by the accounting and auditing profession
•Explain issues affecting the auditing profession
•Identify groups and standards that impact on auditing
The Need for Auditing
– Modern auditing has developed since the concept of separate legal entity came into existence.
– To safeguard the interest of owners, who are not involved in the day-to-day decisions made by
management
The Need for Auditing cont’d
company
Owners managers
Shareholders directors
Provide finance use finance
Report to owners prepare accounts audit
The Purpose of External Audit
– Outsiders or shareholders are quite remote from internal operations
– Organisations must issue stewardship reports on
resource administration- source, quantity, allocation, accumulation and depletion
– The increasing size and complexity of modern enterprises
– The development of more accurate and sophisticated computerised systems
The Purpose of External Audit
– Modern companies have expanded; some across political boundaries making accounts preparation complex since it involves various legislations.
Hence the need for independent experts in examining financial statements.
– To ensure compliance with various legislations and standards.
– To satisfy all stakeholders ie bankers, creditors,
employees that financial statements are objective.
The scope of External Audit
• Stages of a typical audit include:
- planning – staffing, timing and the procedure to be employed are key at this stage
- interim audit – the internal control systems are recorded, evaluated and tested
- Final audit – testing of account balances and a critical review of the financial statement as a whole
- reporting – the final stage when the auditor
expresses an opinion on the financial statement
AUDITING, ATTESTATION, AND ASSURANCE SERVICES
• AUDITING (broadly defined) is a systematic process of objectively obtaining and evaluating evidence regarding assertions (declarations) about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested parties.
• AUDITING (narrowly defined) is a written report on the examination of financial statements for a client.
AUDITING, ATTESTATION, AND ASSURANCE SERVICES CONT’D
• ATTESTATION occurs when a practitioner is engaged to issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.
• Examples:
– The effectiveness of internal control
– Financial information other than the financial statements – Future-oriented financial information
– Compliance with statutory, regulatory, or contractual obligations
– Management’s discussion and analysis
AUDITING, ATTESTATION, AND ASSURANCE SERVICES CONT’D
• ASSURANCE services are independent
professional services that improve the quality of information, or its context, for decision makers.
• Examples:
– Risk assessment – audit
– Information system reliability – Electronic commerce
– Health care performance measurement
TYPES OF AUDITS
• Financial statements audits – an audit whose objective is to express an opinion on whether the financial statement present fairly, in all respects, the financial position, results of operation.
• Compliance audits – an appraisal of the
extent to which organizational objectives are
met
TYPES OF AUDITS CONT’D
• Operational/ value for money audits An audit that is concerned not only with
accounting and financial matters, but also with the overall goal achievement, effectiveness of operating procedures and internal controls,
performance of individual managers and other non-financial aspects of the organisation’s
operations.
TYPES OF AUDITS CONT’D
• Forensic audits – a specialised area of auditing concerned with solving commercial crimes,
forensic auditors are often required to testify in court regarding the evidence they have
gathered.
• Environmental Audit – a process that assesses an organisation’s compliance with
environmental laws, policies and standards.
TYPES OF AUDITS CONT’D
Internal audits –
•a process that seeks to measure the effectiveness and efficiency of an organisation’s controls over financial, accounting and other operations.
•Internal audit is normally carried out by internal auditors who are mostly employees of the
organisation they audit.
Others – public sector audit etc
Objective of an External Audit
• To enable the auditor express an opinion on whether the financial statements are prepared, in all material respects, in accordance with identified financial reporting framework.
• In other words whether the financial statement give a ‘true and fair view’.
• Inherent in the above is for auditors to detect
error and help improve accounting and control
systems.
SCOPE OF AN AUDIT
• Refers to the audit procedures deemed necessary to achieve the objective of the audit.
• The procedures should be in accordance with
the standard (ISAs), relevant professional
bodies, legislation, regulation, and the terms
of the audit engagement.
TYPES OF AUDITORS
• External auditors
• Internal auditors
• Government auditors
• Forensic auditors
THE PUBLIC AUDITING/ACCOUNTING PROFESSION
• Public accounting firms eg. Ernst and Young, PWC, Deliotte & Touche, KPMG etc.
Types of services
• Audits
• Tax services
• Management advisory services
• Accounting and review services
ORGANIZATIONAL GROUPS AND STANDARDS THAT IMPACT AUDITING
GROUPS
•International Federation of Accountants (IFAC)
•International Accounting Standard Board (IASB)
STANDARDS
•International Standards on Auditing (ISAs)
•Ghana Auditing standards
•International accounting standards (IASs)
•International financial reporting standards (IFRSs)
THE EXPECTATION GAP
People have various misconception about the role of auditors;
•A misconception that the auditor’s duty is to detect fraud.
•A misconception that the auditor’s report goes to directors of the company and not members.
What auditors do and what people expect them
to do is the ‘expectation gap’.
ISSUES AFFECTING THE PROFESSION
• Expanded services
• Globalization
• Litigation
• Independence issues
assignment
One of the companies that you audit has recently appointed a new member to its board of directors. This director has asked for clarification about the range of services your firm can offer. In particular he has asked for clarification about the following:
•Accountancy services
•Audit
•Review engagement
Write an appropriate letter to the director, describing the above services and clearly identifying the work involved.