THE AUDITING FUNCTION

LECTURER: SHAUNTAI
BURKE
DATE: FEBRUARY 5, 2024
TIME: 6PM
 DE-STRESS
https://www.youtube.com/watch?v=IJOvIRifPyY

https://www.youtube.com/watch?v=2x9efwgb9ag
 LESSON OVERVIEW

.
 LESSON OBJECTIVES
STUDENTS AFTER STUDYING THIS UNIT, YOU
WILL BE ABLE TO
1. EXPLAIN THE ROLE OF THE SECURITIES AND EXCHANGE COMMISSION IN
ACCOUNTING AND AUDITING.
2. DISCUSS GENERALLY ACCEPTED AUDITING STANDARDS.
3. DISCUSS THE ROLE OF INTERNATIONAL AUDITING STANDARDS.
4. IDENTIFY QUALITY CONTROL STANDARDS AND PRACTICES WITHIN THE ACCOUNTING
PROFESSION.
5. DESCRIBE THE PARTS OF THE STANDARD UNQUALIFIED AUDIT REPORT.
6. SPECIFY THE CONDITIONS REQUIRED TO ISSUE THE STANDARD UNQUALIFIED REPORT.
7. DESCRIBE THE FIVE CIRCUMSTANCES WHEN AN UNQUALIFIED REPORT WITH AN
EXPLANATORY PARAGRAPH OR MODIFIED WORDING IS APPROPRIATE.
THE SECURITIES AND EXCHANGE
COMMISSION

It was created by Congress in 1934 as the

first federal regulator of the securities
markets. The SEC promotes full public
disclosure, protects investors against
fraudulent and manipulative practices in
the market, and monitors corporate
takeover actions in the United States. It
also approves registration statements for
book runners among underwriting firms.
 THE SECURITIES AND EXCHANGE
COMMISSION
The Securities and Exchange Commission (SEC) is a U.S. government
oversight agency responsible for regulating the securities markets and
protecting investors.

The SEC was established by the passage of the U.S. Securities Act of
1933 and the Securities and Exchange Act of 1934, largely in response to
the stock market crash of 1929 that led to the Great Depression.

The SEC can itself bring civil actions against lawbreakers, and also
works with the Justice Department on criminal cases.
 SECURITIES AND EXCHANGE COMMISSION IN
Background
Since the Commission's creation in 1934, it has consistently emphasized the need for auditors to remain
independent.
The Commission's requirements are set forth in Rule 2-01 of Regulation S-X (“Rule 2-01”).
Additional guidance can be found in staff FAQs and other materials.
Significant updates to Rule 2-01 in:
2000 [Link to Rule Release]
2003 [Link to Rule Release]
2019 [Link to Rule Release]
2020 [Link to Rule Release]
Applicable to 1933 & 1934 Act filers, registered investment companies, registered
investment advisers, unregistered funds, brokers and dealers
 ROLE OF THE SECURITIES AND EXCHANGE
COMMISSION
The mission of the U.S. Securities and
Exchange Commission (SEC) is to
protect investors, maintain fair,
orderly, and efficient markets, and
facilitate capital formation. The SEC
requires public companies to disclose
meaningful financial and other
information to the public. This
provides a common pool of knowledge
for all investors to use to judge for
themselves whether to buy, sell, or hold
a particular security.
Each year the SEC brings hundreds of
civil enforcement actions against
individuals and companies for violation
of the securities laws. Typical
infractions include insider trading,
accounting fraud, and providing false
or misleading information about
securities and the companies that issue
them.
FOUR (4) MAJOR RESPONSIBILITY OF THE
SECURITIES AND EXCHANGE COMMISSION

The SEC consists of five divisions and

23 offices.
Their goals are to:
1. Interpret and take enforcement
actions on securities laws
2. Issue new rules
3. Provide oversight of securities
institutions
4. Coordinate regulation among
different levels of government
 EXAMPLE OF THE SECURITIES AND
EXCHANGE COMMISSION

The SEC frequently gets big news coverage during

major instances of investor fraud. For example, the
Securities and Exchange Commission investigated the
Enron scandal, the Bernie Madoff pyramid scheme,
and trading improprieties during the 2008
Financial Crisis
 Generally Accepted Auditing Standards
This is a set of systematic guidelines used GAAS are divided into these main
by auditors when conducting audits on sections:
companies' finances, ensuring the
accuracy, consistency and verifiability of 1) General standards
auditors' actions and reports. 2) Standards of fieldwork
3) Standards of reporting
By relying on Generally Accepted
Auditing Standards (GAAS), auditors
can minimise the probability of missing
material information.
 Generally Accepted Auditing Standards
GAAS GENERAL GAAS STANDARDS OF GAAS STANDARDS OF
STANDARDS FIELD WORK REPORTING

Requirements: Requirements: Requirements:

Adequate technical Adequate planning and Financial statements
training and proficiency proper supervision presented by GAAP
Independence in mental Understanding the internal Consistency in the
attitude control structure application of GAAP
Due to professional care Obtaining sufficient Adequacy of informative
competent evidential disclosure
matter Expression of opinion
 International Auditing Standards
International Standards ISAs are designed to ISAs cover the following
on Auditing (ISA) are improve the areas:
professional standards
for the performance of
uniformity of 1. Respective
financial audit of auditing practices responsibilities
financial information. and related services 2. Audit planning
throughout the 3. Internal Control
These standards are world by issuing 4. Audit evidence
issued by International
Federation of
pronouncements on 5. Using work of other
Accountants (IFAC) a variety of audit experts
through the and attest functions 6. Audit conclusions and
International Auditing and promoting their Audit report
and Assurance Standards acceptance 7. Specialised areas
Board (IAASB).
worldwide.
 QUALITY CONTROL STANDARDS AND PRACTICES
WITHIN THE ACCOUNTING PROFESSION

The quality control policies and procedures applicable to a firm's

accounting and auditing practice should encompass the following
elements:
 Independence, Integrity, and Objectivity
 Personnel Management
 Acceptance and Continuance of Clients and Engagements
 Engagement Performance
 Monitoring
 QUALITY CONTROL STANDARDS AND PRACTICES
WITHIN THE ACCOUNTING PROFESSION
The elements of quality control are interrelated. For example, the maintenance
of Integrity, Objectivity, and, where required, Independence requires a continuing
assessment of client relationships.

Similarly, the element of Personnel Management encompasses criteria for professional

development, hiring, advancement, and assignment of the firm's personnel to
engagements, which affect policies and procedures developed to meet the objectives of
the quality control element of Engagement Performance.

Similarly, policies and procedures for the quality control element of Monitoring are
established to provide the firm with reasonable assurance that the policies and
procedures related to each of the other elements of quality control are suitably
designed and are being effectively applied.
 AUDIT REPORTS
Auditor's reports are important to users of financial statements
because they inform users of the auditor's opinion as to whether
or not the statements are fairly stated or whether no conclusion
can be made with regard to the fairness of their presentation.
 UNMODIFIED AUDIT OPINION
Types of Unmodified Audit Opinion:
1. Unmodified audit opinion – expressed when the auditor concludes the client’s financial
statements are presented fairly, in all material respects, in accordance with applicable financial
reporting framework.
2. Unmodified audit opinion with emphasis-of-matter – a paragraph that is included in the report
that refers to a matter appropriately presented or disclosed in the financial statements but in the
auditor’s professional judgment, is fundamental to the users’ understanding of the financial
statements.
3. Unmodified audit opinion with other-matter - a paragraph that is included in the report that refers
to a matter other than those presented or disclosed in the financial statements but in the auditor’s
professional judgment, is relevant to users’ understanding of the audit, the auditor’s
responsibilities or the auditors’ report.
 MODIFIED AUDIT OPINION
Types of Modified Audit Opinion:
1. Qualified audit opinion – the auditor concludes that misstatements, individually or in
aggregate, are Material but not pervasive .
2. Adverse opinion - the auditor concludes that misstatements, individually or in aggregate,
are both Material and pervasive (should not be relied upon).
3. Disclaimer of opinion – the auditor is unable to obtain sufficient appropriate audit
evidence on which To base an opinion.
 Parts of the standard unqualified audit report.
The seven parts of a standard unqualified audit report are the title, addressee, introductory paragraph, scope
paragraph, opinion paragraph, name of auditor (CPA firm), and date of report.

1. Title - public company reports are
required to begin with a title that
references the "independent
registered public accounting firm".
Reports for nonpublic companies
may contain titles such as
"independent auditors report, or
"report of the independent auditor“
3. Introductory Paragraph - This paragraph must state three things:
"which financial statements are covered by the report, that the
statements are the responsibility of management, and that the
auditor has a responsibility to express an opinion" (Messier et al.,
2006, p. 50).

2. Addressee - This is the individual,

group, entity, board of directors, and/or
stockholders who retained the services
of the auditor.
 Parts of the standard unqualified audit report.
The seven parts of a standard unqualified audit report are the title, addressee, introductory paragraph, scope
paragraph, opinion paragraph, name of auditor (CPA firm), and date of report.
4. Scope Paragraph - This paragraph states 5. Opinion Paragraph - This paragraph
what is involved in the audit. For public expresses the auditor's opinion in regard to the
companies the scope paragraph states that the fairness of the financial statements based upon
audit was performed in accordance with Public evidence obtained through the audit.
Company Accounting Oversight Board
(PCAOB) standards, and for nonpublic
companies it states that the audit was
performed in accordance with generally
accepted auditing standards (GAAS). The
scope paragraph must also state "that the audit
provides only reasonable assurance that the
financial statements contain no material
misstatements,...that an audit involves an
examination of evidence on a test basis.
 Parts of the standard unqualified audit report.
The seven parts of a standard unqualified audit report are the title, addressee, introductory paragraph, scope
paragraph, opinion paragraph, name of auditor (CPA firm), and date of report.
6. Name of Auditor – Name of the CPA 7. Date of Report – The appropriate date
firm that conducted the audit, along with for the report is the end of fieldwork,
the manual or printed signature of the when the auditor has gathered sufficient
auditor. appropriate evidence to support the
opinion.
 CONDITIONS REQUIRED TO ISSUE THE STANDARD
UNQUALIFIED REPORT
1. All statements—balance sheet, income statement, statement of retained
earnings, and statement of cash flows—are included in the financial
statements.
2. The three general standards have been followed in all respects on the
engagement.
3. Sufficient appropriate evidence has been accumulated and the auditor has
conducted the engagement in a manner that enables him or her to
conclude that the three standards of field work have been met.
 CONDITIONS REQUIRED TO ISSUE THE STANDARD
UNQUALIFIED REPORT
• The financial statements are presented in accordance with appropriate
accounting standards such as generally accepted accounting principles or
IFRS. This also means that adequate disclosures have been included in the
footnotes and other parts of the financial statements.
• There are no circumstances requiring the addition of an explanatory
paragraph or modification of the wording of the report.
 QUALIFIED VS. UNQUALIFIED REPORT
• For an unqualified report, the auditor has concluded that most financial matters are dealt
with correctly—although there may be some outstanding minor issues. In contrast, an
auditor’s is qualified for reasons such as limited scope in the auditor’s work or if there
are issues concerning the accounting policies. The points of concern must be financially
significant for an auditor to qualify a report.
• For example, the auditor might consider that an issue misrepresents the actual financial
position of the firm. In this case, the auditor might issue a disclaimer or adverse opinion.
• However, a qualified audit report does not necessarily mean that a business is in distress
or that a firm is failing to disclose important information in the financial statements. A
qualified audit report only reflects the auditor’s inability to give a clean report
 CIRCUMSTANCES WHEN AN UNQUALIFIED REPORT
WITH AN EXPLANATORY PARAGRAPH OR
MODIFIED WORDING IS APPROPRIATE.
1. The auditor's opinion is based in part on the report of another auditor

2. There is substantial doubt about the entity's ability to continue as a going concern.

3. There has been a material change between periods in accounting principles or in the method of
their application

4. A material misstatement in previously issued financial statements has been corrected

Certain circumstances relating to reports on comparative financial statements exist

 CIRCUMSTANCES WHEN AN UNQUALIFIED REPORT
WITH AN EXPLANATORY PARAGRAPH OR
MODIFIED WORDING IS APPROPRIATE.
5. Selected quarterly financial data required by SEC Regulation S-K has been omitted or has not been reviewed

6. Supplementary information required by the Financial Accounting Standards Board (FASB), the
Governmental Accounting Standards Board (GASB), or the Federal Accounting Standards Advisory
Board (FASAB) has been omitted, the presentation of such information departs materially from
FASB, GASB, or FASAB guidelines, the auditor is unable to complete prescribed procedures with
respect to such information, or the auditor is unable to remove substantial doubts about whether the
supplementary information conforms to FASB, GASB, or FASAB guidelines.

7. Other information in a document containing audited financial statements is materially inconsistent

with information appearing in the financial statements.
 REFERENCE

• 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-DISTINC
TIVE-ROLES-IN-ORGANIZATIONAL-GOVERNANCE.PDF