LECTURE 1:- Saturday 7th August

KEY AREAS OF THE SYLLABUS

• Audit framework and regulation

• Internal Audit
• Planning and Risk assessment
• Internal Control
• Audit Evidence
• Review
• Reporting

What is an audit?

Audit comes from the greek word “Audire” which means to hear. The objective of
an audit of financial statement is for the auditor to express an opinion on whether
the Financial Statement gives a true and fair view and has been prepared in
accordance with the law applicable reporting framework.

True:- Free from material misstatement and based on verifiable evidence

Fair:- Objectively presented, free from management bias and relevant to the needs
of the users.

*Accounts are audited to increase their credibility

Duty of auditor and Management

1. The duty of an auditor is to form an opinion on the truth and fairness of

financial statement.
2. The duty of management is to detect fraud and irregularities in the company

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Output of the auditor

It will be an audit report address to the shareholders of a company.

Types of Audit

• Balance sheet audit

• VFM audit
• Risk Based audit
• Internal system audit

Social Concept

Auditing add value to the society by adding efficiency of the markets and
encouraging investment funds to be rationally allocated among available
investment venture.

Agency Theory

An agency relationship exist when one party (the principle) employs another
party(an agent) to perform a task on his behalf. For instance directors are agents
are shareholders and employees are agents of directors while auditors are agents of
shareholders.

Responsibility of Directors

• Directors duties is to safeguard the company assets and to prevent fraud and
errors in the company
• To ensure that the company Financial Statement are prepared
• To prepare the Financial Statement to show the results of the company for
the year ended and the state of financial position as at the Balance Sheet
date.
• To deliver the audited FS to the registrar of the companies within 7 months
of the accounting year
• To set-up an internal control system to ensure the smooth running of the
business.

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Services provided by an audit Firm

• Auditing
• Accounting
• Taxation
• Recruitment
• Training
• Consultancy
• Special Investigation(Fraud)
• Secretarial Services
• IT services
• Receivership

Appointment Of The Auditor

Auditors are appointed at each AGM at which account are presented. The
appointment is for a period of time “Tenure of office” and that is from the
conclusion of the meeting to the next conclusion AGM.

For the commencement of a new company, the directors may appoint the auditor at
any time before the first AGM.

Subsequent appointment is usually made by members at each AGM to hold office.

Casual vacancies in the office will be filled by directors.

Remuneration of the auditor

The remuneration is fixed by the person appointing the auditor.

Eligibility

A person will be eligible for appointment as the company auditor only if he is

 A member of a recognized supervisory body.
 Eligible for appointment under the rules of that body
 Authorize by the state

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Most countries require auditors:-
 To be a member if an appropriate professional body
 Has satisfied criteria for appointment as auditor
 Hold a recognize qualification obtain in UK
 Hold an approve overseas qualification
 Authorize by the state

Ineligibility (excluded by law)

• is an offer or employee of the company

• is a partner or employee of such a person

Inegibility (excluded by ethics)

IFAC and ACCA ethics rule require auditors to consider whether there are
objectivity or independence might be questioned or impair by external parties
because of:-
• business relationship
• personal relationship
• long association with the client
• fee dependency
• Non-audit services

IFAC (International Federation Of Accountants)

There is a need for global harmonization of both accounting and auditing standards
to prove the quality of both financial reporting and the quality of audit interest.

It issues international, ethical, technical and educational pronouncement for the

global profession.

Removal of auditors

It is only members who are empowered to remove the auditors or reject the
proposal of directors that the auditor has carried his job consciously.
Procedures to remove an auditor are carried in such a way:-

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 • That the auditors has sufficiently secured Tenure of office, to maintain
independence of managers
• Current auditors can be removed if there are doubts about their continuing
abilities to carry out work effectively.
Procedures are:-

 Special notice of 28 days are required to remove the auditors before

expiration of his terms of office by ordinary resolution.(majority voting
rights)
 The company must send a copy of that resolution to the auditor being
removed.
 The auditor must give members notice of the resolution together with the
resolution of the meeting
 The company must allow the auditors to make written representations which
the directors must circulate to all shareholders or if no time, read out at the
meeting unless the court decides otherwise.
 The auditor has the right to speak at the meeting on the subject of the
intended removal.
 In many countries a single majority is sufficient but in others 2/3 or 75%
majority decides.

Resignation of Auditors

Auditor may resigned by depositing in writing to that effect to the registers office.
The notice must include either a statement of any circumstances which should be
brought into attention of members or creditors or no such circumstances connected
with the resignation.

The auditor can also ceased to be an auditor of the company by simply not seeking
a re-election.

The company must send within 14 days the receipt of the notice, a copy to the
registrar of companies.

Auditors responsibilities on appointment and removal

On appointment:-

o Obtain clearance from client to write to the existing auditor(if that is

declined, the appointment should be declined)

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 o Write to the existing auditor asking for any reasons as to why appointment
should be accepted

On Removal:-

o Deposit at the company office a statement of circumstances connected with

the removal/resignation
o Statement that there are no such circumstances
o Deal promptly with request from clearance with new auditors

Auditors rights and duties

 Access to the company’s books and record

 To receive information and explanation necessary for the audit
 Receive notice of all AGM and to attempt them
 To be heard and attend any meeting on matters of concern to the auditor

Auditors duties

• Duty is to express an opinion on the truth and fairness of Financial

Statement
• To ensure that accounts, Financial Statement has been prepared as applicable
reporting framework.
• Ensure proper accounting records have been kept.
• Financial statement are in agreement with accounting records and returns
• Proper returns have been kept at branches not visited by auditor
• Such information and explanation that he thinks is necessary for the
performance of his duties has been received from the company’s offices.

Audit Regulation

The conduct of an audit is governed by 3 sets of rules:-

1. sets of ethics
2. The ISA
3. The company’s law/act
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What is the due process of the IAASB involve in producing an ISA?

ISA’s are produced by the international audit and assurance standard board which
is a technical committee of the IFAC formed in 1977.

The standard setting process

1. The sub-committee of the IASB determines appropriate areas for an ISA

2. The sub-committee produces an exposure draft for that measure
3. The exposure draft is sent to the IASB for approval
4. Once approved it is circulated among members of IFAC and other interested
parties and produced for public exposure.
5. Members committee makes comment on the Exposure Draft
6. Comments are sent back to the IASB
7. Exposure Draft is amended if necessary or another Exposure Draft\
8. Exposure draft is re-issued as an ISA, which must be approved by quorum of
12 members before finalizing.

What is the overall authority of the ISA and how they are applied to
individual countries?

• They are designed to be applied in auditing of the FS

• May be applied to audit of other historical accounts
• Contain basic principles and procedures
• Provides guidance on implementation of those procedures and principles
• Auditors must follow ISA wherever possible
• Departure from ISA is permissible so long it is justifiable(it may be
demonstrated that the audit will be more efficient)
• IFAC is a growing of accounting bodies which must have no legal
standing in individual countries. Countries must therefore have
arrangement in place for regulating audit profession or implementing audit
standards.

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Extent to which ISA applies to small entities:

Small entities specially owner managed companies are sometimes exempted from
being their account audited and hence from ISA ( less than £5.6 million turnover)

This is because the person who owns the company is the one managing the
company.

Advise and values that accountants bring to small entities are more likely to be
other services such as tax and accounting rather than audit.

Impact of misstatement

Given that audit fees and related fees are seen as to great as cost to any benefit that
audit might bring, small entities shall be exempted.

Code of ethics

Professional behaviour
Objectivity
Confidentiality
Competence
Integrity

Accountants require a code of ethic as a whole position of trust and people rely on
them. Accountants are trusted and exposed to sensitive information about the
business, they should obey or follow a code of ethic, ACCA has published
guidance for its members and code of ethics for its conduct.

IFAC also published its fundamental principle in its code of ethics for professional
accountants:-
• Professional Behaviour:- members should comply with relevant laws and
avoid desecrating their profession.
• Objectivity:- members should be honest and straightforward in all
professional business behaviour relationship.

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 • Competence:- duty to maintain professional knowledge and skill at
appropriate level.
• Confidentiality:- information on client should not be disclosed without
appropriate specific authority
• Integrity:- members should be honest and straightforward in all professional
business behaviour relationship.

Specific Guidance

The recent revised ACCA’s guidance states its purpose in a series of step, it aims
to help firms and members:-

• Identify the threats

• Evaluate if the threat is significant
• Identify and apply safeguard to eliminate and reduce the threat
• Take corrective action if necessary

Possible threats to the ethical behaviour and professionalism:-

1. Independence
The auditor should be independent both in appearance and in mind. Auditors
responsibility is to form an opinion on the Financial Statement. If this opinion is
not credible then it is essential that the auditor is seen as independent from the
audit client. Independence can be threatened from a number of ways such as:-

• Self interest Threat

Under normal circumstances not more than 15% of the recurring gross fee income
or 10% in case of a listed company or other public interest company should come
from anyone client source. This is dependant on one client or a group of clients for
a significant portion of the firms total fee income.

• Holding shares in an audit client

Such share holding should not be held by reporting partner or any staff involved in
the audit. If they are held they should be disposed or the staff should not be
involved in the audit.

• Close Business personal or family relationship

Auditor with long standing involvement with a particular client may be look upon
as a professional adviser rather than as an independent auditor.

• Loan or warranties
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Members should not make loan to a client or accept a loan from a client unless it is
an arms length transaction. Similar restrictions apply to the making and giving of
warranties.

• Hospitality
Auditors should not accept goods and services from a client unless the value of the
benefit is modest

• Over-due fees
Fear that fees are not paid and ultimately no invoice are issued.

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