Section A Flashcards
Advantages of Outsourcing Internal Audit Department?
1- Out sourcing provides immediate specialist service
2- No need to hire staff permanently saving training and hiring costs to company
3- Services can be acquired for a particular period as per needs of the company
4- Service provider will indemnify in case of loss to company
Disadvantages of Outsourcing Internal Audit Department?
1- An outsourced department may not be as per flexible when problem arise since they donot have a permanent presence
2- Lack of control over the staff of outsourced firm
3- Outsourced may be expensive to the company or may not provide Service as per the requirements of the company
4- Lack of understanding of the organizations objective and culture
5- Conflict of interest or independence issue if internal audit dep is outsourced from company’s external auditors
Disadvantages of maintaining Internal Audit Department?
1- Internal auditors may lack the specialized skills or experience that outsourced professionals can provide immediately.
2- Maintaining an internal team involves permanent hiring, training, and salary costs
3- Internal teams might be underutilized during periods of lower audit needs, leading to inefficiency
4- Unlike outsourced providers who may indemnify the company for errors or losses, an internal department does not offer such protections
Advantages of maintaining Internal Audit Department?
1- The company has direct control over the internal audit staff, ensuring alignment with specific requirements and objectives.
2- An internal audit department has a permanent presence, allowing it to address issues or problems promptly
3- For regular or continuous audit needs, an internal team may be more cost-efficient compared to outsourcing
4- Deeper Organizational Understanding: Internal auditors are embedded within the company, providing a better understanding of its objectives, culture
Roles/Responsibilities/Functions/Features of Audit Committee:
1- Monitors the integrity of financial statements
2- Monitors and reviews the internal audit function of the company.
3-Provides recommendations to the board regarding external auditors, i.e., appointment, reappointment, remuneration, removal, etc.
4- Monitors and reviews independence and objectivity and eventually the effectiveness of the audit process.
5- Carries out investigations for fraud and error.
6- Is available to external auditors for any unresolved issues.
Advantages of Audit Committee:
Provides assurance to shareholders regarding the external audit process.
Strengthens public confidence in the company (double-check).
Provides NEDs an opportunity to play a vital role in corporate governance.
Helps the internal audit function to work with independence and objectivity (as no pressure is involved).
Helps create a climate of discipline which reduces chances of fraud and error.
Disadvantages of Audit Committee:
NEDs have insufficient time as they are involved with many companies, which may lead to poor decision-making.
EDs may not understand the purpose of the audit committee and may think it’s supervising them.
Costs of the audit committee may outweigh the benefits.
NEDs with caliber and skill may be difficult to select and retain.
Such formal procedures may hinder the smooth flow of operations.
Professional Ethics?
COPPI
See register for explaination.
Threats to independence?
1-Self Interest Threat:
When auditor has personal interests in a client
i.e:
-Expensive Gifts and Hospitalities(politeley refuse them)
-Looking for a job position in client(instantly rotate auditor)
-Auditor has shares in a client( dispose the shares immediately)
-Revenue dependency(threshold 15%, leave other services to bring down to threshold or consider joint audit)
-Contingent fee i.e fee as a percentage of profit(refuse contingent fee and ask for a fixed fee)
-partner is biased( rotate the partner )
-Overdue fee ( Never start next work untill previous fee is paid or any written schedule of payment is provided)
2-Self Review Threat:
When auditor checks his own work
i.e:
-When auditor prepares f/s and audits them(send team other than that which prepared f/s)
-Auditor who valued assets does audit ( same above)
-When finsncial controller leaves the company joins audit firm and audits the f/s (Donot send that person)
3-Familiarity Threat;
When auditor and clients have personal or family relations
i.e;
-personal or family relations (Rotate that person)
-Auditor on same client for 3 years limit (Send other one and rotate this one)
4-Intimidation Threat:
When auditor is presurized or compelled to do certain tasks
i.e:
-Threat of litigation
-Dominant position/person in a senior position on client
-threat of not giving other work
( sab ka ya ka Matter should be brought to the attention of the audit Committee or resign)
-Overdue fee ( Never start next work untill previous fee is paid or any written schedule of payment is provided)
5-Advocasy Threat:
when auditor acts as an advocate of client
i.e:
-representing client in a legal dispute
-Commenting publicaly on clients events
-Meeting investors to invest in client
( auditor should either act as auditor or advocate so resign from 1 )
Conflict of Interest Types and Safeguards?
See Register.
What are Preconditions of Audit?
1- See whether Financial Reporting Framework is applicabe
2- Ensure management acknowledges its responsibility for preparation of Financial Statements , implementation of controls and providing auditor access to all information
Audit Engagement Letter and its Contents?
A letter stating terms and conditions of an audit in the form of a letter is called Audit Engagement Letter.
Contents:
1-Audit and Scope of an Audit
2-Management’s Responsibilities
3-Auditors Responsibilities
4-Applicable financial reporting framework
5-Expected form and content of report
6- Fees and Billing
7- Involvement of Experts
8- Involvement of internal audit
Appointment Ethics ( Steps firm should take before accepting Nomination ) ?
1- Ensure profsesionally qualified to act
2- Ensure adequate resources available
3- Communicate with previous Auditors
4- Do client screening i.e:
-Check whether management is honest or not
-Do cos benefit analysis
-Check level of clients risk
-Check whether client wants a long term relation
- Check whether resources are available
Steps an audit firm should take after accepting Nomination?
1-Ensure outgoing auditors removal is appropriate
2-Ensure new auditors appointment is valid
3-Setup and submit audit engagement letter
Can firms advertise to provide services?
No firms cannot.
If question comes in paper then in recommendation write that the firm should immediately stop advertizing.
what is expectations Gap?
Small question on register lec 2
Why auditor gives only Reasonable assurance and not gurantee?
1- Auditos are humans so there is always possibility of human error
2- Audit is done on sample basis not population basis
3- Sometimes management is itself involved in Fraud and it is difficult to identify management fraud
4- F/S are based on estimates and estimates may be wrong
What is review, agreed on procedures , compilation engagements and due diligence?
On reguister lec 2
5 elements of assurance Engagements?
Crest
1- Criteria: There should be some criteria on the basis of which assurance is done like in audit ISA’s are the criteria
2-Report: A written report should be given like in audit a written report is submitted
3-Evidence: Assurance should be given on the basis of evidence like evidences collected during audit process
4-Subject matter: Assurance should be given on some subject like in audit f/s are the subject matter
5-Triparty relation: There must be 3 parties involved like:
-Practitioner
-Intended User
-Responsible party
Responsibilities of Directors and Auditors?
Lec 2 Register
Differenciate Internal and External Audit?
Lec 15
Tasks Carried Out by Internal Audit Deoartment?
Lec 15
Faactors to consider by external auditor before placing relevance on internal audit?
Lec 15
Rights and responsibilities of Auditor?
Rights:
Right to access all records
Right to seek info on any matter from management
Right to speak and be heard at AGM
Right to receive all notices from management on any matter
Duties:
Duty to maintain Confidientiality
Duty to report all finding at the end of audit into a written report
Duty to maintain consistency between f/s and accounting information
Duty to maintain consistency between f/s and other information
What is the internal audit?
A monitoring Activity established by the entity within the entity and to provide services to the entity.
