CHAPTER 1

Audit and review

EXAM FOCUS
The theory of auditing and the social responsibility of auditors is a likely topic in the optional
section of the paper. This examiner appears to favour an approach that looks at the “why” of
auditing as well as the “how to audit”. A well prepared student should therefore be aware of the
theoretical as well as the practical side of auditing.

SYLLABUS AND STUDY GUIDE COVERAGE

This chapter covers the following elements of the ACCA study guide:

1 The Nature, Purpose and Scope of Audit and Review

Explain the:

 nature, development and social role of audit and review.

 concepts of accountability, stewardship and agency.
 concepts of materiality, true and fair presentation and reasonable assurance.
 reporting as a means of communication to different stakeholders and the
importance of stakeholder dialogue.
 high level of assurance provided by audit assignments and risk-based approaches;
the moderate level of assurance provided by review assignments and procedural
approaches; assignments in which no assurance is provided.
 concepts of direct and attest engagements.
 recent extension in the scope of audit and review assignments.

In order to cover these elements the following topics are included:

Postulates of auditing
Accountability and stewardship
Agency theory
Social responsibility and stakeholder dialogue
ISA 100 Assurance engagements
Assurance on financial, social and environmental issues

1 The nature and development of auditing and review

1.1 Historical background
The word audit comes from the Latin word “audire” which means “to hear”. In ancient times
stewards gave an account of their financial dealings by reciting how they spent their master’s
money. Their accounts were heard or audited by their audience. Nowadays the word audit
implies some sort of checking or validation of a person’s work by someone who is an
independent reviewer.

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ACCA Paper F8 Text – Audit and Assuarance (International)

The most common usage of the word “audit” is in a business context and refers to the task of
examining the affairs of a commercial entity by an independent person who is called the
external auditor. (An external auditor, who is independent of the entity being audited, can be
distinguished from an internal auditor, who is employed by the entity being audited.)

There are a range of legal structures in which a business can be operated. The most common
forms internationally are described below.

 A sole trader is an individual person who carries on a business with a view to profit. Sole
traders generally have very few restrictions on how they carry on business so long as they
pay their taxes.
 A partnership consists of two or more people working together to make a profit.
Partnerships are a flexible form of business organisation with relatively few constraints
imposed on them.
 A registered company is an artificial creation with a separate legal personality of its own.
It owes its existence to the rules of law contained in the statute of the country in which it is
registered.

A company must therefore comply with certain legal requirements in relation to accounting
matters. Its accounts are usually a matter of public record and must be prepared in a legally
prescribed form. It may also be required to appoint an independent accountant to carry out an
audit of its financial statements.

The reasons why it is important for a company’s accounts to be audited derive from:

(a) the separate legal identity of a company, and

(b) the separation of a company’s ownership from its control.

In nearly all countries, a company has a separate legal personality, meaning that it can own
assets in its own right and can sue and be sued. In particular, this means that if a company
goes bust while owing money to creditors, those creditors cannot look to the assets of the
shareholders for satisfaction. Creditors of a limited liability company can only look to be paid
from the net assets owned by the company. The obligation to be audited has been described
as the price that has to be paid for the advantage of limited liability.
A company is owned by its shareholders, but run by its managers and directors. In a small
company, these are likely to be all the same people. For example, a small company might
have three directors who each own one third of the company’s issued share capital. However,
a large publicly quoted company will have thousands of different shareholders who take no part
in running the company, but who rely on the published accounts to assess the stewardship of
the directors in running the company on their behalf. The fact that the accounts are signed by
an external auditor adds to the reliability of the financial statements, giving the shareholders
confidence that their investment is being managed satisfactorily.

1.2 Recent developments

The basic principle outlined above meant that, in many countries, statute originally required all
companies to be audited by an external auditor each year. The trend throughout the twentieth
century was to question whether this was appropriate. Very small companies saw little point in
having to pay auditors to report to the shareholders on how the directors had performed, when
the shareholders and the directors were the same people. (In fact, there are significant
advantages that even very small companies can gain from an audit, as you will see later in this
text.)
Many governments were convinced by the cost-benefit arguments and have now excused
small companies from having to undergo annual statutory audits. For example, in the UK
unquoted companies with an annual sales revenue below £1m are excused from statutory
audit.

However, a small company can still choose to undergo an external audit each year. If a small
company does not want to undergo an audit but wishes to enhance the reliability of its

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accounts, it can choose to appoint accountants to review the accounts rather than audit them.
Review involves less detailed work and provides less assurance to the readers of the accounts.

The current position is that, after 50 years of the pendulum swinging away from compulsory
audit, with more and more companies being excused every time the sales threshold limit was
raised, suddenly the need for reliable audited accounts is back in the news. The accounting
problems at Enron and WorldCom in America have concentrated attention on the role of
external audit as never before. The momentum to excuse companies from audit has been
stopped. Instead the pressure is on auditors to deliver a quality service at a fair price.

1.3 Definitions
An audit has been defined as “an independent examination of, and expression of opinion on,
the financial statements of an enterprise by a duly appointed auditor in pursuance of a
relevant statutory or professional obligation”.

It is important to consider the meaning of the terms in italics because they are highly relevant to
an understanding of the audit role.

Independent – an auditor is remote from the enterprise that he/she is reporting on. This
independence is defined by law and professional practice.

Opinion – an auditor gives an opinion. He does not certify or guarantee the financial
statements as accurate or free from error or irregularity. Financial statements are themselves
imprecise because they are based on judgements and conventions. It is a common
misconception that auditors are employed primarily to detect or prevent fraud and error.

Duly appointed auditor – an external auditor carrying out a statutory audit holds office
because of legal rules established in the country in which the company is registered.

An audit should be distinguished from a review. The objective of a review engagement is to

enable a reviewing accountant to state whether, on the basis of procedures which do not
provide all the evidence that would be required in an audit, anything has come to the reviewer’s
attention that causes him to believe that the financial statements are not prepared, in all
material respects, in accordance with an identified financial reporting framework.

While an audit gives positive assurance about the accounts (ie, the auditor reports that in his
opinion the accounts do give a true and fair view), a review gives negative assurance (ie, the
reviewer reports that nothing has come to his attention suggesting that the accounts do not
give a true and fair view).

1.4 The social role of audit

The role of auditing in society can be viewed either in narrow financial terms or in the wider
context.

As far as financial auditing is concerned (ie the auditing of financial statements in order to give
an independent opinion on those statements), since audited statements will be more reliable
than unaudited statements, the audit is beneficial to society in that it will help to channel
investment funds to the genuinely most profitable opportunities, thus improving the allocative
efficiency of financial markets.

In a wider context some academics have supported the idea of social auditing. A social report
is provided alongside the financial statements; in this social report the company explains its
impact on society, eg providing employment opportunities (a social benefit) but also causing
pollution and noise (a social cost). The auditor would be required to audit the social report as
well as the more traditional financial statements.

2 Audit theories
2.1 Postulates of auditing

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Any professional discipline needs a framework of theory to provide a basis for the development
of good practice. Auditing has developed through the need for some form of systematic
validation of one person’s behaviour by another. Auditing practice has evolved over the years
through a combination of factors. The development of Company Law, the complexity of
business and the developments of codes of conduct by the professional bodies have all
contributed to a body of knowledge and practice. Academics have attempted to codify certain
underlying principles or postulates, which serve as the basis of auditing theory. A postulate is a
concept that can be observed to be relevant to some course of study. Professor Tom Lee
(1973) identified certain postulates that underlie the practice of auditing.

 Truth and fairness – the auditor is concerned that the financial statements under
examination conform to law and best practice.
 Independence – the auditor is independent through status and is truly objective in
expression of opinion.
 Evidence – an auditor arrives at his opinion through the systematic collection of evidential
data on which his judgement is based.
 Responsibility – the auditor does not prepare financial statements or guarantee their
accuracy nor is he a business valuer. He is not responsible for the prevention or detection
of fraud.

In some countries (eg, the UK) the external auditor is required by statute to report whether in
his opinion the financial statements give a true and fair view. In other countries (eg, the US)
the auditor is required to report whether the financial statements present fairly in all material
respects.

The two requirements can be thought of as being identical. Financial statements that give a
true and fair view of the financial position, performance and changes in financial position of the
enterprise can also be described as giving a fair presentation in all material respects.

Materiality does have an official definition: ISA 320 states that information is material if its
omission or misstatement could influence the economic decisions of users taken on the basis
of the financial statements. Materiality depends on the size of the item or error judged in the
particular circumstances of its omission or misstatement.

Unfortunately, there is no official definition of ‘true and fair view’ or ‘fair presentation’. Each has
been described as a concept similar to physical beauty: it is impossible to define but everyone
knows it when they see it. The IASC Framework document states that following appropriate
accounting standards and applying the qualitative characteristics (ie, choosing accounting
policies that are relevant, reliable, understandable and comparable) should nearly always
produce financial statements that give a true and fair view and a fair presentation.

2.2 The work of Mautz and Sharaf

Mautz and Sharaf in their seminal work The Philosophy of Auditing define various concepts
which can be seen to be relevant to the present day.
The eight postulates laid down by Mautz and Sharaf are as follows:
(a) Financial statements and financial data are verifiable.
(b) There is no necessary conflict of interest between the auditors and the
management of the enterprise under audit.
(c) The financial statements and other information submitted for verification are free
from collusive and other unusual irregularities.
(d) The existence of a satisfactory system of internal control eliminates the probability of
irregularities.
(e) Consistent application of generally accepted accounting principles (GAAP) results
in the fair presentation of financial position and the results of operations.

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(f) In the absence of clear evidence to the contrary, what has held true in the past for the
enterprise under examination will hold true in the future.
(g) When examining financial data for the purpose of expressing an independent opinion
thereon, the auditors act exclusively in the capacity of auditor.
(h) The professional status of the independent auditor imposes commensurate
professional obligations.

Financial statements and financial data are verifiable

This postulate recognises that auditing is concerned with the validation of accounting data by
some form of verification process. This implies that the financial data subject to audit is
objective and transaction based. There are situations when financial data is not verifiable and
the auditor is obliged to state that his opinion is limited or is flawed as a result.

No necessary conflict of interest between auditors and management

This postulate assumes that auditors and managers are working together towards one goal
namely the presentation of financial data that is true and fair. If a conflict exists it is sometimes
resolved by the resignation of the auditor as his position would be untenable.

Financial statements are free from unusual irregularities

This postulate has practical difficulties. The Courts recognise that an auditor is not a detective
with a mission to discover all error and fraud. Yet modern auditors do take on assignments
where the risk of irregularity is high.

Satisfactory system of internal control eliminates errors

This postulate has practical difficulties. Many organisations with strong control systems (eg
banks) are still susceptible to fraud and error. Auditors must plan their work so that they judge
the risk of error and the impact that errors may have on the fairness of financial data.

Application of GAAP results in fair presentation

While it is true that GAAP encapsulate best practice they cannot be universally accepted.
Some organisations are so specialised as to require individual accounting treatments that go
beyond what is generally acceptable.

What has held true in the past will hold true in the future
This postulate recognises that business operations as a general rule do not change radically
from one year to the next and the skills and judgements of management should be applied
consistently from year to year. The pace of change in a volatile business environment may
reveal this postulate to be somewhat simplistic.

The auditors act exclusively in the capacity of auditor

In the real world of audit practice, large accountancy firms provide taxation, consultancy and
corporate finance services to audit clients. Small audit firms provide accountancy and taxation
services to audit clients. This artificial separation of audit from non-audit does give rise to
conflicts of interest, which must be carefully resolved.

The professional status of the independent auditor imposes commensurate professional

obligations
Auditors carry out their work with due skill, care and competence and they are judged by the
standards of their peers. If they fall short of this exacting standard they suffer financial
penalties in the form of damages that may be awarded against them by the Courts.

2.3 Accountability and stewardship

It is the shareholders of a company who are the owners of the business and in whose interest
the business should be run. In a large company, the directors control the business from day-to-
day, with the shareholders probably only meeting once a year at the Annual General Meeting to
have their say.

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ACCA Paper F8 Text – Audit and Assuarance (International)

At all times the directors are accountable for their actions, directly to the shareholders since the
shareholders own the business, and more widely to society at large. If directors behave
unethically (even if in the shareholders’ immediate interests), perhaps by refusing to cut down
on noxious smoke emissions from a factory, then society will express its disapproval (eg, by
criticism in local newspapers or by the public boycotting the company’s goods).

The theory is that directors are stewards of the company’s net assets. The net assets are
owned by the company which is owned by the shareholders, and the directors are supposed to
deal with the net assets exclusively to further the shareholders’ interests. In practice the
directors’ stewardship of the net assets may not appear to be entirely selfless; this point is the
subject of agency theory covered below.

But the theory is clear. Directors are accountable to the shareholders and others for their
stewardship of the company’s net assets.

Directors are fiduciaries; they act in a position of trust. They cannot make any secret profits
because of their office as directors. They must account for their actions with openness and
integrity.

2.4 Agency theory

The concept of Principal Agency theory is more often found in the literature of management
accounting but has some relevance to auditing theory and practice. The essence of this theory
is that a principal will employ agents to safeguard his interests when he is unable to himself act
to protect his interests. For example, a houseowner (the principal) might appoint an estate
agent (the agent) to find prospective purchasers of his house if he wishes to sell it. The
houseowner wishes to benefit from the expertise of the estate agent in setting up a satisfactory
sale. The agent is supposed to operate wholly in the interests of the principal, for example he
must sell the house to the highest bidder, rather than recommend a sale to his sister at a
knockdown price.

In the field of company law, the shareholders of a company acting together as a body (the
principal) appoint directors as agents to run the company, and auditors as agents to report on
the financial statements produced by the directors. The directors are paid a salary to reward
them for their work. The auditor is a rational being, motivated by self-interest, who will seek to
maximise his economic worth by performing his task to the best of his ability. The principal
seeks to maximise his wealth by investing in profitable opportunities and will seek to obtain the
maximum worth he can from the agent. The agent’s hopes to retain his occupation are based
upon the rapport that he establishes with the principal.

In practical terms the auditor is a rational being, guided by market forces, who has a business
to run and will therefore charge a market rate for his services. This consideration also takes
into account that the business world is highly competitive and if the auditor is to give
satisfaction to his principal he should ensure that his work is not only of the best standard but it
is also priced competitively. This drive for competitive edge sometimes drives audit firms to
tender for work at rates that seem unrealistically low in order to secure an engagement. This
practice of “low-balling” as it is called is often perceived as verging on improper practice. Can
an auditor discharge his duties as an honest agent if he prices his work at uneconomic levels?

Agency theory assumes that agent and principal will adopt an optimal sharing rule where each
will receive a reward commensurate with effort and neither will suffer as the result of the human
weaknesses of the other. The audit therefore gives an assurance to the principal that their
interest is safeguarded. The principal in this case is the body of shareholders to whom the
auditors owe a duty of care.

2.5 Social responsibility and stakeholder dialogue

The framework of company law in many countries has been criticised for its orientation towards
primarily protecting the interests of investors and effectively giving social issues short shrift. It
is now recognised that the auditors of a significant entity (eg, a company whose shares are
listed on a Stock Exchange) may have a social responsibility to various users of financial

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statements. These users can be described as “stakeholders” and are often classified as
primary, secondary or tertiary groups.

Primary stakeholders
Investors
Secondary stakeholders
Loan creditors
Bankers
Suppliers
Tertiary stakeholders
Employees
Business community
Government departments
Analysts and potential investors

The main vehicle of stakeholder dialogue through which auditors communicate to stakeholders
is in the annual audit report, in which auditors state their opinion as to whether the financial
statements give a true and fair view. In most countries the audit report is required to be
addressed to the shareholders of the company (the primary stakeholders). However, each of
the other stakeholder groups can read the audit report and gain assurance that the financial
statements have been properly prepared. In many jurisdictions it is possible for non-primary
stakeholders to sue the auditors for compensation if the audit report proves to be unreliable.
For example, a bank owed money by an insolvent company might sue the auditors if the audit
report gave no indication of trouble.

The auditors’ dialogue with stakeholders is important since it is through the audit report that the
stakeholder groups gain confidence that the published financial statements can be relied upon
to make economic decisions about the company (eg, whether to lend money to the company,
whether to buy goods from the company, whether to work for the company, etc).

3 Assurance issues
3.1 ISA 100: Assurance engagements
The external audit, as so far described in this text, is a specific example of an assurance
engagement. ISA 100 explains that the objective of an assurance engagement in general is for
a professional accountant to evaluate a subject matter that is the responsibility of another party
against identified suitable criteria, and to express a conclusion that provides the intended user
with a level of assurance about that subject matter.

An assurance engagement will therefore exhibit all of the following elements:

(a) a three party relationship involving:
 a professional accountant
 a responsible party
 an intended user;

(b) a subject matter;

(c) suitable criteria;
(d) an engagement process; and
(e) a conclusion.

For example, in the case of an external audit:

(a) the three parties involved are the auditor (the professional accountant), the company
management (the party responsible for preparing the accounts) and the readers of the
accounts (the intended users, particularly the shareholders).

(b) the subject matter is the financial statements.

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ACCA Paper F8 Text – Audit and Assuarance (International)

(c) the criteria are the contents of the applicable financial reporting framework, for example
IASs and relevant statute.

(d) the auditor is appointed to his position by a formal process.

(e) the auditor expresses his conclusion in the audit report that provides a level of
assurance as to whether the financial statements give a true and fair view.

Not all engagements carried out by professional accountants are assurance engagements. For
example, the preparation of tax returns for a client is not an assurance engagement, since no
conclusion is expressed.

An auditor cannot give a categorical assurance that the financial statements are free of error,
misstatement or any other irregularity. The standard wording of an audit report in ISA 700
contains the line that auditors ‘plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement’. Reasonable assurance
lies between 100% assurance and moderate assurance, and is a concept that the auditor must
use his professional judgement to apply. An auditor gives an assurance that is based on the
acceptance of a risk that he may give an inappropriate opinion. This concept of audit risk is
dealt with in more detail in the chapter on planning. An auditor is inevitably constrained by a
number of factors when he gives his opinion:

Time – Audits are time constrained in the sense that there are deadlines for publishing financial
statements and these may result in penalties if they are not met.

Cost – Audits are constrained by cost as it is a basic principle that audit work must be done in
reasonable time and at reasonable cost. Auditors have to make judgements about the amount
of time that they will devote to an audit task.

Knowledge of the entity – Audit work is constrained by the state of knowledge of the entity.
Auditors use their cumulative audit knowledge and experience (CAKE) in order to devise the
best strategy for conducting audit work.

Management’s co-operation – Audit work is done on the basis that there is trust between the
auditee and the auditor.

Audit competence – Ultimately the auditor is constrained by his own skills and resources.

The risk based approach taken by auditors today is based on a realistic evaluation of the
above. By considering the amount of risk inherent in his audit opinion (audit risk), the auditor
will be able to give a higher level of assurance in his opinion than if he carried out no risk
assessment. The risk-based approach to audit is therefore the modern recommended way to
carry out an audit instead of the more procedural approach of the past (simply carrying out a
series of standard audit tests, and then giving one’s opinion based on the findings of all the
tests).

3.2 The nature of review assignments

Accountants also undertake review assignments, which can meet the definition of assurance
engagements but do not involve the degree of investigation and verification of an audit in its
fullest sense. In this case in the past the assurance may not have been formally articulated in
a report but it may have been implied by the understanding between the parties. This is
illustrated by an American legal action 1176 Tenants Corporation v Max Rothenberg. The
defendant accountant was engaged to write up the books of a housing association. No audit or
verification work was to be carried out. It was later discovered that the work had been done in
such a mechanical, careless fashion that several blatant acts of fraud were unreported. The
client successfully proved a breach of contract on the grounds that a basic level of skill was
assumed to be inherent in the engagement of a qualified accountant.

Guidance to professional accountants in carrying out review assignments has now been issued
in the form of ISA 910 Engagements to review financial statements. Whereas an audit offers a

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high level of assurance to the intended users, a review only offers a moderate level of
assurance.

At the end of his review procedures, the accountant should issue a review report containing a
clear written expression of negative assurance on the subject matter, ie whether any
information obtained during the review indicates that the financial statements do not give a true
and fair view in accordance with the identified financial reporting framework.

ISA 120 ‘Framework of International Standards on Auditing’ contains a useful chart

summarising the differences between the processes of auditing and of related services.
(Related services comprise reviews, agreed-upon procedures and compilations.)

Auditing Related services

Nature of Audit Review Agreed-upon Compilation

service procedures

Level of assurance High, but not Moderate No No

provided absolute assurance assurance assurance assurance

In an audit, the auditor gives positive assurance on the assertions embodied in the financial
statements, reporting the auditor’s opinion on whether the financial statements give a true and
fair view.
Report Positive assurance Negative Factual Identification
In aprovided on assertion(s)
review, the accountant assurance
gives negative on on the findings
assurance of statement
financial of information
assertions,
reporting whether anything has come to his assertion(s) procedures
attention suggesting that the financialcompiled
statements
are not properly prepared or do not give a true and fair view.

In an engagement to perform agreed-upon procedures, the accountant is engaged to carry out

specific stated procedures (eg, to check the accounts receivable at a specific date). The
accountant carries out the procedures and reports his factual findings.

In a compilation engagement, the accountant is engaged to use his expertise to collect, classify
and summarise financial information (ie, to compile a set of accounts). The accountant does
not test the basic data so expresses no assurance.

This exam is primarily concerned with auditing and with review assignments.

3.3 Direct and attest engagements

In a direct reporting engagement, the accountant expresses a conclusion on the subject matter,
regardless of whether the party responsible for creating the subject matter has made a written
assertion concerning the subject matter. A statutory audit is an example of a direct reporting
engagement; the auditor is solely responsible for reporting his opinion on whether the financial
statements give a true and fair view. The auditor must gather sufficient evidence from a range
of sources to support his opinion; he cannot rely entirely on representations made by
managers.

In an attest engagement, the accountant’s conclusion relates to an assertion by the party

responsible for the subject matter. The accountant can either express a conclusion about the
assertion, or provide a conclusion about the subject matter in a form similar to the assertion.

A range of levels of assurance can be provided in both direct engagements and attest
engagements. For example, it would be possible to engage an accountant to gain a high level
of assurance in a direct engagement (as in an audit), or it would be possible to gain a moderate
level of assurance in an attest engagement (where the accountant reviews a statement by
directors that their company is a going concern).

3.4 Assurance on non-financial issues

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Many large firms of accountants offer assurance services outside the conventional area of
financial statement reporting. Typical areas are in social and environmental reporting.

Social accountability
Large enterprises recognise their accountability to stakeholder groups and devise their
business activities to take account of a variety of issues. These include:
 Human rights – fair dealing in employment.
 Diversity – equal opportunities for people.
 Consumer rights – fair dealing for customers.
 Ethical treatment of suppliers – reasonable payment terms to avoid conflict.
Ethical audits can be undertaken to establish if the performance of the entity is socially and
ethically desirable.
Environmental accountability
Most countries now recognise the need to police the environment, and legislation exists to deal
with pollution, hazardous substances, waste and health and safety. Environmental audits
examine the interface between environmental policies and the financial implications of any
breaches. Oil companies such as BP-Amoco are sensitive to the issues of environmental
responsibility and the need to devise business practices that do not infringe the law or damage
their corporate image.
Firms with a traditional history of providing audit services now also provide social and
environmental assurance services. This can involve environmental audits on such issues as:
 Compliance with laws and regulations.
 Evaluating the financial implications of handling dangerous chemicals.
 Identifying the risk and cost of land contamination.
 Identifying the consequences of using products with banned substances.
 Evaluating ethical issues resulting from any of the above.

3.5 Recent extension in the scope of audit and review assignments

Over the past ten years, a significant distinction has emerged between the assurance required
on the accounts of large and listed companies on the one hand, and of small unquoted
companies on the other.
The accounts of large and listed companies are usually required to be audited by the law of the
country concerned. The local Stock Exchange may impose further duties on the auditor eg, to
review whether the local rules on corporate governance have been complied with, or to review
the directors’ statement on whether the company is a going concern. There are trends for the
auditor also to give an opinion on non-financial matters, eg social accountability and
environmental matters.
In many countries the accounts of small unquoted companies are no longer required to be
audited. While it is always possible for a small company to choose to be audited, it is
increasingly common for the directors of a small company to choose to be subject to review by
an independent accountant rather than to offer no assurance at all on the accounts. The terms
of the review will be decided between the directors and the accountants.

3.6 Assignments to review internal controls

Accountants may be engaged to carry out a review of the internal controls in a company,
whether or not they are the appointed auditors of the company. It is suggested that, in such
engagements, a lengthy narrative report will be required at the end of the engagement rather
than a short report in standard wording like the standard audit report. A standardised short-
form report might lead to misunderstandings and unfulfilled expectations.

Practice question 1 (The answer is in the final chapter of this book)

Auditing
“Auditing is a profession but it is also a business” - David Kent, Current Issues in Auditing.

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Does a business-like approach to audit work compromise professional standards?

Required
Discuss this proposition in the light of what you have read about the postulates of auditing as
developed by Mautz and Sharaf, and the concept of agency theory. (10 marks)

4 Summary
This chapter examines the historical development of audit and its impact both as a legal and a
social or ethical control system. The historical background of audit as a checking mechanism
is difficult to shake off today. Many lay people have very high expectations of auditors and
there is a considerable “expectation gap” between what auditors deliver and what the lay public
perceives as their role in the business environment. Any commercial scandal sooner or later
raises the issue of auditor incompetence or complacency. In some instances this criticism is
justified and accountancy practices have been penalised by fines, damages awarded by the
Courts and adverse criticism from Government sources. The auditing profession is aware of
this expectation gap and has addressed the issue by attempting to improve the system of
communication between auditor and stakeholders as well as by continuously striving for higher
professional standards.

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