What is an audit
1. Express an opinion whether Fs give a true and fair view of the entitys financial position.
2. Ensure Fs have been properly prepared in accordance with applicable reporting
framework.
(Fs consists of SOFP, SOCI, SOCIE, SOCF and accompanying notes)
Reasons for an audit
1. Shareholders r d owners
2. S/h appoints directors to run d Co. on their behalf.
3. Directors prepare Fs
4. Fs lack of credibility.
5. Independent auditor examine Fs r free frm material misstatement.
Benefits of an audit
1. Adds credibility to Fs
2. Detection of fraud and errors during audit procedures
3. Improvements in Internal Control Procedures.
4. Deterrence of possible fraudulent acts
Meaning of true and fair views
True : 1. Information is factual, conforms with reality, no factual errors.
2. Comply with accounting standards and any relevant legislation.
3. Data being correctly transferred frm accounting records to Fs.
Fair : 1. Information is clear, impartial and unbiased
2. Reflects plainly the commercial substances of the transactions of the entity.
Responsibilities of directors
1. Preparation and presentation of Fs.
2. Applicable financial reporting framework.
3. Directors responsibility to present Fs that show a true and fair view, not materially
misstated.
4. Directors responsibility to ensure adequate accounting and control system.
5. Select and apply only appropriate ACCT policies.
6. Make reasonable ACCT estimates.
7. Auditor does NOT certify or guarantee Fs are correct. (Absolute assurance), he only
providing REASONABLE ASSURANCE due to inherent limitations.
Inherent limitations
1. Accounting estimates Eg. Allowance for doubtful debts / inventory obsolescence
2. Inherent limitations of internal controls Eg. Management overrides, collusion or
manipulation of evidence, human errors.
3. Opinion involves judgement on (i) gathering evidence in determining NTE.
(ii) conclusions drawn based on the evidence gathered
4. Most audit evidence are persuasive rather than conclusive believe the substances, no
assurance.
5. Method of testing Sampling
Time constraints, technical knowledge & cost vs. benefits
Audit (-ve)
1. Substantial cost
2. Disruption to clients operations
Audit (+ve)
1. Improve operational efficiency, accounting and IC system
(auditor is able identify weakness during the audit)
2. Ensures directors have fulfilled their statutory obligations
3. Provide other services advice and assistance on accounting, taxation and so forth
(easier to sell / merge the biz)
Audit regulation
International Federation of Accountant (IFAC)
International Auditing & Assurance Board (IAASB) Develop & issue high quality auditing
stds (uniformity)
Confidence in the audit process globally
International Standards on Auditing (ISAs) Statements containing principles & essential
procedures
Setting of ISAs (5 stages)
1. IAASB set up a subcommittee develop a draft std (exposure draft) based on research &
consultation
2. ED presented & debate at IAASB meeting
3. ED placed on IAASBs website not fewer than 120 days
4. All commets & suggestions r considered ED being revised & re-issued where necessary
5. Finalised & approval of ED affirmative vote of at least two thirds majority of the
members ( >10 )
Clarity project
2004 to enhance the clarity of ISAs
2008 IAASB had finalised all its clarified ISAs
(36 newly updated & clarified ISAs resulted in major changes
Authorities attached to ISAs
1. In 2009 ISAs does not have :
Introduction purpose, scope, subject matter of ISA & auditors respoesibility
Objective
Definitions
Requirements
2. Exceptional cases depart from ISA, justify the departure
3. Does not override the local regulations (encourage changes in local regulations to
comply with ISAs)
Obligatory Disclosure
(i)
Drug trafficking / terrorist offences
(ii)
Court demand
Voluntary Disclosure
(i)
Protect members interest
(ii)
Public duty (client committed action against public interest unauthorised release of
toxic chemicals)
Negligence
Conduct that is careless or unintentional in nature which entails a breach of contractual
obligations to another person.
(a) Duty of care DOC enforceable by law
(b) Negligence judged by the accepted professional standard
(c) Damages suffered monetary loss
Auditors only liable to parties with whom there is a contractual relationship which r
specifically known to rely on Fs for specific purpose (Caparo Industries Pty Ltd v Dickman
and Others)
Engagement Letter
The company and auditors bond by a contract.
Express terms:
1. Responsibility of management preparation& fair presentation of Fs
2. Responsibility of management auditors with access to all information & records
3. Responsibility of management audit evidence
Terms stipulated in EL
Auditors have duty / right to:
1. exercise reasonable care (diligence, cautious)
2. reasonable expediency (time limit)
3. reasonable remuneration (audit fees)
Independence
CoEC - Independence requires independence of mind & independence in appearance.
- muz b, n muz b seen 2 b, independent. (impartial)
Confidentiality
Auditor hav PD of Con. However dey may b compelled by law/desirable in public interest 2
disclose details of clients affairs 2 3rd parties.
SI threat
1. Audit firm has direct financial/indirect material interest in audit client (partner, family
audit team hold share)
2. Audit staff r offered gifts/hospitality by client (value not modest)
3. Audit fees frm single client r a high % of d firms total fees (undue dependence on fees)
Professional
disagreement
reasons,
stating
those
reasons
audit
fees,
outstanding,