Aue3701 Notes

AUE3WHAT IS AN AUDITOR? 1.1 Introduction No doubt we all have some idea about what an auditor is and what an auditor does, but these ideas are usually based on what we see in the media, and are often vague or clouded with misconceptions! We hear or read that the “auditors are investigating the matter”, or that the Auditor General “tabled his report in parliament”. On television game shows or talent shows we are told that “the auditors are standing by to verify the results” and we occasionally read in the newspaper that an “environmental audit” has been carried out for a large industrial company. Auditors seem to be involved in numerous different activities and there seem to be numerous different kinds of “auditor”. On the other hand auditors are regularly described as boring, conservative or more rudely as “little grey men (or women)” or bean counters, a description which has grown out of the popular image of auditors, serious looking individuals, in their grey suits with laptops tucked under their arms! And yet, despite the slightly mocking image, there is a general acceptance that auditing is a serious business and that auditors have a very important role to play in society. So what do auditors do? Simply stated, auditors of all types provide assurance pertaining to information prepared or presented by one party to another party with the intention of inspiring confidence in the fairness of the information which is being prepared or presented. Example 1, Tramlines (Pty) Ltd goes to BigMoney Bank to request a loan. BigMoney Bank tells Tramlines (Pty) Ltd that before the bank can consider giving the company a loan it must provide BigMoney Bank with financial statements for the company which must be audited. In effect, BigMoney Bank is telling Tramlines (Pty) Ltd that the company can provide the financial information, but that the bank wants some assurance from a source independent of Tramlines (Pty) Ltd that the financial information provided by Tramlines (Pty) Ltd is fair. This is where the auditor comes in. The auditor will examine (audit) the information provided by Tramlines (Pty) Ltd and report to the bank on whether it is “fair”. (If the auditor does not think the information is “fair”, he will say so.) This assurance about the financial information submitted by Tramlines (Pty) Ltd, adds to its credibility and BigMoney Bank will be more comfortable about relying on the information when making the decision on whether to grant the loan. If the (independent) auditor states that the information is fair the bank will be more confident that granting the loan will not result in the bank suffering a loss because Tramlines (Pty) Ltd cannot repay the loan. If BigMoney Bank did not insist on audited financial information, Tramlines (Pty) Ltd could easily manipulate its financial information to deceive BigMoney Bank into granting it a loan. Example 2. How does giving assurance relate to a television talent show and why do the promoters of the show involve auditors? The answer is that the promoter wants the results of the talent show to be credible. He does not want the sponsors, participants and very importantly the public who support the show to think the results are fixed (manipulated). If this impression is given, sponsors are likely to withdraw their support and audiences (and ratings) will decline until there is no talent show. Thus, producers engage auditors, who are generally perceived by all the parties concerned to be honest, reliable and conservative, to give an opinion on whether the information (e.g. votes cast and counted, rules, etc) underlying the result was fair. In the context of the accounting and auditing profession we can express this more formally by referring to the International Framework for Assurance Engagements, which defines an assurance engagement as one “in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended user…..” (see point 3 below for a full discussion). 1.2 Types of auditor If we consider the following types of auditor we can get a clearer understanding of what they do and what they have in common * registered (external) auditors – auditors who express an independent opinion on whether the annual financial statements of a company, fairly present the financial position and results of the company’s operations. The external auditor is not an employee of the company. The external Downloaded by david matina () lOMoARcPSD| 1/3 auditor enhances the degree of confidence which users of the financial statements will have in the information in those financial statements. Registered auditors offer their services to the public. They are described as being “in public practice” and must be registered with the Independent Regulatory Board for Auditors (IRBA). An audit of financial statements is by no means the only assurance engagement which registered auditors conduct. As you will see later in this text, registered auditors also frequently perform review engagements, which are also assurance engagements but which provide a lower level of assurance than an audit provides. * internal auditors – auditors who perform independent assignments on behalf of the board of directors of the company. These assignments are varied but usually relate to the evaluation of the efficiency, economy and effectiveness of the company’s internal control systems and business activities and to the evaluation of whether the company has identified and is responding to the business risks faced by the company. In a sense, the internal audit function helps senior management to meet their responsibilities in running the organisation by providing independent information about the company’s departments, divisions or subsidiaries. The internal auditor enhances management’s degree of confidence that the company’s systems are functioning as intended and that the risks are being assessed and addressed. The internal auditor is an employee of the company, but must be independent of the department, division or subsidiary in which the assignment is being carried out. The organisational structure and reporting lines in the company will be designed to ensure that the internal audit function is as independent as possible. An individual is not required to be registered with a professional body to be employed as an internal auditor, but may choose to register with the Institute for Internal Auditors. Many internal auditors are chartered accountants and will be registered with the South African Institute of Chartered Accountants. * government auditors – government auditors perform a role similar to that of the internal auditor – but within government departments. They will evaluate and investigate the financial affairs of government departments, reporting their findings to senior government. They assist government in meeting its responsibilities in running the financial affairs of the country and increase the degree of confidence which the government has in its departments and indirectly, the confidence which the public has in the government’s financial management. The government auditor (called the Auditor General), is an employee of the government but again his status and organisational positioning makes his office independent of the government departments in which assignments are carried out. Registration with a professional body is not required to be employed as a government auditor, but again many government auditors are registered with professional bodies. * forensic auditors – forensic auditors concentrate on investigating and gathering evidence where there has been alleged financial mismanagement, theft or fraud. Forensic audits may be carried out in any government or business entity, but it should be obvious to you that the forensic auditor needs to be independent of the entity under investigation. Where an independent and competent forensic auditor has been involved, the degree of confidence which the court/investigating body has in the financial evidence, is increased. Forensic auditing is a specialist field but because of the emphasis on financial matters, most if not all forensic auditors have a background/qualification in auditing. * special purpose auditors – these are auditors who specialise in a particular field such as environmental auditors, who audit compliance with environmental regulations, and VAT auditors who work for the South African Revenue Services and who audit vendors’ VAT returns. The conclusion presented by the special purpose auditors enhance the degree of confidence which, for example, SARS will have in the “correctness” of the VAT returns audited, or a local authority will have in an environmental impact report. What is the characteristic com701 NOTES