ACT307 Audit and Assurance

Introduction to Financial Statements

Audit
 LESSON OUTLINE

1.1. Concept of audit and other assurance engagements

1.2. Regulatory framework of audit
1.3. Types of audit and scope of audit
1.4. Audit objectives
1.5. Corporate governance and audit mechanism
1.6. Internal audit and external audit
1.7. Auditing standards
1.8. Auditors liability
1.9. Independence and ethical requirements for auditors
1.10. Statutory audit requirements of the Companies Act
 (1) Audit and Assurance engagement
General Concept

An audit is:

an engagement in which an auditor expresses a conclusion, e.g.

audit opinion designed to enhance the confidence of the intended
users (e.g. information users) other than the responsible party (e.g.
management who prepares FSs) about the outcome of the
evaluation or measurement of the subject matter (e.g. financial
statements) against criteria (e.g. accounting standards)
 Audit and Assurance engagement
Definition

Auditing is a systematic process of objectively obtaining

and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of
correspondence between those assertions and
established criteria and communicating the results to
interested users (American Accounting Association).
 (2) Types of audits
(a) Financial Statement Audit

• Financial Statements Audit involves obtaining and evaluating

evidence about an entity’s presentation of its-
o financial position,
o results of operations, and
o cash flows

• for the purpose of expressing and opinion on whether they

are presented fairly in conformity with established
accounting standards or financial reporting framework such
as BAS/IFRS (Boyton & Johnson)
• Companies act generally prescribes the requirements of
financial statements audit by an external and independent
auditor.

• Since financial statements audit is a requirement under

the Companies Act, this audit is also called statutory audit.
• The Companies Act of Bhutan 2016, Chapter 10 (245) requires that a
company should prepare a complete set of financial statements so as to
give a true and fair view of state of affairs of the company as at the
financial year end, of its profit or loss and movement of liquid resources
for the year ended 31st December, every year and shall conform to the
relevant accounting standards prescribed by the Accounting and Auditing
Standards Board of Bhutan (AASBB).

• The Companies Act of Bhutan 2016, Chapter 10 (247) requires that the
financial statements of a company must be duly audited unless exempted
from audit by regulations, and the same must be laid before the Annual
General Meeting, a copy thereof as well as Directors’ report shall be filed
with the Registrar along with annual return under section 267.
• The established criteria is the relevant financial reporting framework or
accounting standards such as BAS/IFRS and any other relevant laws and
regulations.

• Independent auditor expresses and opinion on the financial statements

whether the financial statements are presented in a true and fair manner.

• Auditor issues report to the shareholders or members of the company

although other stakeholders’ demand for such report is increasing.
(b) Compliance audit

• A compliance audit involves obtaining and evaluating evidence to determine

whether certain financial or operating activities of an entity conform to
specified criteria such as rules or regulations (Boyton & Johnson).

• The established criteria may be coming from different sources such as the
national laws and regulations (e.g. Environmental Act, Waste Management
Act) and management own policy.

• Independent auditor expresses an opinion on the degree of compliance of

the subject/activities with the criteria (FRR2016)

• Auditor issues a report to the concerned sponsor of the compliance audit.

(c) Operational/Performance/Value for Money Audit
• This audit involves in obtaining and evaluating evidence about the efficiency,
economy and effectiveness (3Es) of an entity’s operating activities in relation
to specified objectives.

• The Royal Audit Authority performs such audit for all government budgetary
agencies.

• The specified objectives are normally those established mandates or policy of

the entity or government or expectation of the public in case of the public
organisations.
 (3) Types of Auditors

(a) Independent/External Auditors

• They are usually certified or chartered accountants either individual

practitioner or members of public accounting firms.

• They are qualified accountants who are members of professional

accounting bodies.

• By virtue of their education, training and experience they are usually

allowed to perform all types of audit.
An auditor’s task obtain evidence to validate management’s assertions
and communicate the results

It enhances the credibility and reliability of information for the users of

financial statements
(b) Internal auditors

• They are employees of the organizations they audit.

• The objective of the IA is to assist management in the effective

functioning of the organization in terms of ensuring effective internal
controls, efficient operations and compliance with regulatory and
management policy requirements.
• Internal auditors generally hold internal auditor credential and some are
members of professional accounting bodies.
• They also assist external auditors [Refer ISA 610 (Revised 2013), Using the
Work of Internal Auditors].

• WorldCom Internal Auditor Discovers Misstatements

 (c) Government auditors
• Government auditors are employed by local, state and central governments.

• They are either employees of government or autonomous bodies such as the

Royal Audit Authority (RAA).

• Although government auditors employ similar audit approach as statutory

auditors, they are mostly guided by the Audit Act or the auditing standards
developed for government audits.

• Government auditors are not necessarily the members of a professional

accounting bodies.

• Government auditors generally perform operational, compliance and value for

money audits in order to ensure public budgets are being used economically,
efficiently and effectively.
 (4) Levels of assurance

• Auditors provide different levels of assurance when performing

assurance services.

Reasonable assurance

• This is very high level of assurance but not a guarantee or a hundred

percent assurance.

• In financial statements audit, auditor provides a reasonable assurance

based on the evidence which are sufficient and appropriate to support
this level of assurance.
• There are several reasons for auditors providing a reasonable assurance
rather than a guarantee. For example,
• sampling test based audit evidences
• inherent limitations of internal controls
• subjective nature of accounting and auditing standards

• The auditor provides a reasonable assurance that the financial

statements as a whole are free from material misstatements or that
the financial statements are presented in accordance with the relevant
accounting standards.
 (5) Benefits of audit and assurance

1) Access to capital markets (example, stock exchange requirement for

listing, banks and money lenders)

2) Lower cost of capital as a result reduced information risk.

3) Deterrent to inefficiency and fraud, (employees are less likely to make

errors in performing accounting functions and are less likely to
misappropriate company assets. As such, the accounting record
becomes more reliable and losses from embezzlement will be
reduced).
 Benefits of audit and assurance – contd…

(4) Control and operational improvements, e.g. auditor giving suggestion to

improve internal controls and risk management.

(5) Enhance corporate governance

• Audit committee – ensure financial reporting is relevant and reliable

• Disclosure of material information
(6) Theories on demand and supply of audit services

The demand for audit services may be explained by several

different theories.

Theory of Inspired Confidence

Agency Theory

Read the materials supplied and note points for discussion and presentation