AUDITING&ASSURANCE

REVISION WORKSHOPS
MARCH/APRIL 2015
ROY CHANDLER

MyCredentials
Deloitte
APB
IFAC
Cardiff University

Ourplan today
Introduction
Background and History
Theory
Independence

Ourplantomorrow
Reporting
Audit Process
Responsibility
Exam preparation

FormatofaMemo/report
To: Partners in Alexis & Co
From: Me (be creative but polite)
Date: March 31, 2014
Re: Auditor Independence Issues

May earn you presentation marks

Audit
Why do we need to check?
Think of examples of controls or checks in our daily lives
What other sorts of check/audit could be done at SIM?

Financialstatementaudit
What is it?
Who does it?
Why?
What role does auditing play?

OtherFormsofcheck
Assurance services applied to:

Systems and procedures e.g. safety, energy

Accounting-related:
Forecasts
Compilation
Control systems

Results in findings less than audit assurance

PastDevelopments
Change in audit objective
Why?
How?
What difference does it make?
Do people expect too much of auditors?

WhatLessonsfromthepast?
Dont trust management check (KCM)
Tell the truth (LGB)
Keep your distance (Enron)
Look for weaknesses (Barings)
Report them asap (Sasea)

HighlightsfromAUDITINGhistory
1844 Joint Stock Companies Act
1860s & 1870s legislation for banks, railways, friendly,
industrial & provident societies
1900 Companies Act
1948 Companies Act
1989 Companies Act
2006 Companies Act

WhatistheExpectationsgap?
DETECTION OF FRAUD

(e.g. SIA $35m over 13 years)

Could that have been detected?
Poor controls
Life-style of the culprit
GUARANTEE OF CORPORATE SOLVENCY
REVIEW OF MANAGEMENT EFFICIENCY

Whatisthegapmadeupof?
Unreasonable expectations
Poor standards
Poor performance

Whatcanwedo?
Educate the public
Improve auditors performance
root out bad conduct
tougher standards

Do something else - develop other assurance services (e.g.

Independent Professional Review)

Do nothing

CONSEQUENCESofdoingnothing
Macro-level
Reduction in confidence in capitalist system.
Failure of markets could damage economies

Micro-level
Other professional groups may take over
Government intervention.

Audittheory
Theoretical underpinning is a distinguishing feature of

practice of a profession (cf a trade)

Audit education risks emphasising the how not the why
Attempts to write theoretical reviews include Mautz &

Sharaf, Lee, and Flint

Whatgoodisatheory?
A theory could help:
To explain practice
Highlight deficiencies in practice
Guide audit regulators
Teachers explain the practice of auditing
Students understanding.

WhatAssumptions?
Unaudited information lacks credibility
Credibility is best added by compulsory audit
Shareholders cannot audit for themselves
Verifiability
The auditor acts exclusively as auditor
No unreasonable legal restriction on auditor
The auditor is suitably skilled

Whatconceptsareinvolved?
Independence and Ethical Conduct
Evidence and Materiality
Competence and Legal Responsibility
Audit Reporting

Independence
CA 2006
Eligibility
Appointed and remunerated by shareholders
Rights of access to info
Right to attend meetings

IndependenceThreats
1.

Self-interest threat

2.

Self-review threat

3.

Management threat

4.

Advocacy threat

5.

Familiarity threat

6.

Intimidation threat fear of physical violence

Unlikely but remember the murder of an internal
auditor in the Carrian/Bumiputra Finance in
1983

ES5Nonauditservices
Internal audit.
IT services.
Valuation.
Tax.
Litigation support.
Recruitment.
Corporate finance.
Accounting services.

Howtoimproveindependence?
Enhance powers of audit committees
Ban other services
Rotation
Government

Problems?

WhatdoAuditorsReportsContain?
a) Title;
b) Addressee;
c) Introductory paragraph
d) Respective responsibilities
e) Scope paragraph

Auditing framework and work done;

f)

Opinion paragraph
Accounting framework and opinion;

g) Date of the report;

h) Auditors location; and
i)

Auditors signature

links
http://www.icpascaa.org.sg/wp-

content/uploads/2010/07/SSA-700-R.pdf
https://www.singaporeair.com/pdf/Investor-

Relations/Annual-Report/annualreport1213.pdf
http://www.frc.org.uk/Our-Work/Publications/APB/700-

The-auditor-s-report-on-financial-statements.aspx

WhatisaTFV?
T & F has become a term of art. It is generally
understood to mean a presentation of
accounts drawn up according to accepted
principles, using accurate figures as far as
possible and reasonable estimates otherwise;
and arranging them so as to show within the
limits of current accounting practice as
objective a picture as possible, free from wilful
bias, distortion, manipulation or concealment
of material facts.
GA Lee

T&F
1.

Compliance with GAAP

2.

Adequate Disclosure

3.

Substance over Form

Qualifications
Effect is:
Limitation of
scope

Material
only

Pervasive

Except for Disclaimer

Disagreement Except for Adverse

Otherpossibilities
Suggest other things that might be included in the auditors

report:
How likely is it that auditors will add to the contents of their

reports?
If unlikely, why?

evidence
Different types
Different purposes
Match type with purpose

Typesofauditevidence/techniques ?

Inspection of documents:

a)
b)
c)

from third parties;

from third parties held by entity; and
created and held by the entity.

Observation

Enquiry and confirmation

Computation

Analytical procedures

Subsequent events

AUDITOBJECTIVESP&L
Transactions and events:
(i)

Occurrence.

(ii) Completeness.
(iii)

Accuracy.

(iv)

Cut-off.

(v) Classification.

AUDITOBJECTIVESB/S
Account balances:
(i)

Existence.

(ii) Rights and obligations.

(iii)

Completeness.

(iv)

Valuation and allocation.

TheAuditEvidenceProcess
1.

Understand the client

Assess risks
Form a view on materiality

2.

Overall analytical procedures

3.

Assess accounting system and evaluate

controls

4.

Compliance test effectiveness of controls

5.

Test through substantive procedures:

Either analytical procedures; or
Tests of detail

PresumptionsonReliability
Independent sources outside the entity produce more

reliable evidence.

Internally generated evidence is more reliable with effective

controls.

Evidence obtained directly by the auditor is more reliable

than evidence obtained indirectly or by inference.

Documentary evidence is more reliable oral.

Original documents are more reliable than photocopies.

Consistent evidence is more persuasive than contradictory

pieces of evidence.

CaseLaw whosues?
In Contract - Client
Auditor in contract with company. So need engagement

letters, esp. in non-statutory situations (Apfel; 1136 Tenants

Corp)
In Tort 3rd parties
Deceit
Negligence

NegligenceActions
2 key questions:

What is reasonable skill and care?

To whom am I responsible?

ResponsibilityforWhat?
Must do more than mechanical audit
Leeds Estate, Building and Investment Co v Shepherd

Howmuchchecking?
Kingston Cotton Mill
Re Westminster Road Construction
Re Thomas Gerrard

Hindsight?
Henry Squire v Ball Baker

suspiciouscircumstances=morework
Arthur E Green v Central Advance & Discount
Re City Equitable Fire Insurance
Fomento Ltd. v Selsdon Fountain Pen

Blamethedirectors?
London Oil Storage v Seear Hasluck
AWA v Daniels
Sasea Finance Ltd v. KPMG

But cannot force them to change

SP Catterson & Sons

Honestreporting
London & General Bank
Lloyd Cheyham accounting standards

Responsibilitytowhom?
Privity of contract
Gradually extended
Occasionally halted

Ultramares
Cardozos 3 indeterminates

Later explained by social utility rationale

Is it still relevant?

Floodgatesopen Thirdpartyactions
Candler v. Crane Christmas
Hedley Byrne
Anns
Scott Group:
Fruitless task if no reliance.
Commerce depends on a/cs.
Investors cant investigate.
Accounts filed publicly.

Thirdpartyactions
Jeb Fasteners
Twomax

Tideturns Caparo
1.

Purpose of the audit is for shareholders

2.

BUT a duty of care may be owed to others if:

reliance was reasonably foreseeable

relevant degree of proximity between parties

the imposition of a duty is fair, just and reasonable

3.

the auditors were negligent

4.

loss was suffered as a result of the negligence

5.

the loss can be quantified.

Butthreatrecedes? PostCaparo
Al Saudi Banque
James McNaughton
Morgan Crucible
Berg & Sons
Galoo
ADT v BDO Binder Hamlyn

PostCaparocontd
Peach Publishing
BCCI v. PWs
Barings v. Coopers
Bannerman
Moore Stephens
MAN v Freightliner

DeepPocketSyndrome
Towhatextentdoyouconsideritfairthatauditorsshouldbe

madetobearthecostofinvestmentlosses?
Socialpolicy&socialisingthecostofnegligence

Bigbusinessshouldpaybigdamages

Consequencesoflitigationflood
What are the possible consequences of a rise in litigation

against auditors?

Effectonauditpractice
Higher standards and performance
Tougher quality control measures.
More cautious client acceptance criteria.
More emphasis on identification of risk areas.
Greater willingness to qualify or limit liability? See

standard opinion

Otherconsequences

LLP Act 2000

Limited Liability Agreements CA 2006

Develop concept of contributory negligence

Beforeexam
Read
Revision schedule
Summarise notes
Relax and get a good nights sleep

exam
Before writing:
Read instructions
Comply
Complete cover
THINK!!!!

Exam 2
During:
Start each question on new page
Do not write in margins
Insert question number and put at top of

page

Indicate which part

Make separate point in separate para
Columns in Section A if relevant
No bullets in essays

Exam 3
After:

Say nothing
Do nothing
Move on
FORGET ABOUT IT!!!!

 Thank you for listening

Good luck!