Auditing

21-BBA(5th Semester)
Course Instructor: Dr. Waqar A. Sethar
Session 21st November, 2023 and onwards
Lecture 05.12.2023
Learning Objectives Chapter 01
• LO3 Explain the role of auditing in information risk reduction
• LO4: Describe the other major types of audits and auditors
LO3 Explain the role of auditing in
information risk reduction
Auditing is risk reducing activity
“Auditing in financial reporting is a process of reducing (to a socially
acceptable level) the information risk to users of financial statements”
Economic activity takes place in “Business Risk”
Proper disclosure of these risks in financial Statements
Auditor must judge business risk
Risk understanding help auditor to understand financial statements properly
LO3 Explain the role of auditing in
information risk reduction
Business Risk: “is the probability that significant conditions, events,
circumstances, or actions might arise that will adversely affect the entity’s
ability to achieve its objectives and execute its strategies”
Information risk refers to the possible failure of financial statements to
appropriately reflect the economic substance of business activities
For example, if a company fails to disclose that it plans to file for bankruptcy,
the risk of bankruptcy is a business risk, and failure to disclose it is an
information risk
LO3 Explain the role of auditing in
information risk reduction
Information risk arises from agency problem, Three party accounting system
, Conflict of interest
Management (Agent) must accept the responsibility for providing
information.
Auditor accepts the responsibility for audititing the information provided by
the management
Information Risk give rise to :
 Misstatements
 Omissions
The auditors are hired to detect such misstatements and omissions
LO3 Explain the role of auditing in
information risk reduction
From the auditor’s perspective:
 Information Risk is Risk (Probability) that financial statements provided by the
management will be
 Materially false and misleading
Financial analysts use F.S to make purchase and sales decisions
Labor organizations to see ability to page wages
Parliament use them to analyze , ascertain taxes and subsidies
From the auditor’s point of view
There are two major categories of information Risk
Insufficient evidence audit risk
Other is GAAP is not used for disclosure (Accounting Risk)
LO3 Explain the role of auditing in
information risk reduction
(Accounting Risk) is basically responsibility of accounting standards and
IFRS
Audit risk is responsibility of auditing standards
Auditing tasks is reducing the risk of giving an inappropriate Opinion on
financial statements.
Accounting risk (account level): the part of information risk due to
incorrectly predicting events, especially in accounting estimates
LO3 Explain the role of auditing in
information risk reduction
The Royal Canadian Mint announced in June 2009 that 17,500 ounces of Mint
gold had been lost or stolen. This disappearance was confirmed during an audit
of the Mint by Deloitte & Touche, CAs, under the direction of the Auditor
General of Canada.
Lack of independent audit raise credibility questions
A related issue to consider at this point is how might you audit something like
the quantity of gold
First, you would need to count the gold bars and check the accuracy of what is
recorded at Fort Knox(147.3 million ounces)
Further, tests could include checking serial numbers against records for
accuracy, determining who owns the gold, and perhaps randomly testing the
gold bars for purity
LO4 Describe the other major types of audits
and auditors
The terms independent auditor, external auditor, Chartered Professional
Accountant (CPA), and public accountant (PA)
In governmental and internal contexts, auditors are identified as
governmental auditors, operational auditors, and internal auditors.
“Internal auditing is an independent, objective assurance and consulting
activity designed to add value and improve an organization’s operations. It helps
an organization accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management,
control, and governance processes”
LO4 Describe the other major types of audits
and auditors
Operational auditing(Form of internal auditing) (performance auditing or
management auditing) is the study of business operations in order to make
recommendations about the economic and efficient use of resources, effective
achievement of business objectives, and compliance with company policies.
Internal Auditors
1. Reviews of control systems for ensuring compliance with company policies,
plans, procedures, and laws and regulations
2. Appraisals of the economy and efficiency of operations;
3. Reviews of program results in comparison with their objectives and goals.
LO4 Describe the other major types of audits
and auditors
Public Sector (Governmental) Auditing is an accounting, auditing, and
investigating agency of Parliament, headed by the Auditor General.
This is the highest level of internal auditors for the federal government
Provincial audit agencies
Similar work as performed by Auditor General of Pakistan
Many government agencies have their own internal auditors
LO4 Describe the other major types of audits
and auditors
Regulatory Auditors
For the sake of clarity, other kinds of auditors deserve separate mention. You
are probably aware of tax auditors employed by CRA. These auditors take
the “economic assertions” of taxable income made by taxpayers in their tax
returns and audit these returns to determine their correspondence to the
standards found in the Income Tax Act.
Federal and provincial bank examiners audit banks, trust companies, and
other financial institutions for evidence of solvency and compliance with
banking and other related laws and regulations.
LO4 Describe the other major types of audits
and auditors
Fraud Auditing “Fraud is an attempt by one party (the fraudster) to deceive
someone (the victim) for gain”
 It falls under criminal code
 It is deception based on manipulation of accounting records and Financial Statements
 Auditor should detect material financial reporting fraud
 Companies now screen clients before any wrong doing
 Screening done by specialist auditors
 In normal audit procedures are diagnostic not investigative
 Fraud auditing is a separate engagement that might be done on behalf of the audit
committee—
LO4 Describe the other major types of audits
and auditors
Forensic Auditing “Forensic accounting includes fraud auditing and uses
accounting and/or auditing skills in investigations involving legal issues”
 It is proactive approach
 Fraud auditing and forensic is huge growth in recent times
 White-collar crime is fastest growing crime
 Police and regulators need expertise of auditors
 Legal issues could be (Criminal) and Civil (e.g. commercial disputes)
 These could be fraudulent insurance claims etc.
LO4 Describe the other major types of audits
and auditors
Public Accounting “
 Chartered accountants
 Certified General Accountants
 Certified Management Accountants
 Chartered Professional Accountants
Public Accounting Firms they are big 4.
 Ernst & Young,
 Deloitte & Touche,
 KPMG, and
 PricewaterhouseCoopers
Public interest and profit motive
LO4 Describe the other major types of audits
and auditors
Public Accounting “
 Chartered accountants
 Certified General Accountants
 Certified Management Accountants
 Chartered Professional Accountants
Public Accounting Firms they are big 4.
 Ernst & Young,
 Deloitte & Touche,
 KPMG, and
 PricewaterhouseCoopers
Public interest and profit motive
LO4 Describe the other major types of audits
and auditors
LO4 Describe the other major types of audits
and auditors
Assurance Services
 Audit of Financial Statement most frequent assurance service
 Accounting and review services are the “non-audit” services
 PAs can be associated with clients’ financial statements without giving the standard
audit report.
 They can write financial statements with audit report
 assurance to vote counts
 to dollar amounts of prizes claimed
 investment performance statistics
 claims made about the capabilities of computer software programs
LO4 Describe the other major types of audits
and auditors
Taxation Services
 Local, provincial, national, and international tax laws are often called “full-employment
acts”
 Public accountant prepare tax planning and tax preparation
 Income
 Sales
 Taxation
 Property
Consulting or Management Advisory Services
 accounting firms have created consulting units with professionals from other fields—lawyers,
actuaries, engineers, and advertising executives, to name a few.