5QQMN531 Audit and Assurance Lecture 1 Individual Coursework | KCL

Audit and Assurance 

Audit 

Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. 

Performed by a competent, independent person. 

The definition of auditing includes the following key words and phrases: 

• Information and established criteria
• Accumulating and evaluating evidence
• Competent, independent person
• Reporting 

Information and Established Criteria

 In the context of an audit, "information" refers to the financial statements, records, or any data that is subject to examination. 

"Established criteria" are the benchmarks, standards or norms against which the auditor evaluates the information. 

These criteria could include generally accepted accounting principles (GAAP), specific legal requirements, industry standards, or any other relevant standards that are considered appropriate for the specific audit engagement. 

The audit process involves comparing the provided information with the established criteria to assess the accuracy, completeness, and compliance of information. 

Accumulating and Evaluating Audit Evidence 

In the audit context, accumulating and evaluating evidence are integral processes. Auditors gather diverse evidence, ensuring sufficient quality and quantity. 

Examples of types of evidence: 

• Documentary evidence (invoices, contracts)
• Physical evidence (inspection of assets)
• Oral evidence (verbal explanations)
• Electronic evidence (digital records)
• Observation (directly witnessing processes)
• External confirmations (confirmation from external parties)

Competent, Independent Person

A "competent and independent person" is an auditor who possesses professional expertise, education, and experience in auditing, demonstrating a thorough understanding of accounting principles and adherence to ethical standards. 

Competence involves the ability to navigate complex information and apply professional judgement in line with established standards.

Independence requires maintaining an objective and unbiased perspective, avoiding conflicts of interest, and adhering to ethical guidelines. 

Reporting 

Reporting in an audit involves the formal communication of an auditor's findings, conclusions, and opinions regarding the examined financial information or other audit subjects. 

• This is known as an audit report. It differs in nature and in form 

Overall, reporting plays a crucial role in influencing stakeholder confidence in the reliability of financial information. 

Accounting and Auditing 

Accounting is the ongoing process of recording, classifying and summarising financial transactions to generate accurate financial information for internal and external decision-making. It is an integral part of daily business operations and is carried out by internal accounting departments. 

On the other hand, auditing is an independent and periodic examination of financial statements and records to verify their accuracy and reliability. Auditors, external to the organisation, provide an unbiased opinion on the fairness of the financial statements. Auditing occurs after the accounting period, serving as a retrospective assessment. 

• Auditors know accounting because it is the "criteria".
• Auditors possess expertise in the accumulation and interpretation of evidence for their opinion. 

Assurance Definition and Services 

An assurance service is a professional service provided by auditors and other qualified professionals to enhance the reliability and credibility of information for decision-makers.

The primary goal of assurance services is to provide an independent and objective assessment of various aspects, such as financial statements, processes, or controls, to instil confidence in the accuracy and completeness of the information. 

These services go beyond traditional financial audits and may include reviews and may include reviews, compilations, and other engagements that assure the reliability of information without necessarily expressing an opinion. 

Attestation Services 

An attestation engagement - a practitioner assesses and reports on "subject matter or an assertion about the subject matter that is the responsibility of another party." 

Some financial attestation engagements (other than audits):

• Audit of historical financial statements
• Audit of internal control over financial reporting
• Review of historical financial statements
• Other attestation services that may be applied to a broad range of subject matter

This regulation requires: 

• Independent professionals
• Objective benchmarks against which auditors can be measured
• Reliability and consistence of audit 

International Auditing Standards 

International Standards on Auditing (ISAs) are issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC). 

The IAASB works to improve the uniformity of auditing practices & related services throughout the world. 

• IAASB: independent standard-setting body that serves the public interest by setting high-quality international standards and facilitating convergence of international & national standards. 

The IAASB's medium-term strategy addresses the following three main themes in the public interest: 

• Supporting the global financial stability
• Enhancing the role, relevance and quality of assurance and related services in the evolving world.
• Facilitating the adoption and implementation of the standards 

USA Regulation Sarbanes Oxley Act 

In response to several accounting-related corporate scandals, Congress passed the Sarbanes-Oxley Act. 

The provisions changed the relationship between publicly held companies and their audit firms. 

The Act's major provisions include: 

• Requirement of CEO/CFO certification of financial statements.
• Requirement of an auditor examination of the company internal controls. 
• Creation of the Public Company Accounting Oversight Board (PCAOB) to serve as a "watchdog".
• Prohibition of certain client services by firms conducting a client's audit. 

PCAOB 

The Sarbanes-Oxley Act established the PCAOB to: 

• Provide oversight for auditors of public companies.
• Establish auditing, attestation, and quality control standards for public company audits.
• Perform inspections of audit engagements & quality controls at audit firms performing the audits. 

American Institute of Certified Public Accountants (AICPA) 

Membership in the AICPA is voluntary and restricted to certified public accountants (CPAs). 

Not all CPAs join, and not all members are practising as independent auditors. The AICPA: 

• Sets professional requirements for CPAs.
• Conducts research.
• Publishes materials on many different subjects related to accounting, auditing, attestation and assurance services, management consulting services, and taxes. 

The AICPA sets standards and rules that all members and other practising CPAs must follow: 

• Auditing standards
• Preparation, compilation, and review standards
• Other attestation standards
• Code of Professional Conduct

USA Auditing Standards 

AICPA Audit Standards: 

• Auditing standards for private companies and other entities in the US are established by the Auditing Standards Board (ASB) of the AICPA.
• These standards are referred to as Statements on Auditing Standards (SASs).
• AICPA auditing standards are also called the US generally accepted auditing standards (GAAS). 

PCAOB Audit Standards: 

• Standards issued by the PCAOB apply only to the audits of US public companies and other SEC registrants, including brokers and dealers.
• The PCAOB also considers international auditing standards when developing new standards. 

Relation of US and International Auditing Standards

UK Audit Regulatory Environment 

Profession effectively regulates itself with some laws. Financial Reporting Council: assess the quality of the audit. 

UK has lots of institutes, e.g. ACCA, ICAEW, ICAS. All are characterised by: 

• Stringent entrance requirements
• Strict code of ethics
• The Technical updating of members. 

Organisation of Audit Standards 

The Audit principles underlying an audit provide a framework to help auditors fulfil the two objectives: 

• Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error
• Report on the financial statements, and communicate by the auditor's findings 

The principles do not carry authority, but they provide structure for the Codification. The structure is organized around the following principles: 

• Purpose of an audit
• Responsibilities
• Performance
• Reporting Standard of Performance

Internal Auditing

The role of internal audit is to provide independent assurance that an organisation's risk management, governance and internal control processes are operating effectively. 

Internal auditors have professional duty to provide an unbiased and objective view. They must be independent from the operations we evaluate and report to the highest level in an organisation: senior managers and governors. 

• Typically, this is the board of directors or trustees, the accounting officer or the audit committee.

Except for certain governmental organisations, the audits of most FSs in the US are done by CPA firms.

Three size categories are used to describe CPA firms: 

• Big Four international firms
• National/Regional firms
• Local firms 

Activities of CPA Firms 

CPA firms provide audit services as well as other attestation and assurance services. Additional services commonly provided by CPA firms include: 

• Accounting and bookkeeping services
• Tax services
• Management consulting and risk advisory services
• Business valuation
• Forensic accounting
• Corporate responsibility and sustainability reporting
• Information technology (IT) advisory services 

Structure of CPA Firms 

CPA firms vary in the nature and range of services offered, which affects the organisation and structure of the firms. Three main factors influence the organisational structure for all firms: 

• The need for independence from clients
• The importance of a structure to encourage competence
• The increased litigation risk faced by auditors 

There are six organisational structures available to CPA firms: 

• Proprietorship
• General Partnership
• General Corporation
• Professional Corporation
• Limited Liability Company
• Limited Liability Partnership