Lecture 1 - What is Auditing? Flashcards
What is an Audit?
An audit is an investigation or search for evidence to enable reasonable assurance to be given on the truth and fairness of financial and other info by a person or persons independent of the preparer and persons likely to gain directly from the use of info, and the issue of a report on the info with the intention of increasing its credibility and therefore usefulness.
Equation for gross margin
Gross Profit * 100/Sales
Why is audit needed?
Info Hypothesis
Agency Theory
Insurance Hypothesis
Why is audit needed?
Information Hypothesis
The auditor makes the information more reliable & therefore useful.
So auditors can make sense of what is going on.
Why is audit needed?
Agency Theory
Owners & providers of resources cannot trust management to act in their best interests.
Therefore they need an independent & expert agent (the auditor) to act on their behalf and monitor management and verify their reports.
Agency Theory - Auditors are the agents of the shareholders’
Why is audit needed?
Insurance Hypothesis
Users of audited accounts may be able to sue the auditor if they incur a loss.
(negligence & duty of care must be proven)
Who is Audited?
- Companies & limited liability partnerships registered under the company act 2006
- Public bodies e.g. local authorises
- Not-for-profit bodies e.g. charities
Note:
Special (extra) requirements for public interest entities
Exceptions for small companies and small charities
Small Companies Exemption from Audit A company is exempt from statutory audit if it has at least 2 of the following: - - -
Companies who are exempt can opt for an audit even if they are expemt
A company is exempt from statutory audit if it has at least 2 of the following:
- Revenue no more than £10.2 million
- Total Assets no more than £5.1 million
- 50 or fewer employees on average
What are Public Interest Entities (PIE)?
All listed entities (all limited companies are PIE’s); and
Entities for which the audit is required by regulation or legislation to be conducted in compliance with the same requirements that apply to the audit of listed entities.
PIE what is it essentially according to the EU definition?
Essentially, these are companies that are important to the operation of the capital market of that country.
Public Interest Entities Requirements
- Compliance with the UK governance code
- Additional reporting requirements
- Additional audit requirements
- Additional requirements for auditors
What is the relationship between auditors and their clients?
- What is the main relationship
- Who do external auditors report mainly to?
- Main relationship - between auditors and shareholders as the audit report is for them
- Auditing committee
What is the Audit Committee Responsible for?
- For appointing internal auditor
- Carrying out tender to secure audit
- For overseeing the financial reporting process
- Responsible for making sure audit it up the companies standards
What does the Companies Act 2006 set out?
- Who can audit
- Auditor’s rights to access of information
- Period of appointment
- Auditors rights if removed early or resign early
- Statutory rights between auditors & sh’s
Who can audit?
Sole practitioners or firms can audit private companies if they are registered with a supervisory body and you are a qualified accountant
Statutory auditors and other practitioners or bodies can audit public sector organisations if allowed under enabling legislation
