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Learning outcomes. Can explain what is audit and assurance Evaluate the significance of principal-agent relationship Describe the role of standards Distinguish types of audits. Introduction to auditing and assurance services. Development of audit Purpose of audit Auditing versus accounting
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Learning outcomes • Can explain what is audit and assurance • Evaluate the significance of principal-agent relationship • Describe the role of standards • Distinguish types of audits
Introduction to auditing and assurance services • Development of audit • Purpose of audit • Auditing versus accounting • Stewardship, agency theory and accountability • Auditing standards • Legal framework
introduction • Auditing framework • IFAC • MIA
Shuo and Yam (1987) • Written records show China was the first country in the world to establish an auditing system • Emphasised completeness of records (financial) of the imperial kingdom, honesty of government officers in handling public money and property
Early audits • Looked for errors and fraud • Reported to emperor • Offenders were sentenced to death • Auditors selected by emperor, commanded a prestigious, privileged and powerful position
Auditing today • Is not what it started out as • Latin “AUDIRE” • Examine accounts, read out the report heard by authorities - china • Confidence of investors • Attests to quality of information • Asymmetry of information • Auditing versus accounting
Types of audit • Audit • Review • , non-attest service • Other professional service requiring accounting and auditing expertise
audits • Financial statements audit, compliance audit, internal audit, quality, governments, tax
stewardship • Who • Nature of today’s business • Agent and principals • Need for monitoring • Independent expert
Audit today • Who, what and how • Professional • Opinion • Licensed • Assurance about what?
AgencyPrincipal and agent • Information asymmetry • Agency theory • Independent agent • Regulation • Corporate governance
assurance • Independent professional services that improve the quality of information for decision makers • Many types • Service provider knowledgeable, independent, expert in gathering and evaluating evidence • Criteria for evaluation e.g. GAAP
Auditing standards • Who sets? • Who follows?
Auditing • A process of obtaining and evaluating evidence to support information presented to a third party • Attestation: get evidence about assertions • Evaluate evidence (using criteria) • Communicate conclusion
assertion • A positive statement about an action, event, condition or performance over a period of time • Financial statements?
Why do we need assurance? • People not wanting to tell the truth • Not telling the whole truth • Transactions are so complex, experts are required • Potential bias
Greater demand for accountability • Why did the world’s biggest public accounting firm fail? • Why did investors lose so much money? • Loss of confidence in management, auditing profession • Information misleading despite being audited
more • Reports • Audit regulation • Corporate governance • Public expectation • Assurance that quality of information is reliable
Issue 1 • Identify 4 users of audited financial information • Primary use • Indicate how accounting treatment can benefit one user at expense of another
Issue 2 • Auditing does not create any new product. Hence it has no added value to a business
Issue 3 • We hire an auditor so that he can detect any wrong doings in my company
