AUDITING AND THE AUDIT PROFESSION

AUDITING AND THE AUDIT PROFESSION

CHAPTER OBJECTIVE

1. WHAT IS AN AUDIT
2. THE PURPOSE OF THE EXTERNAL AUDIT
3. ADVANTAGES AND DISADVANTAGES OF AN AUDIT
4. THE RELATIONSHIP BETWEEN AUDITING AND ACCOUNTING

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1. WHAT IS AN AUDIT?

Audit is: the independent examination of evidence from which the financial statements of an enterprise are derived in order to give the reader of those statements confidence as to the truth and fairness of the state of affairs which they disclose.

ISA 200 the Overall Objectives of the Independent Auditor and The Conduct of an Audit: the objective of an audit is 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.

What can we see as the essential features of an audit from a combination of these definitions and explanation?
 An audit involves an examination of financial statements – the auditor is not responsible for the preparation of financial statements.
 The result of an audit is an opinion to assist the user of the financial statements – auditing therefore relies heavily on professional judgment, not merely facts.
 The auditor’s opinion makes reference to true and fair, or fair presentation- but true and fair is again a matter of judgment
 In order for the user of the information to feel confident in relying on the audit report, the auditor should be independent of the enterprise subject to audit.

2. THE PURPOSE OF THE EXTERNAL AUDIT

The need for an external audit centres around the requirements of the users of the accounts who are primarily, but not solely, the shareholders in the case of company audits.

There are also many other outside parties who use the financial statements as a basis for making decisions regarding a company. Bankers, suppliers and lenders as well as potential investors, customers and employees all have an interest in the state of the company’s financial affairs.

The independent audit requirement fulfills the needs for a professional opinion on whether those financial statements are objective, free from bias and manipulation and relevant to the needs of the users.

3. ADVANTAGES AND DISADVANTAGES OF AN AUDIT

ADVANTAGES OF AN AUDIT

 Any audit will give assurance to readers of the accounts.
 Disputes between stakeholders may be more easily settled. For instance, complicated profit-sharing arrangements.
 Major changes in ownership may be facilitated if past accounts contain an independent audit report, for instance, where two sole traders merge their business to form a new partnership.
 Applications to third parties for finance may be strengthened by the submission of audited accounts, as it adds credibility to the figures.
 Give constructive advice to management on improving the efficiency of the business.

DISADVANTAGES OF AN AUDIT

 The audit fee
 Time to providing information to the auditor

4. THE RELATIONSHIP BETWEEN AUDITING AND ACCOUNTING

The directors of a company are responsible for preparing the annual financial statements. We assume that the financial statements have to comply with IASs, IFRSs and conceptual accounting framework.

Auditors are primarily concerned with the end result of this work i.e. do the financial statements show a true and fair view?
All companies listed in the European Union use IFRSs since January 2005 and use of ISAs in the EU since 2004.

Source:

1. Phnom Penh HR (www.pp-hr.com)
2. Kaplan, FAU