Week 1 - Lecture 1 - Audit Practice Procedures PDF

AUDIT PRACTICE AND PROCEDURES II The Audit Function; History, Importance and Dynamics Week One  The Auditor General’s Department The Department was first established in 1829 as a part time office. It was not until 1851 under section 2 Ca...

AUDIT PRACTICE AND PROCEDURES II The Audit Function; History, Importance and Dynamics Week One  The Auditor General’s Department The Department was first established in 1829 as a part time office. It was not until 1851 under section 2 Cap 53 of Law, that the independent office of Auditor General was established. Current Auditor General Pamela Monroe Ellis, FCCA, FCA, CISA, 2008 – Present NB: There were twelve Auditor General’s before her.  Duties and Responsibility of the Auditor General The duties and responsibilities of the Auditor General are as stated in the Jamaican Constitution and the Financial Administration and Audit Act. Accordingly, the Auditor General is responsible for assessing the effectiveness of the management of the Government of Jamaica’s financial management systems and the level of compliance with financial management policies and guidelines. Section 25(1) provides that the Auditor General shall, in performing his/her functions under section 122 (1) of the Constitution ascertain whether in his/her opinion: The accounts referred to in that section are being faithfully and properly kept; The rules and procedures framed and applied are sufficient to secure an effective check on the assessment, collection and proper allocation of the revenue and other receipts of the Government; All money expended and charged to an appropriation account has been applied to the purpose for which the provision made by Parliament was intended and that any payment of public money conforms to the authority which governs it, and has been incurred with due regard to the avoidance of waste and extravagance. Essential records are maintained and the rules and procedures framed and applied are sufficient to safeguard control of Government property; The provision of this or any other enactment relating to the administration of public money and Government property have been complied with; Satisfactory procedures have been established to measure and report on the effectiveness of programmes and services. Section 25(1) provides that the Auditor General shall, in performing his/her functions under section 122 (1) of the Constitution ascertain whether in his/her opinion: Such other functions in relation to the accounts of the Government of Jamaica and the accounts of other public authorities and other bodies administering public funds in Jamaica as may be prescribed by or under any law for the time being in force in Jamaica; or Such other functions in relation to the supervision and control of expenditure from public funds in Jamaica as may be so prescribed; or Such other functions in relation to the accounts of any other government as he/she may be empowered to perform by any authority competent in that behalf. The FAA Act requires that upon presentation of the annual Estimates of Revenue and Expenditure, the Minister of Finance shall present the Houses of Parliament with a Fiscal Policy Paper that details the macroeconomic framework, the fiscal responsibility statement and the fiscal management strategy. The Auditor General is required under the FAA Act to examine the components of the FPP and provide a report to the Houses of Parliament within 2 weeks after the Fiscal Policy (FPP) is laid before the House in February of each year, stating whether: There are any public bodies that do not form part of the specified public sector which in the preceding financial year formed part of the specified public sector. The justifications provided by the Ministry of Finance and Planning in respect of deviations of the fiscal outcome from the targets of the previous fiscal year, are reasonable; The conventions and assumptions underlying the preparation of the FPP comply with prudent financial principles. There are any public bodies that are deemed of a commercial nature and should not be included in the specified public sector. Section 20 – 24 of the FAA Act allows the Auditor General to recommend to the Financial Secretary that a surcharge be laid against an Officer who is, was or had: Failed to collect monies owing to the Government a responsibility for which the individual had been given; Responsible for any improper payment of public monies or for any payment which was not duly vouched; Responsible for any deficiency in, or for, the loss or destruction of, any public monies, stamps, securities, stores of other Government property. This surcharge is intended to allow the Government to  Definition of Auditing “Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be done by a competent, The word “audit” comes from the Latin word audire, meaning “to hear”. According to Flint (1988), audit is a social phenomenon which serves no purpose or value except of its practical usefulness and its existence is wholly utilitarian. Flint (1988) further explains, the audit function has evolved in response to a perceived need of individuals or groups in society who seek information or reassurance about the conduct or performance of others in which they have an acknowledged and legitimate interest. Flint (1998) argues that audit exists because interested individuals or groups are unable for one or more reasons to obtain for themselves the information or reassurance they require. Hence, an audit function can be observed as a means of social control because it serves as a mechanism to monitor conduct and performance, and to secure or enforce accountability. Mackenzie (as cited in Normanton, 1996, p. vii) in the foreword to The Accountability and Audit of Governments made the following remark: “Without audit, no control; and if there is no control, where is the seat of power?” All in all, an audit function plays a What is the Audit Function?  What is the Audit Function? In order to gain an understanding of the audit function the following should be noted: Execution of an audit. A full grasp the audit process. Internal Audit External Audit  What is the Audit Function? 1.Provides objective insight 2.Improves efficiency of operations 3.Evaluates risks and protects assets 4.Assesses organizational controls 5.Ensures legal compliance  Internal Audit Functions vs External Audit Functions Internal auditors are those auditors who are employed by and work within a particular organization. On the other hand, the external auditors are those independent firms hired by the company to execute, for example, their year-end audit. That word “independent” is what distinguishes the external auditor from the internal auditor. This is not to say that the internal auditor is not essential to an organization; in fact, quite the opposite as a company with an established internal auditing sends a message of According to the Institute strong corporate of Internal Auditors (IIA), “internal governance. auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.” The purpose of internal audit is to help businesses meet strategic objectives, detect fraud, and improve operations. Internal auditors also ensure that corporate governance is functioning correctly. They may also be called upon to review the budgeting process for special projects, or to review internal The scope of their work is directed by management, but they maintain objectivity and independence by reporting to the audit committee or the board. Their audit reports are shared with the senior management of the area of their examination. These reports point out ways that internal controls can be optimized and ideas for streamlining operations. Internal audit is generally performed on a continuous basis. Their audit work takes a holistic view of the organization’s financial and non-financial metrics for overall risk management. They ensure that a company’s business practices help it meet its strategic goals. Their focus is both forward and backward: they verify that financial transactions are recorded correctly in a company’s information systems while also looking ahead to ensure the company’s long-term strength. The job of the internal auditor is to identify risks and weak points within the company’s processes and systems and to find errors before they can cause too much damage. For example, companies put internal controls in place to reduce the risk of errors and improve fraud prevention and detection. One goal of the internal audit process is to identify any weakness in the internal controls that could increase risks for the company. This serves both to protect the company from these issues and to ensure there are no red flags when an external auditor makes similar checks. One of the key differences between internal and external auditor is that internal auditors are employees of the company working to serve the company’s goals. External auditors tend to be public accountants working as independent auditors to assess a In summary, company’s internal internal audit helps control to improve systems companies and accounting from the practices. inside, while external audit ensures that what they present to the outside world reflects what really happened. Both types of audit keep the engine of our economy running efficiently and accurately.  External Auditor Functions The purpose of external audit is to provide assurance to investors, lenders, and other stakeholders that a company’s issued financial statements present the organization’s results in a materially correct and fair manner. In the U.K., this is known as presenting a “true and fair view.” This assurance is provided by verifying that a company is reporting its financial results in accordance with the relevant accounting standards. In the U.S., that means generally accepted accounting principles or GAAP. Besides performing audits of financial statements, auditing services may also include verification that an organization is in compliance with specific regulations or laws. While the scope of an audit is determined by the purpose, external auditors design their audit work programs according to their assessment of risk within the organization. Unlike internal auditors, external auditors perform the bulk of their work at the end of the year, looking backwards to verify that an  External Auditor Functions Cont’d When the auditors have completed their work, they provide a report (audit management letter) to management and other stakeholders. The content and format of these external audit reports is specified by the auditing standards. At an exit conference with management, the auditors may discuss the deficiencies in a company’s internal controls and may also provide management with suggestions for improving the business. External auditors can suggest changes but are not allowed to implement those changes as that would impair their independence. External auditors work for an independent body to assess the financial records and practices of a company. To ensure the company’s balance sheet and other statements give an accurate representation of financial position and are free of material misstatements, they follow a series of procedures to test the accuracy of the company’s numbers and evaluate its internal Internal vs. External Audit Comparative Table  Framework for internal audit effectiveness The International Professional Practices Framework (IPPF) is the conceptual framework that organizes authoritative guidance promulgated by The Institute of Internal Auditors (IIA). A trustworthy, global, guidance- setting body, The IIA provides internal audit professionals worldwide with authoritative guidance organized in the IPPF as mandatory guidance and recommended guidance.  Understanding the Dynamics You should by now realize that the dynamics of the function speaks to the ever-changing world as we know it. What do I mean by that? Think about changing technology, the change in the environment and the change in the requirements of stakeholders, to name a few. As these change, so too does the audit function, as with these changes comes new rules, new regulations and the auditor will have to change with them. Additionally, if you look at the vantage point of the internal auditor you will gather that the role can be transformed into a consultancy role, for example.  Understanding the Dynamics The vantage point of the internal auditor you will gather that the role can be transformed into a consultancy role, for example In a case were the external auditor identifies a significant issue with the accounts, they will provide the managers in the company with an “audit management letter” which records any issues and how they should be resolved. External auditors are important towards promoting confidence and trust in financial information.  Understanding the Dynamics For Internal Audit to realize this transformation, it needs to:  Align itself with the organization’s key business objectives. Improve audit efficiency and effectiveness, and streamline processes to drive cost savings.  Offer broader risk coverage and be proactive about current and emerging risks. Enable cost efficiencies across all business units  Identify and employ the right internal and external skills  Understanding the Dynamics There are three key steps Internal Audit can take to enhance the function and become a value driven strategic player for the organization.  Terminology: External Auditors: External Auditors inspect clients' accounting records and express an opinion as to whether financial statements are presented fairly in accordance with the applicable accounting standards of the entity, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) Internal Auditors: Internal Auditors are employees of a company charged with providing independent and objective evaluations of the company's financial and operational business activities, including its corporate governance. Auditor independence: Auditor independence refers to the independence of the external  Terminology: Accountability: Accountability is the obligation of an individual or organisation to account for its activities, accept responsibility for them, and to disclose the results in a transparent manner. Audit Evidence: Audit evidence includes records, factual statements, and other verifiable information that is related to the audit criteria (GAAP, IFRS) being used. Corporate Governance Corporate Governance is the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders.  References https://floqast.com/blog/internal-audit-vs-external-audit-whats-the-differ ence/ https://auditorgeneral.gov.jm/our-history/ https://auditorgeneral.gov.jm/auditor-general-duties-and-responsibilities/ https://youtu.be/S1_1dRniNAM Standards (theiia.org) (476) The IPPF: The Framework for Internal Audit Effectiveness – YouTube untitled (forbes.com) https://kirkpatrickprice.com/blog/5-reasons-why-internal-audit-is-importa nt/ https://youtu.be/4-ko4n-Hyjs