Flashcards
AUDITING UNIT 1
Flashcards do conjunto (25)
- 1Why are audits needed?Directors may be motivated to show good results
The directors and shareholders goals may clash.
Shareholders need an independent view to give them believability / realism
Impractical for shareholders to check accounts
Auditors add value as they also report on:
whether proper books and records have been kept
weaknesses in the accounting systems - 2What is an audit?“The independent examination of, and expression of opinion on the financial statements of an enterprise by an appointed auditor in compliance with any relevant statutory obligation”
APB - 3What do auditors do?The auditors job is to gather evidence to prove that
Profits and losses are properly stated
Assets and liabilities belong to the company and are shown at their correct values
Accounting entries are properly recorded in the correct accounting period
To do this they
Review the accounting records and controls
Ask for explanations
Obtain details from third parties - 4What are the advantages of an audit?The auditor can provide an impartial view and hence be believed.
The auditor can perform a knowledgeable review of the business and pick up any errors.
The auditor can offer some advice on any weaknesses he finds. - 5What are the disadvantages of an audit?The cost
Time answering the auditors questions
Subjective because it is an opinion - 6Different types of AuditStatutory audit – Companies Act 2006
Internal audit
Assurance assignments
Non statutory audit
sole traders
partnerships
Small Companies (see homework!)
Management audits
Environmental audits
Value for money audits - 7What is an Assurance EngagementConsists of 5 elements:
C riteria - measure against something
R eport – from practitioner to intended user
E vidence – sufficient evidence gathered
S ubject matter – data to be evaluated
T hree party relationship:
Intended user
Responsible party
Practitioner - 8What is an Internal Audit?An independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations.
It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”
IIA - 9Who requires an Internal Audit Function?Mandatory for all listed companies under UK Corporate Governance Code.
Also a legal requirement in the public sector (funded by public money)
e.g. local authorities and NHS - 10Scope of internal audit functionAPB’s Guidance for Internal Auditors:
examine, evaluate and report on the adequacy of systems of internal control, at a reasonable cost
maintain personal objectivity / independence
display professionalism
work within the resources provided by developing a comprehensive plan with full evaluation and recording of the system of internal controls
ensure thorough evidence gathering, reporting and follow-up procedures. - 11IndependenceCan IA set it’s own pattern of work?
Do they have unrestricted access to management at highest level e.g.CEO, Audit Committee?
Free from any operational activities?
Head Int Aud independent of Financial Director?
Can Int Aud communicate freely with Ext Aud? - 12Scope of Internal Auditor’s workMuch wider than the External Auditor’s role
All aspects of an organisations activities including:
Compliance Auditing
Operational auditing - efficiency and effectiveness
Managerial systems – for example, strategic planning, performance monitoring, investment appraisal, personnel and human resources.
Value for money audit (3 E’s)
Economy – least cost for quality
Efficiency – best use of resources
Effectiveness – best results
Special one off audits , e.g. slow moving stock - 13Similarities between Ext Aud and Int AudSimilarities include:
checking effectiveness of internal control system
asset safeguarding
detailed checking
reporting weaknesses to management
ratio analysis - 14ISA 610 – Sect 11 Using The Work Of Internal AuditorsWhen the external auditors use specific internal work to reduce the extent of their audit procedures, they should evaluate and perform audit procedures on that work to confirm its adequacy for their purposes
- 15Before relying on any work that the internal auditor has performed the external auditor must assess the:a) Internal auditor
b) and his work - 16The Internal AuditorIndependence
Consider some of the things from slide 29
Technical competence
Qualified auditors?
Up to date ?
Due professional care
Proper planning?
Supervision?
Effective communication between Internal auditor and External Auditor
Resources available (enough staff?) - 17B. His work6. Scope and objectives
Do the objectives co-coincide
Are Int Aud constrained by management?
7. Risk of material misstatement (ROMM)
8. Reporting standards
Reports prepared?
High quality?
Actioned by management? - 18Key points to note:If the EXT AUD plans to use the work of the INT AUD and rely on it for audit evidence then the INT audit work must be documented.
If any doubt over the INT AUD work then the EXT AUD would need to perform additional procedures.
The EXT AUD should audit all material matters himself - 19. Internal Audit ReportsThe APB Internal Audit Guidelines clearly state that the primary purpose on INT AUD reports are to:
Provide management with an opinion as to the adequacy of the internal control system AND
Inform management of significant audit findings
Make conclusions and recommendations - 20Internal Audit Reports - AimThe primary reporting line for internal auditors is management.
The aim of every internal audit report is:
to prompt management action to implement recommendations for change, leading to improvement in performance and control and
to provide a formal record of points arising from the internal audit assignment and, where appropriate, of agreements reached with management. - 21Report to WhomThese reports are confidential and should only be sent to:
managers who need to know (and have authority to take action on the INT AUD’s recommendations)
Audit committee (then leads to EXT AUD)
Managers are asked to give their response in writing.
Once recommendations have been agreed a follow up audit is advised to ensure that recommendations have indeed been implemented! - 22In house Internal Audit BenefitsConfidentiality
In-depth knowledge of the organisation
Better working relationship with staff as the auditor is not seen as an outsider
Shared commitment to achieve the aims of the organisation
Continuity of staff
Fixed costs with no hidden extras
Not dependent upon selling additional work
Staff retain skills / knowledge within the organisation. - 23In house Internal Audit DisadvantagesLack of flexibility
Staff career progression is often difficult
Costs of regular training/updating of staff
Small numbers may mean the range of skills may be restricted
Quality of service may deteriorate without fresh input
Complete independence may be difficult to achieve
Lack of available resources for small organisations - 24Outsourcing Internal Audit BenefitsIndependence from the organisation
No staff training required
Knowledge brought in from other sources and sectors
Flexible resource availability
Full access to technical expertise
A flexible contract – you only pay for what you get. - 25Outsourcing Internal Audit DisadvantagesCosts may be relatively high
Staff are not always available on site
The continuity of staff at junior level is less certain
Loss of control of quality of staff provision
Contract restraints – only get what have specified and agreed to pay for.