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Auditors Have a Great Responsibility

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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 Lenders Company Managers

3 Auditing and Investor Risk
Presentation Outline The Nature of Auditing Auditing and Investor Risk Assurance Services

4 I. The Nature of Auditing
Auditing Defined The Distinction Between Accounting and Auditing Types of Audits Types of Auditors

5 A. Auditing Defined Auditor accumulates and evaluates evidence
to ascertain correspondence between the information established criteria and and communicates results to interested users

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 Audit Determine whether the auditee has complied with specific procedures, rules, or regulations set by some higher authority. Financial Statement Audit Determine 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 Auditors External 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 Debt Causes of Information Risk Ways of Reducing Information Risk

10 Risk-free rate – return on notes for the term of the business loan.
A. The Cost of Debt Auditing 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. Warning Thin 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 Services Other Assurance Services Non-Assurance Services

14 A. Assurance Services Decision 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 SERVICES ATTESTATION SERVICES Audits of historical financial statements 2. Effectiveness of internal control over financial reporting 3. Review of historical financial statements 4. 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
ATTESTATION SERVICES Audits Internal Controls Reviews Other OTHER ASSURANCE SERVICES Other 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 bookkeeping Taxes Management consulting

22 Summary The Audit Process Types of Audits and Auditors
Risk and the Need for Auditing Assurance and Attestation


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