The Role Of The Public Accountant 2024 Fall Part 1.pdf

 This Lecture Will Cover The Following Points What Is the Objective Of Financial Statements. Who is responsible for Financial Statements? The existence of Conflict of interest Information Risk and how to reduce it? What Creates The Demand For Audits? The relationship between accounting...

 This Lecture Will Cover The Following Points What Is the Objective Of Financial Statements. Who is responsible for Financial Statements? The existence of Conflict of interest Information Risk and how to reduce it? What Creates The Demand For Audits? The relationship between accounting and auditing PREPARED BY DR AMANI HUSSEIN 2  What Is the Objective Of Financial Statements The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. PREPARED BY DR AMANI HUSSEIN 3  Who is responsible for Financial Statements? The company’s management is responsible for preparing and implementing the appropriate financial accounting and reporting systems and communicating reliable financial information to interested parties. Thus, the financial statements are assertions by management regarding the financial performance and financial condition of the company. PREPARED BY DR AMANI HUSSEIN 4  Who is responsible for Financial Statements? What is assertions? Assertions are part of the criteria management uses to record and disclose accounting information in financial statements. They are classified into five broad categories of assertions: Existence Or Occurrence Completeness Valuation Or Allocation Rights And Obligations Presentation And Disclosure PREPARED BY DR AMANI HUSSEIN 5  Who is responsible for Financial Statements? All recorded assets on the balance sheets Existence Or Occurrence exist Completeness Existing assets haven't been omitted Assets are valued in accordance with Valuation Or Allocation GAAP Rights And Obligations All assets are owned by the client. Assets are appropriately classified and Presentation And Disclosure disclosed PREPARED BY DR AMANI HUSSEIN 6  The existence of Conflict of interest All decision makers especially the external users of the financial information (e.g. investors , bankers, government) are relying upon information provided by others. In many of these situations, the goals of the providers of information may be different of those of the users of the information (i.e conflict of interest). DESIRES TO PRESENT THE RESULTS IN THE MOST FAVORABLE. SHAREHOLDER…. TRUE FINANCIAL POSITION RESULTS. PREPARED BY DR AMANI HUSSEIN 7 What Creates The Demand For Audits? Thus , the conflict of interest may lead to information risk. Information risk is the probability that the information circulated by a company will be false or misleading or misstated. Financial statement misstatements arise due to-- accidental errors lack of knowledge of accounting principles unintentional bias deliberate falsification (fraud) PREPARED BY DR AMANI HUSSEIN 8  What Creates The Demand For Audits? Examples that may lead to information risk When a borrower provides financial statements to a lender, there is considerable likelihood that the borrower will bias the statements to increase the chance of obtaining a loan. The misstatement could be incorrect dollar amounts or inadequate or incomplete disclosures of information. Owners (Shareholders) divorced from management Directors not involved in day-to-day operations or decisions Possibly millions of transactions processed daily via sophisticated computerized systems PREPARED BY DR AMANI HUSSEIN 9  What Creates The Demand For Audits? The objective of the audit is to support users of accounting information and financial reporting in determining the quality of information being received. Theaudit function should add to the credibility of information because the user of the information needs to have confidence in it when making decisions. However, audits do not directly address business risk, the risk that a company will not be able to meet its financial obligations due to economic conditions or poor management decisions. PREPARED BY DR AMANI HUSSEIN 10 The relationship between accounting and auditing Accounting process involve identifying, measuring and recording the transactions that affect the entity. Theresult of this process is the preparation and distribution of financial statements that are in conformity with generally accepted accounting principles (GAAP). The ultimate objective of accounting is the communication of relevant and reliable financial data that will be useful for decision making. PREPARED BY DR AMANI HUSSEIN 11  The relationship between accounting and auditing Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions (financial statements including footnotes) about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria (GAAP) and communicating the results (audit report) to interested users(such as creditor &investors). PREPARED BY DR AMANI HUSSEIN 12  The relationship between accounting and auditing Auditors are responsible for planning and performing an audit to obtain reasonable assurance that the financial statements are free of material misstatement. The concept of reasonable assurance, however, does not guarantee the accuracy of the financial statements. The concept of reasonable assurance implies that audits involve tests. auditors rarely examine 100 percent of the items in an account or transactions class. PREPARED BY DR AMANI HUSSEIN 13  Accounting main Steps Auditing main Steps Measure and record transaction data Planning the Audit Classify and summarize Performing the Audit recorded data Procedures Prepare financial Obtain reasonable assurance statements based on Conformity with about financial statements GAAP GAAP Distribute financial statements to Audit Report stockholders PREPARED BY DR AMANI HUSSEIN 14  ACCOUNTING AUDITING Guided by GAAP Guided by GAAS Responsibility of Management Responsibility of Auditor Measure and record transaction data Perform audit procedure Classify and summarize recorded data Obtain and evaluate evidence Prepare financial statements based on GAAP Obtain reasonable assurance that financial statements are presented fairly in conformity with GAAP Distribute financial statements and auditor’s report to Express opinion through auditor’s shareholders in annual report report a PREPARED BY Accounting and auditing require the application DR AMANI HUSSEIN of significant professional judgment 15 PREPARED BY DR AMANI HUSSEIN 16 The criteria for evaluating information. (GAAP) Evidence to determine whether the information being audited is stated in accordance with the established criteria PREPARED BY DR AMANI HUSSEIN 17  Evidence Balance sheet. All included assets and obligations exist. Includes all assets and obligations. Assets and obligations are properly valued. Income statement. Sales actually occurred. Sales have been recorded at appropriate amounts. Recorded costs and expenses are applicable to period. All expenses have been recognized Financial statement amounts. Accurate, properly classified and summarized. Notes are informative and complete. PREPARED BY DR AMANI HUSSEIN 18  Types Of Services Assurance services--the broad range of information enhancement services that are provided by certified public accountants (CPAs). It is independent professional service that improves the information quality (reliability and relevance) for decision makers. PREPARED BY DR AMANI HUSSEIN 19  Types Of Services Elements of an assurance engagement There are five elements of an assurance engagement: 1) Three party involvement  Practitioner – the reviewer of the subject matter who provides the assurance.  Intended users – the people using the subject matter to make economic decisions.  Responsible party – the party responsible for preparing the subject matter. 2 )Appropriate subject matter The information subject to examination by the practitioner. PREPARED BY DR AMANI HUSSEIN 20  Types Of Services 3 suitable criteria The criteria against which the subject matter is evaluated, i.e. standards, guidance, laws and regulations. 4 sufficient appropriate evidence Sufficient appropriate evidence is needed to provide a basis for the opinion/conclusion 5.written assurance report in an appropriate form The output of the assurance engagement expressing a conclusion/opinion about the subject matter PREPARED BY DR AMANI HUSSEIN 21  Types Of Services Element In relation to an audit Three party involvement Practitioner Auditor Intended user Shareholders Responsible party Directors Appropriate subject matter Financial statements Suitable criteria Financial reporting framework Sufficient appropriate evidence Obtained by performing audit procedures such as tests of controls, tests of detail and analytical procedures Written assurance report in an Independent auditor’s report providing an opinion as to whether appropriate form the financial statements give a true and fair view 22  To sum up The role of auditing is to verify the overall fairness of the financial statements presented and to judge its reliability. The auditor must be : Qualified Competent. Independent in mental attitude (in fact)and appearance. PREPARED BY DR AMANI HUSSEIN 23  Review-True/False An independent audit of a small business by a CPA firm usually results in an unconditional guarantee of the accuracy of the financial statements. False The economic interests of the providers of financial information and the users of the information are the same, and this common interest creates the demand for an annual independent audit. False Auditing is frequently only a small part of the practice of local CPA firms. True PREPARED BY DR AMANI HUSSEIN 24  Review Multiple Choice The risk that a company’s financial statements will materially depart from generally accepted accounting principles is referred to as: Business risk. Information risk.  detection risk. document risk. The risk that a company will not be able to meet its commitments is referred to as: Risk of collapse. Inherent risk. Business risk.  Information risk. PREPARED BY DR AMANI HUSSEIN 25 Which of the following best describes the reason why independent auditors report on financial statements? a management fraud may exist and it is more likely to be detected by independent auditors. an audit provides credibility to the financial statements.  a misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work. poorly designed internal control may be in existence. PREPARED BY DR AMANI HUSSEIN 26