All points from lecture

• Audit


  An independent examination of an entity's financial statements and records to express an opinion on whether the financial statements show a true and fair view
• Advantages of audit


  • Objectivity and understanding of accounting records
  • Suggestions for improvements in accounting system
  • Avoidance of arguments between partners
  • Greater credibility of accounts for other users
• Disadvantages of audit


  • Additional cost
  • Time spent by staff and management
  • Disruption to normal working routines
  • Staff perception of being checked on
• Financial records


  Accounting records sufficient to disclose the financial position of the company and enable the directors to prepare financial statements in accordance with the law
• Financial records


  • Cash book
  • Payables ledgers
  • Receivables ledgers
  • Inventory records
  • Non-current asset register
• Financial statements


  Statements produced for shareholders, banks, suppliers, customers, employees and tax authorities
• Financial statements


  • Statement of profit or loss and other comprehensive income
  • Statement of financial position
  • Related notes
• Audit requirement and exemptions


  Listed companies and some NGOs are required to have audits, while small companies are exempt
• Auditors


  Appointed by shareholders, can only be removed by shareholders
• Auditors' rights


  • Access to records and information
  • Attend general meetings
  • Receive all notices and communications
• Auditors


  Have the rights to:

  • Access to records and to require information and explanations for audit purposes
  • Receive all notices relating to any general meetings
  • Attend and to speak at any general meeting
  • Not to participate any directors meetings
• Resignation


  Auditors have to prepare:

  • Statement of circumstances
  • Notice of resignation

  Auditors have to notify all appropriate parties (shareholders)

  The right to convene a general meeting to discuss the circumstances of resignation
• True


  Conform with reality, not false, accurate. Figures have been correctly extracted from the underlying records.
• Fair


  Free from bias, impartial. Reflect the commercial substance of the company's underlying transactions.
• Auditors can only provide reasonable assurance:

  • Auditors do not test every transactions
  • Auditors use professional judgment to evaluate evidences and form conclusions
  • Inherent limitations of internal controls (people not following the procedures)
  • Audit evidences are persuasive rather than conclusive.
• Chronology of audit


  A. Determine audit approach

  B. Understanding the entity

  C. Assess the risk of material misstatement

  D. Select audit procedures to respond to risk of material misstatement

  E. Review the financial statements

  F. Express an opinion
• Audit report


  Auditors produce report (Independent Auditor's Report) to the shareholders.

  Unqualified Report: the financial statements are true and fair, and, properly prepared.
• Internal control


  • A system of internal control within a company assists in the efficient and effective operations of the company.

  Examples:

  • Approval by two directors before buying non current assets
  • Credit reference checked before approving credit sales
• Over the past two decades the bill for litigation settlements of Big Four audit firms alone has run into billions of dollars
• The Enron scandal led to the breakdown of Arthur Anderson in 2002
• The Worldcom accounting scandal involved booking capital expenditure instead of expense and inflating revenues
• PWC's $229m settlement in the lawsuit brought by the shareholders of audit client Tyco in 2007
• Directors' responsibilities


  • To keep adequate accounting records and prepare financial statements
  • Select suitable accounting policies and then apply them consistently
  • Make judgments and accounting estimates that are reasonable and prudent
  • State whether applicable accounting standards have been followed
  • Prepare the accounts on the going concern basis
• The directors have the responsibilities to protect the assets of the company and to prevent and detect fraud
• The auditor shall maintain professional skepticism throughout the audit
• Engagement letter


  Contract between the company and the auditors which includes responsibilities of management, responsibilities of auditors, and audit fees
• Duty of care for auditors

  • Duty of care enforceable at law (when a contract is in place)
  • Negligent in the performance of that duty (not doing the job correctly, not respecting the ISA or Code of Ethics)
  • Suffered monetary loss
• Duty of care for third parties

  • No contract between the auditor and the third party
  • Only if the auditor was aware of the existence of the third party AND was going to rely on the audited financial statements
• A liability clause in the contract is not required for a client to bring a successful action against auditors in contract
• The structure of the accounting and auditing profession and IFAC will be covered in the next chapter
• Accounting and Auditing profession structures differs from one country to another
• Regulatory bodies of the profession

  • USA: AICPA
  • UK: ACCA
  • Cambodia: KICPAA
• Auditors


  State whether the financial statements are in accordance with the applicable financial reporting framework
• Examples of reporting standards

  • IFRS
  • US GAAP (Generally accepted accounting principles)
• International Federation of Accountants (IFAC)

  • Non profit, non governmental international organization of accountancy bodies
  • Setting minimum standards and requirements for accountants
  • Guidance to countries without well-developed framework
  • Aiding intra-country recognition of accountancy qualifications
• ACCA is a member of IFAC
• KICPAA is an associate of IFAC
• Fit and proper persons appointed as auditors

  • Have the competence and capacity
  • Act according to ethical principles in all walks of life
• Each country accounting body ensures: Audit is conducted properly with professional integrity, Following technical standards of audit, Eligible persons maintain an appropriate level of competence
• Different types of review

  • Peer review: review by another partner of the firm
  • Hot review: review by an experienced auditor before the report is signed
  • Cold review: independent review after the report is signed