Auditing
2020
288
by: Alexandra Shtein
,AUDITING
Audit definition:
- systematic process of the collecting & evaluating of evidences and information objectively of assertions on
economic operations and events made by management of an entity
not: guarantee existence of a company / no objective to defeat fraud
• Duties & responsibilities of auditor:
* ALWAYS INDEPENDENT
- to express an opinion
- to investigate financial statements
- ensure accounting records in accordance with company’s requirements
- minute books in appropriate form
• Audit objective:
- to express an opinion on the financial statements that they are free from material misstatement and a fair
representation in all material aspects
EXPLANATION OF THE OBJECTIVE
the auditor’s opinion enhances the credibility of the financial statements but does not warrant :
the future feasibility of the business / the capability and effectiveness of which management
manages the entity
• Inherent limitations of audit: why an auditor can only provide
reasonable assurance
ST FRANCI
- S – sampling – not 100% testing
- T – time and resources
- F – fraud hidden by management
- R – reliability
- A – audit nature (legal limitations)
- N – nature of financial reporting (use judgement to make estimates)
- C – cost vs benefit
- I – incorrect (un)intentionally
1
,• Types of services:
- 1) Reasonable assurance engagement eg: financial statements audit
- 2) Limited assurance engagement eg: independent review
- 3) Non-assurance no opinion formulated
• Kinds of audits:
- compliance audit
- financial statement audit
- operational audit
• Types of auditors:
- independent auditor (external)
- internal auditor
- government auditor (public)
- forensic auditor
• Company Act requirements:
- financial year
- accounting records
- financial statements
- annual financial statements
every company must appoint an auditor when its PI score is more than 350
• PIS (Public Interest Score):
- method to access companies public interest
for a private company:
PIS COMPANY CC’s or owner managed
< 100 independent review no assurance required
100 – 349 - audit if AFS internally compiled - audit if AFS internally compiled
- independent review if AFS externally compiled - no assurance if AFS externally compiled
> 350 audit audit
• Auditing Postulates:
to claim as true, existent or necessary
1) Truth & Fairness
financial statements and data = verifiable
no collusion / irregularities
principles = consistently applied
2) Independence
no conflict of interest
professional status
auditor capacity
2
, INTERNAL CONTROL
Internal Control definition:
- process designed & effected by management to provide reasonable assurance about the achievement of an
entity’s objectives relating to:
reliability of financial reporting, effectiveness & efficiency of operations, compliance with laws and
regulations
• Inherent limitations of internal control:
CRRABH
- C – collusion / control becomes inadequate
- R – routine / repetitive transactions
- R – reasonable assurance
- A – abuse of responsibilities of internal control
- B – Cost vs benefit
- H – human error
• Internal auditor:
- understand WHY internal control is needed
- apply understanding
- know how to gain knowledge
- generate documents
- INTERNAL auditor – focus on operational goals
- EXTERNAL auditor – focus on financial outcomes
• Characteristics of Internal control system:
CHOPPER
o C – commitment to competence
o H – human resources and policies
o O – organisational structure
o P – philosophies
o P – participation by those charged with governance
o E – ethical values / integrity
o R – reliability of directors
• The control environment
What is it?
The control environment is created by management and provides a favourable “environment” in which internal
controls could function. It is the attitude of management towards internal control.
Evaluation of the environment is important for the auditor:
because an effective internal control system is not possible if a favourable control environment was not created. This
helps us to assess the risk of material misstatement of the financial statements.
3
2020
288
by: Alexandra Shtein
,AUDITING
Audit definition:
- systematic process of the collecting & evaluating of evidences and information objectively of assertions on
economic operations and events made by management of an entity
not: guarantee existence of a company / no objective to defeat fraud
• Duties & responsibilities of auditor:
* ALWAYS INDEPENDENT
- to express an opinion
- to investigate financial statements
- ensure accounting records in accordance with company’s requirements
- minute books in appropriate form
• Audit objective:
- to express an opinion on the financial statements that they are free from material misstatement and a fair
representation in all material aspects
EXPLANATION OF THE OBJECTIVE
the auditor’s opinion enhances the credibility of the financial statements but does not warrant :
the future feasibility of the business / the capability and effectiveness of which management
manages the entity
• Inherent limitations of audit: why an auditor can only provide
reasonable assurance
ST FRANCI
- S – sampling – not 100% testing
- T – time and resources
- F – fraud hidden by management
- R – reliability
- A – audit nature (legal limitations)
- N – nature of financial reporting (use judgement to make estimates)
- C – cost vs benefit
- I – incorrect (un)intentionally
1
,• Types of services:
- 1) Reasonable assurance engagement eg: financial statements audit
- 2) Limited assurance engagement eg: independent review
- 3) Non-assurance no opinion formulated
• Kinds of audits:
- compliance audit
- financial statement audit
- operational audit
• Types of auditors:
- independent auditor (external)
- internal auditor
- government auditor (public)
- forensic auditor
• Company Act requirements:
- financial year
- accounting records
- financial statements
- annual financial statements
every company must appoint an auditor when its PI score is more than 350
• PIS (Public Interest Score):
- method to access companies public interest
for a private company:
PIS COMPANY CC’s or owner managed
< 100 independent review no assurance required
100 – 349 - audit if AFS internally compiled - audit if AFS internally compiled
- independent review if AFS externally compiled - no assurance if AFS externally compiled
> 350 audit audit
• Auditing Postulates:
to claim as true, existent or necessary
1) Truth & Fairness
financial statements and data = verifiable
no collusion / irregularities
principles = consistently applied
2) Independence
no conflict of interest
professional status
auditor capacity
2
, INTERNAL CONTROL
Internal Control definition:
- process designed & effected by management to provide reasonable assurance about the achievement of an
entity’s objectives relating to:
reliability of financial reporting, effectiveness & efficiency of operations, compliance with laws and
regulations
• Inherent limitations of internal control:
CRRABH
- C – collusion / control becomes inadequate
- R – routine / repetitive transactions
- R – reasonable assurance
- A – abuse of responsibilities of internal control
- B – Cost vs benefit
- H – human error
• Internal auditor:
- understand WHY internal control is needed
- apply understanding
- know how to gain knowledge
- generate documents
- INTERNAL auditor – focus on operational goals
- EXTERNAL auditor – focus on financial outcomes
• Characteristics of Internal control system:
CHOPPER
o C – commitment to competence
o H – human resources and policies
o O – organisational structure
o P – philosophies
o P – participation by those charged with governance
o E – ethical values / integrity
o R – reliability of directors
• The control environment
What is it?
The control environment is created by management and provides a favourable “environment” in which internal
controls could function. It is the attitude of management towards internal control.
Evaluation of the environment is important for the auditor:
because an effective internal control system is not possible if a favourable control environment was not created. This
helps us to assess the risk of material misstatement of the financial statements.
3
