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SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT AFIN 318:AUDIT

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Title: SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT AFIN 318:AUDIT


1
  • SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT
    AFIN 318AUDIT ASSURANCE
  • Presented by Matthew C Hara

2
Learning Objectives
  • At the end of the session you will learn
  • the origins of audit
  • Origins of statutory audits
  • Definition of audit
  • Why audit/purpose of audit
  • Rights, duties and liabilities of auditor
  • Appointment and removal of auditor
  • Concept of true and fair view

3
Origins of audit
  • NATURE AND DEVELOPMENT
  • In the olden days big businessmen known as
    merchants used to own huge tracts of land were
    they grew all sorts of foodstuffs and sold. They
    employed managers who themselves were expected to
    be checked by an independent individual for
    efficacy and report to the owner in form of a
    spoken word.
  • The word audit comes therefore from the Latin
    word audire which means to hear because, then
    in the middle Ages, accounts or revenue and
    expenditure were heard by the auditor.
  • This apparently has not really changed as
    accounts are still being heard.

4
Origins of audit
  • Statutory audits (i.e. carried out in accordance
    with statutory provisions) became mandatory for
    companies in 1900. At this time the purpose of an
    audit was to detect fraud, technical errors and
    errors of principle.

5
Origins of audit
  • However, the recognition in case law is that it
    is unreasonable to expect auditors to detect all
    aspects of fraud, even though they exercised
    reasonable skill and care, means that this is not
    now a primary purpose. Notes below

6
Background
  • What is audit?
  • An audit is the examination of the financial
    statements/report of an organisation - as
    presented in the annual report - by someone
    independent of that organisation.
  • The financial report includes a balance sheet
    (statement of financial position), an income
    statement, a statement of changes in equity, a
    cash flow statement, and notes comprising a
    summary of significant accounting policies and
    other explanatory notes.

7
Background
  • The purpose of an audit is to form a view on
    whether the information presented in the
    financial report, taken as a whole, reflects the
    financial position of the organisation at a given
    date, for example
  • Are details of what is owned and what the
    organisation owes properly recorded in the
    balance sheet (statement of financial position)?

8
Background
  • Are profits or losses properly assessed?
  • When examining the financial report, auditors
    must follow auditing standards which are set by a
    government body such as IFAC, ACCA among others.
  • Once auditors have completed their work, they
    write an audit report, explaining what they have
    done and giving an opinion drawn from their work.
  • Requirements are different e.g. with some
    exceptions, all organisations subject to the
    Corporations Act must have an audit each year.

9
Background
  • Other organisations may require or request an
    audit depending on their structure and ownership
    or for a special purpose.
  • There are different uses of an audit and there
    are equally different types of audits, to serve
    different purposes.

10
Why audit?
  • Auditing is not as important as it might seem to
    be except for the wickedness of man Genesis 65
  • It is only important and useful for stakeholders
    (i.e. shareholders, bankers, investors etc) that
    have an interest in public corporations.
  • Stakeholders require an assurance on management
    behaviours and assertions that they make in
    financial reports.
  • This is the primary function of external
    auditors that is to provide a credibility to the
    financial information that stakeholders need to
    make sound business decisions.

11
Why audit?
  • stakeholders do not need any type of information,
    they specifically need an error free reliable
    information.

12
Can institutions do away with audit?
  • Yes, auditing for small businesses and private
    corporations may not be required at all because
    they don't post their shares on public stock
    exchanges.
  • Audit is about providing an independent
    assurance to the stakeholders. If the stakeholder
    is the owner then why provide assurance to
    yourself since you are already sure?
  • So, auditing is primarily conducted on
    institutions whose resources are obtained from
    elsewhere and whose owners are not the managers
    of the resources.

13
Can institutions do away with audit?
  • Audits are conducted with a view of providing an
    independent assurance to the owners of the money
    as they are not part of the daily process.

14
NATURE, PURPOSE AND SCOPE OF AUDIT AND REVIEW
  • 1 AUDITING
  • Is an independent examination of the financial,
    stores and other records of a company or
    institution in order to form an opinion.
  • 2 NATURE AND DEVELOPMENT
  • The word audit comes from the Latin word
    audire which means to hear because, in the
    middle Ages, accounts or revenue and expenditure
    were heard by the auditor.

15
AUDIT SCOPE
  • Is simply the activities covered by an
    internal/external audit. It includes,
  • audit objectives
  • nature and extent of auditing procedures
    performed
  • Time period audited among others so as to
    delineate the boundaries of the audit.
  • Why delineate the boundaries of an audit?

16
Purpose of audit
  • Statutory audits (i.e. carried out in accordance
    with statutory provisions) became mandatory for
    companies in 1900.
  • At that time the purpose of an audit was to
    detect fraud, technical errors and errors of
    principle.
  • However, the recognition in case law that it is
    unreasonable to expect auditors to detect all
    aspects of fraud, even though they exercised
    reasonable skill and care, means that this is not
    now a primary purpose. However, what goes round
    comes round. Things and times change. Slide 5 had
    details.

17
Purpose of audit
  • A century later (2000) this state of affairs is
    returning arising from irresponsible acts
    perpetrated by institutions such as Enron and
    WorldCom among others resulting into dissolution
    of Anderson Anderson
  • Today according to the SabanOxley act , more is
    demanded to be performed by the auditor, boards,
    management and the introduction of audit
    committees. Notes below.

18
Purpose of audit
  • stakeholders do not need any type of information,
    they specifically need an error free reliable
    information. On the other hand, auditing for
    small businesses and private corporations may not
    be required at all because they don't post their
    shares on public stock exchanges!!!!

19
RIGHTS, DUTIES AND LIABILITIES OF AUDITOR
  • According to Companies Ordinance 1984
    (UK) Powers/Rights of an Auditor Section (255)
  • i) Right of access to books of account and
    vouchers 255(1). ii) Right to receive information
    and explanations. iii) Right of access to books
    and papers of branch 255(2). iv) Right to receive
    notices of general meetings and to attend those
    meetings. (255(6)). v) Right to make
    representation where another person is being
    appointed as auditor. (253(3)).

20
Duties of an Auditor
  • a) Duties of auditor under section. (255(3)
    are i) To give a report to the members on the
    accounts, books of account, balance sheet
    and profit and loss account examined by him.
    (255(3)). ii) Where any matter reported upon is
    answered in the negative or with a qualification
    the report shall include reasons for such
    qualification with factual position. iii) To
    include in the report of the company such matters
    as directed by the Federal/central Government.
  • Duties and responsibilities of Auditor General,
    according to Part 10 Articles 121 122 of the
    Zambian Constitution See details below

21
Duties of an Auditor
  • To attend those general meetings of a listed
    company, either himself or through authorized
    person, in which the balance sheet (statement of
    financial position), profit and loss account and
    the auditors' report are to be considered.

22
Duties of an Auditor
  • d) To make report on declaration of solvency in
    case of voluntary winding up. e) To exercise
    reasonable care and skill in carrying out his
    duties and make such inquiries as considered
    necessary.

23
Appointment and removal of the auditor
  • (1) Every company shall at each annual general
    meeting of the company appoint an auditor or
    auditors to hold office from the conclusion of
    that meeting until the conclusion of the next
    annual general meeting of the company. (2) Where
    at an annual general meeting of a company no
    auditors are appointed or reappointed, the court
    may, on the application of any member of the
    company, appoint a person to fill the vacancy.

24
Appointment and removal of the auditor
  • (3) The first auditors of a company may be
    appointed by the directors at any time before the
    first annual general meeting of the company, and
    auditors so appointed shall hold office until the
    conclusion of that meeting. (4) If the directors
    fail to exercise their powers under subsection
    (3), those powers may be exercised by the company
    in general meeting.

25
Appointment and removal of the auditor
  • The directors, or the company in general meeting,
    may fill any casual vacancy in the office of
    auditor, but while any such vacancy continues,
    the surviving or continuing auditor or auditors,
    if any, may act.

26
Appointment and removal of the auditor
  • (6) A company may by ordinary resolution remove
    an auditor before the expiration of his term of
    office, notwithstanding anything in any agreement
    between it and him and, except in the case of a
    private company, where a resolution removing an
    auditor is passed at a general meeting of a
    company, the company shall within 14 days give
    notice of that fact in the specified form to the
    Registrar. (Amended 3 of 1997 s. 35)

27
Appointment and removal of the auditor
  • (7) If a company fails to give notice as required
    by subsection (6), the company and every officer
    of the company who is in default shall be guilty
    of an offence and liable to a fine and, for
    continued default, to a daily default fine.
    (Amended 7 of 1990 s. 2)

28
Appointment and removal of the auditor
  • (8) The remuneration of the auditor of a company-
  • (a) in the case of an auditor appointed by the
    directors or by the court, may be fixed by the
    directors or by the court, as the case may
    be (b) subject to paragraph (a), shall be fixed
    by the company in general meeting or in such
    manner as the company in general meeting may
    determine.

29
Appointment and removal of the auditor
  • For the purpose of this subsection "remuneration
    includes any sums paid by the company in respect
    of the auditor's expenses.

30
Appointment and removal of the auditor
  • (9) The appointment of a firm by its firm name to
    be the auditors of a company shall be deemed to
    be an appointment of those persons who shall from
    time to time during the currency of the
    appointment be the partners in that firm as from
    time to time constituted and who are qualified
    for appointment as auditors of that company

31
Appointment and removal of the auditor
  • Provided that any such appointment shall lapse,
    and thereby create a casual vacancy in the office
    of auditor, if all those persons who were
    partners in the firm and qualified as aforesaid
    at the date of the appointment cease to be
    partners or so qualified before the period of the
    appointment expires.

32
Appointment and removal of the auditor
  • (10) Nothing in subsection (6) shall be taken as
    depriving a person removed thereunder of
    compensation or damages payable to him in respect
    of the termination of his appointment as auditor
    or of any appointment terminating with that as
    auditor.

33
Appointment and removal of the auditor
  • (11) Where a company's auditor or auditors are
    holding office at the date of commencement of
    the Companies (Amendment) Ordinance 1984 (6 of
    1984), nothing in this section as amended by that
    Ordinance shall be taken as terminating their
    appointment, or as requiring either their
    reappointment or the appointment of other
    auditors, before the conclusion of the annual
    general meeting of the company held next after
    that date.

34
Concept of True and Fair view
  • A true and fair view is one of the bedrock
    principles of preparing financial information.
    This can be linked back to the four basic
    concepts on presenting this information going
    concern, accruals (matching), consistency, and
    prudence.
  • As stated in Financial Accounting (Arnold, Hope,
    Southworth and Kirkham 1994, p56)

35
Concept of True and Fair view
  • True and fair view is a form of standardised
    accounting treatment of financial transactions.
  • It would be very difficult for a user of accounts
    to compare the performance of an organisation
    either through time or with the performance of
    other organisations.
  • This is very similar to The Statement Of
    Principles for Financial Reporting (SOP, 1999)
    and Chapter 3, which details The Qualitative
    Characteristics Of Financial Information
    relevance, reliable, comparability,
    understandable.

36
Concept of True and Fair view
  • But how can the accountant be sure that the
    statements show a true and fair view, especially
    when there is no precise definition?
  • There are many definitions and explanations in
    the Statement of Principles, but they are
    qualitative rather than specific measurements.
  • Elliot Elliot (1997, p189) however offer the
    following explanation true and fair is a legal
    concept and can only be authoritatively decided
    by a court

37
Concept of True and Fair view
  • They do give some specific attributes -
  • Authority all transactions are official and
    above board.
  • Accurate all information provided is accurate,
    e.g. sales invoices give full details of vat,
    discount, and amounts payable
  • Complete there should be no missing dockets in
    the accounting system.

38
Concept of True and Fair view
  • Existence Are the reported assets such as
    buildings, motor vehicles, land there? Where they
    physically seen/verified by the auditor and
    confirmed that they belonged to the organisation
    under audit?

39
Concept of True and Fair view
  • Although valuation practice is well established
    in the case of equity and asset values, it is
    historically the case that much less attention
    has been focused on the valuation of liabilities.
    (Lonergan, 1998)

40
End of Session
  • Next session we will discuss
  • CORPORATE GOVERNANCE
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