Audit Framework regulation - Chapter 1

Audit Framework & Regulation

General Overview

• Imperial College of Business Studies

• Course Title: Audit Framework & Regulation

• Tutorial 01

• Lecturer: K. Sivagar (B.Sc (Hons), ACMA, CGMA, FICM-SL)

Key Concepts in Audit

Definition of Audit

• Audit: An independent examination of financial information, irrespective of the form, regardless of whether it is a financial statement or information included in a report.

Importance of External Audit

• Need for External Audit:

  • Shareholders fund the company but may not engage in daily operations.

  • Directors manage the company, aiming for maximization of shareholder wealth.

  • Financial statements prepared by directors may be manipulated; hence, an independent audit is essential to ensure transparency and fairness.

• Objective of an Audit:

  • Assess whether financial statements provide a true and fair view.

Audit Goals

• Provide reasonable assurance on the integrity of financial statements.

• Evaluate if statements comply with financial reporting frameworks.

Auditor Responsibilities

Responsibilities of Management and Governance

• Management: Prepare and fairly present financial statements adhering to IFRSs.

• Going Concern Assessment: Management must evaluate the company's continuance and disclose related matters if necessary.

• Governance Oversight: Those in charge should oversee financial reporting processes.

Auditor’s Obligations

• Obtain Assurance: Ensure that financial statements are free from material misstatement.

• Communicate Findings: Provide an audit report that conveys findings and opinions according to ISAs.

• Professional Judgement: Exercise scepticism and judgment throughout the audit.

Identification of Risks

• Assess Risks: Recognize and evaluate financial statement risks due to fraud or error.

• Internal Controls: Understand internal controls to adapt audit procedures as necessary.

Audit Materiality and Limitations

Definition of Materiality

• A matter is material if its omission or misstatement could influence economic decisions.

• Reasonable Assurance: The highest level of assurance but not an absolute guarantee against material misstatement.

Benefits of Auditing

• Quality of information and reliability enhances market reputation.

• Independent verification reduces management bias and potential fraud.

• Provides credibility for financial statements before authorities (tax, lenders).

Limitations of Auditing

• Audit evidence is not absolute; it may not detect all instances of fraud or error.

• The scope of audit may not cover all items within financial statements.

• Auditors express an opinion, but cannot guarantee complete correctness.

Assurance Engagements

Elements of Assurance Engagements

• Criteria: Subject matter evaluated against specified criteria.

• Report: Issued to intended users with the practitioner’s opinion.

• Evidence: Collect sufficient evidence to support the required assurance level.

• Subject Matter: Data being reviewed, including financial and non-financial information.

• Three Party Relationship: Involves intended user, responsible party, and practitioner.

Types of Assurance Engagements

• Reasonable Assurance Engagements: More thorough procedures, higher level of assurance.

• Limited Assurance Engagements: Fewer procedures, lower level of assurance.

Statutory Audit and Regulation

Legal Framework

• Auditing is often mandated by law; usually defined by national laws like the UK Companies Act 2006.

• Key exceptions may exist for small companies.

Auditor Appointment

• Eligibility: Must be a member of a recognized supervisory body.

• Appointed by shareholders via vote or by directors in specified circumstances.

Auditor’s Rights & Responsibilities

• Auditors have rights to access company records and participate in meetings.

• Their primary duty is to audit financial statements and ascertain fair presentation.

Corporate Governance

Overview

• Definition: Internal systems guiding how companies are controlled and directed.

• Aims: Promote transparency, accountability, and efficient operations.

OECD Principles

• Key Principles of Corporate Governance:

  • Establish effective governance frameworks.

  • Ensure equitable treatment of shareholders.

  • Maintain transparency and accountability in reporting.

  • Involve stakeholders appropriately.

Professional Ethics in Audit

ACCA Code of Ethics

• Fundamental Principles:

  1. Integrity

  2. Objectivity

  3. Professional competence and due care

  4. Confidentiality

  5. Professional behavior

Threats to Principles

• Self-interest, Self-review, Advocacy, Familiarity, Intimidation: Various threats that could compromise ethical practices within auditing.

Quality Control Procedures

Ensuring Audit Quality

• Firm-Level Quality Control: Creating culture around quality, adequate training, and standards.

• Individual Engagement Quality Control: Each audit must comply with professional standards.

Engagement Reviews

• Engagement Reviews: Vital for listed entities to ensure significant judgments and conclusions are vetted for appropriateness.

Conclusion

• Understanding the auditing framework provides insights into productive auditing processes, regulatory obligations, ethical conduct, and the importance of quality control.