CHAPTER 1 INTRODUCTION TO AUDITING

1 AN AUDIT
Definition: An exercise whose objective is to enable auditors to express an opinion
on whether the financial statements give a true and fair view (or equivalent) of the
entity’s affairs at the period end and of its profit or loss (or income and
expenditure) for the period then ended and have been properly prepared in
accordance with the applicable reporting framework (e.g. relevant legislation and
applicable accounting standards) or where statutory or other specific requirements
prescribe the term, whether the financial statements “present fairly”.

• Audit has a well established role in society
• Auditor reports to the shareholders of the company
• Report on the truth and fairness of the financial statements
• High level of assurance
• Usually as a result of a statutory requirement
• SAS’s provide guidance on how to undertake an audit
• An audit is required for all companies with a turnover>£5.6m
• An audit is required by all PLC’s, banks or insurance companys or a company
registered under the Financial Services Act.

2 AN ASSURANCE ENGAGEMENT
Definition: Assignment whereby a professional accountant is required to evaluate or
measure a subject matter that is the responsibility of another party against
identified suitable criteria, and to express a conclusion that provides the intended
user with a level of assurance about that subject matter.
• Assurance is a relatively new concept
• Auditor reports to the persons requesting the assurance
• May be a low/moderate level of assurance
• Non statutory
• No standards available for guidance.

Examples of assurance engagements- internal control review, report on compliance
with relevant laws and regulations, debt management, etc.

3 EXERCISE 1
List the advantages and disadvantages of an audit.

4 AUDITING STANDARDS AND GUIDELINES

4.1 AUDITING PRACTICES BOARD
The board aims to
• Establish high standards of auditing
• Ensure public confidence in the auditing process
• Meet the developing needs of users of the financial statements.
To meet these aims the APB issues the following forms of guidance for auditors
Form Nature Authority Statements of Auditing Standards (SAS’s) Basic principals
and essential procedures Explanatory material to assist
in interpreting and applying the above Mandatory-failure to comply could lead to
disciplinary action.

Practice Notes (PN’s)
Guidance to assist auditors in applying SAS’s to particular industries or
circumstances Persuasive but not prescriptive.

Indicative of good practice Bulletins Provide up to date guidance on new or
emerging issues Persuasive but not prescriptive.

Indicative of good practice.

5 THE AUDIT PROCESS

Consider legal, ethical, practical issues Ascertain document and confirm
accounting and internal control system Planning Preliminary evaluation of internal
controls Internal controls weak Internal controls good Full substantive testing
Reduced substantive testing Overall review of financial statements Audit report
 

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