Chapter 1. Introduction and Overview of Audit & Assurance

Transcription

1 Assurance & Auditing Textbk Ntes Chapter 1 Intrductin and Overview f Audit & Assurance Audit prcess in Fcus 1.1 Auditing & Assurance Defined - An assurance is an engagement where an auditr r cnsultant is hired t prvide an pinin n a subject matter - Dne t enhance reliability f infrmatin - Assurance Engagement: An engagement perfrmed by an auditr r cnsultant t enhance reliability f subject matter - Accuntability Relatinship: A situatin in which ne party is answerable t anther fr the subject matter Fr a financial statement audit, the cmpany is the accuntable party, sharehlders are the users, subject matter is the financial statements - Engagements where the practitiner is hired t prvide advice t clients, such as management and tax cnsulting, are nt assurance engagements n accuntability relatinship 1.2 Demand fr Audit and Assurance Services Financial Statement Users Investrs Determine whether they shuld invest r buy, hld, r sell shares in the entity being reprted n Interested in return n investment Cncerned entity will remain a ging cncern 1

2 Assurance & Auditing Textbk Ntes Interested in capacity t pay dividends Suppliers Determine whether the entity can pay them fr gds supplied Custmers Whether the entity is likely t remain a ging cncern Lenders Determine whether the entity can pay interest and principal n their lans Emplyees Whether the entity can pay their wages r salaries Future stability and prfitability f cmpany Jb security Gvernments Determine whether the entity is cmplying with regulatins and paying a fair amunt f taxatin given its reprted earnings, and t gain a better understanding f the entities activities The General Public Determine whether they shuld assciate with the entity Surces f Demand fr Audit and Assurance Services - Infrmatin Risk: The risk that users will rely n incrrect infrmatin t make a decisin - The causes f infrmatin risk: Remteness Mst financial statement users d nt have access t the entity under review Cmplexity 2

3 Assurance & Auditing Textbk Ntes Mst financial users d nt have the accunting and legal knwledge t enable them t assess chices Cmpeting Incentives Mst financial users may find it difficult t identify when management is presenting biased infrmatin Reliability Mst financial users are cncerned with the reliability f the infrmatin cntained in financial statements Independent auditrs have n incentives, they are cncerned with ensuring the infrmatin cntained n the financial statements is reliable frm any significant (material) misstatements (errr r fraud) Theretical Framewrks - Used t explain why audits ccurred prir t regulatins requiring they be dne Agency Thery Due t the remteness f the wners frm the entity, the cmplexity f items included in the financial statements, and cmpeting incentives between the wners and managers, the wners (principal) have incentive t hire an auditr t assess the fair presentatin f the infrmatin cntained in the financial statements prepared by their managers (agents) Owner (principal) and manager (agent) are ne When an wner hires a manager, the manager has incentives t prvide favurable results When there are several wners, it is difficult fr them t mnitr management effectively Infrmatin Hypthesis 3

4 Assurance & Auditing Textbk Ntes Due t the demand fr reliable, high-quality infrmatin, varius user grups (sharehlders, banks, lenders) will demand that financial statements be audited t aid their decisin-making Insurance Hypthesis Investrs will demand that financial statements be audited as a way f insuring against sme f their lss shuld their investment fail Auditrs are required t take ut prfessinal indemnity insurance plicies An investrs ability t prve that audit failure was t blame fr lss f invested mney Demand in Vluntary Setting - Assurance prviders (auditrs, cnsultants) trend twards crprate scial respnsibility (CSR) disclsures, including envirnmental, sustainability and carbn emissins reprts - Peple demanding cmpanies be mre accuntable fr their impact n the envirnment and sciety - Cmpanies are nt required t have their envirnmental and ther CSR disclsures assured, yet several cmpanies d 1.3 Different Assurance Services Financial Statement Audits - Financial Statement Audit: An audit that prvides reasnable assurance abut whether the financial statements are prepared in all material respects in accrdance with the financial reprting framewrk - Listed Entity: An entity wh s shares, stcks r bnds are listed n a stck exchange - Must publish audited financial statements annually 4

5 Assurance & Auditing Textbk Ntes - Fair Presentatin: The cnsistent and faithful applicatin f accunting standards when preparing the financial statements - Auditr must be independent f the cmpany audited and exercise prfessinal due care - The auditr methdically gathers evidence t crrbrate the financial infrmatin presented by management - At the end f the audit, the auditr issues a reprt indicating whether the financial infrmatin is fairly presented in accrdance with the financial reprting framewrk lends credibility t the infrmatin Prcess f a Financial Statement Audit An audit is a systematic prcess Invlves gathering evidence in a lgical fashin t substantiate the balances and disclsures in the financial statements Regardless f cmpany size, the principles remain the same Steps: Planning Stage Perfrming an verall risk assessment Devises an verall audit strategy Allws auditr t plan when t perfrm field wrk (wrk dne n clients premises), wh will d it, and what needs t be dne Financial statements divided int sectins Each sectin has an audit wrking paper prgram (lists prcedures t be perfrmed in that area) 5

6 Assurance & Auditing Textbk Ntes Executin Stage Typically dne n clients premises As wrk is dne it is dcumented in the audit wrking paper file Dcumentatin is dne thrugh mems, narrative, r schedules with audit ticks Audit prgrams are signed ff r initialed when cmplete Each cmpletin is then reviewed by a senir auditr Cmpletin Auditr leaves client premises Dcuments nce cmpleted g t the partner respnsible fr audit review If partner believes infrmatin is sufficient they will apprve and issue an unmdified audit pinin n the financial statements Limitatins f a Financial Statement Audit Nt guarantee the financial statements are free frm errr and fraud Cmpliance Audits - An audit t determine whether the entity has cnfrmed with regulatins, rules, r prcesses 6

7 Assurance & Auditing Textbk Ntes - A cmpliance audit invlves gathering evidence t ascertain whether the persn r entity under review has fllwed the applicable rules, plicies, prcedures, laws, and regulatins. - A tax audit is used t determine whether an individual r cmpany has cmpleted a tax return in accrdance with the Incme Tax Act Operatinal Audits - An assessment f the ecnmy, efficiency, and effectiveness f an rganizatin's peratins - Cncerned with the ecnmy, efficiency, and effectiveness f an rganizatin's activities. Ecnmy refers t the cst f inputs, including wages and materials. Efficiency refers t the relatinship between inputs and utputs; specifically, efficiency refers t the use f the minimum amunt f inputs t achieve a given utput. Effectiveness refers t the achievement f certain gals r the prductin f a certain level f utputs. - Operatinal audits are generally cnducted by an rganizatin's internal auditrs, r they may be utsurced t an external audit firm. Operatinal audits are smetimes referred t as value fr mney audits, perfrmance audits, r efficiency audits Cmprehensive Audits - An audit that encmpasses a range f audit and audit-related activities, such as a financial statement audit, peratinal audit, and cmpliance audit Internal Audits - An independent service within an entity that generally evaluates and imprves risk management, internal cntrl prcedures, and elements f the gvernance prcess 7

8 Assurance & Auditing Textbk Ntes - Cnducted t prvide assurance abut varius aspects f an rganizatin's activities - Thse charged with gvernance: Generally the bard f directrs, and may include management f an entity - The internal audit functin ften cnducts peratinal audits, cmpliance audits, internal cntrl assessments, and reviews - When cnducting a financial statement audit, the external auditr may cnsider the wrk dne by the internal auditrs Crprate Scial Respnsibility (CSR) Assurance An Emerging Area - A range f activities undertaken vluntarily by a crpratin; CSR disclsures include envirnmental, emplyee, and scial reprting - CSR disclsures include envirnmental, emplyee, and scial reprting. Sme rganizatins chse t have their CSR disclsures assured by an independent assurance prvider - The assurance f CSR disclsures can be carried ut by bth auditrs and specialist cnsulting firms: nn-audit firms that prvide assurance services n nnfinancial infrmatin, such as crprate scial respnsibility and envirnmental disclsures - Assurance Engagements - Due t the increasing demand fr assurance n greenhuse gas infrmatin, the Internatinal Auditing and Assurance Standards Bard (IAASB) develped and apprved the Internatinal Standard n Assurance Engagements (ISAE) In Canada, this standard was apprved by the Auditing and Assurance Standards Bard (AASB) and entitled the Canadian Standard n Assurance Engagements (CSAE) 3410, Assurance Engagements n Greenhuse Gas Statements. 8

9 Assurance & Auditing Textbk Ntes - The standard stipulates an auditr's respnsibilities in identifying, assessing, and respnding t the risks f material misstatement when engaged t reprt n green huse gas (GHG) statements 1.4 Different Levels f Assurance Reasnable Assurance - Assurance that prvides high but nt abslute assurance n the reliability f the subject matter - Means that the auditr has dne adequate wrk t reprt with reasnable certainty that the infrmatin being assured is, r is nt, reliable. This des nt reflect abslute assurance, as an auditr can never be 100 percent certain that there are n errrs r missins. - Highest level f assurance prvided Mderate Assurance - Assurance that prvides negative assurance n the reliability f the subject matter - This means that the auditr has dne adequate wrk t reprt whether r nt anything came t their attentin that wuld lead them t believe that the infrmatin being assured is nt wrthy f belief. - The auditr is able t say nly that the infrmatin is plausible, in that nthing makes them believe therwise - Review Engagement: Engagement in which the auditr des adequate wrk t reprt whether r nt anything came t their attentin that wuld lead them t believe that the infrmatin being assured is nt fairly presented 9