Presentation on theme: "Auditors Have a Great Responsibility"— Presentation transcript:
1 Auditors Have a Great Responsibility Internal auditor Tariq Saleem found an unsupported entry for Rs500 million in computer acquisitions.Billions of Rupees in fees paid to telephone companies were recorded as capital assets turning a Rs662 million loss into a Rs2.4 billion profit.
2 The Demand for Audit and Other Assurance Services Company Owners and LendersCompany Managers
3 Auditing and Investor Risk Presentation OutlineThe Nature of AuditingAuditing and Investor RiskAssurance Services
4 I. The Nature of Auditing Auditing DefinedThe Distinction Between Accounting and AuditingTypes of AuditsTypes of Auditors
5 A. Auditing Defined Auditor accumulates and evaluates evidence to ascertain correspondence betweenthe informationestablishedcriteriaandand communicates resultsto interestedusers
6 B. The Distinction Between Accounting and Auditing Accounting is the recording, classifying, and summarizing of economic events for the purpose of providing financial information used in decision making.Auditing is determining whether recorded information properly reflects the economic events that occurred during the accounting period.
7 C. Types of Audits Operational Audit Involves evaluation of any part of an organization’s operating efficiency and effectiveness.Not limited to accounting areas.Compliance AuditDetermine whether the auditee has complied with specific procedures, rules, or regulations set by some higher authority.Financial Statement AuditDetermine whether overall financial statements are stated in accordance with specified criteria.Generally accepted accounting principles are normally the criteria, although other basis of accounting are at times used.
8 D. Types of AuditorsExternal or Independent Auditors – CAs are the only group permitted to provide financial statement audits. Such audits are required of all Public & Private traded companies.Internal auditors – Auditors who are employees of the companies they audit.
9 II. Auditing and Investor Risk The Cost of DebtCauses of Information RiskWays of Reducing Information Risk
10 Risk-free rate – return on notes for the term of the business loan. A. The Cost of DebtAuditing has no effect on either the risk-free rate or business risk, but it can have a significant effect on information risk!When a bank makes a loan, it will charge a rate of interest determined by primarily three factors:Risk-free rate – return on notes for the term of the business loan.Business risk for the customer – risk associated with a particular business that may result in it being unable to repay a loan.Information risk – Improper business risk decisions resulting from inaccurate information.
11 B. Causes of Information Risk Remoteness of information – information provided by others must be relied upon.Biases and motives of the provider – can result from honest optimism of intentional misstatement.Voluminous data – the amount of data grows with the organization. Important details can be lost.Complex exchange transactions – business transactions are becoming increasingly complex.WarningThin Ice!
12 C. Ways of Reducing Information Risk User verifies information – normally impractical for user to go to business and examine information.User shares information risk with management – although users may bring suit against management for supplying inaccurate information, it is often difficult to collect on losses.Provide audited financial statements – most feasible approach is to have an independent party check for completeness, accuracy, and removal of bias.
13 III. Assurance Services Attestation ServicesOther Assurance ServicesNon-Assurance Services
14 A. Assurance ServicesDecision makers seek assurance regarding the reliability information they use to make decisions.Assurance services are valued because the assurance provider is perceived as an independent and unbiased evaluator of information.Assurance services can be provided by CAs and a variety of other professionals.
15 B. Attestation Services Many other assurance services do not meet the criteria of attestation services: a CA who issues a report about the reliability of an assertion that is the responsibility of another party. There are four categories of attestation services.ASSURANCE SERVICESATTESTATIONSERVICESAudits of historical financial statements2. Effectiveness of internal control over financial reporting3. Review of historical financial statements4. Other attestation services
16 B1. Audits of Historical Financial Statements An audit of historical financial statements is a form of attestation in which the auditor issues a written report expressing an opinion about whether the financial statements are in material conformity with generally accepted accounting principles.Publicly traded companies in the Pakistan are required to have audits under the Rules of SECP
17 B2. Attestation on Internal Control over Financial Reporting Public companies to report management’s assessment of the effectiveness of internal controls over financial reporting.Auditors attest the effectiveness of internal control over financial reporting.
18 B3. Review of Historical Financial Statements Many nonpublic companies want to provide assurance on their financial statements without incurring the cost of an audit.In comparison to an audit, less evidence is necessary to support the level of assurance provided by a review.
19 B4. Other Attestation Services Other attestation services are natural extensions of financial statement engagements:Debtor compliance with loan agreement provisions.Forecasted financial statements.
20 C. Other Assurance Services ATTESTATIONSERVICESAuditsInternal ControlsReviewsOtherOTHERASSURANCESERVICESOther assurance services differ from those involving attestation in that:The CA is not required to issue a written report.The assurance does not have to be about the reliability of another party’s assertion about compliance with specified criteria.
21 D. Non-Assurance Services CAs also provide non-assurance services including:Accounting and bookkeepingTaxesManagement consulting
22 Summary The Audit Process Types of Audits and Auditors Risk and the Need for AuditingAssurance and Attestation