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CIS- Auditing notes(1)

CIS- Auditing notes(1)

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CISINTRODUCTIONWhen the retail world was still non- existent, owners of wealth entrusted their  possessions to stewards.Stewards would from time to time account to their masters, reciting from memory thegoods acquired, those disposed of and those still in their possession.The master would listen to this recital of the stewards’ transactions and question himthereon.The master was the listener or auditor. As a result the word auditor (derived from thelatin word audire – to hear) acquired a secondary meaning – one who satisfies himself asto the truth of the accounting of another.In ancient Egypt and Babylon, the practice of checking records was well established. TheGreeks and Romans also had very complete systems of auditing public accounts. TheGreeks for instance considered the accountability of officials as being of such importancethat everyone connected with Government or public administration had to render hisaccounts.
The Evolution of Auditing
The historical development of auditing has evolved the audit function through a number of stages. Auditing first emerged in the form of ancient checking activities in the ancientcivilizations of China, Egypt and Greece. However, the practice of modern auditing didnot become firmly established until the advent of the industrial revolution in the midnineteenth century in the UK. The audit practice in the mid 1800s to early 1900s can beregarded as “traditional conformance role of auditing” as auditing was mainly concernedwith ensuring the correctness of accounts and detecting frauds and errors. Over the past30 years or so, the auditor played an “enhancing role” by enhancing the integrity andcredibility of financial information. Today, auditors are expected not only to enhance thecredibility of the financial statement, but also to provide value-added services, such asreporting on irregularities, identifying business risks and advising management on theinternal control environment. However, extensive reforms were implemented in variouscountries as a result of the collapse of big corporations; it is expected that the role of auditors will converge.The role of auditors has moved from “mere conformance through an enhancing role to aconvergence role”. It is evident that the paradigm of independent auditing has shiftedover the years. It is believed that it may continue to shift in the future.A review of the historical development of auditing has shown that the objective of auditing and the role of auditors are constantly changing as they are highly influenced bycontextual factors such as the critical historical events (e.g. the collapse of bigcorporations), the verdict of the courts, and technological developments (e.g.advancement of computing systems and CAATs). It can be observed that any major changes in these contextual factors are likely to cause a change in the audit function andthe role of auditors. As a result, auditing is seen to be evolving at all times.1
 
The audit function in a market economy ultimately evolves by social consent because:Society either accepts or rejects the role of a professional group assumes for itself, in timethe group either finds a role acceptable to society or the group disappears. As conditionsand apparent needs change, society may reject roles formerly considered accepted so professional groups must continually be alert to the desirability of role modification andrevision.However, it is important to note that the change in society’s expectation and the responseof the auditing profession towards these changes are not always at the same pace. Hencethere is a natural time gap between the changing expectation of the users and the response by the profession and due to this time gap there arises what has been stated as theexpectation gap or audit expectation gap. Even though the existence of such a naturaltime gap is inevitable, auditors should be sensitive to the changing expectation of therelevant groups while at the same time containing these expectations within theconstraints of what is possible. There are inevitably economic and practical limitations onwhat an audit can do, and this is something which those who wish the benefit mustunderstand.
The Agency Theory/Problem
The objectives of management may differ from those of the firm’s Stockholders.Ownership and control are separate, a situation that allows management to act in its own best interests rather than those of the Stockholders.Management is an agent of the Stockholders and decision making is delegated.Due to the differences in objectives, Stockholders then have to motivate management tothink along the lines of the owners (stockholders) by way of incentives, such as stock options, bonuses and perquisites for management to make optimal decisions.Stockholders apart, from giving incentives, can monitor management through bonding,systematically reviewing management perks,
auditing financial statements
andexplicitly limiting management decisions.
Definition of Auditing
An independent examination by a qualified appointed person (auditor) of a company’sfinancial statements and books of accounts so as to express or formulate an opinion as towhether the financial statements show a true and fair view of the financial position of thatcompany and its results, and whether the financial statements have been prepared inaccordance with International accounting standards, International Financial reportingStandards or Generally Accepted Accounting Principles.
True and Fair View explained
There are three possible auditing approaches which might be used and these are:2
 
1.
Prescriptive approach – The
auditor would list requirements with minimumindividual interpretation.2.
Laissez faire – The auditor w
ould leave it up to the directors to decide howmuch information is required.
3.True and Fair View
This literally means that financial statements represent what they are supposed torepresent.Financial statements are prepared annually so that shareholders and other users can makeappropriate judgments.True and fair view prescribes general principles and establishes information which isconsidered necessary and also laying down particular requirements only in so far as theyare necessary to support general principle. The overriding requirements of an account areto give a fair view and this overrules all other prescription requirements.The main consideration for those who prepare financial statements is what is mostappropriate.Skills of directors and auditors must be sound for a true and fair view approach to work.There should be a tendency to disclose more rather than less and we should prevent theembarrassment incidences of hidden facts and figures.The substance of a transaction or an event takes precedence over its legal form. It must bean opinion arrived at rationally and on a supportable basis both theoretically and pragmatically.It requires to be capable of being substantiated by the directors to the auditors who havethe responsibility to consider independently on the evidence whether the accounts prepared by the directors do indeed give reference to a true and fair view.
RESPONSIBILITIESDirectors’ responsibilities
0Manage the business1Assess business risks2Safeguard assets3Implement a system of internal controls to prevent and detect fraud and erro4Maintain books and records5Preparation and delivery of financial statements –suitable policies, judgements andestimates6Compliance with laws and regulations relevant disclosures in accounts7Stewardship of the business – fiduciary relationship - Agent8Accountability9Ensure the business is a going concern and can continue to be.
Auditors’ responsibilitiesStatutory auditOther assurance engagements
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