- •Explain the five elements of an assurance engagement
- •Describe the types of assurance engagement
- •Briefly describe what internal auditing is
- •Outline the stages of an audit
- •Define professional scepticism
- •1.2.1 Professional skepticism
- •Describe the limitations of external audits
- •Explain the relationship between International Standards on Auditing and national standards
- •Analyse the structure and roles of audit committees and discuss their benefits and limitations.
- •Define and apply the fundamental principles of professional ethics of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.
- •Define and apply the conceptual framework, including the threats to the fundamental principles of self-interest, self-review, advocacy, familiarity and intimidation
- •Discuss the safeguards to offset the threats to the fundamental principles
- •1. Self – interest threat
- •2. Self – interest threat
- •Provision of non – audit services in general
- •Preparing accounting records and financial statements
- •Valuation services
- •Describe the auditor's responsibility with regard to auditor independence, conflicts of interest and confidentiality
Briefly describe what internal auditing is
Internal auditors are employed as part of an organization’s system of controls. Their responsibilities are determined by management and may be wide-ranging.
Internal auditing is an appraisal or monitoring activity established or provided as a service to the entity. Its functions include examining, evaluating and monitoring the adequacy and effectiveness of internal control.
Up to now we have discussed assurance services where an independent outsider provides an opinion on financial information. Assurance can also be provided to management (and by implication, to other parties) by internal auditors.
As part of good corporate governance all directors are advised to review the effectiveness of the company's risk management and internal control systems. They should also consider the need for an internal audit function to help them carry out their duties.
Larger organisations may therefore appoint full-time staff whose function is to monitor and report on the running of the company's operations. Internal audit staff members are one type of control. Although some of the work carried out by internal auditors is similar to that performed by external auditors, there are important distinctions between the two functions in terms of their responsibilities, scope and relationship with the company, and we will examine these in more detail in Chapter 5.
There are a number of assignments that may be carried out by internal auditors and these include:
Value for money (VFM) audits which examine the economy, efficiency and effectiveness of activities and processes
An information technology (IT) audit, which is a test of controls in a specific area of the business
Best value audits. ‘Best value’ is a performance framework introduced into local authorities by the UK government. They are required to publish annual best value performance plans and review all of their functions over a five year period and internal audit can carry out this review
Financial, operational and procurement audits
Outline the stages of an audit
Define professional scepticism
Auditors are required to carry out the audit with an attitude of professional scepticism, exercise professional judgement and comply with ethical requirements.
Professional scepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
Professional judgement is the application of relevant training, knowledge and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.
1.2.1 Professional skepticism
ISA 200 states that auditors must plan and perform an audit with an attitude of professional skepticism recognising that circumstances may exist that cause the financial statements to be materially misstated. This requires the auditor to be alert to:
Audit evidence that contradicts other audit evidence obtained
Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence
Conditions that may indicate possible fraud
Circumstances that suggest the need for audit procedures in addition to those required by ISAs
Professional scepticism needs to be maintained throughout the audit to reduce the risks of overlooking unusual transactions, over-generalising when drawing conclusions, and using inappropriate assumptions in determining the nature, timing and extent of audit procedures and evaluating the results of them. Professional scepticism is also necessary to the critical assessment of audit evidence. This includes questioning contradictory audit evidence and the reliability of documents and responses from management and those charged with governance.
(optional) 1.2.2 Professional judgement
ISA 200 also requires the auditor to exercise professional judgement in planning and performing an audit of financial statements. Professional judgement is required in the following areas:
Materiality and audit risk
Nature, timing and extent of audit procedures
Evaluation of whether sufficient appropriate audit evidence has been obtained
Evaluating management's judgements in applying the applicable financial reporting framework
Drawing conclusions based on the audit evidence obtained