Lecture 9 - Introduction to Auditing Flashcards
Why Auditing?
Accounting vs. Auditing
Auditing is
- the accumulation and evaluation of evidence
- to determine and report on the degree of correspondence between the information and established criteria
- The purpose is to enhance the degree of confidence of intended users in the FS
- This is achieved by the expression of an opinion on whether the FS are prepared, in all material aspects, in accordance with an applicable financial reporting framework.
Why Auditing?
Economic driver: information risk
Why Auditing?
Benefits
+ Enhance the reliance in the FS for stakeholders and investors
+ An important condition for well functioning markets
+ Reduction of decision-maler uncertainty
+ Reduced uncertainty giver lower transaction costs and consequently increases efficiency
+ Protecting the interests of shareholders that might differ from the manager’s objectives
Corporate Governance
Accounting Scandals
Corporate Governance
The Fraud Diamond
Pressure (Incentive): Motivation or incentive to commit fraud.
Examples: Financial difficulties, personal debt, pressure to meet targets, greed.
Opportunity: Situation that enables fraud to occur.
Examples: Weak internal controls, lack of oversight, access to assets, lack of segregation of duties.
Rationalization: Mindset or justification that allows the fraudster to perceive the fraudulent act as acceptable.
Examples: “I deserve this,” “It’s just a loan,” “The company won’t miss this money,” “Everyone else is doing it.”
Capability (Power): Personal traits and abilities that enable the individual to commit fraud.
Examples: Position of authority, intelligence, confidence, ability to handle stress, knowledge of how to exploit weaknesses.
Corporate Governance
Most Commonly Cited Fraud Risk
Incentives/Pressures
- To seek personal gain
- Becaue I can
- Driven by organizational culture
- To meet targets/hide losses
Opportunities
- Due to weak internal controls
- Reckless dishonesty regardless of controls
- By colluding with others to circumvent existing controls
Corporate Governance
Lines of Defense
Corporate Governance
Audit Committee
Task: to form its own opinion of the quality of internal&external audit, the internal control systems, and the annual FS
Members: independent members of a company’s BoD (3-5, sometimes 7, directors who are NOT part of management)
Responsibilities:
- Help auditors remain independent of management
- Appointment, compensation, and oversight
- Preapproval of all audit and nonaudit services, responsible for the oversight of work of the auditors, including conflict resolution
- Auditors are reponsible for communicating all significant matters identified to the committee
Corporate Governance
Internal Control
The system designed, implemented, and maintained by those charged with governance, management, and other personnal, to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliabilit of financial reporting, effectiveness, and efficiency of operations, and compliance with applicable laws and regulations
5 inter-related components:
1. Control environment
2. Entity’s risk assessment process
3. Control activities
4. Information system and communication
5. Entity’s process to monitor the system of internal control
Auditing Regulation
Landscape in Switzerland
Auditing Regulation
CH: Regulatory Framework
In general, mandatory for:
- Stock companies
- LLC
- Cooperatives
- Associations and Foundations
2 Types of audits: Ordinary & Limited statutory examination
Comanies exceeding 2 of the following threshold in two subsequent years need to conduct an ordinary audit:
- BS over CHF 20mn
- Revenue CHF40mn
- 250 full-time position (average p.a.)
Auditing Regulation
Comparison vs. Limited Audit
Level of Assurance
Auditing Regulation
Ordinary vs. Limited Audit
Auditing Regulation
Opting up/in/out
Out: All shareholders of a non-economically significant company may waive a limited audit, provided that there are not more than 10 full-time positions available
Down: Voluntary audits for opting-out candidates without fulfillment of the audit-firm’s professional requirements
Up/In: minorities holding at least 10% of the share capital may request an ordinary audit.
- general meeting as well as articles of association may provide for an ordinary audit
- Individually liable members (association, limited partnership, cooperative) can demand an ordinary audit
- Market pressure (banks)
Auditing Regulation
Regulation in the EU
Auditing Regulation
International and U.S Auditing Standards
Independence
Code of Ethics
Auditor Independence
Requirements
Not compatible with independence:
Audit Planning
Whole Overview
Audit Planning
Planning Overview
Audit Planning
Specification of test objects
Risk Assessment
Materiality (Pt. II)
Risk Assessment
Audit Risk Model
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the FS are materially misstated. This level of appropriate audit risk is specified by the auditor. The risk includes:
Risk of material misstatement (RMM)
- Inherent Risk (IR): inherent nature of environment, industry, business structure.
- Control Risk (CR): result of Internal Control Systems
Detection risk (DR) is the risk that the procedures the auditor uses DO NOT detect a material misstatement. Only this risk can be directly influenced by the auditor.
Risk Assessment
Factors Influencing risks
Risk Assessment
Inherent Risk
Risk Assessment
Control Risk
Risk Assessment
Control Risk (COSO)
Risk Assessment
Internal control
Risk Assessment
Detection Risk
Design Audit Programs
Overview
Design Audit Program
Significant Risks and Key Audit Matters
Design Audit Program
Audit Evidence
Design Audit Program
Relevance - Assertions
Assertions are fundamental claims made by management regarding the FS used by auditors to decide what evidence is needed to form an opinion.
Assertions can be placed into 3 categories:
1. Account balances
2. Transactions
3. Presentation & Disclosure
Design Audit Program
Assertions and Type of Tests
To examine assertions related to FS, auditors use a pool of tests
- Risk assessment procedures
- (substantive) analytical procedures
- Test of controls
- (substantive) tests of details (transaction and balance-level)
Auditors use all type of test when eprforming an audit (i.e. increase degree of persuasiveness). Auditory always make risk assessment.
Certain type of tests may be emphasized, depending on the circumstances:
- availability of evidence
- Effectiveness of internal controls and inherent risks
- relarive cost of each type of tests
Design Audit Program
Type of Tests
Design Audit Program
Filling the Assurance Buckets - Types of evidence
Design Audit Program
Type of tests and timing
Design Audit Program
Type of Tests and Audit risk model
Design Audit Program
Filling the Assurance Buckets
