SESSION – 1A

AN INTRODUCTION TO ASSURANCE
AND AUDITING

MOHSIN PATEL
THE STUDY OF AUDITING
The study of auditing is different from other
accounting courses that you have taken because …

IN OTHER COURSES AUDITING

Rules, Analytical and

techniques and logical skills
computations to
prepare and Much more
analyse financial conceptual in
information nature
THE DEMAND FOR AUDITING AND
ASSURANCE

The development of the corporate form of

business and the expanding world economy
over the last 200 years have given rise to an
explosion in the demand for assurance
provided by auditors.
AUDITING AND ASSURANCE
DEFINED
Assurance

Auditing

An engagement in which a practitioner

expresses 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.
AUDITING AND ASSURANCE
DEFINED
Assurance

Auditing

Auditing comes under the umbrella of

Assurance. It is 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.
ASSURANCE = Confidence
a) A three party relationship: 1) intended user, (2) responsible party
and (3) the Practitioner
b) A subject matter: data to be evaluated that has been prepared by the
responsible party i.e. historical financial information, non-financial
performance (key performance indicators), processes (internal control)
and behavior (compliance with laws and regulations).
c) Suitable criteria: The subject matter is evaluated or measured against
criteria in order to reach an opinion (Accounting Framework).
ASSURANCE (continued)
d) Evidence: Sufficient appropriate evidence needs to be
gathered to support the required level of assurance.
e) An assurance report: A written report (Audit Report)
containing the practitioner's opinion is issued to the
intended user, in the form appropriate to a reasonable
assurance engagement or a limited assurance engagement.
 LEVELS OF ASSURANCE
Absolute Not used in cases of FS

High but not absolute

Reasonable Positive form of opinion
(Used for Audit)
Risk greater than Reasonable
Limited Negative form of opinion
(Review)
The degree of assurance that can be provided about the reliability of the financial
statements will depend on:
• the amount of work performed in carrying out the assurance process, and
• the results of that work
Why auditor gives reasonable assurance only?
1. It is not objective, judgments are to be made (what to test, how to test,
risk assessment, audit opinion)
2. Not all items are tested (sampling risk)
3. Limitations of accounting and control system (human error, unusual
transactions, possibility of collusion and fraud, controls override)
4. Inherent limitation of Audit Report (standard report format, users may
not understand the report)
5. Audit report issued a long time after the year end
 CORPORATE GOVERNANCE

• A process by which owners and creditors exert control

and require accountability for resources entrusted to
organizations
• Owners elect board of directors to provide:
• Oversight of organizations’ activities
• Accountability to stakeholders
EXHIBIT 2.5 - OVERVIEW OF CORPORATE GOVERNANCE
RESPONSIBILITIES AND ACCOUNTABILITIES
PARTIES INVOLVED IN CORPORATE GOVERNANCE

• Board of directors: The major representative of stockholders,

who ensure that the organization is run according to the
organization’s charter and that there is proper accountability
• Audit committee: A subcommittee of the board of directors
responsible for monitoring audit activities and serving as a
surrogate for the interests of shareholders
PARTIES INVOLVED IN CORPORATE GOVERNANCE

• Board of directors and its Audit committee oversee

management
• Expected to protect stockholders’ rights
• Ensure that controls exist to prevent and detect fraud

• Stakeholders: Anyone who is influenced, either directly or

indirectly, by actions of a company
 RESPONSIBILITIES OF AUDIT COMMITTEES

• Appointment, compensation, and oversight of work of audit firms

• Must be independent
• Establish whistleblowing mechanisms within companies
• Authority to engage their own independent counsel
• Companies must provide adequate funding for audit committees
MCQ-1:
Which two of the following are elements of an assurance engagement?
• (1) A three-party relationship
• (2) Suitable criteria
• (3) Determination of materiality
• (4) An engagement letter

A (1) and (2) only

B (1) and (3) only
C (2) and (3) only
D (1), (2) and (3)
Solution to MCQ-1:
• (1) A three-party relationship
• (2) Suitable criteria

There are five elements in total: Criteria, Report,

Evidence, Subject matter and Three-party relationship
(remember CREST).
MCQ-2:
Who normally appoints the external auditors of a company?
• A Directors
• B Shareholders
• C Audit committee
• D Senior management
Solution to MCQ-2:
Who normally appoints the external auditors of a company?
• B Shareholders

B - The shareholders of the company usually appoint the auditors at a

shareholders' annual general meeting. In rare circumstances, the directors
may appoint the auditors.
MCQ-3:

Who is ultimately responsible for a company's system of internal

controls?
• A External auditors
• B Board of directors
• C Internal auditors
• D Audit committee
SOLUTION TO MCQ-3:
Who is ultimately responsible for a company's system of internal controls?
• A External auditors
• B Board of directors
• C Internal auditors
• D Audit committee

B - The directors have ultimate responsibility. The board must set up

procedures of internal control and monitor them regularly to ensure
that they are operating effectively.
 AUDITING DEMANDS LOGIC, REASONING, AND
RESOURCEFULNESS
An auditor needs to understand more than just the
accounting concepts and techniques.

Auditing is a fundamentally logical process of thinking

and reasoning – so use your common sense and reasoning
skills!

As you learn new auditing concepts, take some time to

understand the underlying logic and how the concepts
interrelate with other concepts.

Being a good auditor sometimes requires imagination and

innovation.