BACC 22193AUDITING & ASSURANCE SERVICE

B. B. mgt. Accountancy (Special) Degree

Year II – Semester II

INTRODUCTION TO AUDITING AND ASSURANCE SERVICES

The Demand for Auditing

Why do organizations request an audit?It allows contracting to take place in an agency relationship

Demand for Auditing created due to;• Potential conflict between users and preparers of

financial statements

• Provide decision makers with unbiased information

• Expertise is often required for preparing and verifying information

• Minimize the information risk to the users of financial statements

Primary Economic Reason for An Audit

An auditwill cost our

Companythousands of

Rupees!!

What’s the point?

An auditcan helpreduce

informationrisk - therisk that

informationupon whicha businessdecision is

made isinaccurate.

BOD Preparation of FS

S/H

Credibility Gap

Auditors

Gathering audit evidences

Evaluate FS based on GAAPs & SLASs

Forming an opinion on True & Fair view

Enhance the confidence

Auditing & Assurance Services

Assurance Engagement An engagement in which a practitioner express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

Assurance

Reasonable Assurance

Limited Assurance

High Level

No Assurance

Moderate Level Zero Level

Positive OpinionE.g. Audit

Negative OpinionE.g. Review

No OpinionE.g. Agreed up on

Auditing & Assurance Services

Sri Lanka Framework for Assurance Engagements

Audit & Review of Historical FS

Assurance Engagements

Other than Audit or Review

SLAuSs100 - 999

SLAPSs1000 - 1999

SLSREs2000 - 2699

SLRPs2700 - 2999

SLSAEs3000 - 3699

SLAEPs3700 - 3999

Related Services

SLSRS4000 - 4699

SLRSPs4700 - 4999

Auditing A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

Auditing & Assurance Services

Review EngagementIn a review engagement, the auditor provides a moderate level of assurance that the information subject to review is free of material misstatement. This is expressed in the form of negative assurance.

The Objective of an Audit of Financial Statements

To enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.

Assertions

• Refers to management representations that embodied in F/Ss components, records or systems

• The assertion is made through the F/Ss

Auditor determines whether the statements meet the established criteria

AssertionsAccuracy

Completeness

Cut-off

Understandability

Classification

Occurrence

Valuation & Allocation

Existence

Rights & Obligation

Applicable Financial Reporting Framework

Requirements of • accounting standards, • law and regulations

applicable to the entity that determine the form and content of its financial statements.

General Principles of an AuditThe auditor should comply with the Code of Ethics for Professional Accountants issued by the ICASL.Ethical principles(a) Independence;(b) Integrity;(c) Objectivity;(d) Professional competence and due care;(e) Confidentiality;(f) Professional behavior; and(g) Technical standards.

• The auditor should conduct an audit in accordance with SLAuSs.

• The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated.

General Principles of an Audit

Scope of an Audit“Audit procedures” deemed necessary in the circumstances to achieve the objective of the audit.

Should be determined by the auditor having regard to • the requirements of SLAuSs,• the ICASL legislation, regulations and, • where appropriate, the terms of the audit

engagement and • reporting requirements.

Reasonable AssuranceAn auditor cannot obtain absolute assurance because there are inherent limitations in an audit that affect the auditor’s ability to detect material misstatements.• The use of testing.• The inherent limitations of internal

control • The fact that most of audit evidences

are persuasive rather than conclusive.

Audit Risk and MaterialityThe auditor should plan and perform the audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit.

Audit risk is a function of the

• Risk of material misstatement of the financial statements and

• Detection risk - the risk that the auditor will not detect such misstatement

Audit Risk

Risk of Material Misstatement

Detection Risk

Inherent Risk Control Risk

Audit Risk and Materiality

Risk of Material Misstatement

The risk that the financial statements are materially misstated prior to audit.

This has two components.

1. Inherent risk

susceptibility of an assertion to a misstatement that could be material, assuming that there are no related controls.

2. Control risk

risk that a misstatement that could occur in an assertion and that could be material, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

Detection RiskThe risk that the auditor will not detect a misstatement that exists in an assertion that could be material, either individually or when aggregated with other misstatements.• A function of the effectiveness of an audit

procedure and of its application by the auditor.

• Cannot be reduced to zero because the auditor usually does not examine all of a class of transactions, account balance, or disclosure and because of other factors.

• The auditor is concerned with material misstatements

• In order to design audit procedures to determine whether there are material misstatements the auditor considers the risk of material misstatement at two levels

1. Overall financial statement level

2. Assertion level - in relation to classes of transactions, account balances, and disclosures and the related assertions

Audit Risk and Materiality

Responsibility for the Financial Statements

The responsibility for preparing and fairly presenting the financial statements in accordance with the applicable financial reporting framework is rest with the management of the entity, with oversight from those charged with governance.

Your firm is helping to Mr.Namal, a sole trader, prepare his accounts for the taxation authorities. He has asked your advice on the following matters.

You are Required to advise on

(1) The advantages to the business of having its accounts Audited.

(2) Whether the audit undertaken on his small company would be the same as an audit undertaken on a large one

(3) Whether he has any alternatives to audit that would still provide him a degree of assurance.