Audit & Assurance Lecture Notes 2024 PDF

Audit & Assurance Lecture 2 Key Syllabus areas 1) Audit framework and regulation 2) Planning and risk assessment. 3) Internal control. 4) Audit evidence. 5) Review and reporting. What is an assurance assignment? An assurance engagement is one in which a practitioner expresses a conclusi...

Audit & Assurance Lecture 2 Key Syllabus areas 1) Audit framework and regulation 2) Planning and risk assessment. 3) Internal control. 4) Audit evidence. 5) Review and reporting. What is an assurance assignment? 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 Key elements include: ⮚ 3rd party involvement ⮚ Subject matter ⮚ Suitable criteria ⮚ Sufficient appropriate evidence ⮚ Written assurance report What is an Assurance Assignment? Eg Buying a house Practitioner = Surveyor Intended user = Buyer Responsible party = Seller Subject matter = House Suitable criteria = Buildings regulations/Best practice Sufficient evidence = Physical inspection Written assurance report = Surveyors report Levels of Assurance Limited Assurance eg Assurance assignment to review a forecast ⮚ Moderate/Low levels of assurance ⮚ Conclusion is expressed negatively “Nothing has come to our attention which causes us to believe these assumptions do not provide a reasonable basis for…..” Reasonable Assurance – eg Audit of the Financial statements ⮚ High but not absolute assurance ⮚ Opinion expressed positively “In our opinion the financial statements give a true and fair view Reasonable assurance v Limited Assurance ⮚ More regulations and standards ⮚ Procedures would be more thorough ⮚ Evidence will need to be of a higher quality Examples of assurance engagements 1) Audit of financial statements 2) Review of a forecast/business plan 3) Review of internal controls 4) Fraud investigation 5) Due diligence 6) Environmental audit External Audit A common type of assurance engagement is the audit of a company’s financial statements. In the UK, audits are governed by: 1) Companies Act 2006 2) International Standards on Auditing (ISAs). External Audit ISA 200 Overall objectives of an independent auditor ⮚ Obtain reasonable assurance as to whether the financial statements as a whole are free from material misstatement ⮚ Express an opinion as to whether the financial statements are prepared in accordance with the financial reporting framework ⮚ To report on the auditors findings Why do we have an audit? ⮚ Shareholders are often not involved in the day to day running of the business, management therefore need to give an account of their stewardship ⮚ Directors prepare the accounts and have an incentive to manipulate the financial statements ⮚ Auditors provide an external verification External Audit In order to comply with these requirements, the auditor must: 1) Comply with relevant ethical requirements 2) Plan and perform the audit with professional scepticism 3) Exercise professional judgement 4) Obtain audit evidence that is sufficient and appropriate on which to base their opinion External Audit Professional scepticism An attitude that includes a questioning mind, being alert to conditions, which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence Professional judgement The application of relevant training, knowledge and experience in making informed decisions about the courses of actions that are appropriate in the circumstances of the audit. External Audit Benefits of an audit ⮚ Higher quality information giving investors confidence ⮚ Independent scrutiny may help management ⮚ Reduce the risk of management bias, fraud and error ⮚ Enhances the credibility of the financial statements for other stakeholders ⮚ Deficiencies in the internal control system may be highlighted Limitations of an audit ⮚ Financial statements include subjective estimates and judgement ⮚ Internal controls may be relied upon by the auditors ⮚ Representations from management are not always reliable ⮚ Evidence is not always conclusive ⮚ Do not test all transactions, only samples Expectations gap ⮚ Belief that auditors test all transactions ⮚ Belief auditors will detect all fraud ⮚ Belief auditors prepare the financial statements ⮚ Belief that a clean audit opinion guarantees the company is a going concern ⮚ Belief that the statement of financial position shows the true value of a company Audit – Legal Requirements Who can carry out an audit ⮚ A member of a recognised supervisory body eg ICAEW or ACCA and allowed to do so by that body 1) To sign off audit reports an individual must also hold a practising certificate and an audit qualification 2) The practice must hold an audit registration ⮚ Someone authorised by the state Audit – Legal Requirements Who can’t carry out an audit by law ⮚ Anyone that manages or works for the company ⮚ Anyone that has a business or personal connection to the company Code of Ethics requires auditors to be ⮚ Independent ⮚ Competent ⮚ Keep all information gained on an audit confidential Appointment & removal of auditors ⮚ Shareholders, directors (with member approval) or the Secretary of state can appoint auditors ⮚ Auditors can be removed by a simple majority vote at a general company meeting ⮚ Auditors can resign by giving written notice and a statement of circumstances ⮚ However, if auditors are removed a statement of circumstances must be provided to members and the regulatory authorities Rights of an auditor ⮚ Access the company’s books and records ⮚ Receive explanations and information needed ⮚ Receive notification and attend any general meetings of members ⮚ To be heard at such meetings on relevant matters ⮚ Receive copies of written resolutions ⮚ Request a general meeting to discuss circumstances of removal/resignation ⮚ Require the company to circulate circumstances of removal/resignation Duties of an Auditor ⮚ An external auditor has a duty to audit the financial statements and provide an opinion on whether they give a true and fair view ⮚ Local national law may also require confirmation that the financial statements have been prepared in accordance with local laws Professional Standards ⮚ The International Federation of Accountants (IFAC) promotes international regulation of the accountancy profession ⮚ One of the subsidiary boards of IFAC is the International Audit and Assurance Standards Board (IAASB) ⮚ They develop and promote International standards on Auditing (ISAs) ⮚ ISAs provide guidance to auditors, not legal requirements, for the audit of the financial statements, any departure from ISAs should be justified Professional Standards ⮚ Different countries can set their own auditing standards or modify ISAs to suit national needs ⮚ If there is a conflict between ISAs and local standards, local regulations will apply The role of professional bodies ⮚ Promote quality within the profession through the provision of - Rigorous qualifications - Support to members - Giving technical expertise to governments on accounting and business Role of the Profession ⮚ To obtain membership - Complete exams - Demonstrate at least 3 years practical experience - Complete an ethical assessment ⮚ To maintain membership - Demonstrate continuing CPD - Comply with the code of ethics ⮚ Professional bodies can take disciplinary action including fines, reprimands and withdrawal of membership What is Corporate governance? It is the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with all its stakeholders (financiers, customers, management, employees, government, and the community Aim of Good Corporate Governance To ensure that companies are run well and in the interests of their shareholders, employees and other stakeholders, such as the wider community It also reduces the risk that Directors will abuse their powers Auditing Financial Statements https://www.pwc.com/im/en/services/Assurance/pwc-understanding-financ ial-statement-audit.pdf https://investor.ryanair.com/wp-content/uploads/2024/06/Ryanair-2024-An nual-Report.pdf Review the Ryanair Accounts in pairs – What observations can you make:- Financial Non Financial Other