MANG3015

AUDITING

1
INTRODUCTION TO THE UNIT
• Aims and objectives of the unit
• Prior knowledge
• Teaching and learning activities
• Handouts
• Reading and resources

2
 ASSESSMENT
• Group presentation (15%)
– Scenario based problem
– Assessed on both audit knowledge and group
working skills.

• Examination (85%)
– Format given on Blackboard
– Includes self choice question

3
WHAT IS THE MODULE LIKE?
• How difficult is it?
• Predominantly written exam paper
• Past performance:
– Average module mark: 59%
– 51% students obtained over 60%
– 3% students obtained less than 40%
• Exemption from ICAEW Assurance paper.

4
 INTRODUCTION TO AUDIT
• The need for audit
• Definition of audit
• Audit process
• Other services
• Internal audit
• Advantages and disadvantages
• Audit market
• Structure of the firm
• Current issues

5
 ROLE OF DIRECTORS
• Separation of ownership and management

• Directors duties
– Prepare financial statements
– Keep proper accounting records
– Safeguard the assets

6
 DEFINITION OF AUDIT
Auditors are the troops who watch a
battle from the safety of a hillside and
when the battle is over, come down to
count the dead and bayonet the wounded.

(Dictionary of Business Quotations)

7
 DEFINITION OF AUDIT
An independent examination of, and
expression of opinion on the financial
statements of an enterprise by an appointed
auditor in the pursuance of that appointment
and in compliance with any relevant
statutory obligations.

What are the key terms in this definition?

8
 CONDUCT OF AN AUDIT
• Appointment
• Understanding of company
• Identify and assess risks
• Consider internal controls
• Testing
– Observation
– Discussion
– Examination of books and records
– Inspection of physical assets
– Confirmations from third parties
– Re-performing calculations
– Judgements
• Report to shareholders

9
 AUDIT REPORT
Contents
– Identifies the financial statements
– Responsibilities of auditors and directors
– Basis of opinion
– Opinion
– Identity of auditor and date

If the auditor needs to report matters of concern

the audit report will be modified or qualified.

10
 TYPES OF SERVICE
• Audit
• Review
• Agreed upon procedures
• Compilation engagement

11
 OTHER SERVICES
Audit
• Full procedures
• High assurance
• Acting as principal
• Positive report

12
 OTHER SERVICES
Review
• Inquiry and analytical procedurs
• Moderate assurance
• Acting as principal
• Negative report

13
 OTHER SERVICES
Agreed upon procedures
• Specified procedures
• No assurance
• Acting as agent
• No report

14
 OTHER SERVICES
Compilation engagement
• Preparation of accounts
• No assurance
• Acting as agent
• No report

15
 INTERNAL AUDIT
An independent, objective assurance and
consulting activity designed to add value
and improve an organisation’s operations. It
helps an organisation accomplish its
objectives by bringing a systematic,
disciplined approach to evaluate and
improve the effectiveness of risk
management, control and governance
processes. (IIA)
16
 INTERNAL V EXTERNAL AUDIT
• Legal requirements
• Appointment
• Remuneration
• Security of tenure
• Independence
• Qualifications
• Experience
• Role and duties
• Reporting

17
 ADVANTAGES OF AUDIT
• Improved quality of accounts
• Independent review of systems
• Advice
• Encourages good corporate conduct
• Improved management decision
• Reduced risk of fraud
• Increased credibility of accounts
• Ease of raising finance
• Ease of collecting taxes

18
 DISADVANTAGES
• Costs
• Staff time and disruption
• Over confidence in accounts
• Power of audit firms

19
NATURE OF THE AUDIT MARKET
• Type of business
– Sole trader
– Partnership
– Company
– LLP

• Number of audit firms

– 7,375 firms
– Big Four dominate market
20
 BIG FOUR DOMINATION
• Lack of competition

• Problems if one collapsed

21
 TYPICAL FTSE100 AUDIT
• Average fee £5.4m

• Average time 60 days

22
 STRUCTURE OF THE FIRM
• Partner
• Manager
• Senior
• Trainee 1
• Trainee 2
• Trainee 3

23
 CURRENT CONCERNS
• Role in the banking crisis

• Accounting standards

• Shareholder base

• International harmonisation

24
 ACTION TAKEN
2004 Audit Quality Forum established

May 2006 FRC published “Choice in the

Audit Market”

March 2011 House of Lords report

Oct 2011 Competition Commission inquiry

Nov 2011 EC proposals

25