Seminar Audit

Seminar 1 The framework for presentation and preparation of financial statements

An acceptable coherent framework of accounting principles is essential for preparing financial statements. The major reasons for a framework for the preparation and presentation of financial statements are: To identify the concepts underlying the preparation and presentation of financial statements To assist users to understand the international financial reporting standards To provide principles as not all issues are covered by the international financial reporting standards.

The scope of the framework: The existing framework deals with the following: The objective of financial statements The elements of financial statements The recognition of the elements of financial statements Measurement of the elements of financial statements

The objective of financial statements is to provide information about: The financial position Balance Sheet The performance Income Sheet Changes is the financial position cash flow statement

This information should be useful to a wide range of users for the purpose of making economic decisions. Fair presentation is achieved through the provision of useful information in the financial statements whereby transparency is secured. If one assumes that fair presentation is same to transparency, a secondary objective of financial statements can be defined as follows: To secure transparency through full disclosure and provide a fair presentation of useful information for decision-making purposes.

The following are basic elements that make the information provided in financial statements useful to users: Relevance. Relevant information influences the economic decisions of users, helping them to evaluate past, present and future events or to confirm or correct their past evaluations. Reliability. Reliable information is free from material error and it can be depended upon by users, the following contributing to reliability: faithful representation, substance over form, prudence, completeness.

Comparability. Information should be presented in a consistent manner over time and in a consistent manner between entities.

Understandability. Information should be understandable by users who have a basic knowledge of business, economic activities and accounting and who have a willingness to study the information. The following are underlying assumptions of financial statements: Accrual basis, which means the effects of transactions and other events are recognized when they occur, not when the cash flows. So, the effects are recorded and reported in the financial statements of the period to which they relate. Going concern, it is assumed that the company will continue to do business for the foreseeable future.

The following are constraints of providing relevant and reliable information: Timeliness, which means that in due delay in reporting could result in loss of relevance but improved reliability. Benefit vs costs which means that benefits derived from information should exceed the costs of providing it.

The elements of financial statements The following are elements that relate to the measurement of financial position: Assets - resources controlled by the company as a result of past events and for which future economic benefits are expected to flow to the company. Liabilities present obligations of a company arising from past events, the settlement of which is expected to result in an outflow from the company of economic benefits. Equity shareholders funds assets liabilities.

The following elements are directly related to the measurement of performance: Income increases in economic benefits in the form of inflows of assets or decreases of liabilities that result in a increase of shareholders funds. Expenses decreases in economic benefits in the form of outflows of assets or increases of liabilities that result in decreases of shareholders funds.

The initial recognition of elements A financial statement element should be recognized in the financial statements if it is probable that any future economic benefit associated with the item will follow to or from the company and the item has a cost or value that can be measured with reliability. Subsequent measurements of elements are based on the historical cost, the current cost, the settlement value or the present value (also known as fair market value). Presentation and disclosure for financial statement preparation Financial market trends of the 80s brought increasing volatility and the need for information as a means to ensure financial stability. In the 90s, as the financial market increased, there was mounting 2

pressure for the provision of useful information in both the financial and private sectors. The provision of information involves costs, therefore the usefulness of information for the public must be evaluated against the cost to be borne by the entity. The timing of disclosure is also important. In the long run, a full disclosure is beneficial even if some problems are experienced in the short-term because the cost on the financial system of not being transparent is in the end higher than the cost of being transparent. Transparency and accountability Transparency is necessary for accountability to take hold among the major groups of users of the financial statements such as: lenders, borrowers, investors, national authorities, international financial institutions. Transparency and accountability are mutually reinforcing. Transparency actually enhances accountability by facilitating monitoring and accountability enhances transparency by providing an incentive for agents to ensure that the reasons for their actions are properly understood. Transparency and accountability are not ends in themselves. They are designed to assist in increasing economic performance and can improve the working of the international financial markets by enhancing the quality of decision-making and risk management of all market participants, including official authorities. The transparency is secured through the international financial reporting standards framework. Case study A company is engaged in the production and selling of products and wishes to extend its market and export some of its products. It has come to the attention of the financial manager that compliance with international requirements is a significant condition if it wishes to sell products overseas. And though the company has put in place some policies in the past, it is clear that it is also common practice to have an audit done from time to time which will cost 100 000 Euros. The audit will encompass the following: A full review of the policies A review of compliance with the legal requirements A report containing recommendations of those policy changes that would be necessary to meet international requirements

The financial manager of the company has suggested that the 100 000 Euros be capitalized as an asset and then written off against the revenues from export activities so that the matching of income and expense will occur.

Seminar 2 Seminar 3 Ethical Values

Leadership responsibilities for quality on audits The engagement team should implement quality control procedures that are applicable to the audit engagement. A company is required to establish a system of quality control designed to provide it with reasonable assurance that the company and its employees comply with professional standards and legal requirements and that the auditors report issued by the company is appropriate.

The engagement partner should take responsibility for the quality of each audit engagement to which the partner is assigned. The engagement partner is the partner or another person in the company who is responsible for the audit engagement and for the audit report that is issued on behalf of the company. The engagement partner should consider whether members of the engagement team have complied with ethical requirements. The engagement partner should assess the compliance with independence requirements that apply to the audit engagement. In doing so, the engagement partner should obtain relevant information from the company and, where applicable, network companies to identify and evaluate facts and relationships that create threats to independence. He should also evaluate information to see if there is a threat to independence for the audit engagement and take appropriate action to take rid of such threats or reduce them to an acceptable level. The engagement partner should be satisfied that the engagement team has the appropriate abilities to perform the audit engagement in compliance with professional standards and legal requirements. The appropriate abilities expected of the engagement team are the following: An understanding of audit engagements of a similar nature An understanding of professional standards and legal requirements Appropriate technical knowledge Knowledge of relevant industries in which the client operates Ability to apply professional judgement and an understanding of the companys quality control policies and procedures

The engagement partner should be responsible for the direction, supervision and performance of the audit engagement in compliance with professional standards. The engagement partner directs the audit engagement by informing the members of a team of their responsibilities, the nature of the companys business, risk-related issues and problems that might arise. The engagement partners responsibilities include maintaining an objective state of mind in order to perform the work delegated in accordance with the ethical principles of due care. Appropriate communication should take place within the engagement team. It is important that all members of the engagement team understand the objectives of the work they are to perform. The engagement partner should be satisfied that members of engagement team have undertaken appropriate communication during the engagement, both within the engagement team and between the engagement team and others at the appropriate level within or outside the company. CASE STUDY 1 1. Obtain the relevant facts The client uses a method of revenue recognition for 10 years. This method is not appropriate according to SEC. The client is one of the most prestigious clients. Frank might become a partner. 2. Identify the ethical issues from the facts Is it ethical for Frank to give his opinion without including in the working statement that he disagrees with the engagement partners decision? Should he follow the requirements or not? 4

3. Determine who is affected the outcome of the dilemma and how each person or group is affected Frank is asked to violate the requirements of SAS 22. His future as a partner is affected. He might have legal problems in the future. His attitude towards the company might change. The audit company might lose the customer, might face the legal consequences. They might lose the customer. They can face the legal liabilities. The customer they can be required by the shareholders to change the method. The partner is affected as much as the company. 4. Identify the alternatives available to the person who must resolve the dilemma - State his opinion - Not state his opinion - Talk to the top management - Hand out his resignation 5. Identify the likely consequences of each alternative - Frank will not be promoted - Frank will be promoted but he will be liable in the future 6. Decide the appropriate action For the exam: present our personal point of view and argue. CASE STUDY 2

Seminar 4
The auditor should accept and continue an auditing mission only when the basis upon which is to be performed has been agreed by establishing whether the pre-conditions for an audit are present and confirming that there is a common understanding between the auditor and management of the terms of the audit engagement. The use by management of an acceptance financial reporting framework in the presentation of financial statements and the agreement of management to the basis on which the audit is conducted. The auditor shall see if the financial reporting framework to be applied in the presentation of the financial statements is acceptable and obtain the agreement of management that it understands its responsibility for issuing the financial statements in compliance with the applicable financial reporting framework and for such internal control, as to enable the presentation of financial statements that are free from material misstatement and to provide the auditor with access to all information of which management is aware that is relevant for the presentation of financial statements such as records and documents and with unrestricted access to the companys employees from whom the auditor considers its necessary to obtain audit evidence. If the management imposes a limitation on the scope of the auditors work, in the terms of a proposed audit engagement such that the auditor believes will result in the auditor disclaiming an opinion on

the financial statements, the auditor shall not accept such a limited engagement as an audit engagement. The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so. If the terms of the audit engagement are changed, the auditor and management shall agree on and record the new terms. The auditor shall agree the terms of the audit engagement with management. The agreed terms of the audit engagement shall be recorded in an audit engagement letter. The auditor should request the management to provide written statements that it has fulfilled its responsibilities. It may be appropriate to make management aware that receipt of such official statement will be expected with written information to support other audit evidence relevant for the financial statements. It is in the interest of both the entity and the auditor that the auditor sends an audit engagement letter before beginning the audit to help avoid problems with respect to the audit. Before the former content of the audit engagement letter may be different for each company. In the audit engagement letter may be presented the scope of the audit, the form of any other communication, arrangements regarding the planning and performance of the audit, the audit team, the agreement of the management to make available to the auditor draft financial statements. The conditions that require the modification of an unqualified opinion: lack of evidence, misstatements. Unqualified standard report = unmodified opinion everything is ok. Materiality is established by the auditor, it is the limit above which everything is audited. A material problem is that one which affects the decision making of the users of the financial statements.

Seminar 5 de recuperate Seminar 6

Test: 7 mai! Present the main reasons why the auditor should properly plan engagements: Make sure that important factors are not overlooked = proper audit evidence Coordinate the work of auditors, experts, assistants Make a schedule to ensure completion on time Think beforehand of potential problems Help keep audit costs reasonable Avoid misunderstandings with the client

Explain why the engagement letter is important in planning the audit: Type of mission (financial statements, review, etc) Deadlines Responsibility (managements and the auditors) Restrictions 6

Schedule Fees Standards, principles understandings