UCC Audit Practice II - Week 1 PDF

AUDIT PRACTICE AND PROCEDURES II THE AUDIT FUNCTION: HISTORY,IMPORTANCE AND DYNAMICS  The History of the Audit Function  “Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the...

AUDIT PRACTICE AND PROCEDURES II THE AUDIT FUNCTION: HISTORY,IMPORTANCE AND DYNAMICS  The History of the Audit Function  “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, independent person.” Arens, et al., 2012:  The History of the Audit Function  There are some key words to note: “competent” and “independent” and “established criteria” which refer to standards (for example IFRS) and “information” which refers to evidence.  The History of the Audit Function  The following excerpt from the Journal of Modern Accounting and Auditing, 2008 in order to gain an appreciation of the history:  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.  The History of the Audit Function  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 critical role in maintaining the welfare and stability of the society.  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 Internal Audit Function Internal audit function is defined in the ISAs as a function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entity's governance, risk management and internal control processes. An effective internal audit function may reduce, modify or alter the timing of external audit procedures, but it can never eliminate them entirely. Internal Audit Function Even where the internal audit function is deemed ineffective, it may still be useful to be aware of the conclusions formed. The effectiveness of internal audit will have a great impact on how the external auditors assess the whole control system and the assessment of audit risk. The external auditor will need to determine whether the work of the internal audit function can be used for the audit and, if so, establish the nature and extent of work that can be used. External Audit Function External auditors concern themselves with examining annual reports of an organisation that it has no involvement with. Emphasis is on the external auditor not playing any part in the daily operations of the organisation. Unlike internal auditors, external auditors express their opinions on whether the information presented in financial statements, reflect those in the financial position at any date in time. For example, are the details of the organisations income and liabilities properly recorded in the income statement. External Audit Function 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 The dynamics of the function of the internal audit speaks to the ever changing world as we know it. 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.  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 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.  Understanding the dynamics  Enable cost efficiencies across all business units  Identify and employ the right internal and external skills  Create competitive advantage by contributing to sustainable business improvements  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.  REFERENCES  Arens, Elder, Beasley: Auditing and Assurance Services, an Integrated Approach, 12th to 15th Edition: Pearson: Prentice Hall.  Kerr, Elder, Arens: Integrated Audit Practice Case: 6th Edition: Armond Dalton Publishers, Inc  https://na.theiia.org/  http://www.davidpublishing.com/  http://www.investopedia.com/  http://images.forbes.com/  http://www.businessdictionary.com/  REFERENCES  BPP LEARNING MEDIA. (2017). ACCA F8 AUDIT AND ASSURANCE.  Knowledge Grab. (2019). Function of Internal and External Auditors - Knowledge Grab. [online] Available at: http://knowledgegrab.com/learners-zone/study- support/risk-and-control/internal-auditing/function-of- internal-and-external-auditors/ [Accessed 17 Jan. 2019].  Images.forbes.com. (2019). [online] Available at: https://images.forbes.com/forbesinsights/StudyPDFs/Unlocking_ Strategic_ValueofInternal_Audit.pdf [Accessed 17 Jan. 2019].