Advanced Auditing. Why Auditing? Instructor: Arslan Ayub. Department of Commerce Bahauddin Zakariya University, Multan

Size: px

Start display at page:

Download "Advanced Auditing. Why Auditing? Instructor: Arslan Ayub. Department of Commerce Bahauddin Zakariya University, Multan"

Noel Barber
5 years ago
Views:

1 Advanced Auditing Why Auditing? Instructor: Arslan Ayub Department of Commerce Bahauddin Zakariya University, Multan

2 What is Audit? A search of synonyms reveals various suggestions for the term audit, such as; Inquiry Report on Exploration Inquest Inquisition Examination Research Inspection Study Scrutiny Probe Analysis Account for Survey Review Check out

3 Definition of Auditing Systematic and independent examination of data, statements, records, operations, and performances (financial or otherwise) of an enterprise for a stated purpose. Concept of Auditing Egyptians, Greeks, Romans (Checking Clerks) Origin of Auditing Industrial Revolution > Large Scale Production > Joint Stock form of organizations (Safeguarding Shareholders Interests)

4 Why Auditing? Due to strong incentives (including taxation, mis-selling and other forms of fraud) to misstate financial information, auditing has become a legal requirement for many entities who have the power to exploit financial information for personal gain. Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a business.

5 The Accountability Model

6 Corporate Accountability

7 Auditors Internal Auditor Employed by the organization External Auditor/Statutory Auditor Independent firm engaged by the client To assess errors and frauds Cost/Financial Auditor To assess an opinion over the effectiveness of internal controls over cost/financial reporting.

8 Contd. Performance Audit To examine Safety Security Information system performance Environmental concerns Quality Audit To verify conformance standards such as ISO/GMP/CGMP

9 Advantages of Auditing Readily accepted in Government Authorities Errors and Frauds Detection Greater authority Easy borrowing due to previously audited accounts Settlement of claims Shareholders satisfaction Financial position of the business

10 Objectives of Auditing Primary To determine and judge the reliability of the financial statement and the supporting accounting records of a particular financial period is the main purpose of the audit. Secondary Detection and prevention of errors Detection and prevention of frauds

11 Contd. Detection and prevention of errors Clerical errors Errors of commission Errors of omission Compensating errors Errors of principle Fundamental principles of accounting

12 Contd. Detection and prevention of frauds Misappropriation of cash Misappropriation of goods Falsification or manipulation of accounts 1. Inflating or deflating expenses and incomes 2. Writing off of excess or less bad debts. 3. Over-valuation or under-valuation of closing stock. 4. Charging excess or less depreciation 5. Charging capital expenditures to revenue and vice-versa 6. Providing for excess or less doubtful debts. 7. Suppressing sales and purchase or showing fictitious sales and purchases etc.

13 Contd. Window dressing 1. To win the confidence of share holders 2. To obtain further credit 3. To raise the price of shares in the market by paying higher dividend so that shares held may be sold 4. To attract prospective partners or shareholders. 5. To win the confidence of shareholders. Secret reserves 1. To conceal the true position from the competitors. 2. To avoid or reduce the tax liability 3. To reduce the price of shares in the market by not paying dividend or paying lower dividend so that the shares may be bought at a much lower price.

14 The Audit Process In general a typical audit includes the following sequential steps Scheduling an opening conference to discuss the audit objectives, timing, and report format and distribution. Assessing the soundness of the internal controls or business systems and operations. Testing the internal controls to ensure proper operation. Discussing with management all preliminary observations. Discussing with management the draft audit report and their responses, if available, prior to release of the final audit report. Following up on critical issues raised in audit reports to determine if they have been successfully resolved

15 IAASB The International Auditing and Assurance Standards Board (IAASB) is an independent standard-setting body that serves the public interest by setting high-quality international standards for auditing, quality control, review, other assurance, and related services, and by facilitating the convergence of international and national standards.

16 ISA International Standards on Auditing (ISA) are professional standards for the performance of financial audit of financial information. These standards are issued by International Federation of Accountants (IFAC) through the International Auditing and Assurance Standards Board (IAASB) List of ISAs (Assignment)

IAASB EXPOSURE DRAFT OF INTERNATIONAL STANDARD ON AUDITING 550 (REVISED) ON RELATED PARTIES

ED of proposed International Standard on Auditing 550 (Revised) Related Parties January 2006 To: Members of the Hong Kong Institute of CPAs All other interested parties IAASB EXPOSURE DRAFT OF INTERNATIONAL