1 Introduction to Auditing Flashcards
What is the definition of auditing?
Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested parties
What is the definition of systematic?
An audit is a series of well-planned procedures based on a sound conceptual framework that includes auditing standards and objectives
What is objective?
= based on verifiable evidence (not a guess)
* To ensure an unbiased opinion the auditor must retail an objective mental attitude through the evidence gathering and evaluation stages of the audit process.
* This requires that the auditor is independent
* Therefore, two people looking at the same evidence should reach the same conclusion.
* The evidence, the whole evidence and nothing but the evidence
What are assertions
- … about economic actions and events
- Management makes many representations which includes both the information presented in the financial statements and the accounting information system.
- The auditor must evaluate these assertions withing an established framework.
What is the audit’s degree of correspondence?
- … with established criteria
- The standard against which economic assertions are evaluated must be, to a large degree, uniform and mutually understandable to both prepare and user group.
- For independent and external reporting, the criteria is normally generally accepted accounting principles.
- Which includes, but is not limited to, approved accounting standards.
How must the results be communicated?
This involves the preparation of an auditor’s report to communicate the results of the auditor’s examination to the users of the information.
Without their opinion whole process is useless
What is the scope of an audit?
For this module we will only be looking at PLCs but you can audit charities and public companies
What is the PRIMARY objective of an audit?
- For the auditor to express their opinion on the truth and fairness of financial statements
- This is the only objective in the companies act
- Due to management bias there needs to be an independent review
What are the SECONDARY objectives of an audit?
Occasionally detect fraud and error when looking at the statements but this is in pursuit of the primary objective
What are the key needs for an audit?
- Conflicts of interest
- Consequence
- Complexity
- Remoteness
What is a conflict of interest?
- A conflict of interest exists between users and management with management having incentives to bias the information
- To reduce risk want to try and minimise this
- This is done with an audit
- The fee charged is evidence of the reliance on the process
What is complexity?
- Overwhelming complexity requires considerable knowledge to understand the accounts
- Auditors act as the market professionals to support others in understanding
What is consequence?
- Financial systems rely on information and that has to be accurate
- Auditors opinion establishes this
What is remoteness?
- Separation of owners and managers
- Owners have no right to information (cant just walk into the office if you own one share of a PLC)
- Auditors have a statutory right to ask for any information they deem necessary
What are the limitations of auditing?
- Accounting is past orientated and therefore so is auditing
- In making accounts managers make judgement and assumptions to create this true and fair view
o E.g. how much to depreciate a building - In turn an auditor is making a judgement on these judgements
- There is only a small sample size taken
o This is mitigated as a lot of financial data is automated and if they test the system and it works then they can be relatively sure the rest are correct - Auditors never guarantee accounts are accurate. They can be wrong
- The companies act does not define “true and fair” so it is up to the judgement of the auditor to decide if the careful selection of accounting practices transitions to window dressing.
