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Balance sheet audit 2

Balance sheet audit 2. Audit and assurance. Lecture 1a Introduction to auditing. The Auditing and Assurance course A few notes. Changes in assurance services (including auditing) and accounting since 1990 rapid on-going up-to-date texts Class handout notes (on WebCT)

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Balance sheet audit 2

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  1. Balance sheet audit 2 Audit and assurance Lecture 1a Introduction to auditing

  2. The Auditing and Assurance courseA few notes • Changes in assurance services (including auditing) and accounting since 1990 • rapid • on-going • up-to-date texts • Class handout notes (on WebCT) • Are not sufficient! They are note sheets to aid your study • BPP (set text) • Aims of Higher Education and Professional Education are different

  3. The Auditing course - a few notes • Detailed texts – necessary! • In-depth reading • English (Hong Kong /Singaporean / Malaysian)law • Tutorials • Questions to be attempted before the tutorial

  4. A note for the 2009-10 academic session • This course will be updated on a continuous basis from September 2009 and be based on the new generic ISA’s issued to become effective for audits commencing after 15.12.09 • Up until June 2009 the course has been based on the national ISA’s employed in the UK and RoI • In order to be fair to students during the 2009-10 academic year, and to accommodate textbooks that may not yet be up to date, students will not be penalised for using the following: • ISA (generic) in force to 14/12/09 • ISA (generic) in force from 15/12/09 • ISA (UK and Ireland) in force currently • ISA (UK and Ireland) for audits with periods ending after 30/9/09 • ISA or equivalents for Hong Kong SAR, Malaysia or Singapore

  5. The objective of an audit • ‘The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework’ • Glossary of Terms, APB May 2008

  6. Stewardship Accounting OWNERS (principals) MANAGERS (Limited company) (Directors/stewards/agents) FINANCIAL STATEMENTS

  7. Stewardship Accounting OWNERS (principals) MANAGERS (Limited company) (Directors/stewards/agents) FINANCIAL STATEMENTS EXTERNAL ‘CHECKER’ (Auditor/agent)

  8. Introduction to audit • Independent audit gives CREDIBILITY to FS’s • Therefore, without INDEPENDENCEthe audit function is of little value

  9. Audit andaudit-related services1. Assurance engagements • ‘Audit engagement’ (ISA’s) • High level of assurance • Positive report expressing ‘reasonable assurance’ that statements do not contain ‘material misstatement’ • ‘Review engagement’ - (ISRE 2400) • Moderate level of assurance • Negative report – nothing in the review indicates that the financial statements are not true and fair

  10. Audit andaudit-related services2. Non-assurance engagements • ‘Agreed-upon procedures’ - (ISRS 4400) • No assurance given • Actual findings are reported • ‘Compilation engagement’ - (ISRS 4410) • No assurance given • Accounting activities only

  11. Basic ‘types’ of audit • STATUTORY (FINANCIAL) AUDIT • Mainly financial statement (FS) audit • In the UK • Required by statute • ‘Registered auditors’ (RA) • Report to owners (or as statute directs)

  12. Basic ‘types’ of audit (cont.) • NON-STATUTORY FS AUDIT • Clubs, partnerships, sole traders, smaller companies… • NON-FINANCIAL AUDIT • Compliance audit • fe: Circulation audit, environmental audit… • Operational audit • Used to improve activities of a organisation

  13. Internal and external audit EXTERNAL AUDIT • Third parties • Independent INTERNAL AUDIT • Employees • As independent as possible • A function for ‘internal control’ • Nowadays closely linked to good corporate governance

  14. STATUTORY Ltd., cyf., plc, ccc, SE Building Societies Trade Unions Housing Assns. Large charities Investment businesses NON-STATUTORY Sole traders Partnerships Clubs Royalty statements Small charities Non-financial Examples of external audit (UK)

  15. Cyfyngedig Cwmni Cyfygedig Cyheddus Welsh English • Limited Company • Public Limited Company

  16. Definition of a (financial) audit • ‘The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework’ • Glossary of Terms, APB May 2008 • ‘An “audit” is the independentexamination of, and expression of an opinion on, the financial statements of an enterprise’ • Explanatory foreword, Auditing Guidelines APC 1989 (now superseded)

  17. Definition of a (financial) audit (cont.) • INDEPENDENT • An ‘outsider’ (unconnected) • Statutory and professional body regulation • EXAMINATION • Preparation is duty of the directors • OPINION • ‘True and fair’ or ‘Fairly presented’ • Compliance(statutes and rules concerned)

  18. Benefits from statutory audit • Verification of FS’s • Owners • Third parties • Accounting recommendations • Control (systems) recommendations • (Possible) detection of fraud and error

  19. … and of non-statutory audit • Partnerships • A basis to settle accounts (profit-share/goodwill) • Reassures ‘sleeping’ or distant partners • Use by taxation authorities • HMRC (UK); _XX_(HK); _XX_ (Singapore) _XX_ (Malaysia) • Valuation on sale of business • Lenders (overdrafts, loans … )

  20. Registered Auditors in the British Isles • MAJOR BODIES • ‘Certified Accountants’(ACCA) • ‘Chartered Accountants’(ICAEW, ICAS, ICAI) • MINOR BODIES • UK • ‘Authorised Public Accountants’ (AAPA) • RoI • ‘Certified Public Accountants' (ICPAI) • ‘Incorporated Accountants’ (IIPA)

  21. Statutory Auditors in Hong Kong • Professional Accountants Ordinance 1973 • HKICPA (HKSA till 2004) • ‘Professional Accountants’ • CPA • FCPA • Statutory auditors • CPA (Practising) • FCPA (Practising)

  22. Statutory Auditors in Singapore • (to insert)

  23. Statutory Auditors in Malaysia • (to insert)

  24. RSB’s ACCA ICAEW ICAI ICAS AAPA IIPA ICPAI RQB’s All RSB's AIA - ‘International Accountants’ CIPFA Recognised Supervisory and Qualifying Bodies in the British Isles (Auditing)

  25. Major accounting bodies in the British Isles • ACCA • ICAEW • ICAI CCAB • ICAS • CIMA • CIPFA

  26. Auditing regulation in the British Isles The Financial Reporting Council • The Auditing Practices Board (APB) • The Accounting Standards Board (ASB) • The Financial Reporting and review panel (FRRP) • The Professional Oversight Board (POB) • The Investigation and Discipline Board (IDB) • The Board for Actuarial Standards (BAS)

  27. Auditing regulation (cont.) • The APB issues: • Auditing standards • ISA (UK and Ireland)'s • SAS’s are the predecessor of ISA’s • Not yet withdrawn • Practice Notes (PN’s) • Bulletins • Advisory matter to support standards

  28. Auditing regulation (cont.) • International auditing standards (ISA's) • ISA (UK and Ireland) • Contain the full ISA • Additional material • Brought from SAS's to maintain the standards at SAS level • National statutory provisions and other regulations affecting the UK and Irish RA

  29. ‘International’ auditing regulation • ‘Generic’ ISA’s will form the basis of this course. • Different countries will ‘adopt’ these generic ISA’s and frequently add to them to cover specific national regulations and, or extra requirements. They may delay adoption or decide not to adopt any aspects of the generic ISA’s

  30. A typical audit firm Money & Co - Registered Auditors Engagement Partners Other Partners Audit Managers Audit Seniors Audit Juniors Audit Clerks

  31. Auditing and assurance Lecture 1b The True and Fair Concept (UK) ‘Fair presentation’ – International

  32. A ‘Fair presentation’ - IAS 1 • ‘The faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework’ (s13)

  33. ‘Fair presentation’ • ‘The application of IFRS’s, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation’ (IAS 1.13)

  34. ‘Fair presentation’ • ‘Override’ provisions (IAS 1.17-18) • Management may conclude (in extremely rare circumstances) that compliance with an IFRS requirement would be misleading (in effect a ‘material misstatement’) • As IFRS are a ‘principles-based’ set of standards, the entity is required to depart from the IFRS to show a ‘fair presentation’ • Detailed disclosure of the nature, reasons, and impact of the departure is required

  35. ‘True and Fair’ - UK legislation • A ‘true and fair’ requirement remains for those companies reporting under UK FRS • Martin Moore QC (2008) re-confirmed Mary Arden’s opinion that ‘The ‘T&F concept’ is a dynamic concept… subject to continuous rebirth’ - Miss Mary Arden QC Legal opinion 1993 (FRC PN222)

  36. ‘True and Fair’ - UK legislation • For those UK companies reporting under IAS / IFRS • IAS / IFRS’s are explicitly part of the law (in the UK and RoI) and IAS 1 states FS’s must be ‘presented fairly’ (IAS 1) • However the auditor's report will use the term ‘true and fair’whether they are prepared in accordance with international or UK accounting standards (FRC PN222)

  37. ‘True and Fair’ (CA 2006) • In general, a ‘True and fair’ view will be given by directors when they have followed Generally Accepted Accounting Practice (UK GAAP)

  38. ‘True and Fair’ (cont.) • ‘UK GAAP’ consists of… • UK (or International) Accounting Standards (FRS, SSAP, UITF, SORP; IFRS, IAS…) • Statutes (CA 2006, FSA, TUA…) • Common law • Case precedent (direct and persuasive) • Other accepted practice • ‘Override’ of CA 06 and FRS/IFRS provisions • Detailed disclosure of the nature, reasons, and impact of the departure is required

  39. Homework • Read the set text (BPP ACCA F8 June 2009 edn.) – Chapter 1 • Complete the ‘Quick Quiz’ and Q1 in the set text. Check you answers. • Tutorial question: Can auditors certify that a set of financial statements are correct? Discuss. • Additional tutorial questions 1, 2 and 3 on handout

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