NATURE Of Audit

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NATURE, PURPOSE AND SCOPE OF AUDIT AND REVIEW
NATURE, PURPOSE AND SCOPE OF AUDIT AND REVIEW
1 “AUDITING”
In independent examination
2 NATURE AND DEVELOPMENT
The word “audit” comes form the Latin word audire which means “to hear” because, in the middle Ages, accounts or revenue and expenditure were “heard” by the auditor. Statutory audits (i.e. carried out in accordance with statutory provisions) become mandatory for companies in 1900. At this time the purpose of an audit was to detect fraud, technical errors and errors of principle. However, the recognition in case law that it is unreasonable to expect auditors to detect all aspects of fraud, even though they exercised reasonable skill and care, means that this is not now a primary purpose. Over the last 20 years or so the auditing profession has sought to broaden its role (e.g. with value for money, operational audits, etc – see later)

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3 CONCEPTS
Stewardship
Directors or other managers of an enterprise have the responsibility of stewardship for the property of that enterprise. Responsibilities, which may be duties embodied in statute, may include: Keeping books of accounts and proper accounting records;

Producing a balance sheet and income statement that show a true and fair view; Producing a directors’ report which is consistent with the financial statements and contains certain specified information. Agency

A director can be described as an agent having a fiduciary relationship with a principal (i.e. the company that employs him). (A fiduciary relationship is one of trust.)
In meeting their responsibilities of stewardship, managers have fiduciary duties to safeguard assets and implement and operate an adequate accounting and internal control system. Accountability
Auditors act in the interest of the primary stakeholders whilst having regard to the wider public interest. The identity of the primary stakeholders in determined by reference to the statute of agreement requiring an audit. For companies, the primary stakeholder is the general body of shareholders. 4 OBJECTIVE & GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS 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. It is management’s responsibility to prepare the financial statements. Whilst the auditor’s opinion adds credibility to the financial statements: It is no guarantee of future viability not of management’s efficiency or effectiveness. A degree of imprecision is inevitable due to:

inherent uncertainties
use of judgment
Only reasonable assurance is given
The amount of audit work is determined by:
Judgement
Requirements of professional bodies and legislation
Agreed terms of the engagement
The need to exercise professional skepticism
The ability to reduce audit risk is limited by:
The necessity to sample
Inherent limitations in any accounting and control systems
Possible fraudulent collusion
Certain evidence will be persuasive not conclusive
Audit Opinion

The audit opinion is given on whether the financial statements give a true and fair view of the entity’s financial statements and whether they have been properly prepared in accordance with the applicable reporting framework. This opinion is reached after:

Extensive risk assessment has been performed
Extensive testing of controls and substantive tests on transactions and balances for validity, accuracy and completeness of recording. Extensive verification procedures have been performed to test for existence, ownership, valuation, presentation and disclosure of items in the financial statements. Extensive review of whether the financial statements comply with applicable accounting standards and legal requirements. As such, the audit...
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