Auditing I
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Ali KhanAuditing I
Uploaded by
Ali KhanAUDITING-I
BSAF 5A & BBA
PARVEZ ALI ABBASI
What does the auditor do?
The auditors job is to gather evidence to prove that:
Profits and losses are properly stated
Assets and liabilities belong to the company and are
shown at their correct values
Accounting entries are properly recorded in the
correct accounting period
To do this they:
Review the accounting records and controls
Ask for explanations
Obtain details from third parties
BENEFITS OF FINANCIAL AUDIT
During the course of their work auditors may be
involved in:
discovering weaknesses in systems
checking compliance with laws and
accounting standards
discovering frauds or errors
AUDITING THEORY, POSTULATES & CONCEPTS
Three basic academic writings considered fundamental to this area:
1) Theory of Rational Expectations – Limperg
The work carried out by the auditor should be governed by the rational
expectations of those who use their reports so auditors should not
disappoint those expectations. Further auditors should not seek to raise
those expectations by any more than the work they do justifies.
2) The Philosophy of Auditing – Mautz & Sharaf
Auditing is based on scientific logic where the auditing process is a
rational process of examination, observation and evaluation of
evidence. Eight postulates or assumptions.
Does not consider risk or accountability between parties
3) Flint - Philosophy and Principles of Auditing
Expanded on Mautz & Sharaf . Seven postulates based on the
fundamental idea that auditing has a social benefit and is not simply a
technical exercise for the purposes of regulation.
Globalisation & AUDITING
A strong auditing profession is important to global markets because:
•Reliable financial reporting promotes confidence and stability in the market
•This involves reducing risk to potential investors by providing them with
‘sound’ information.
•Corporate failures, particularly those involving fraud by senior management
reduces confidence and creates instability. It also tends to encourage
increased regulation which may restrict market operations or encourage
further deception.
•The concepts of agency require an auditing profession which is able to
enforce standards of accountability on company managers though the
mechanism of the auditors’ report.
ADVANTAGES OF AUDIT
•Audits can help protect creditors.
•An audit can reinforce financial discipline
•An audit helps establish the credibility of the company
•There may be shareholders who are not involved in the business and their
interests need to be protected by an independent audit.
•It provides reassurance for directors that the figures they are using are reliable.
DISADVANTAGES OF AUDIT
•An audit is only for compliance and doesn’t assist management in running
the business – it is simply ‘red tape’.
•The costs of the audit represent a non-productive expense and the money
could be better used elsewhere.
•Suppliers will deal on a pro-forma basis (i.e. cash before supply) until a
depth of trust has been established.
•Historical accounts, taking advantage of limited disclosure requirements,
are of little value as they can be up to nine months old when they become
publicly available.
OTHER BENEFITS OF AUDIT
An audit is useful to company management
Operational audit - check if management procedures are followed or not
Compliance audit - check if rules of an outside regulator are followed or not
This work may be done by an Internal Auditor who is likely to be company
employee.
RIGHTS, DUTIES & RESPONSIBILITIES OF AUDITOR
Rights
information and explanations
access to company records
receive notice of meetings, attend and speak
Duties
report to shareholders whether accounts show a true
and fair view and comply with Companies Act
Responsibilities
statement on leaving
resign if ineligible...
AUDIT ISSUES
Increased corporate governance requirements have led to increased
accountability and disclosure.
Examples of good corporate governance practices include:
Calculation of the company's carbon footprint;
Respect for human rights in the company;
Transparency of executive salaries;
Implementation of a code of conduct for employees.
the need for auditors to use technology and to develop new approaches to the
audit of large, multinational businesses. New technologies in auditing
Developments in artificial intelligence (AI), data analytics and block chain
technologies are having a significant impact on audit and finance.
Growth of internet based ‘on-line’ trading which has challenged
conventional audit approaches. e-commerce, online trading, Bit coin
SCOPE OF AUDIT
1. FINANCIAL AUDIT
2. OPERATIONAL AUDIT
a. By external auditor
b. By Internal Auditor
3. MANAGEMENT AUDIT
a. By external auditor
b. By Internal Auditor
1. FINANCIAL AUDIT
Auditor should not only check the accuracy of the accounts but should also
satisfy himself whether the books of accounts show a true picture of
accounting records.
Accuracy of account records
Check of Account books
Check of balance sheet
Report to clients
Audit of public limited company
Discretion of auditor
Impossibility to conduct 100% audit
Reliance of test check
Reliance of internal audit check
Reliance on information supplied by officials
Thorough verification/investigation
2. OPERATIONAL AUDIT
An operational audit refers to a method of examining how an
organization conducts business. It requires analyzing the processes,
procedures and systems used within the company.
A. BY EXTERNAL AUDITOR
Performance of employee
Cost control system
Advertisement process
Training of workmen
Accounts receivable collections
B. BY INTERNAL AUDITOR
Checking of objectives of operations
Nature of policies
Compliance of rules and procedure fixed
Collection of administrative information/data
Submission of report to management
3. MANAGEMENT AUDIT
A management audit is an assessment of how well an organization's management
team is applying its strategies and resources. A management audit evaluates whether
the management team is working in the interests of shareholders, employees, and the
company's reputation.
A. BY EXTERNAL AUDIT
Examination of work performed
Review of managerial work
Appraisal of policies
Compliance with pre-established standards
B. BY INTERNAL AUDIT
Identification of objects of the firm
Establishment and plans of the organization
Review of the organizational structure
Fixation of responsibility
Evaluation of performance of different departments
Pointing out deficiencies
Future course of action
ADVANTAGES OF AUDIT
A. FOR BUSINESS ORGANIZATION
Finding of errors
Location of frauds
Efficiency of staff
Better reputation
Helpful suggestions for business improvement
B. FOR OWNER OF BUSINESS
For sole traders
For partnership
For joint stock company
For a trust
C. FOR GOVERNMENT
For assessment of taxes & For recovering of taxes
For checking economic progress
Privatization of industry
AUDIT OBJECTIVES
A. PRIMARY OBJECTIVES:
Preparation of financial statement as per Companies Ordinance, 1984
Agreement of financial statements with the accounting records
B. SECONDARY OBJECTIVES:
Detection of errors and frauds
Prevention of errors and frauds
C. IMPLIED OBJECTIVES:
Moral checks
Constructive advice of external audit
Difference between Accounting and Auditing
Accounting is referred to as the process of recording, classifying,
summarizing and interpreting the financial transactions, statements to
determine the financial position of an organization. Accounting is also
known as the specialized language of the business.
Auditing, on the other hand, is referred to as the process of
examining the financial records such as transactions and statements of an
organization in order to find any discrepancies during the process of
recording of the transactions and also to verify the accuracy of the records.
