Advanced auditing lecture lecture 1.pptx

AUDITOR LIABILITY

1. VALLEY VIEW UNIVERSITY ADVANCED AUDIT AND ASSURANCE LECTURE 1 REGULATION & LEGAL MATTERS I COMPILED BY: KWAME ODURO AMOAKO (PHD)

2. LECTURE 1 ACC 645: ADVANCED AUDIT & ASSURANCE INTRODUCTION TO REGULATION & LEGAL MATTERS Compiled by: Kwame Oduro Amoako (PhD)

3. What is assurance? It is often not possible to check things for yourself, whether quality, accuracy, performance or existence: you might not have the skills or the time, or you might be in the wrong location. Therefore you must rely on someone else to give you assurance . Independent professional services that improve the quality of information , or its context, for decision makers. You could almost summarize the process of assurance in the phrase ‘collect evidence that supports everything that is being claimed’.

4. Assurance Service Elements Assurance services are (1) independent (2) professional services that (3) improve the quality of information, or its context , (4) for decision makers . Assurance services include many areas of information, including nonfinancial areas.

5. Need for Assurance Regarding Information and Operations Understanding a Client’s Business Environmental Conditions Information Risk

6. A. Understanding a Client’s Business Business risk is the risk that an entity will fail to meet its objectives. Failing to reach objectives can eventually result in temptation to misstate financial statements to avoid business failure .

7. B. Environmental Conditions Complexity – Decisions makers are not trained to collect, compile, and summarize the key operating information themselves. Time sensitivity – Decisions must often be made on a moment’s notice. Consequences – A drop in investment value can wipe out one’s life savings . Remoteness – Investors are not able to personally visit locations to check on investments. Global society Lack of personal interaction Can’t physically inspect goods Can’t interview management Can’t inspect facility Can’t review books and records I lost my savings in a bad investment!

8. C. Information Risk or bias Information risk is the probability that the information circulated by a company will be false or misleading. Client management has an incentive to make the business appear better than it actually may be. This can create a conflict of interest between client management and investors . Potential Bias in Providing Information Sellers Management Inside information Compensation of management Stock options held by management Financial Statements

9. The elements of an assurance engagement   The following are the five elements of an assurance engagement : A three party relationship involving a practitioner, a responsible party, and intended users . Appropriate subject matter ( eg the financial statements, a budget, a take-over target ).   Suitable criteria ( eg financial reporting standards ) Sufficient appropriate evidence . A written assurance report in the form appropriate to a reasonable assurance engagement or a limited assurance engagement.

10. Definition of Auditing cont’d The independent examination of and expression of opinion on the financial statements of an entity by a duly appointed auditor in pursuit of that appointment (ACCA, 2019). The important words here are ‘ independent ’ and ‘ opinion’.

11. What is Auditors independence Independence is essential and underlies the value of auditing - and of all other forms of assurance The  auditor  should be  independent  from the client company, so that the audit opinion will not be influenced by any relationship between them. The   auditors  are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders

12. Auditor’s opinion A view or judgement formed about something, not necessarily based on fact or knowledge. E.g. "that ,  in my opinion , is right " An auditor’s opinion is a formal statement made by an auditor concerning a client’s financial statements . Opinion really means that one auditor or accountant could look at a set of financial statements (or a cash budget) and disagree with the opinion of another.

13. So, an audit opinion… is NOT an assurance as to the future viability of an entity is NOT an opinion as to the efficiency or effectiveness with which its operations, including internal control, have been conducted Is NOT a guarantee that the financial statements are free of error

14. Types of Audits Financial Statement Audits Evaluates correspondence between financial statements and GAAP Operational Audits Evaluates correspondence between org’s procedures and methods and criteria of efficiency and effectiveness Compliance Audits Evaluates correspondence between org’s operations and specific procedures or rules

15. Who Performs Audits? Public Accounting Firms Independent as external to audit client Primarily f/s audits, but can be hired to perform other types of audits Internal Auditors Employees of org. Less independent:depends on org structure Primarily operational and compliance audits

16. Who Performs Audits? Government Auditors Often perform comprehensive audits, but depends on mandate Revenue Canada Auditors Compliance audits

17. Accounting vs. Auditing Accounting Recording, classifying and summarizing of economic events for the purpose of providing financial information for decision making Requires understanding of IFRS Auditing Determining whether recorded information properly reflects the economic events of the period Requires understanding of IFRS AND of accumulation and interpretation of audit evidence

18. Advantages of Auditing 1 ] Assurance to the Owners/Investors One of the biggest advantages of auditing is that it offers assurances to the owners, investors, shareholders etc. The owners of the business will be assured about the accuracy of their books of accounts. They will be satisfied with the workings of their various departments and the overall efficiency and profitability of their business operations. It is the same case with investors, who will find assurance in the books of accounts after auditing.

19. Advantages of Auditing cont’d 2] Errors and Frauds An error is something that is done without the intention to fraud the company, it is an innocent mistake. Fraud , on the other hand, is deliberate. During the process of auditing, both errors and frauds are discovered. Auditing also helps prevent such errors and frauds. It creates a fear of being detected. So auditing helps us minimize the risks of errors and frauds in our books of accounts but does not eliminate the risk entirely. There is always the chance that the error may go unnoticed, and the fraud is very cleverly hidden so may go undetected.

20. Advantages of Auditing cont’d 3] Independent Viewpoint If the auditor is an external auditor, the business can get a second opinion on their financial statements and their financial standing as well. An external auditor will closely inspect the books and be completely true and fair in his opinion as he has no hidden agenda. If he says the accounts are true and fair, it has a lot of weightage with the company and the investors.

21. Advantages of Auditing cont’d 4] Moral Check One of the other advantages of auditing is that the staff and the workers of the company do not try to steal or defraud the company. They are under constant scrutiny since they know that the accounts will be audited. Any irregularities can be identified during such an audit, and they will be caught eventually. This helps the staff in being honest and responsible at all times. 5] Stakeholders Confidence After auditing stakeholders like creditors, investors, banks, debenture holders etc. can rely on the books of accounts with more confidence. And so after auditing by an independent authority, the financial statements have more credibility.

22. Limitations of Auditing 1 ] Cost Factor: A very thorough and detailed audit would be a costly affair. It is not cost effective. So the auditor has to limit the scope of his audit and use techniques like sampling and test checking. 2] Time Factor: Auditors generally work on a very specific timeline. Sometimes this is due to statutory requirements. This means he has to audit a whole year’s accounts in a few weeks. Hence insufficient time is one of the main limitations of auditing. 3] Inconclusive Evidence: Generally , the audit evidence the auditor collects is persuasive in nature, not conclusive in nature. So there is never cent percent conclusive evidence in most cases while auditing. This is one of the major limitations of auditing. There also a lot of use of estimates in accounting. The auditor cannot measure or comment on the exact accuracy of these estimates. He has to rely on his knowledge.

23. Relationship between audit and assurance Audit is intended to provide  reasonable assurance , but not absolute assurance, that the financial statements give a true and fair view in accordance with the financial reporting framework . Assurance  is a professional service with the aim of improving the quality and transparency of information, to reduce the chance of problems occurring from incorrect information. An audit is a type of assurance service. Assurance services can be  regulatory or compliance-based . They work to ensure that a company or organisation is following guidelines, rules and policy, and provide both internal and external confidence for financial statements . audits give assurance over information used by investors and the capital markets – a responsibility to the public interest

24. 1- 24

25. E. Graphical Representation of Assurance Services The Relationships Among Auditing, Attestation, and Assurance Engagements Assurance Services Any Information Attestation Services Primarily Financial Information Auditing Financial Statements

26. Audit and Professional skepticism Skepticism means that you don’t know. It does not mean that the practitioner assumes everyone is dishonest or that figures have been deliberately misrepresented. Nor does it mean that you believe all figures and statements are correct. It means you are aware that we can all be subject to optimism (perhaps too much), human error, giving quick answers because we are short of time, and misunderstanding. It also recognizes that sometimes people are deliberately misleading or dishonest . Skepticism means that evidence is required to test statements or assumptions

27. T he expectation gap in audit T he difference between what the public expects from the auditing profession and what the auditing profession actually provides. ACCA defines the expectation gap in audit as ‘the difference between what the general public thinks auditors do and what the general public would like auditors to do’. The expectation gap in audit is a topic that attracts attention. It broadly measures public concern about audit. Historically , some in the profession might have portrayed the gap as being due to the public’s lack of understanding rather than being a legitimate concern. Even though there might be a gap in knowledge, that doesn’t cancel the calls for auditors to do more or better.  Everyone closely connected to the audit profession, from regulators to the general public, will need to work together in order to close the expectation gap.

28. Some examples of the misunderstandings inherent in the public’s expectations are as follows: The public believes that the audit opinion in the audit report amounts to a ‘certificate’ that the financial statements are correct and can be relied upon for all decision-making purposes.   The public also believes that the auditor has a duty to prevent and detect fraud and that this is one reason for an audit.   The public assumes that, in carrying out his audit work, the auditor tests 100% of the transactions undertaken during the accounting period.

29. The three gaps  The performance gap focuses on areas where auditors do not do what auditing standards or regulations require. This could be because of insufficient focus on audit quality or differences in interpretation of auditing standard between practitioners and regulators.

30. Bridging the audit gap-Proper education User of financial statements must understand that it is not the responsibility of auditor to detect fraud as public thinks that audit is only for the purpose to detect fraud. Audit work is based on sampling which means that auditor does not verify all the transaction so absolute assurance cannot be given. General purpose financial statements are prepared for general use of the users so special nature of decision making should not be made. Audit report should mention the nature of work auditor carried out and that their opinion is based on the information provided to them and to the best of their knowledge and belief.

31. APPOINTMENT AS AN AUDITOR Every auditor wants to get more jobs to do, but one must hasten slowly in accepting new jobs to avoid getting into unforeseen troubles by getting involved with a client who may be of high risk and damage your reputation.

32. Marketing professional services The professional accountant in public practice must be honest and truthful and must not :   Make exaggerated claims for services, experience etc or be misleading in other ways. Make disparaging references or unsubstantiated comparisons to the work of another. Bring the ICA, the accountancy profession or other accountants into disrepute . If fees are mentioned, promotional material must state the basis of charging and great care has to be taken that readers are not mislead about the services offered and the fees that will be charged . It is possible to compare fees with those of other firms provided the comparison is not misleading . If commissions are paid or received (for example, by recommending software package), full disclosure of the commercial arrangement must be made.

33. Tendering for professional services Often, to obtain new work, accountants will be asked to submit a tender in competition with other firms. Before submitting a tender, contact must be made with the existing or previous accountant to see if there are any reasons why the appointment should not be accepted . The fees quoted can be whatever the accountant thinks appropriate, but there can be threats to compliance with the fundamental principles. For example, if the fee were so low that it would be difficult to carry out the work to the required standard of competence and due care. The IESBA states that: Auditors should perform high quality audits irrespective of the audit fee charged . Adequate time must be planned and spent to enable the audit to be performed in accordance with the technical and professional standards.

34. Before you say ‘yes’ (and continuance decisions) Practical issues Timetable suitable? Suitable personnel? Specialist? What work is required? Future plans for the entity? Why auditors being changed?

35. Communication with existing auditors If the auditor is approached by new audit client, if it’s a new business and this is the first audit there will be no previous auditors to communicate with and new auditors must make their own decision .   If it is not a new business and there is an existing auditor then the new auditor must ask the client for permission to contact the old auditor . If permission is not given, the appointment should be declined. Why would permission not given ? Is a client trying to conceal something? Why else would they not allow a new auditor to communicate with the existing auditor ?

36. Communication with existing auditors cont’d Assuming permission is given the new auditor will write to the old auditor for information. The old auditor can’t simply send that information to the new auditor because that is confidential, and the old auditor has to ask the client for permission in turn. If that permission is not given the new auditor should decline the appointment because again the client is trying to stop communication between the old and new auditors If the old auditor provides information then the new auditor is more fully equipped to make their accept or reject decision. If the existing auditor decides not to provide information the new auditor should try to persuade the old auditor to provide it, but otherwise might have to rely on information as been found in other ways.

37. Letter of engagement An audit engagement is an arrangement that an auditor has with a client to perform an audit of the client's accounting records and financial statements . The term usually applies to the contractual arrangement between the two parties, rather than the full set of auditing tasks that the auditor will perform. To create an engagement, the two parties meet to discuss the services needed by the client. The parties then agree on the services to be provided, along with a price and the period during which the audit will be conducted. This information is stated in an engagement letter , which is prepared by the auditor and sent to the client. If the client agrees with the terms of the letter, a person authorized to do so signs the letter and returns a copy to the auditor . By doing so, the parties indicate that an audit engagement has been initiated. This letter is useful for setting the expectations of both parties to the arrangement.

38. Content of letter of engagement Description of the objective of an audit: to express an opinion whether or not the financial statement show a true and fair view . Defining responsibilities: management’s are to prepare the financial statements and to set up a   system of internal control. It is the auditor’s responsibility to audit the financial statements . Reference to the applicable financial reporting framework. For example, national legislation ( eg companies act) and/or IFRS .   Emphasis that audits depend on sampling that there are no guarantees. The audit looks for only material misstatements. It will examine records on a test basis that can only give a reasonable assurance.  will state that they expect unrestricted access to the company’s records and they expect full explanations for any queries they might have .

39. Content of letter of engagement cont’d They will state that the auditor’s report is a matter between them and the addressees of the report (the members of company) and that it should not be relied upon by other parties. There will be certain matters about planning the audit, such as arranging the interim audit and final audit, attending inventory counts, organising external confirmation of receivables, and liaison with the internal audit department. Almost certainly there will be something about fees, and remember fees should never be absolute. They should be estimate but subject to the proviso that if more work needs to be done, it will be done and additional fees will be required.  Description of the expected relationship between the external auditor and internal audit; how the work of internal audit might be reviewed and then relied on by the external auditors.

40. PROFESSIONAL ETHICS IN AUDIT One of the key traits of a professional is adherence to a rigorous set of ethical guidelines. When someone veers too far from ethical standards, their trustworthiness and judgment come into question . Sadly, not everyone who works in the accounting field is trustworthy. Daily violations of public and private trust occur, and resolving ethical dilemmas doesn’t always end favorably .

41. Professional Ethics The conceptual framework approach to ethics recognises that there are : Ethical principles to be followed These are subject to threats Accountants should use safeguards to avoid or to respond to threats by reducing them to acceptable levels.

42. The following are five areas that deserve the attention of anyone considering working in as an independent accountant. Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour

43. Fundamental Principles

44.  Integrity Demonstrating integrity means being straightforward and honest in all business and professional relationships. Upholding integrity requires that accountants do not associate themselves with information that they suspect is materially false or misleading — or that misleads by omission.

45. Confidentiality Disclosure of financial information or revealing the disposition of a potential merger by an accounting professional without express permission violates the trust that is the foundation of a professional relationship — unless there is a legal or professional reason to do so.

46. Objectivity Members shall not allow bias, conflicts of interest or the undue influence of others to compromise their professional or business judgement A critical component of trust is making unbiased decisions and recommendations that benefit the client . To remain objective, it is also necessary to ensure that recommendations are not subject to outside influence. An accountant’s professional judgment is compromised if they subordinate their judgment to someone else’s.

47. Professional Competence   As technology, legislation and best practices change, a professional accountant must remain up to date. To exercise sound judgment, an accountant must stay abreast of developments that could affect a decision’s outcome. Practicing due care means recognizing your skill level and not suggesting that you have expertise in an area where you do not. Consulting with other professionals is a standard practice that helps to bond a network of individuals and generate respect. Similar guidelines also apply to accounting professionals who supervise others. These accountants must ensure that the subordinates receive proper training and guidance as they carry out their responsibilities.

48. 5. Professional Behaviour Ethics require accounting professionals to comply with the laws and regulations that govern their jurisdictions and their bodies of work. Avoiding actions that could negatively affect the reputation of the profession is a reasonable commitment that business partners and others should expect.

49. Threats to the fundamental principles (independence) Advocacy Threat: Occurs when the audit firm, or a member of the audit team, promotes, or may be perceived to promote, an audit client's position or opinion. For example: dealing in, or being a promoter of, shares or other securities in an audit client

50. Self-interest   Financial interests – the provisions of the Code consider who holds the interest, whether the interest is direct or indirect and materiality. Firms, members of audit teams and immediate family members cannot hold direct or material indirect financial interests in audit clients. However, safeguards may be applied where a close family has such an interest . Close business relationships – cannot be entered into unless immaterial and insignificant to both the firm and the client or is management . Family and personal relationship – the existence and significance of any threat depends on the individual’s role in the audit team, the role of the individual within the client and the closeness of the relationship . Loans and guarantees – the existence and significance of any threat depends on whether making loans is the client’s business, the terms and conditions and to whom it is made . Recruiting for client Fees – the Code does not prescribe the basis for calculating fees. However : Contingent fees – are not permitted for audit engagements Relative size – the only benchmark in the Code is 15% of total fees, for two consecutive years, for a PIE client Low-balling – quoting a lower fee is not in itself unethical, but must not be so low that it threatens professional competence and due care Overdue fees – may be seen as equivalent to a loan

51. Self-review threats Self review threats arise when an auditor does work for a client and that work may then be subject to self-checking during the subsequent audit. For example, if the auditor prepares the financial statements, and then has to audit them, or the auditor performs internal audit services and then has to check that the system of internal control is operating properly. Auditors could obviously be reluctant to criticise the work which their own firms have earlier undertaken, and this could interfere with independence and objectivity.

52. Advocacy threats Advocacy is where the assurance or audit firm promotes a point of view or opinion to the extent the subsequent objectivity is compromised. An example would be where the audit firm promotes the shares in a listed company or supports the company in some sort of dispute ( eg with the tax authorities). Advocacy can interfere with professional skepticism. As always, the audit firm should weigh up the risks to its objectivity, integrity and independence and should withdraw from performing further work if those risks are too high.

53. Familiarity threats

54. Intimidation Threat

55. S afeguards within the client’s systems and procedures The client requires persons other than management to ratify or approve the appointment of a firm to perform an engagement. The client has competent employees with experience and seniority to make managerial decisions. The client has implemented internal procedures that ensure objective choices in commissioning non-assurance engagements. The client has a corporate governance structure that provides appropriate oversight and communications regarding the firm’s services.

56. Safeguards in the work environment   Two types of safeguards in the work environment – T hose that are firm-wide, and T hose that are engagement-specific

57. Safeguards in the work environment Firm-wide safeguards include Policies and procedures to implement and monitor quality control of engagements. Policies and procedures that will enable the identification of interests or relationships between the firm or members of engagement teams and clients. Policies and procedures to monitor and, if necessary, manage the reliance on revenue received from a single client. Using different partners and engagement teams with separate reporting lines for the provision of non-assurance services to an assurance client. Policies and procedures to prohibit individuals who are not members of an engagement team from inappropriately influencing the outcome of the engagement. Advising partners and professional staff of assurance clients and related entities from which independence is required. A disciplinary mechanism to promote compliance with policies and procedures.

58. Safeguards in the work environment E ngagement-specific Having a professional accountant who was not a member of the assurance team review the assurance work performed or otherwise advise as necessary. Consulting an independent third party, such as a committee of independent directors, a professional regulatory body or another professional accountant. Discussing ethical issues with those charged with governance of the client. Disclosing to those charged with governance of the client the nature of services provided and extent of fees charged. Rotating senior assurance team personnel.