Financial statement audit and

auditor’s responsibility
Difference between Accounting & Auditing

Auditing is the accumulation & evaluation of

evidence about quantifiable information to
determine & report on the degree of
correspondence between the information &
established criteria.
Accounting is recording, classifying &
summarizing of economic events in a logical
manner for the purpose of providing financial
information for decision making.
Difference between Accounting & Auditing

Auditing is a branch of accounting. The

auditors work begins when the
accountant works end. No prescribed
qualification is legally required to be
possessed before appointment of an
accountant is made.
But it is mandatory that an auditor of a
public limited company must be a
chartered accountant.
 Difference between
Accounting & Auditing

• Accounting is the basis of auditing

The work auditing starts where the works accounting ends.

• The accountants prepare the financial statements of the

company.

The auditors express an opinion over the financial statements

prepared by accountant.
 Difference between Accounting & Auditing

• An accountant doesn’t require to be a CA.

According to “Bangladesh Chartered Accountants order

1973” an auditor must be a CA.

• Its main objective is to provide certain types of

information that management & others can make
decision.
Its main objective is to determine whether recorded
information properly reflects the economic events.
 Types of Auditing:

• Audit mainly of 3 types:

 Financial Statements Audit
 Compliance Audit
 Operational Audit/ Management Audit/ Performance
Audit/ Govt. Audit
 Financial Statement Audit:

• It involves obtaining & evaluating evidence about an

entities financial statement for the purpose of expressing an
opinion on whether they are presented fairly inconformity
with established criteria (GAAP).

• This type of auditing is done by external auditor by the

company whose statements are being audited.
 Need for Financial statement audit:

• Conflict of interest: Many users of financial statement are

concerned about an actual or potential conflict of interest
between themselves and the management of the reporting
entity. Thus users seek assurance from outside independent
auditors that the information is both:
– Free from management bias, and
– Neutral with respect to the various user groups.
 Need for Financial statement audit:

Consequence: Because of the significant economic, social and

other consequence of their decisions, statement users look to the
independent auditor for assurance that the financial statements
have been prepared in conformity with GAAP including all the
appropriate disclosures.

Remoteness: Distance, time and cost make it impractical even

for the most knowledgeable users of financial statement to seek
direct access to the underlying accounting records. An
independent auditor helps to meet their needs.
 Need for Financial statement audit:

• Complexity: As the level of complexity increases, so

does the risk of misinterpretations and unintentional
errors. Finally, it more difficult or even impossible to
evaluate the quality of the financial statements
themselves, users rely on independent auditors to
assess the quality of the information contained there
in.
 Economic Benefits of an Audit

• Listing at Stock Exchange

The auditing is beneficial for business. The listing of securities
at stock exchange is optional. The public limited companies
can get registration at stock exchange. Stock exchange
management for registration purpose accepts the audited
accounts.
• Errors are Located
Auditing is helpful for business. The error can be located
through it. The location and correction of error is possible
through auditing. The true and fair information about
business is available.
 Economic Benefits of an Audit

• Frauds are Discovered

Auditing is helpful for business. The discovery of fraud is
possible through it. The guilty persons can be held responsible.
The auditing accounts show fair about business.
• Planning Becomes Possible
Auditing is helpful for business. The audits accounts present
true and fair view of business activities. The facts and figures
can be used to prepare budge and estimates for the next years.
The projected cash receipts and payments, income statement
and balance sheet can be prepared.
 Economic Benefits of an Audit

• Improvement of Internal Control

Auditing is helpful for business. The auditor can point out the
weakness of internal control system. The business
management can take steps to remove these weaknesses. The
effective control systems are essential for large-scale business
enterprises.
 Limitations of Auditing:

Reasonable cost: A limitations on the cost of an audit results in selective

testing or sampling, of the accounting records and supporting data. In
addition, the auditor may choose to test internal controls and may obtain
assurance from a well functioning system of internal controls.

Reasonable length of time: The auditor's report on many public

companies is usually issued three or five weeks after the balance sheet
date. This time constraint may affect the amount of evidence that can be
obtained concerning events and transactions after the balance sheet date
that may have an effect on the financial statements. Moreover, there is a
relatively short time period available for resolving uncertainties existing at
the statement date.
 Limitations of Auditing:

• Alternative accounting Principles: Alternative accounting

principles are permitted under GAAP. Financial statement
users must be knowledgeable about a company's accounting
choices and their effect on financial statements.

Accounting Estimates: Estimates are an inherent part of the

accounting process, and no one, including auditors, can foresee
the outcome of uncertainties. Estimate range from the allowance
for doubtful accounts and an inventory obsolescence reserve to
impairment tests of fixed assets and goodwill. An audit can not
add exactness and certainly to financial statements when these
factors do not exist.
 Generally Accepted Auditing Standards (GAAS)

• There are general guideline to help the auditors in fulfilling

there professional responsibilities in the audit of historical
financial statements.

• There are 10 guidelines are available:

– General Standards
– Standard of field Work
– Reporting Standards
 General Standards:

• The auditor should have adequate training & proficiency.

• Independence of mental attitude.

• Due professional care is to be exercised in the performance

of examination & reparation of the report.
 Standard of field Work

• Proper planning of the audit & proper supervision of the

assistance.

• Sufficient understanding for the internal control standards.

• Sufficient & competent evidence should be obtained.

 Reporting Standards:

• Whether financial statements were prepared in accordance

with GAAP is to be considered.

• Circumstances should be identified, when GAAP was not

consistently followed.

• Whether there was adequate disclosure or not.

• Expression of opinion on the financial statements as a

whole.
 Basic Elements of Auditor’s Report

• The auditor’s report is the auditor’s formal means of

communicating to interested parties a conclusion above
the audited financial statements.

• The auditor must meet the 4 reporting standards of

Generally Accepted Auditing Standards (GAAS) in
preparing the audit report.

• An audit report indicates the completion of audit process .

 Basic Elements of Auditor’s Report

• Title of the report

• Address of the report
• Introduction paragraph
• Scope paragraph
• Opinion paragraph
• Name of the firm
• Date of the report
• Auditor Signature
 Title of the report

• The audit report should be titled as “independent audit report”

in order to communicate the users that opinion is free from all
management influence & control.

• Heading: “Independent Audit Report”

 Address of the report

• The audit report generally is addressed to the shareholders.

The logic behind this, it creates a distance between the auditors
& management.
 Introduction paragraph

• It should covers 3 matters:

– It should establish the fact that a particular audit firm has
done this audit.

– It specifies the types of financial statements audited

including the period cover.

– It shows the responsibility of both auditor & management.

 Scope paragraph

• It indicates extend of audit investigation; it should mention

that the auditors have followed the Generally Accepted
Auditing Standard. (GAAS)
 Opinion paragraph

• This paragraph should satisfy the 4 reporting standards of

Generally Accepted Auditing Standards.

• It contains a statement of auditors regarding the result of audit

investigation.

• In our opinion, financial statement referred above is….

• Should not use: We certify/ Guarantee/
accurately/Exactly/Correctly…
 Name of the firm

• The name of the firm is given to show the responsibility.

• The name of the firm also helps in publicity.

 Date of the report

• The date of the report is important because it makes the end of

the auditors investigation & responsibility for findings

• Auditor Signature
 Auditor’s Report:

• Standard/ Unqualified Audit Report

• Standard report with explanatory paragraphs

• Other report
• Qualified report
• Adverse opinion
• Disclosure of opinion
 Standard/ Unqualified Audit Report

• This is the most common type of audit report

The auditor can express an unqualified opinion
only when the following conditions are met:

a) The financial statements prepared by the clients

consist of balance sheet, income statement, cash
flow statement & owner’s equity statement.

b) The 3 general standards of technical proficiency,

independence & due professional care are made.
 Standard/ Unqualified Audit Report

c) The 3 field work standards (audit planning & supervision,

understanding of the clients internal control systems &
obtaining sufficient & competent evidences) are made.

d) The financial statements are prepared & presented in

accordance with GAAP & also with necessary disclosures.

e) There are no circumstances which may necessitate the use of

an additional explanatory paragraph in the audit report by
modifying the wordings of the report.
 Standard report with explanatory paragraphs
(Modified Wordings)

• All unqualified audit reports have a standard format of

presentation. This standard format includes a set of paragraphs
wordings.

• In this case, the auditor is satisfied with the audit but feels it
helpful to provide some additional information for better &
easy understanding of the report users. An explanatory
paragraph is included after or before the opinion paragraph
 Qualified Audit Report:

• If the auditor uncovers any material departure from GAAP, the

auditors should ask the client to make necessary correction. If
the client refuses to do that a qualified or an adverse opinion
can be issued.
• Example: Purchase of asset is shown an expense not whole
part of asset is mistake but only that kind of things is mistake.
• In our opinion, except for…………….the financial statements
referred above are presented fairly……….
 Adverse Opinion:

• An adverse opinion should be expressed when the auditor

believes that financial statements taken as a whole are not
presented fairly in conformity with GAAP.

• In our opinion, the financial statements referred above are not

present fairly……
 Disclaimer of Opinion :

• Disclaimer of opinion is basically “no opinion”. Auditors issue

a disclaimer of whenever they are unable to form an opinion as
to the fairness of the presentation of financial statements.

• If the auditors not find all documents/evidence, we are unable

to give any opinion because of lack of document.
 Auditor’s responsibility and Expectation Gap

Users of financial statements expect auditors to:

• Perform the audit with technical competence, integrity,
independence and objectivity.
• Search for and detect material misstatement, whether
intentional or unintentional.
• Prevent the issuance of misleading financial statement.
Some users have concluded that these expectations are not being
met, leading to what has become known as the “Exception Gap”.
 Auditor’s responsibility and Expectation Gap

They equate these business failures and investment losses with

audit failures. In most such cases, the auditors claim to have met
their responsibilities by having performed the audits in
accordance with GAAS.
The expectation gap relates largely to three troublesome areas:
• Detecting and reporting on errors and irregularities, especially
fraud,
• Detecting and reporting on illegal client acts,
• Reporting when there is uncertainty about the ability of an
entity to continue as a going concern.
 Narrowing the Expectation Gap

• The AICPA, to study ways to eliminate the issuance of

fraudulent financial reports by publicly held companies. It
recommended to independent public accountants that:

• Auditing standards be changed to better recognize the auditors

responsibility for detecting fraudulent financial reporting, and
• The auditor’s standard report be improved to better
communicate the work done by the auditor.
 Error& Irregularities

Error- an unintentional misstatement in financial statements,

including the omission of an amount or a disclosure, such as
the following:
· A mistake in gathering or processing data from which financial
statements are prepared.
· An incorrect accounting estimate arising from oversight or
misinterpretation of facts.
· A mistake in the application of accounting principles relating to
measurement of facts, recognition, classification, presentation,
or
 Error& Irregularities

Irregularities - refers to an international act by one or more

individuals among management, those charged with
governance, employees or third parties, involving the use of
deception to obtain an unjust or illegal advantage.
False representation for entry made intentionally to defraud
somebody is called fraud.
• Types of fraud:
Two types of international misstatements are relevant to the
auditors consideration of fraud:
* Misstatements resulting from fraudulent financial reporting;
and
* Misstatements resulting from misappropriation of assets.
 Misstatements resulting from fraudulent financial
reporting

• Deception such as manipulation or alteration of

accounting records or supporting documents from which
the financial statements are prepared.
• Misrepresentation in , or intentional omission from, the
financial statements of events, transactions, or other
significant information.
• Intentional misapplication of accounting principles
relating to measurement, recognition, classification,
presentation or disclosure.
Misstatements resulting from misappropriation of assets

• Misappropriation of assets involves the theft of an entity’s

assets.
• Misappropriation of assets can be:
– Stealing physical or intangible assets
– Causing an entity to pay for goods & services not received.
• It is often accomplished by false or misleading records or
documents in order to conceal the fact that the assets are
missing.
Reporting Doubts as to an Entity’s ability to continue as
a Going Concern

• Fair presentation is not a guarantee of the continuation of an

entity as a going concern. Doubt as to the entity’s ability to
continue as a going concern may result from evidence obtained
in the audit that the entity has suffered recurring net losses,
defaulted on loan contracts or is atteming to restructure debt.

• When the auditors concludes that there is substantial doubt

about the entity’s ability to continue as a going concern during
this time period, the auditor should state this conclusion in the
audit report.