OVERVIEW OF THE AUDIT FUNCTION

LECTURER: SHAUNTAI BURKE

DATE: SEPTEMBER 4, 2023
TIME: 6PM
ICE BREAKER
 LESSON OVERVIEW

.
 LESSON OBJECTIVES
STUDENTS AFTER STUDYING THIS UNIT, YOU
WILL BE ABLE TO
• DEFINE AUDITING
• DEFINE THE TERM AUDITOR
• DISCUSS THE HISTORICAL EVOLUTION OF THE AUDIT FUNCTION
• DISCUSS THE IMPORTANCE OF AUDITING IN MAINTAINING THE CREDIBILITY OF
ACCOUNTING RECORDS
• DESCRIBE THE ROLES OF AUDITORS
• EXPLAIN HOW THE FUNCTIONS OF MANAGEMENT INTEGRATE WITH THE AUDIT
FUNCTION
• IDENTIFY STAKEHOLDERS WHO CREATE THE NEED FOR AUDITING A COMPANY’S
FINANCIAL STATEMENTS
• OUTLINE IMPORTANCE OF AUDIT FIRMS IN AUDITING PROCESS
 CONCEPT DEFINITIONS
Students should define the following:
Auditing
Internal Auditor and External Auditor
Audit Function
Auditing process
Attestation service
Assurance service
 TEST YOUR KNOWLEDGE ACTIVITIES

In your own words define internal auditing

 AUDITING DEFINED
The modern definition:
"Auditing is the accumulation and evaluation of evidence about information to determine and
report upon one's opinion about the degree of correspondence between that information and
established criteria. Auditing should be done by a competent and independent person (auditor)."

Internal auditing is an independent,

objective assurance and consulting
activity designed to add value and
improve an organization's operations.

Source: The Institute of Internal Auditors

 WHY HAVE AN AUDIT?

1. TO ACCOMMODATE STEWARDSHIP FOR THE SHAREHOLDERS’

PURPOSE
2. TO ENABLE COMPANIES TO OBTAIN CAPITAL THROUGH THE
SECURITIES MARKET
3. FOR COMPANIES TO OBTAIN FINANCING THROUGH BANKS AND
OTHER LENDING INSTITUTIONS
4. TO PROMOTE OPERATIONAL EFFICIENCY
5. TO REDUCE ERRORS AND FRAUD
6. TO SATISFY LEGAL REQUIREMENTS
 ACTIVITY 1 (BREAKOUT ROOMS)

IN TWO GROUPS STUDENTS SHOULD:

1. DISCUSS THE HISTORICAL EVOLUTION OF THE AUDIT

FUNCTION

2. DISCUSS THE IMPORTANCE OF AUDITING IN MAINTAINING

THE CREDIBILITY OF ACCOUNTING RECORDS
 AUDIT FUNCTION
Auditing evolved and grew rapidly after the industrial revolution in the 18th century with the growth of the joint
stock companies where the ownership and management became separate. The audit function was mainly to
provide credibility to the financial statements prepared by company managers for their shareholders.
The chief functions of an audit department are to: determine compliance with policies and procedures. Assess
the quality of internal controls. Evaluate the quality of risk management. Evaluate compliance with rules and
guidelines established by regulatory agencies (e.g., Securities and exchange commission)
• Assess compliance with accounting standards, whether issued by the financial accounting standards board or
government accounting standards board or other
• Review the effectiveness and security of information technology systems
• Review the strength of the code of ethics and actions to handle violations
• Provide additional oversight to internal accounting practices that external auditors may not focus on
• Opine on the quality of work of external auditors
• Verify physical assets and inventory
• Investigate employee complaints and alleged fraudulent activities
IMPORTANCE OF AUDITING IN MAINTAINING THE
CREDIBILITY OF ACCOUNTING RECORDS

Auditing ensures the integrity and compliance of your

accounts with generally accepted accounting principles
(GAAP). Performing frequent internal and external audits helps
in maintaining the credibility of your finances
 IMPORTANCE OF AUDITING IN MAINTAINING THE
CREDIBILITY OF ACCOUNTING RECORDS

• An auditor’s job is to ensure that your BOOKKEEPING ACTIVITIES are on point

and to determine if your financial statements are in sync with the real financial
position of the business. A well-audited, up-to-date business grabs a place in the good
books of the shareholders who want to invest in your company.
• However, if an auditor finds out that the financials have been tampered with, your
business could face legal punishment. In such situations, businesses often dissolve
because of the ruptured reputation in the eyes of customers and stakeholders. To avoid
this, you must plan for regular internal audits so that accounting professionals or
auditors can detect fraudulent activities or roadblocks to compliance before they affect
the business’s reputation.
ROLES OF AUDITORS
 ROLES OF AUDITORS

• The objective of audit of financial statements is to enable the auditor to

express an opinion whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting
framework.
• The overall objective of the audit of the financial statements of an entity is
to gather and evaluate audit evidence of sufficient quantity and
appropriate quality in order to form, and communicate to the users of the
financial statements, an audit opinion on the reliability of the assertions of
management inherent in those financial statements for the purpose of
adding credibility to those assertions.
 ROLE OF AUDITORS

International audit standards maintain that an auditor's mandate may require

him to take cognizance and report matters that come to his knowledge in
performing his audit duties which relate to:
• Compliance with legislative or regulatory requirements;
• Adequacy of accounting and control systems;
• Viability of economic activities, programmes, and projects.
TYPES OF AUDIT
 TYPES OF AUDITORS:

1. INTERNAL AUDITORS Independent unit within a company., May

perform 3 kinds of audits, assist external auditors, have no operating
involvement in the activities they audit
2. INDEPENDENT AUDITORS Their opinion make the statements more
credible to users such as creditors, investors, bankers, govt. Etc.
3. GOVERNMENT AUDITORS Working in different govt. Depts., And
agencies to audit their activities
 DUTIES OF AN AUDITOR

1. The auditor is required to make a report to the members of the company

on the financial statements and books of account of the company and
on every balance-sheet and profit and loss account or income and
expenditure account.

2. The auditor report covers all other documents forming part of the
balance-sheet and profit and loss account or income and expenditure
account, including notes, statements or schedules annexed with the
financial statements and which are laid before the members of company
in general meeting during his tenure of office.
 DUTIES OF AN AUDITOR (CONT’D)

The auditor’s report to the members covers the following matters:-

1. Confirmation as to whether all information and explanations necessary
for the purposes of the audit have been obtained or not
2. Confirmation as to whether proper books of account are being
maintained by the company as required by ordinance or not
3. Confirmation as to whether that preparation of the balance sheet and the
profit and loss account or the income and expenditure account are in
conformity with the ordinance and in agreement with the books of
accounts
 DUTIES OF AN AUDITOR (CONT’D)

Opinion regarding true and fair view of the following:

1. The balance sheet as at the end of its financial year
2. The profit and loss account or the income and expenditure account and of the profit or loss
or surplus or deficit for its financial year
3. And statement of changes in financial position or sources and application of funds of a
listed company, of the changes in the financial position or the sources and application of
funds for its financial year.
 DUTIES OF AN AUDITOR (CONT’D)

Opinion regarding the following:

• Incurring of expenditure during the year for the purposes of
the company’s business and
• Conducting the business, making investments and incurring
of expenditure during the year in accordance with the
objects of the company

22
 DISCUSSION

• EXPLAIN HOW THE

FUNCTIONS OF
MANAGEMENT INTEGRATE
WITH THE AUDIT FUNCTION
 HOW THE FUNCTIONS OF MANAGEMENT INTEGRATE WITH
THE AUDIT FUNCTION
Management can assist with the auditor’s use of data analytics by:
1. Providing access to quality and complete data. This will likely require the IT department to be included in
audit planning discussions to determine what information is required and who is responsible for preparing the
data for the auditors.
2. Discussing with the auditor what audit data analytics may be performed and making sure the data is available
to perform those analytics.
3. Discussing the results of audit data analytics openly and honestly to both enhance the quality of the audit
evidence for the auditor and to provide insights into the business.
4. With the increase in data, the use of data analytics is increasingly important for the auditor to understand how
all the transactions of an entity fit together, as well as to understand normal transactions as compared to
outliers. The use of data analytics in the audit can provide significant input into the risk assessment –
especially when combined with candid management commentary.
 ACTIVITY (PRESENTATION)
IN TWO GROUPS STUDENTS SHOULD:
GROUP 1: IDENTIFY STAKEHOLDERS WHO CREATE THE NEED
FOR AUDITING A COMPANY’S FINANCIAL STATEMENTS
• GROUP 2: OUTLINE IMPORTANCE OF AUDIT FIRMS IN
AUDITING PROCESS
STAKEHOLDERS WHO CREATE THE NEED FOR AUDITING A
COMPANY’S FINANCIAL STATEMENTS

Typical internal stakeholders with financial information interests include

managers and employees, and also the board of management directors or,
in the not-for-profit sector, bodies such as school administrators, the board
or management committee, elected members of local government, and so
on.
STAKEHOLDERS WHO CREATE THE NEED FOR AUDITING A
COMPANY’S FINANCIAL STATEMENTS
 TEST YOUR KNOWLEDGE ACTIVITIES

Evidence is any information used by the auditor to determine whether the information being audited is
stated in accordance with the established criteria. Evidence may take different forms, which is correct?
A. ORAL, WRITTEN, CALCULATION, effectiveness and efficiency of operations
B. Reliability of financial reporting, compliance with applicable laws and regulations
C. Oral, written, observation, calculation, AND re-performance
D. All of the above
 IMPORTANCE OF AUDIT FIRMS IN AUDITING PROCESS
Why are auditors important?
Auditors are important because they are able to provide assurance of an organization's
financial statements from an objective and independent opinion. It benefits the company
in several ways, such as maintaining consistency, finding errors in their processing, or
detecting fraud.
• Additionally, it objectively advises anyone involved in the company, such as the board of
directors, shareholders, or stakeholders because it is an unbiased report.
• If the auditor is able to report adequate financial statements for a certain company, it can
also help reduce investor risk while providing validity. It, in turn, increases investor
confidence. Overall, an auditor’s certified opinion can provide an overview of the financial
statements of a company and can display good management if determined to be successful
in their audit.
IMPORTANCE OF AUDIT FIRMS IN AUDITING
PROCESS • Evaluate risks
• Assess controls
• Improve operations
• Review processes & procedures
• Assure safeguards
• Provide insight & foresight
• Communicate results & recommend
action
• Find out what’s working and what’s not
• Keep an eye on the corporate culture
• Look at the organization objectively
• Bring organization-wide perspective
• Advocate improvements
• Raise red flags
• Tell it like it is
• Trusted advisor
 TEST YOUR KNOWLEDGE ACTIVITIES
The owner of UCC frontals LTD. Has approached the managing partner of a CPA firm about conducting
a first-time independent audit. While discussing the nature and scope of the audit, the owner of UCC
frontals LTD. Asks if it is really necessary for the auditor to gain an understanding of UCC frontals
LTD. System of internal control. Which of the following responses would NOT be correct?

A. The auditor needs to gain an understanding of the client’s internal control in order to assess risk.
B. An understanding of internal control is necessary to support the audit opinion.
C. Audit standards do not require the auditor to gain an understanding of the client’s system of internal
control since risk can be assessed by other means.
D. Independent auditors can no longer assess control risk at a maximum without having support for that
assessment.
 REFERENCES

• ARENS, A., ELDER, R., BEASLEY, M. (2014) AUDITING AND ASSURANCE SERVICES,
AN INTEGRATED APPROACH. PEARSON. LONDON, UK.
• FUNDAMENTAL OF FINANCIAL ACCOUNTING – PHILLIPS, LIBBY , LIBBY
• ISSUE 8. GLOBAL PERSPECTIVES AND INSIGHTS INTERNAL AUDIT AND EXTERNAL
AUDIT DISTINCTIVE ROLES IN ORGANIZATIONAL GOVERNANCE HTTPS://
GLOBAL.THEIIA.ORG/KNOWLEDGE/PUBLIC%20DOCUMENTS/GPI-DISTINCTIVE-RO
LES-IN-ORGANIZATIONAL-GOVERNANCE.PDF