Accounting. Auditing Flashcards
what is auditing?
Auditing is
o The accumulation and evaluation of evidence about theinformation stated in the FS, determining and reporting the degree of correspondence between the information of a company and the established criteria
o Performed by a competent, independent person
o Comparison of reported information with its underlying real economic
transactions. Auditor checks whether applicable standards have been com-
plied with in the accounting of a company.
what is the purpose of auditing?
o Enhance the degree of confidence on intended users in the financial state-
ment by expressing an opinion on whether the F/S is prepared in all material respects (ISA 200.3)
o It is a reasonable assurance not a guarantee!
What is and audit report and what is its function?
Result of the comparison of reported information with its underlying real economic transac- tion.
Where is the need for an audit?
- Reducing information asymmetries
- Enhancing reliance of F/S for stakeholders
- Condition for well functioning markets
- Reducing uncertainty (for decision making, lowering transaction cost …)
- Protecting interests of investors
What are the audit types?
- Limited Audit
→for smaller companies
→in some cases, the audit can even foregone entirely - Ordinary audit
→for listed companies →subject to strictest regulations
Internal and external audit
- Internal audit: usually performed by permanent employees, internal controlling in accordance with management guidelines
- External audit: performed on a contractual basis independent of the company →coordination between internal and external audit
- Internal audit: usually performed by permanent employees, internal controlling in accordance with management guidelines
- External audit: performed on a contractual basis independent of the company →coordination between internal and external audit
The audit Comittee
- The BoD should set up an audit committee
o Consisting of non-executive and independent members of the BoD
o The majority members, including the Chairman should be experienced in fi-
nancial and accounting matters - Should form its own opinion of the quality of the internal and external audit, the inter-
nal control system and the annual financial statements (detailed list on lecture slides)
What is the expectation gap?
The difference between the levels of expected performance as envisioned by the independent accountant and by the user of financial instruments
- The difference between what the public and financial statement users believe au- ditors are responsible for and what auditors themselves believe their responsibil- ity is
Potential issues
Potential issues with auditor independence (in CH):
-Company assigns and pays for the audit
-Long relation between audit firm and the company that gets audited
-Requirement to change the auditor in case of an ordinary audit (but not the firm) after 7 years (EU: Audit firm changes every 10 years – can be prolonged to max 20 years)
-Non-Audit Fees as an important revenue stream for audit firms
-Market-pressure to cut costs
-Audit market is highly concentrated
What is a mteriality?
The magnitude of misstatements (errors) that individually, or when aggregated with other misstatements, could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements.
Auditing process phase 1
complete
Audit process phase 2
- Audit planning
→ Ensures that as many areas as necessary are covered and means of testing are stablished
1.1 Risk analysis
- Determines areas in financial statement where errors are most likely to occur
- Risk factors must be considered (environmental analysis, change in exchange
rates, technological changes etc.)
- Position specific factors must also be considered (frequency, amount and
complexity of transactions)
- Company specific factors also must be considered (e.g. economic situation,
quality of staff, previous experience with company)
- Important: assessment of the quality of the internal control system
1.2 Audit program
- Determination of which areas in the fin. Statement are audited, how much is audited and by what method
1.3 Time & resource planning
- How many employees and resources are assigned?
Audit process phase 3
- Audit process
- Two types: procedural approach and results-based approach of testing
2.1 Procedural approach
→assessing the internal processed to draw conclusion about the quality of the financial statements in a company.
→processes are documented, reproduced and actual compliance checked. →if processes are stable: assumption that usually the right results are achieved, and less detailed must be applied when checking results.
2.2 Results based approach.
→focus is on concrete figures in the fin. Statement →they are reviewed for accuracy
→two possible procedures
2.2.1 Analytical Audit procedures:
→are results possible and realistic? (e.g., compared to previous years)
2.2.2 Substantive audit procedures:
→concrete evidence is procured (e.g. assets are inspected, recalculations are made)
→usually applied together.
Audit process phase 4
- Judgement and reporting
- Conclusion of auditing
- Audit report, additions and limitations.
different audit opinions
complete
Key audit matters. def and potential
The standard unqualified auditors report does not communicate potentially
useful information about the audit, such as complex issues that require signifi-
cant judgement and the ways in which the audit addresses them
o The new extended audit report: to enhance investors understanding of the
audit process, including the critical judgements made during the audit
- Goodwill
- Revenue recognition
- taxation
- Provisions
