Chapter 1 Business Environment Part 2

Stewardship

Impartial view = independent/objective/unbiased view

PIE: public interest entity.

Key 3 main terms

• Stewardship
• Accountability
• Agency

In a nutshell: Stewardship Agency is given stewardship by the shareholders (Principal) to

manage the wealth and hold accountability for increasing the wealth
through making a profit and capital growth.

What is Agency theory? Agency theory is a principle to use to explain and resolve the
relationship between principals and agents.

What is Agency conflict? Agency conflict or Principal agent problem: when the agency is
having their personal interest upfront instead of the shareholders.
They commit fraud to increase their own wealth.

Audit

How is ISA and IFRS related The ISA guide us to do the audit, but when we are doing the audit,
to each other? in order to know if the financial statements are right or wrong, they
need to compare it with the IFRS.

Definition of ‘True’ and ‘Fair’ True: Information is factual and conforms with reality such that it is
view. not false. The financial statements have been correctly extracted
from the books or records.

Fair: not having any bias or impartiality. An unfair manner is when

manipulating the financial statements that give a wrong opinion to
users.
● Or Information is free from discrimination and bias and
complies with expected standards and rules. The financial
statements should reflect the commercial substance of the
company’s underlying transactions.

Auditors can’t provide absolute 100% assurance that the financial

statements are true and fair. We can only provide reasonable
assurance because of the 4 limitations.

These 4 limitations are:

 ● Auditors do not test every transaction. We do sampling
and check on something that are materials).
○ Impracticality of examining all items within an account
balances or classes of transactions
● Use professional judgement to evaluate evidences and
form conclusions. Get professional judgement through
experience and through learning IFRS and ISA.
● Inherent limitations of internal controls. Internal controls are
done by people and people can make mistakes.
● Audit evidences are persuasive rather than conclusive.

Chronology of an audit

Internal control

Difference between Internal

Audit and External Audit

What is Internal Audit? Internal auditing is an independent, objective assurance and

consulting activity designed to add value and improve an
organization’s operation. It helps an organization accomplish its
objectives by bringing a systematic and disciplined approach to
evaluate and improve the effectiveness of risk management,
control, and governance processes.

Criteria to evaluate whether the work of internal audit function can

be used by the external auditors:
● Objectivity
 ● Competence
● Resource. Enough employee
● Whether the internal audit function applies a systematic and
disciplined approach

The main sections of audit report are

● Audit opinion
● Basic for opinion
● Key audit matters
● Responsibilities of management and TCWG
● Responsibilities of auditors