External Audit and Reporting

Question 1

What is the role of an external audit?

Answer 1

1. To verfiy that the financial statements present a true and fair view and are presented fairly (financial audit);
2. That the underlying transactions were legal and regular (compliance audit), and
3. That the public expenditure was carried out in an economic, efficient and effective
   way (performance audit).

The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

Question 2

What are the three reasons for auditing?

Answer 2

1. Stewardship—an audit provides the independent information necessary to allow allows shareholders (in the private sector) and the public (in the public sector) to hold managers to account.
2. Information—audited financial statements are likely to be more accurate as management know that their figures will be subject to external scrutiny.
3. Insurance—auditors are seen as providing some protection from risk and uncertainty. They are independent and report to the highest level of management.

Question 3

Reporting on financial statements (1)

Answer 3

An external auditor’s report is required to contain a clear expression of opinion on the reliability of the financial statements taken as a whole.
To form an opinion on the financial statements the auditor concludes as to whether:

• sufficient appropriate audit evidence has been obtained
• uncorrected misstatements are ‘material’ (individually or in aggregate)
• the ‘statements, including the related notes, give a true and fair view’
• they are prepared, in all material respects, in accordance with the
• requirements of the relevant financial reporting framework, including
• the requirements of applicable law.

Question 4

Reporting on financial statements (2)

Answer 4

If the auditor comes to the conclusion that they are satisfied that the financial statements give a true and fair view - then an unqualified report will be issued.

However, if this is not the case then the external auditor must issue a qualified audit report. The audit qualification can arise in the following instances:

• qualified opinion that the accounts do not show a true and fair view
• disclaimer of opinion
• adverse opinion.

Question 5

What are approaches are used in auditng?

Answer 5

1. Probity audit
2. Verification audit
3. Compliance audit
4. Risk assessment and the evaluation of the internal control systems (including an assessment of the performance of internal audit)
5. Internal report on any systems weakness and recommendations
6. Auditor’s report

Question 6

What is the objective of a probity audit?

Answer 6

The objective of a probity audit (or vouching) is to confirm the integrity and honesty of revenue expenditure and income. This involves a volume of transaction checking,
and while much of this will have been carried out by internal audit the external auditors will want to ensure for themselves that the transactions are properly authorised both by budgeted or voted authority and by the responsible officer.

Question 7

What is the objective of a verification audit?

Answer 7

The purpose of a verification audit is to confirm the existence of an asset. Assets may be physical (land, buildings, plant, machinery, vehicles) or investments, etc.

Question 8

What is the purpose of a compliance audit?

Answer 8

A compliance audit provides confirmation that an organisation has complied with all relevant accounting standards to justify the completeness of the financial statements.

Question 9

Supreme Audit Institutions (1)

Answer 9

Supreme Audit Institutions are entities whose external audit role is established by the constitution or supreme law-making body.

SAIs are traditionally known for their oversight of public expenditure, which remains a core part of the audit portfolio. SAIs undertake:

• financial audits to assess the reliability and accuracy of public entities’ financial reporting and,
• compliance audits to assess a public entities’ compliance with its governing authorities.

The role of SAIs is evolving, as they are increasingly taking a broader, more comprehensive view on reliability, effectiveness, efficiency and economy of policies and programmes

Question 10

Supreme Audit Institutions (2)

Answer 10

Supreme Audit Institutions may be part of the executive (Switzerland, Denmark), the legislature (Spain, UK, US ), close to or part of the judiciary (France, Italy; Greece, Portugal) or independent entities (Germany).

The independence of SAIs is protected by various constitutional and legal means:

• the protection of the auditors against arbitrary removal from office
• operational autonomy: the possibility of developing its own annual work programme without external interferences
• budgetary autonomy: the possibility of developing its own budget to be approved as a stand-alone chapter in the Budgetary Law by Parliament
• regulatory autonomy: the possibility of developing its own internal regulations
• managerial autonomy in the organisation and internal functioning of the institution.