Auditing Theory and practice

References:
1-Auditing
Alan Millichap & John Taylor 9th ediition
2-ACCA manual
Corporate Governance (CG)
• CG refers to the system of structures, rights,
duties and obligations by which corporations
are directed and controlled.
The governance structure specifies the
distribution of rights and responsibilities among
different participants in the corporation such as
Board, Managers, Shareholders, Creditors,
Auditors, Regulators and other stakeholders and
specifies the rules
And procedures for making decision in corporate
affairs.
Governance involves the alignment of interests
among the stakeholders.
There had been reviewed governance practices
particularly in accountability, due to the following:
1-The high collapse in a number of large organizations
most of them involved accounting fraud
2- The recent financial crisis in 2008.
 Principles of Corporate
Governance
1-Rights and equitable treatment of
shareholders by openly and effectively
communicating information and encouraging
shareholders to participate in general meeting
2-Interest of other stakeholders: Organizations
should recognize that they have legal,
contractual, social market driven obligations
to non shareholders, stakeholders including
Employees, investors, creditors, suppliers, a
stores and policy makers
3- Role and Responsibility of Board: The board
needs sufficient relevant skills and
understanding to review and challenge
management performance. Also needs
adequate size of independence and
commitment.
4-Integrity and ethical behaviour: Code of conduct
that promotes ethical and responsible decision
making for the company’s directors and
executives.
5- Disclosure and Transparency: Organization
should clarify and make publicly known the roles
and responsibilities of the Board and
Management to provide shareholders with the
level of accountability. All investors should have
access to clear factual information
 Introduction to Auditing
• An audit has been defined as (The indenedent
examination of,and expression of opinion on
the financial statement of an enterprise by an
appointed auditor in pursuance of that
appointment and in compliance with any
relevant statutory obligation.
• This definition shows that the Auditor must:
• 1-Be Independent
• 2-An auditor conducts an examination of the
financial statement
• 3- An auditor must express an opinion on the
financial statement presented to him
 Evolution of Auditing
• In Industrial REVLOUTION LIMITED LIABILITY
COMPANY WERE INTRODUCED.
• Modern Company came into being in 1856.
• Companies ACT 1900 placed an obligation on
directors to produce annual accounts.
 Financial STATEMENTS
• Financial statements are the basic mechanism
by which activities of the company managers
are monitored They include:
• Income statement
• Statement of Financial position
• Cash flow statement
• Directors report
 OBJECTIVES OF AUDITING
• Primary :To produce a report by the auditors
of their opinion of the truth and fairness of
the financial statements.
• Secondary:
• 1- To adivse management
• 2- To detect fraud and error.
• 3- To prevent fraud and error through
deterrent and moral effect of audit
Parties to financial
statements(stakeholders)
• A-Actual or potential:
• 1-Owners.
• 2-Lenders
• 3-Employees
• 4- customers
• 5- Suppliers
• B- Parties who advise the above
• C-The Government (Taxation-ZAKAT,Local
authorities, and various Government units for
managing the economy.
• D- The public (Consumer protection)
• E-Regulatory Organisations
 Agency Theory
• Agency is the name given to the practice by
which productive resources owned by one
person or group are managed by another
person or group of persons.
 The statutory framework for
auditing-Accounting requirement
•
of the Companies ACT
1-Every company must keep adequate
accounting records.
• 2- Adequate accounting records means sufficient
records to:
• A- Show and explain transactions.
(Understandable)
• B-To disclose with reasonable accuracy and at
any time the financial position (full disclosure and
reliability)
• C- Enable directors to ensure that accounts
comply with the Act requirements.
• 3-The account must in particular contain cash
receipts and payments and record of assets and
liabilities(Accrual bases of accounting).
• 4- If the company assets include inventory
(stock), the records must show:
• A-Inventory (Stock) held B- Statement of stock
taking
• Note that for retail trade stocks are identified
from sales and purchases records.
• Minimum Records are therefore:
• Cash record & record of assets and liabilities.
• OTHER STATUTORY RECORD INCLUDE:
• A- List of directors B-Register of charges (fixed
and floating. C- Minute register of company
directors meetings.D-Register of members.
• F-For Public companies they must register
information received from any person to
whom they have sent a notice requiring them
to disclose whether or not they have an
interest in the company’s voting shares.
• The above listed registers are important to the
auditor because they relate to the accounts
and constitute audit evidence.
Accounting requirements and
Principles
• Requirements:
• A-Accounting reference date.
• B-Form and content of Company accounts
• C-Procedure on completion of the accounts
• D-Modified accounts
• F-Publication of full and abridged accounts
• Principles:
• A- Going concern.
• B-Consistency
• C-Prudence
• D-Accruals basis
• (Postulates(broad basic assumptions)-
Principles- Techniques)
Auditing and Accounting Standards
and Guidelines
• Auditing Practices Board (APB) is authoritative
body that:
• 1. Issues international standards on auditing.
• 2. Practice Notes which helps and indicates
good practice.
• 3. Bulletins which comment on items of
current interest.
 International Standards on
Auditing
• Each standard contains two types of material:
• 1. Basic principles and essential procedures.
• 2. Explanatory and other material
• Non compliance with basic principles can
bring an action against the auditor
( Negligence) .
• For examples of current ISAs refer to the
reference page 50-51.
 Practice Notes
• Practice Notes are designed to assist the
auditor in following basic standards and
applying auditing standards to particular
circumstances and industries.
• They are convincing rather than descriptive.
• It may be included in ISAs.
• For current practice notes refer to the
refernce page 51-52.
 Bulletins
• Bulletins advice auditors on current and new
issues they resemble practice notes.
• For examples of current Bulletins refer to the
reference page 52-53.
 Rules of Professional Conduct
• Fundamental Principles:
• 1- Integrity
• 2-Obiectivity
• 3- Independence
• 4-Competency
• 5-Courtesy and consideration
 Ethics-General Rules
• 1-Profession independence is very important
• 2-Integrity is vital
• 3- Avoidance of matters that may affect
objectivity approach to the audit
• 4- If there is ethical difficulties or if the auditor is
unsure of what course of conduct to follow they
should consult their professional body or take
legal advice ( refer to page 68 of the text book
 Quality Control in audit firms
• Quality control can be seen in several stages:
• 1-Proper organisation of the firm and its
procedures
• 2-Planning for each audit
• 3- Control of each audit
• 4- Working papers
• 5- Review of work done
• 6-Review of organization and procedures
 Second course work
• Question One:
• List the purpose and principal content of an
engagement letter specifying the procedures
connected with that letter