Lecture 2 Flashcards
Audit and Assurance
what is an audit assumption
where a practitioner will express a conclsuion of a subject matter to enhance degree of confidence of intended users
practitioner
the person who will do the independent checks
responsible party
who will be responsible for putting together the relevant subject matter
5 key elements of assurance assignment
> third party involvement
subject matter
suitable criteria
sufficient appropriate evidence
written assurance report
two levels of assurance
limited and reasonable
two features of limited assurance
- moderate / low levels of assurance
- negatively expresses opinion (less confidence)
two features of reasonable assurance
- high but not absolute assurance
- positive opinion (more confidence)
Reasonable vs Limited (3)
- more regulations for higher level of assurance
- More thorough procedures
- Evidence needs to be of higher quality
6 examples of assurance assignments
- Audit of financial statements
- Review of a forecast/business plan
- Review of internal controls
- Fraud investigation
- Due diligence
- Environmental audit
two ways audits in the UK are governed
- Companies Act 2006
- International Standards on Auditing
3 reasons for an audit
- Shareholders not involved in the day to day running of business, management need to give account of their stewardship
- Directors prepare accounts and have an incentive to manipulate the financial statements
- Auditors provide an external verification
4 things an auditor needs to comply with
- comply with ethical requirements
- plan and perform audit with professional scepticism
- exercise professional judgement
- obtain evidence is sufficient
professional scepticism
An attitude that includes a questioning mind, being alert to conditions, which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence
professional judgement
The application of relevant training, knowledge and experience in making informed decisions about the courses of actions that are appropriate in the circumstances of the audit.
benefits of an audit (HIRED)
- Higher quality info giving investors confidence
- Independent scrutiny may help management
- Reduce risk of management bias, fraud and error
- Enhances credibility of financial statements for other stakeholders
- Deficiencies in internal control system may be highlighted
limitations of an audit (FIRED)
- Financial statements include subjective estimates and judgement
- Internal controls may be relied upon by the auditors
- Representations from management not always reliable
- Evidence not always conclusive
- Do not test all transactions, only samples
what is the expectation gap
misunderstandings by the general public about the duties of auditors
5 beliefs of the expectations gap
- auditors test all transactions
- auditors will detect all fraud
- auditors prepare financial statements
- a clean audit opinion guarantees the company is a going concern
- the statement of financial position shows the true value of a company
who can carry out an audit
- member of recognised supervisory body (ICAEW or ACCA)
- To sign off audit reports an individual must hold a practising certificate and an audit qualification
- The business must hold an audit registration
- alternatively someone authorised by the state
who can’t carry out an audit
- Anyone that manages or works for the company
- Anyone with a business or personal connection to the company
what does the code of ethics require auditors to be
- Independent
2 .Competent - Keep all information gained on an audit confidential
who can appoint an auditor
- mainly shareholders
- directors
- secretary of a state
how can an auditor be removed
by a majority vote at a general company meeting
how can an auditor resign
by giving written notice and statement of circumstances
6 rights of an auditor
- Access company’s books and records
- Receive explanations and information needed
- Receive notification and attend general meetings of members
- To be heard at such meetings on relevant matters
- Receive copies of written resolutions
- Request a general meeting to discuss circumstances of removal/resignation
duties of an auditor
external auditor has duty to audit financial statements and give opinion on whether or not they give a fair and true view
3 professional standards
- International Federation of Accountants (IFAC)
- International Audit and Assurance Standards Boars (IAASB)
- International Standards of Auditing (ISA)
IFAC
International Federation of Accountants
- promotes international regulation of the accountancy profession
IAASB
International Audit and Assurance Standards Boars
- a subsidiary board of IFAC
ISA
provide guidance to auditors, not legal requirements
role of professional bodies
to promote quality within profession through provision of
- Rigorous qualifications
- Support to members
- Giving technical expertise to governments on accounting and business
3 ways to obtain membership
- complete exams
- 3 years of practical experience
- complete ethical exam
2 ways to maintain membership
- continuing CPD
- comply with code of ethics
