Auditing and Assurance Principles

• Audit is an independent review of a company's financial statements ensuring honesty and lack of bias.
• Auditors must have reasonable assurance that financial statements are free from material misstatements.
• Assurance is a degree of confidence when reviewing a subject matter.
• Examples of assurance include audits, business plans and cashflows, management performance reviews, reports, and internal control reports.

Levels of Assurance

• Absolute assurance aims to give a 100% guarantee.
• Auditors cannot give a 100% guarantee due to limitations like sampling.
• Reasonable assurance provides a high level of assurance, such as in an audit of financial statements.
• Limited assurance provides a moderate level of assurance, like a review of cashflow forecast.

The Elements

• Criteria: Accounting and auditing standards.
• Report: The auditor's report.
• Evidence: Audit procedures performed.
• Subject matter: Financial statements.
• Three party relationship: Shareholders, directors, and auditor.

Benefits

• Independent opinions enhance information credibility.
• Audits deter fraud and management bias.
• They encourage proper work and help identify areas for improvement.

Expressions of Assurance

• Reasonable assurance offers a positive expression, stating financial statements give a true and fair view.
• Limited assurance gives a negative expression, indicating that nothing suggests a true and fair view is not given.

Audit Regulatory Environment

• Management must keep accounting records and prepare financial statements.
• They implement internal controls to prevent and detect fraud and errors.
• Auditors are responsible for reviewing financial statements by collecting evidence.
• Auditors obtain evidence that financial statements are free from material error.

Audit Regulations

• The Companies Act (1995) covers auditor appointments, removals, resignations, rights, and duties.
• International Standards on Auditing (IAASB) ensures quality and comparable audits.

Auditor Rights

• Auditors can access company accounting records and documents at all times.
• Auditors can request necessary information and explanations.
• Auditors can attend and speak at shareholder meetings.

Auditor Duties

• Auditors report on whether financial statements show a true and fair view.
• Auditors consider material inconsistencies between other information and knowledge gained during the audit.
• Auditors express an opinion on whether the directors' report has required legal compliance and material accuracy.
• An auditor must report to company shareholders if proper accounting records have not been maintained.
• Reporting is required if adequate returns have not been received from branches that they did not visit.
• This is additionally required if financial statements disagree with accounting records and returns.
• This occurs when the auditor does not get all the necessary data.
• Reporting is needed if certain legally required disclosures of directors’ remuneration are absent in statements.

Internal vs External Auditing

Types of Internal Audits

• IT Audit: Assesses a company’s IT environment and infrastructure.
• Compliance Audits: Review whether laws and regulations are being followed.
• Fraud Investigations: Investigating suspected fraud or testing internal controls for prevention and detection.
• Customer Experience Audits: Assess customer service levels by visiting stores and posing as customers.
• Value of money audits: Determine whether the best combination of goods/services has been obtained for the lowest level for resources.