oncept of True and Fair Many countries legislation requires that financial statements give a true and fair

r view (e.g. the UK) or present fairly, in all material respects (e.g. the USA) There has never been, however, any definition in legislation as to the meaning of the expression. The following would be generally accepted definition (based on legal opinion commissioned by the UK Accounting Standards Committee in 1983):

The financial statements comply with Accounting Standards whose purpose is to narrow the areas of divergent opinion and practice in accounting these are the professions attempt, in the absence of statutory definition, to define true and fair view By true is meant that financial statements are:

free from material misstatement based on verifiable evidence

By fair is meant that the financial statements are:

objectively presented free from management bias relevant to the needs of users

The concept is a dynamic concept and is incapable of precise lasting legal definition, but to be true and fair, financial statements must live up to the current needs and expectations of users.

Concept of Materiality Materiality is an important concept in the audit process and affects: Audit risk evaluation The nature, timing and extent of audit procedures (eg sample sizes)

The determination of whether the financial statements are distorted by misstatements discovered ISA 320 - Audit Materiality defines the concept as follows: Transactions, items, events will be material in financial statements if their omission, misstatement, misclassification or non-disclosure would distort the view given by the financial statements and would responsibly influence the understanding and economic decisions of users. Materiality, however, is not capable of general mathematical definition since it involves qualitative as well as quantitative considerations For example, materiality can be viewed in terms of size, an item being compared with a transaction or balance class or being compared with the financial statements as a whole (quantitative judgement)

It can also be viewed in terms of the nature of an item irrespective of size e.g. the non-disclosure of an accounting policy or non-compliance with the requirements of law such as errors or omissions in relation to the disclosure of directors remuneration (qualitative judgement) 5 GENERAL PRINCIPLES GOVERNING THE AUDITOR 5.1 Ethical Principles The auditor should comply with the International Federation of Accountants (IFAC) Code of Ethics for Professional Accountants. Independence Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour Technical standards.

5.2 Adherence to Standards on Auditing An audit should be conducted in accordance with ISAs. ISAs provide: Standards (i.e. basic principles and essential procedures); and Related guidance (i.e. explanatory and other material). 5.3 Professional Skepticism An audit should be planned and performed (conducted) with an attitude of professional skepticism recognizing circumstances that may bring about material misstatement in the financial statements. An auditor should assume neither dishonesty nor unquestioned honesty. See also the auditors responsibilities for fraud and error

The audit process

 Engagement letter Auditor should send all clients an engagement letter setting out the auditors duties and responsibilities. Planning Planning and controlling audit work is essential to performing work to the required high standard of skill and care. Ascertain accounting systems auditors enquire into and ascertain the clients system of accounting and internal controls in order to understand how accounting data is prepared and to gain an impression as to whether systems are reliable. Test controls and transactions Controls must be tested if the auditor intends to rely on them. Records must be tested to obtain evidence that they are a reliable basis for the preparation of accounts. Verify assets and liabilities Figures appearing in financial statements must be verified Review financial statements To see if, overall, they appear sensible. Obtain management representations The auditor asks management to confirm formally the truth and fairness of certain aspects of financial statements. Sign auditors report After the directors have approved the accounts. 7 PURPOSE External Auditing Gives confidence in the integrity of corporate reporting for the benefit of stakeholders and society as a whole, by providing an external and objective view on the reports given by management. Internal Auditing An independent, objective assurance and consulting activity designed to add vcalue and improve an organizations operations Objective is to assist management and staff in the effectivce discharge of their duties. Functions include

Examining, evaluating and monitoring the adequacy and effectiveness of the accounting and internal control systems Providing analyses, appraisals and recommendations concerning the activities reviewed. Value for Money Audit An investigation into whether or not the use of resources is economic, efficient and effective. To identify and recommend ways in which the return for resources employed may be maximised. Environmental Auditing A performance evaluation which aims to help safeguard the environment Facilitates management control of environmental practices.

Assesses the degree of compliance with environmental legislation, external regulations and company policies. Public sector Auditing National and local government, agencies, commissions, etc

Scope and objectives are affected by interests and requirements of third party organisations.

Specific requirements, reelevant regulations, ordinances or ministerial directives may affect the audit mandate. 8 SCOPE OF AN AUDIT OF FINANCIAL STATEMENTS Audit Procedures Deemed Necessary An audit conducted in accordance with ISAs must have regard to the requirements of: ISAs (ie to plan, evaluate controls, obtain evidence, form conclusions and report): Relevant professional bodies (eg ACCA): Legislation and regulations (eg Companies Acts); The terms of the audit engagement and reporting requirements.

Fundamental Concepts Reasonable assurance in an audit engagement, the auditor provides a high, but not absolute, level of assurance, expressed positively in the audit report as reasonable assurance, that the information subject to audit (ie the financial statements)is free of material misstatement. To provide such assurance, the auditor assesses the evidence collected in respect of the fianncial statements as a whole and expresses a conclusion thereon. Inherent limitations However, the auditor may not be able to detect all material misstatements because: Testing is on a sample basis Any accounting and internal control system has inherent limitations. Most audit evidence is presuasive rather than conclusive (eg an asset purchased by an entity, though physically possessed, may bo longer b eowned if title has been transferred to another); Transactions between related parties (ie where one has the abilitiy to control or exercise significant influence over the other) may not be identified as such. The rule of judgement There are two areas in which judgement is particularly important. In gathering audit evidence (eg in deciding the nature, timing and extent of audit procedures); Nature (eg whether to test controls over transactions or substantiate them in depth or using analytical procedures); Extent(eg sample sizes); Timing (eg at an interim visit during the year, the year end or after the year end at the final audit visit. In drawing conclusions based on that evidence (eg in assessing the persuasiveness of conflicting evidence from different sources) 9 NON-AUDIT ENGAGEMENTS: There ar a numbe of reporting assignments or engagemetns which do not give the same degree of assaurance as an audit to users.

 Gudance issued by the International Auditing and Assurance Standards Board (IAASB), a body set up by the International Federation of Accountants, is summarised below Non-audit engagements can be classified into 2 groups as follows:

9.1 Reviews: ISA 900 Egnagements to review financial statements A review eggagement enables the auditor to state whether anything has come to the auditors attention which causes the auditor to belive that the financial statements are not prepared in all material repects with the applicable financial reporting framework. However, the auditor does not perform the extensive testing procedures.

The main procedures involved comprise enquiries of management, analytical procedures (eg ratio anlysis, comparisons and trends analysis on total figurs rather than individual transactions), and comparison of financial statements with accounting records without verification to underlying documentation. The opinion expressed is called a negative assurance The assurance given is therefore much lower than an audit opinion. Notes the following example of a review report and compare it with the audit report above:

Review report to (usually the direcotrs) We have reviewed the accompanying balance sheet of ABC Company at 31 December 20X1 and the related income statement and cash flow statement for the year then ended. These financial statement are responsibility of the companys management. Our responsibility is to issue a report on these financial statements based on our review. We conducted our review in accordance with the (relevant Standard) applicable to review engagements. This standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are free from material misstatement. A review is limited primarily to enquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Based on our review, nothing has come to out attention that causes us to believe that the accompanying financial statements do not gie a true and fair view in accordance with accounting standards. Date Auditor Address 9.2 ISA 100 Assurance engagements These assignments involve a 3 way relationship: The accountant A responsible party (usually client management) An intended user (eg bankers, regulators)

 The accountant evaluates a subject matter which is the responsibility of the responsible pary against suitable criteria, and expresses an opinion providing the intended user with a level of assurance about the subject matter. The subject matter could be historical financial data or prospective financial data. Suitable criteria could be accounting standards, laws, regulations, contract terms. Assurance engagements include:

Direct reporting engagements the auditor/accpimtamt reports on issues that have come to his attention during the course of the commsissioned assignment. Such an assignment would be a due diligence engagement where the auditor/accountant reviews the systems and accounts of a target company and reports to a propective purchaser. Attest or attestation engagements the auditor/accountant declares that a given premise is either correct or not A report on interim accounts might require the auditor to attest whether the accounting policies used are consistent with those used in the annual audited financial statements, and whether any material modifications should be made to the interim accounts. Compilation engagements The accountant uses expertise other than auditing in such engagements For example, the accountant may be commissioned to prepare financial statements from a companys records No audit tests will be performed and management will be solely responsible for the information complied. As stated above, no opinion and hence no assurance is given.

Agreed upon procedures The accountant reports on factual findings No assurance is given. Users draw their own conclusions.

Thus client management may commission a report on accounts receivable or accounts payable the accountant states the results of findings, such as the number of accounts in error and the number of balances agreed with supplier statements or agreed by customers in a debtors circularisation