Audit & Investigation Presentation Module 1.pptx
- 1. Audit & Investigation Short Slides of the Class Notes Instructor: Bashir Mohamed Warsame ACCA, CIPFA, BAEcon Contacts: Email: bashkamohamed@gmail.com Mobile: 0907798155
- 2. Course Aim and Objectives Course Aim The aim of the course is to equip the students with the necessary information required in understanding auditing and investigation practice at their relevant level. Course Objectives At the end of studying this course, among other objectives, you should be able to: Understand the concepts of auditing and investigation List and explain the advantages and importance of auditing Explain the types of audit Give reasons why audit is regulated and explain the sources of regulation.
- 3. Course Objectives Explain the elements of an assurance engagements State and explain the objectives of an assurance engagement Explain the concept “audit programme” and its usefulness in the audit process. Discuss the different types of audit programmes and state the advantages and disadvantages. Discuss the types of audit testing and their importance in the audit process. Discuss the concept of Investigation. Understand the importance of fraud investigation. Discuss the concept of Money Laundry and its effects.
- 4. Course Contents Outline The course contains 6 modules designed as follows: Module One: Audit Framework and Regulation Introduction to Auditing and Other Assurance Engagements Auditors’ Rights, Appointment, Removal, Resignation and Regulation Professional Ethics
- 5. Course Contents Outline Module Two: Audit Planning and Risk Assessment Audit Risks Audit Planning Internal Controls
- 6. Course Contents Outline Module Four: Audit Verification and Evidence Audit Evidence Audit Program Audit Verifications Module Five: Review and Reporting Subsequent events Written representations Audit Reports
- 7. Course Contents Outline Module Six: Forensic Investigation Fraud Money Laundering Whistle blowing
- 8. Module One: Audit Framework and Regulation Introduction to Auditing and Other Assurance Engagements Audit Definition Auditing is defined by the American Accounting Association (AAA) as a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the result to intended users. R.K Moutz, defined auditing as an examination of the accounting books and the relative documentary evidence so that an auditor may be able to find out the accuracy of figures and may be able to make report on the balance sheet and other financial statements which have been prepared from there.
- 9. Objectives of Audit This is divided into primary and secondary objectives. Primary Objective: The primary objective of an audit of financial statements is to enable the auditor express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. Thus, the primary objective of an audit is the expression of professional opinion as to whether or not, the financial statements examined by the auditor, for a reporting period, give a true and fair view (that is, fairly presented in all material respects).
- 10. Objectives of Audit Secondary Objective Other objectives achieved in the course of the audit process include: i. Detection and Prevention of frauds ii. Detection and prevention of errors iii. Evaluation of the effectiveness and appropriateness of internal control system over financial reporting and submitting a report to management for needed improvements iv. Evaluating and reporting on the likelihood of the business continuing as a going concern
- 11. Difference between Audit & Investigation Basis of Comparison Auditing Investigation Meaning Process of inspecting books of accounts of an entity & reporting on it Inquiry conducted for establishing a specific fact or truth Nature General Examination Critical and in depth examination Evidences Persuasive in nature Evidences are unquestionable, therefore, nature is conclusive Time horizon Annually As per requirement Performed by Chartered Accountant Expert Reporting General Purpose Confidential Obligatory Yes No Appointment By shareholders Management, shareholders or third- party Scope Opinion on financial statement Answer questions asked in engagement letter
- 12. Assurance Engagement An assurance engagement is: 'An engagement in which a practitioner obtains sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.'
- 13. Elements of an assurance engagement • Three party involvement (Practitioner, responsible party, intended users) • Appropriate subject matter ( Financial Performance, non- FP, systems & processes) • Suitable Criteria • Sufficient Appropriate Evidence • Written Assurance Report
- 14. Assurance engagements • Audit of financial statements • Review of financial statements • Systems reliability reports • Verification of social and environmental information • Review of internal controls • Value for money audit in public sector organizations.
- 15. Comparison of Audit and Other Assurance Engagements Reasonable Limited Gathers Sufficient Appropriate Evidence to draw reasonable conclusions Gathers Sufficient Appropriate Evidence to draw limited conclusions Concludes that the subject matter conforms in all material respects with identified suitable criteria Concludes that the subject matter with respect to identified suitable criteria is plausible in the circumstances Gives positively worded assurance opinion Gives negatively worded assurance conclusion Gives high level of assurance Gives moderate or lower level assurance Performs very thorough procedures to obtain sufficient appropriate evidence ( test of controls and substantive tests Performs significantly fewer procedures- mainly inquiries and analytical procedures
- 16. Comparison of Audit and Other Assurance Engagements (Reporting) Reasonable Limited In our opinion, the financial statements give true and fair view of the financial statements of Morris & Company as at December 2019, and of its financial performance and its cash flows for the year ended in accordance with International Financial reporting Standard Nothing has come to our attention that causes us to believe that the financial statements of Morris & Company as of 31st December, 2019 are not prepared, in all material respects in accordance with applicable financial reporting framework
- 17. Benefits of an audit Higher quality information which is more reliable improving the reputation of the market. Independent scrutiny and verification may be valuable to management. Reduces the risk of management bias, fraud and error by acting as a deterrent. An audit may also detect bias, fraud and error. Enhances the credibility of the financial statements, e.g. for tax authorities or lenders. Deficiencies in the internal control system may be highlighted by the auditor.
- 18. Expectation gap Some users incorrectly believe that an audit provides absolute assurance – that the audit opinion is a guarantee the financial statements are 'correct'. This and other misconceptions about the role of an auditor are referred to as the 'expectation gap”
- 19. Examples of the expectation gap A belief that auditors test all transactions and balances – they test on a sample basis. A belief that auditors are required to detect all fraud – auditors are required to provide reasonable assurance that the financial statements are free from material misstatement, which may be caused by fraud. A belief that auditors are responsible for preparing the financial statements – this is the responsibility of management
- 20. Limitations of an audit Financial statements include subjective estimates and other judgmental matters. Internal controls may be relied on which have their own inherent limitations. Representations from management may have to be relied upon as the only source of evidence in some areas. Evidence is often persuasive not conclusive. Do not test all transactions and balances. Auditors test on a sample basis.
- 21. Auditors’ Rights, Appointment, Removal, Resignation and Regulation 2.1 Auditors’ Rights and Duties The law gives auditors both rights and duties. This allows auditors to have sufficient power to carry out an independent and effective audit. 2.1.1 Duties The auditors are required to report on every statement of financial position (balance sheet) and statement of profit or loss and comprehensive income (profit and loss account) laid before the company in general meeting. The auditors must consider the following;
- 22. Compliance with legislation Whether the financial statements have been prepared in accordance with the relevant legislation Truth and fairness of accounts Whether the statement of financial position shows a true and fair view of the company's affairs at the end of the period and the statement of profit or loss and other comprehensive income (and statement of cash flows) show a true and fair view of the results for that period Adequate accounting records and returns Whether adequate accounting records have been kept and returns adequate for the audit received from branches not visited by the auditor Agreement of accounts to records Whether the accounts are in agreement with the accounting records and returns Consistency of other information Whether the information in the directors' report is consistent with the financial statements Directors' benefits Whether disclosure of directors' benefits has been made in accordance with the Law.
- 23. 2.1 Auditors’ Rights and Duties 2.1.2 Rights The auditors must have certain rights to enable them to carry out their duties effectively. The principal rights that auditors should have, excepting those dealing with resignation or removal, are set out in the table that follows.
- 24. Access to records A right of access at all times to the books, accounts and vouchers of the company (in whatever form they are held). Information and explanations A right to require from the company's officers such information and explanations as they think necessary for the performance of their duties as auditors Attendance at /notices of general meetings A right to attend any general meetings of the company and to receive all notices of and other communications relating to such meetings which any member of the company is entitled to receive Right to be heard at general meetings right to be heard at general meetings which they attend on any part of the business that concerns them as auditors Rights in relation to written resolutions A right to receive a copy of any written resolution proposed
- 25. 2.2 Appointment of Auditors Auditors have to be reappointed by resolution at every annual general meeting. Note that reappointment is not automatic. This is to prevent the incumbent auditors from simply staying in office. The table below shows what the position should ideally be:
- 26. Directors Can appoint auditor: a. Before company's first period for appointing auditors b. Following a period during which the company did not have an auditor (as exempt), at any time before the next period for appointing auditors c. To fill a casual vacancy Members Can appoint auditor by ordinary resolution: a. During a period for appointing auditors b. If company should have appointed auditor during a period for appointing auditors but failed to do so c. If directors fail to do so Secretary of State Can appoint auditors if no auditors are appointed per above
- 27. 2.2.1 Remuneration The remuneration of the auditors, which will include auditors' expenses, will be fixed by whoever made the appointment. However, the auditors' remuneration is fixed, in many countries it must be disclosed in the annual financial statements of the company.
- 28. 2.3 Resignation and Removal of Auditors It is important that auditors know the procedures, because as part of their client acceptance, they have a duty to ensure the old auditors were properly removed from office.
- 29. 2.3.1 Resignation of Auditors Resignation procedures Auditors deposit written notice together with statement of circumstances relevant to members/creditors or statement that no such circumstances exist. A statement of circumstance must always be submitted for a quoted company, even if the auditor considers that there are no circumstances that should be brought to the attention of members or creditors. Notice of resignation Sent by company to regulatory authority Statement of circumstances Sent by: (a) Auditors to regulatory authority (b) Company to everyone entitled to receive a copy of accounts
- 30. 2.3.1 Resignation of Auditors Convening of general meeting Auditors can require directors to call an extraordinary general meeting to discuss circumstances of resignation. Directors must send out notice for meeting within 21 days of having received requisition by auditors. Statement prior to general meeting Auditors may require company to circulate (different) statement of circumstances to everyone entitled to notice of meeting. Other rights of auditors Can receive all notices that relate to: (a) A general meeting at which their term of office would have expired (b) A general meeting where casual vacancy caused by their resignation is to be filled Can speak at these meetings on any matter which concerns them as auditors.
- 31. 2.3.2 Removal of Auditors Notice of removal Either special notice (28 days) with copy sent to auditor Or if elective resolution in place, written resolution to terminate auditors' appointment. Directors must convene a meeting within a reasonable period of time. Representations Auditors can make representations on why they ought to stay in office. They may require company to state in notice that representations have been made and send copy to members If resolution passed (a) Company must notify regulatory authority (b) Auditors must deposit statement of circumstances at company's registered office within 14 days of ceasing to hold office. Statement must be sent to regulatory authority Auditor rights Can receive notice of and speak at: (a) A general meeting at which their term of office would have expired (b) A general meeting where casual vacancy caused by their removal is to be filled
- 32. PROFESSIONAL ETHICS 3.1 Fundamental principles of professional ethics A professional accountant shall comply with the following fundamental principles: 3.1.1 Integrity A professional accountant should be straightforward and honest in performing professional services.
- 33. 3.1 Fundamental principles of professional ethics 3.1.2 Independence What is required in order to be, and be seen to be, independent? Independence of mind: Independence in appearance:
- 34. 3.1 Fundamental principles of professional ethics 3.1.2 Objectivity A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity. A professional accountant shall not perform a professional service if a circumstance or relationship biases or unduly influences the accountant’s professional judgment with respect to that service.
- 35. 3.1 Fundamental principles of professional ethics 3.1.3 Professional Competence and Due Care A professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill at a level required.
- 36. 3.1 Fundamental principles of professional ethics 3.1.4 Confidentiality A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose.
- 37. 3.1 Fundamental principles of professional ethics Circumstances where professional accountants may disclose Confidential Information: Disclosure is permitted by law and is authorized by the client or the employer; Disclosure is required by law; There is a professional duty or right to disclose, when not prohibited by law; or When disclosure is required for the public interest.
- 38. 3.1 Fundamental principles of professional ethics 3.1.5 Professional Behavior A professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession.
- 39. 3.2 Threats to Fundamental Ethical Principles 3.2.1 Self-interest Threat Self-interest threat is the threat that a financial or other interest will inappropriately influence the professional accountant's judgement or behavior.
- 41. 3.2 Threats to Fundamental Ethical Principles 3.2.2 Self-review threat Self-review threats arise when members review their own work or advice as part of an assurance engagement. Circumstances that may give rise to such threats include the following;
- 43. 3.2.3 Advocacy threat Advocacy threats arise in those situations where the audit firm promotes a position or opinion to the point that subsequent objectivity is compromised. Examples include commenting publicly on future events in particular circumstances or acting as an advocate on behalf of an audit client in litigation or disputes with third parties.
- 44. 3.2 Threats to Fundamental Ethical Principles 3.2.4 Familiarity threat Having an audit client for a long period of time may create a familiarity threat to independence. The severity of the threat depends on such factors as how long the individual has been on the audit team, how senior the person is, whether the client's management has changed and whether the client's accounting issues have changed in nature or complexity. 3.2.5 Intimidation threat An intimidation threat arises when members of the audit team may be deterred from acting objectively by threats, actual or perceived. These could arise from family and personal relationships, litigation, or close business relationships. These are also examples of self-interest threats, largely because intimidation may only arise significantly when the audit firm has something to lose.
- 45. 3.2 Threats to Fundamental Ethical Principles 3.2.6 Conflicts of interest In some ways, conflict of interest issues are similar to the difficulties firms have in maintaining independence. They can arise in a variety of circumstances and each problem has to be dealt with on its own merits. When considering whether to accept a client or when there is a change in a client's circumstances, audit firms must take reasonable steps to ascertain whether there is a conflict of interest or if there is likely to be one in the future.
Editor's Notes
- #17: True: factually correct information which conforms with accounting standards and relevant legislation, and agrees with the underlying records. Fair: clear, impartial and unbiased information which reflects the commercial substance of the transactions of the entity