Audit _Chapter 1.ppt
- 1. AMIRUS SALAT Professor Department of Accounting & Information Systems University of Dhaka Audit and Assurance
- 2. Why Audit and Tax ?
- 3. Enron & Arther Anderson • Enron scandal, series of events that resulted in the bankruptcy of the U.S. energy, commodities, and services company Enron Corporation and the dissolution of Arthur Andersen LLP, which had been one of the largest auditing and accounting companies in the world. The collapse of Enron, which held more than $60 billion in assets, involved one of the biggest bankruptcy filings in the history of the United States, and it generated much debate as well as legislation designed to improve accounting standards and practices, with long-lasting repercussions in the financial world.
- 4. Economic Demand for Auditing: Need for Auditing a) Agency Conflict b) Relevance and Reliability of information c) Lower cost of capital and access to capital market d) Fraud and irregularities etc. Fund: Equity Fund-Shareholders’ fund-Cost of equity Debt Fund- Bank, Bond, other debt-Cost of debt =Cost of capital Agency Relationship 1. Shareholder vs Manager (Top executives) 2. Debtholder vs Shareholder through manager 4
- 5. Concept and Nature of Auditing “Auditing means the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be done by a competent and independent person.” Nature of Auditing: • Evidence accumulation and evaluation • About provided information • Determine the degree of correspondence • Between information and established criteria • Provide opinion • Done be competent and independent person 5
- 6. Concept and Nature of Auditing Con--d Now define the audit of historical financial statements: • Provided information= draft financial statements provided by the Mgt. • Evidence= Source documents, bills and vouchers, books and records etc. • Established criteria= Reporting framework i.e International Financial Reporting Standards • To assess the true and fair view between provided information and IFRS/IAS • To provide an opinion • By a chartered accountants (Chartered accountants firms) 6
- 7. Objective of Audit •Primary Objective •Secondary Objective “Auditor is a watch dog not a blood haunts”. 7
- 8. Objective of an audit Primary Objective of Audit: Expression of opinion The objective of an audit of F/Ss is to enable to the auditor to express an opinion whether the F/Ss are prepared, in all material respects, in accordance with an identified financial reporting framework. The phrases used to express the auditor’s opinion are “give a true and fair view” or “present fairly, in all material respects,” which are equivalent terms. -(BSA 200) 8
- 9. Objective of an audit Secondary Objective of Audit: Prevention and detection of material misstatements in the financial statements, which are referred to frauds and errors; and communication of weaknesses in the accounting and internal control systems. 9
- 10. Auditors, Client, and External Users Relationship 1 0 Auditor Client External Users Client or audit committee hires auditor Auditor issues report relied upon by users to reduce information risk Provides capital Client provides financial statements to users
- 11. Services provided by CA/CPA ⬥ Assurance service ⬥ Non-assurance service ⬥ Attestation service 1 1
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- 13. Assurance An assurance engagement is one in which a practitioner expresses 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. 1 3
- 14. Key elements of Assurance Engagement 1. Three party involvement ⬦ Practitioner ⬦ Responsible party ⬦ Intended users 2. Subject matter 3. Relevant criteria 4. Evidence 5. Written Report 1 4
- 15. How Audit is an Assurance Engagement? 1. Three party involvement ⬦ Practitioner ⬦ Responsible party ⬦ Intended users 2. Subject matter 3. Relevant criteria 4. Evidence 5. Written Report 1 5 1. Three party involvement ⬦ Auditor ⬦ Management ⬦ Shareholders/creditors 2. Financial Statements 3. IFRS, Companies Act, 4. Accounting records and others 5. Audit Report
- 16. Level of Assurance ⬥ Absolute Assurance 100% assurance/guarantee about something. Quite impossible ! ⬥ Reasonable Assurance High level of assurance with positive expression of opinion i.e. Audit. “In our opinion the financial statements present fairly in all material respect” ⬥ Limited Assurance Moderate level of assurance with negative expression of opinion i.e. review, “Nothing has come to our attention that indicates material misstatements in the financial statements”. ⬥ No Assurance No Assurance provided e.g. non-attestation service. 1 6
- 17. Why Absolute Assurance is impossible? ⬥ Nature of financial reporting ⬥ Nature of audit procedure ⬥ Time constraint ⬥ Cost – benefit analysis 1 7
- 18. Responsibilities of management ⬥ Managing the business to achieve company’s objective ⬥ Assessing the business risk and managing the risk ⬥ Safeguarding the company’s assets ⬥ Keeping proper accounting records ⬥ Preparing the financial statements and delivering it to the registrar of JSC ⬥ Ensuring the company compliance with applicable laws and regulation 1 8
- 19. Responsibilities of Auditor ⬥ Conducting audit in accordance with BSA ⬥ Obtaining reasonable assurance that the financial statements are free from material misstatement whether due to fraud or error ⬥ Proving appropriate opinion 1 9
- 20. 20 Who is responsible for the prevention and detection of fraud? - Management; not Auditor ! - “An Auditor is a watchdog, not a bloodhound” Gatekeeper Detective
- 21. Case Study
- 22. 22 SP Ltd was established in June 20x0 to produce medicine. The shares are owned equally by two executives and two non-executive directors. The company’s revenue increased steadily over the first two years of trading. The results for the first year of trading indicated an operating profit margin of 15% and the management accounts for the second year of trading indicate that this has increased to 18%. The directors are currently negotiating a contract worth TK 600,000 to supply a major retailer which has over 100 outlets throughout the country. The company will require an increased overdraft facility to fulfill the order. The finance director has prepared a business plan for submission to the company’s bankers in support of a request for a large overdraft facility. The plan includes details of the company’s products, management, markets, methods of operation and financial information. The financial information includes profit and cash flow forecasts for the six months ending 31 December 20x2 together with details of the assumptions on which the forecasts are based and the accounting policies used in compiling the profit forecast. The company’s bankers require this financial information to be reviewed and reported on by independent accountants. The company was required by its bankers to have an audit of its F/Ss for the year ended 30 June 20x1. Requirement: What are benefits of audit for the company?
- 23. 23 How audit ensures accountability? 2. Users Subject Matter 1. Preparer Accounting Reports ACCOUNTABILITY AUDIT 3. Auditors Auditor’s Reports Regulatory Framework Evidence Assertions Evidence Criteria
- 24. Types of Audit Based on Legal Requirement ⬥ Statutory Audit ⬥ Non-statutory Audit 2 4 Based on Auditors type ⬥ Internal Audit ⬥ External/Independent Audit Based on Subject matter ⬥ Operational Audit ⬥ Compliance Audit ⬥ Financial Statement Audit Based on time Period ⬥ Interim Audit ⬥ Continuous Audit ⬥ Annual Audit
- 25. Internal Audit VS External Audit BASIS INTERNAL AUDIT EXTERNAL AUDIT Meaning Internal Audit refers to an ongoing audit function performed within an organization by a separate internal auditing department. External Audit is an audit function performed by the independent body which is not a part of the organization. Objective To review the routine activities and provide suggestion for the improvement. To analyze and verify the financial statement of the company. Conducted by Employees Third Party Auditor is appointed by Management Members/Shareholders Users of Report Management Stakeholders Opinion Opinion is provided on the effectiveness of the operational activities of the organization. Opinion is provided on the truthfulness and fairness of the financial statement of the company. Scope Decided by the management of the entity. Decided by the statute. Obligation No, it is voluntary Yes, according to Companies Act, 1994 Period Continuous Process Once in a year Checks Operational Efficiency Accuracy and Validity of Financial Statement
- 26. Accounting VS Auditing 2 6 Auditing is determining whether recorded information properly reflects the economic events That occurred during the accounting period. Accounting is the recording, classifying, and summarizing of economic events for the purpose of providing financial information used in decision making.
- 27. A professional degree is one that prepares individuals for the practical aspects of a particular career. Professional degree is awarded by the Professional Body. Various professional degrees in accounting includes mainly- • Chartered Accountants (CA) • Cost and Management Accountants (CMA) • Association of Chartered Certified Accountants (ACCA) • Chartered Financial Analyst (CFA) • Certified Internal Auditor (CIA) • Certified Public Accountants (CPA) • Certified Information Systems Auditor (CISA) 27 Professional Degree in Accounting
- 28. 28 The CA qualification: 3 years Article ship and Course