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Auditing 2013

FEB 2013 TO JUNE

Welcome to Majan College

Faculty of Business Management AUDITING AN INTRODUCTION FEB 2013 TO JUNE 2013

MAJAN COLLEGE (UNIVERSITY COLLEGE)

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Auditing 2013

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AUDITING AN INTRODUCTION

Auditing Practices Board defines Audit of financial statements as: An exercise whose objective is to enable auditors to express an opinion whether the Financial Statements give a true and fair view of the entity's affairs at the end of the financial period and have been properly prepared in accordance to the Reporting Framework.

Companies Act, 1985 requires the following: Limited companies must prepare Financial Statements annually. These Financial Statements must be distributed to the shareholders. A copy of the Financial Statements must be lodged with the public. The Financial Statements must be audited by independent auditors who must report to the shareholders on the degree of dependence they can place on these Financial Statements. Why Auditing ????? Capital Market Authority of Oman and is available for inspection by the

The purpose of all auditing is to carry out procedures designed to obtain sufficient evidence to determine with reasonable assurance whether Financial Statements are free of material
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Auditing 2013 misstatements.

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Types of Audit:

Statutory audits

Required by Companies Act for all public limited companies. CAPITAL MARKET AUTHORITY OF OMAN regulates that all banks, insurance companies, SAOG and SAOC companies must get an external audit performed. Any business with share capital of Rial Omani 20,000 or more must get an external audit performed and the audited financial statements must be filed along with the Income Tax department of Oman. Non-statutory audits

Non-statutory audits are performed by various clubs, sole traders and partnerships because the owners, members want one and not because it is compulsory by the law.

Internal audits The Capital Market Authority regulates that all Public Limited companies must get an internal audit performed. Public Limited companies with a share capital of Rial Omani Five
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Auditing 2013

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million or more must have a full fledged Internal Audit department with a qualified Internal audit manager and staff.

Public Limited companies with a share capital of less that Rial Omani Five million have a choice of not establishing a full fledged Internal Audit department and are allowed to outsource the Internal Audit function to a professional Audit firm.

Differences between Internal and External Audit

Internal Audit

External Audit

1. Internal designed

Audit to

is

an

activity 1. External Audit is an exercise which the enables the auditor to express their opinion on the organizations financial statement.

improve

organizations operations

2. Internal Audit report to the Board of Directors Audit organization and as such to the to the committee

2. External Auditors report to the shareholders

3. Reports prepared by the Internal 3. External Auditors report is Auditor are private and available for inspection by the confidential and are generally to shareholders and the members of be viewed by the directors and the public.
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Auditing 2013 top management of the

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organization.

4. External Auditors are independent of the company and its management. They are appointed by the shareholders

4. Internal Auditors are generally employees of the organization unless the Internal Audit function has been outsourced.

CORPORATE GOVERNANCE AND AUDIT

With an increasing number of corporate frauds such as ENRON, WorldCom, BBCI etc the legal authorities felt the need for corporate governance. Corporate governance leads to more information to the shareholders and more transparency by the Directors. Disclosure of material matters concerning the organization ensures that all investors have access to clear, factual information

CORPORATE GOVERNANCE is a fairly new concept and also fights the inherent limitations of an audit report. Although work has been done to make the report more informative, the standard format is unlikely to reflect all aspects of the audit. Consequently, Capital Market Authority of Oman of Oman has made it mandatory that the management prepares a report of CORPORATE
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Auditing 2013 statutory auditors of the organization.

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GOVERNANCE. This has to be reviewed, audited and certified

The report on CORPORATE GOVERNANCE must include some key areas of information to be disclosed by the Board of Directors for the benefit of the institutional shareholders. These are areas such as

1.

Composition of the Board of Directors.

2.

Classification of Directors i.e. independent, representative and executive directors etc.

3.

Other directorships held by any or all directors.

4.

Remuneration received by the board of directors. This should not exceed the upper limit set out by the Capital Market Authority of Oman.

5.

Curriculum vitaes (C Vs) of executive management of the organization.

6.

Different committees established within the organization statutory and non statutory.

7.

Composition of committees such as Audit committee, Executive committee etc.


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Auditing 2013

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8.

Number of times the different committees met and highlights / minutes of the meetings.

9.

Number of shareholders at the close of the year.

10. Distribution of share holding.

11. Highest market value quoted on the Muscat Securities Market and lowest value quoted on the Muscat Securities Market. for each operational month.

12. Salaries and allowances of top five mangers of the organization.

13. Means of communication between shareholders and management.

14. Profile of external auditors.

15. Any penalties imposed on the organization or any formal censure or reprimands received by the organization for non compliance from any legal body of the government.

AUDIT COMMITTEE As per Capital Market Authority, all Public Limited Companies must
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Auditing 2013 have an Audit Committee.

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The Audit Committee will be made up of three independent directors. An independent director is one who is not an employee of the company or is not a relative of the management. At least two of these directors should be financially literate.

The Audit Committee will coordinate the work of the internal audit department and monitor the effectiveness of this department. For all practical purposes the Internal Audit department is reporting to the Audit Committee. Appointment and removal of internal auditor is the aegis of the Audit Committee. Reviewing and publishing the quarterly unaudited financial statements as per the requirements of the Capital Market Authority. Liaise with the external auditors and provide timely information to the external auditors in order to facilitate the performance of the end of year audit.

Last but not the least; audit committee will also appraise performance of both.

ELIGIBILITY OF AN AUDITOR

The companies Act, 1985 requires an auditor to hold


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Auditing 2013

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A recognised qualification obtained locally and / or A recognised qualification obtained overseas such as a CPA, ACCA or CA Capital Market Authority, Oman regulates that the statutory auditor should be individually approved by the CMA to work as auditor. Limitations of audit

1. Auditing is not a purely objective exercise. Auditors have to make judgments in a number of areas including risk assessment, what constitutes a significant error, what tests to perform and ultimately what opinion to give. Risk assessment

Significant error

Tests to perform

Ultimate opinion

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2. Auditors do not check every item in the accounting records. We shall see that for many tests auditors only check a sample of items. Reasons

3.

The possibility that client management or staff might not tell the

truth, or collude in fraud. One important control may be a division of responsibilities so that one member of staff checks another's work, but the control will be ineffective if the two collude. Example

4.

Audit evidence indicates what is probable rather than what is


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certain. Some figures in the accounts are estimates, some require a significant degree of judgment and some are affected by uncertainty. Estimates

Significant degree of judgment

Affected by uncertainty.

5.

Auditors are reporting generally some months after the balance

sheet date. The client's position may be changing, and the position shown in the accounts at the last year-end may be significantly different from the up-to-date position. Example

6.

The limitations of the audit report. Although work has been done to

make the report more informative, the standard format is unlikely to reflect all aspects of the audit. Example:

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Auditing 2013 whether accounts are completely correct.

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Hence auditors can only express an opinion, they cannot certify

Practice Questions

1. Define the audit of financial statement 2. Discuss users of audited financial statements 3. What do you understand by statutory and non-statutory audit? 4. What do you understand by internal and external audit? 5. Auditing is not a perfect process Critically analyse the audit process and highlight the limitations of audit with the help of suitable examples.

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