The nature and issues of audit Lecture 1 The nature and issues of audit

Lecture 1 The nature and issues of audit Auditing 1 Lecture 1 The nature and issues of audit

History of audit THE ANCIENT AUDITOR Independent arbitrator appointed by interested parties for accounts to be heard by him and he in turn gives an opinion by oral report. Audire ( Latin word) – meaning to hear

Agency theory Shareholders (Principals) as owners invest in companies and appoint Directors (primary agents). Shareholders appoint auditors (secondary agents) who provide report about directors’ stewardship to them.

Audit in perspective What? – independent examination of F/S Why? – to give/express objective opinion as to the true and fairness of the F/S in conformity with GAAP. When? – after the mgmt has prepared the F/S. Who? – independent and expert external auditor Where? – report audit findings in audit report. How? – by performing audit as per GAAS Note: Mgt is to F/S per GAAP Auditor is to audit report per GAAS

Definition of audit Definition by the “Auditing standards and Guidelines” of the Auditing Practices Committee (now Board) Definition; “An independent examination of, and expression of opinion on the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with the relevant statutory obligation”.

Definition of audit An Audit is an exercise which objective is to enable auditors to express an opinion whether the financial statements give a true and fair view of the entity’s affairs at the period end and of its profit and loss for the period then ended, and have been properly prepared in accordance with the applicable reporting framework.

Definition of audit An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment including the assessment of the risk of material misstatements of the financial statement whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statement.

Objectives of an audit IAASB issue in Jan 2007 has no definition audit in glossary but states objectives as; “Audit of FS is to enable the auditor to express an opinion whether the FS as prepared show true and fair view in all material respects and in accordance with applicable financial reporting framework. An audit of FS is an assurance engagement IAASB develops International Standard on Auditing (ISA’s)

Objectives of an audit Primary Objective The primary objective of an audit is to enable the auditor to form and express an independent opinion on the financial statements.

Objectives of an audit Subsidiary/Secondary Objectives To detect errors and fraud. To prevent errors and fraud by the deterrent and moral effect of the audit and also by assisting clients to institute improved financial control system. To assist client with accounting systems, taxation, financial and other problems.

Independent Examination Auditor should be independent in mind and appearance ( fact or mental attitude) Professional code of ethics discusses this

Expression of opinion Auditors opinion enhances the credibility of FS by providing high, but not absolute level of assurance (guarantee) Absolute opinion is not attainable because need for judgment (bias) Lack of precision Use of testing which may not be 100% tested Inherent limitations and internal control systems Evidence is persuasive but not conclusive

Financial statement The main 5 FS Other documents; Director’s Report Corporate Governance statements Operating and financial reviews Five-year trend information Chairman’s statement Value added statement Corporate Social responsibility statement

The appointed auditor The auditor should have authority vested in him or her to be able to perform his duties. Such authority is gained by being appointed under a contract to be able to enjoy the rights and powers bestowed under the Companies Act. To be eligible for appointment in Ghana, one must be a member of ICA (Gh)

Compliance with relevant statutory obligations Auditors duty is governed by statute (GAAS). Companies Act in Ghana and other international/relevant standards and guidelines.

Evidence Evidence should be both Sufficient and appropriate to draw conclusions. Question Discuss how the sufficiency and appropriateness of the audit evidence can be mutually reconciled to be able to draw relevant conclusions.

Detection of fraud and error This is the Primary responsibility of the management Auditor should however consider likelihood of fraud in the conduct of an audit

Audit – related services To provide reasonable and limited levels of assurance

True and Fair view Auditor is required to report whether the F/S show a true and fair view or otherwise True information is not false but factual and conform with reality. Practically the information conforms with required standards and law. Fair information is free from discrimination and bias and is in compliance with acceptable standards and rules. Practically the accounts should reflect the commercial substance of the company’s underlying transactions.

Responsibilities of auditor Primary responsibilities of Auditing. That accounts have been prepared in accordance with regulation Accounts are in agreement with accounting records Proper records have been kept Balance Sheet and Income Statement show a true and fair view show state of affairs and results for the period (True and Fair view / or present fairly in all material respects)

Responsibilities of auditor Secondary responsibilities of the auditor Preventing of errors and fraud Exercise reasonable care and skill ( there should be no preconceived idea that accounts contain frauds and errors Adhere to objective and general principles of audit.

Education/training & proficiency To belong to a Professional accountancy body Obtain years of practical experience Become a member under strict supervision Continuing Professional Development Code of ethics for professional accountancy – IFACs

Advantages of an audit The sale of business as a going concern is facilitated. It enables the auditor to give constructive advice to management on improving the efficiency of the business. Give assurance that statutory responsibilities concerning the accounts have been carried out e.g. assurance that all directors’ emoluments have been disclosed. The auditor may detect errors and fraud during his audit. Settlement of accounts on the death or retirement of a partner is facilitated when audited accounts forms the basis.

Advantages of an audit It enhances application for fund from third parties. Gives assurance that the directors have fulfilled their statutory obligation in keeping proper books of accounts and safeguarding the assets of the enterprise. Disputes between management may be easily settled. Give assurance that the accounts show a true and fair view or otherwise and that it complies with statutory requirements. Sleeping partners and shareholders who have little or no means of checking the books obtain a fair idea of the performance of the directors and of the business.

Advantages of an Audit (Specific) As far as the company’s directors are concerned, the audit gives: Assurance that statutory responsibilities concerning financial statements have been carried out. Assistance with statutory responsibilities concerning the accounts. Availability of expert professional advice – that is, the suggestions which the Auditor is sometimes able to make with regard to the improvement of the accounting system is of great importance to the directors and the company as a whole.

Advantages of an Audit (Specific) As far as the company’s shareholders are concerned it gives: Assurance that the financial statements show a true and fair view and complied with statutory requirement. Assurance that the directors have fulfilled their statutory responsibilities for the books and accounts and the safeguarding of assets. Assurance that all directors’ remuneration has been disclosed.

Advantages of an Audit (Specific) Audited accounts is also important to partnership firm in that: It affords a convenient means of settling accounts between the partners themselves and so avoiding the possibility of future dispute. The Auditor can give advice to the management on how to improve the efficiency of the business.