[00:03.03]Text 3.1 The auditing framewo
[00:06.82]When the independent auditor begins an audit assignment,he assumes that
[00:11.42]the internal control system of the enterprise is appropriate and effectiv
[00:15.57]2. generally accepted accounting principles have been applied in all accounting processes underlying the financial statement
[00:23.17]3. the generally accepted accounting principles utilized have been applied consistently between the current and the prior period;a
[00:31.35]4. there is an adequate amount of informative financial disclosure in the financial statements and footnote
[00:37.72]Evidence gathering and its evaluation enable the auditors to reject or confirm these a prior assumption
[00:44.90]We are thus in a position to define auditin
[00:47.75]Auditing
[00:48.69]The analytical process of gathering sufficient evidential matter on a test or sampling basis to enable a competent professional to express an opinion as to whether a given set of financial statements meets established standards of financial reportin
[01:02.80]Now we can enumerate the major steps of the auditing process
[01:06.74]1.become acquainted with the firm-its environment and its accounting ,personnel,production, marketing ,and other system
[01:16.04]2. review and evaluate the management and the accounting control system in operatio
[01:21.61]3.gather evidential matter on the integrity of the syst
[01:25.73]4. gather further evidence related to the representations made in the financial statements;a
[01:31.79]5.formulate a judgment opinion on the basis of the evidence availabl
[01:36.24]Getting acquaint
[01:37.72]Auditing is an analytical process applied to everyday business situation
[01:43.21]Hence it is closely related to existing business practice
[01:47.23]Without firsthand knowledge of the nature of these practices and their larger setting,the auditor whould have to rely exclusively on available financial dat
[01:56.19]This would jeopardize both audit efficiency and effectivenes
[02:00.66]Therefore a getting acquainted phase(which usually includes a visit to a client's facilities and certain analytical preliminary tests and inquiries) initiates the typical audit proces
[02:13.69]While getting-acquainted preliminaries to the conduct of an audit are standard procedures today
[02:19.34]they were quite novel prior to 1965 Initially such procedures were described as the 'business approach to auditin
[02:27.70]Control system revi
[02:29.81]The auditor's evaluation of the control systems operating within the enterprise has a direct influence on the scope of the examination he undertakes and the nature of the tests he conduct
[02:40.65]However, even though preliminary evaluation of control systems is an essential ingredient of planning the audit scop
[02:47.71]we must remember that eventually both the system and the data it produces are covered by the audit process.
[02:54.50]Example
[02:55.60]The Brothers Three Shopping Center has leased space to Mr Hines,who operates a quality restaurant named The Duncan Inn located within i
[03:04.24]Lease payments are based on a minimum monthly amount sufficient to cover taxes and insurance on the building plus a graduated percentage of the restaurant's gross sales to diners and bar patron
[03:15.60]No percentage payments are due on catering service
[03:18.97]Bar and restaurant receipts of The Duncan Inn are collected in cash and from credit card billing
[03:25.06]A select few patrons have the privilege of open credit with monthly billing
[03:30.44]In planning the intial audit of The Duncan Inn's financial statement a CPA finds that virtually no internal control exists over cash bar receipt
[03:40.55]Hence tests covering cash bar receipts are schduled more comprehensively than those extending to credit card sale
[03:48.18]Evidential matt
[03:49.72]Evidential matter supporting financial statements consists of the underlying accounting data and all corroborating information available to the audito
[03:58.79]The auditor tests underlying accounting data by analysis and review,retracing some of the procedural steps followed in the original accounting process and reconciling the events,with the information reporte
[04:10.93]The auditor's evidential material is the result of tests ,selected observations, and statistical sampling where large compilations of data are involve
[04:21.41]The auditor must always balance the natural desire for more evidential matter to support an opinion against the costliness and social usefulness of completely reconstructing the underlying data and processes that produced the financial statement
[04:35.88]One key justification for independent audits, as we have seen is the economy that results from producing expert opinion-based judgements from limited but reliable evidential matte
[04:47.95]Exampl
[04:49.04]Among tests covering cash bar receipts of The Duncan Inn ,the CPA determined what the expected average ratios should be between liquor use
[04:58.29]average number of individual drinks per bottle of liquor ,and the price structure of drinks serve
[05:03.86]Making appropriated allowances for credit card sales, the CPA was then able to make a reasonable estimate of cash bar receipts for the period under audi
[05:13.00]The estimate of the cash bar receipts constitutes evidential matter for purposes of the audit.(Note that the foregoing test has physical and financial dimension
[05:24.31]A purely financial test would be to subtract cash restaurant receipts from total bank deposits to arrive at cash bar receipts.In an actual engegement, an auditor might have undertaken both types of tests
[05:39.38]Text 3.2 Time to clarify the obligations of audito
[05:45.34]The 1990s pose fundanental problems for UK accounting firm
[05:49.73]In addition to increased commercial pressures, the profession faces a threat from public policy maker
[05:55.97]There is increasing suspicion about the effectiveness of self-regulatio
[06:00.49]Who audits the auditor? And who should do s
[06:04.88]The root of the regulatory debate is the auditor's position between,on one hand, the managers of public companie
[06:11.72]and,on the other,their owners and other groups such as employees, pension fund beneficiaries, creaditors, and government departments which rely on the accuracy of the audited account
[06:23.50]The auditor is hired by the managers to protect the interests of this latter group of 'stakeholder
[06:29.30]There are obvious tensions when the interests of the two groups diverag
[06:33.53]perhaps because of suspected fraud or more typically because managers have an interest in the reported results being well received by investor and other
[06:42.16]Economists analyse such divergences of interest between one party and the agent employed to work on its behalf as a 'principal/agent'proble
[06:52.50]Traditional solutions of professional self-regulation backed up by legal redress as a last resort appear to be ripe for refor
[07:00.28]Recent financial scandals have cast doubts on whether the threat of public disprace is sufficient to safeguard audit standards.
[07:06.81]These doubts are confirmed by the experiences of investors who have sought redress for auditor malpractice in the courts.
[07:13.37]Almost all such cases are settled out of court without any clarification of the legal duties.
[07:19.38]The Caparo case,which clarified auditors' responsibilities,underlines the gulf bwteen what users expect,and what the auditor is prepared to offer.
[07:29.18]The auditor's signature is treated by users of company accounts as an assurance of the quality of the information they contain—
[07:36.18]a kind of insurance policy against the risk that the company's true financial state is not what it appears.
[07:42.11]The leading audit firms,whose strong brand names command a substantial price premium,have an interest in sustaining this belief.
[07:50.18]Yet attempts to make a claim on this policy show that pay-out terms are unreliable and highly uncertain.
[07:57.81]The most common form of audit regulation proposed is to prevent auditors carrying out consultancy assignments for their audit clients—a feature of several EC markets.
[08:08.28]The NEAR study showed that the major accounting firms rely heavily on audit clients for their non-audit business.
[08:15.57]But it also found the firms had managed to avoid the regulations in these countries.
[08:20.56]A second mechanism,favoured in Italy and Spain and suggested elsewhere,is to have periodic compulsory rotation of auditors,
[08:28.87]to prevent too cosy a relationship between the audit partner and the management of the firm.
[08:34.09]But this causes potentially high disruption costs and raises questions as to the quality of the audit scrutiny during the transition period.
[08:42.29]A third solution favoured by some accounting firms,is to introduce measures to reduce the intensity of competition for the audit contract,
[08:49.97]removing the temptation to reduce audit quality as a means of cutting costs.
[08:54.70]Protection from competition might reduce the tendency of the client to question the value for money offered by the auditor.
[09:00.89]But the idea that protectionism guarantees higher standards holds no more water in this context than elsewhere.
[09:07.55]None of the models for reform suggested by the other EC states really addresses the principal/agent problem which underlies the need for reform.
[09:16.23]If the question of auditor independence is to be tackled,more fundamental issus need to be addressed. |