18/09/2014
CHAPTER 1: INTRODUCTION TO
AUDITING
DEFINITION
By the audit process, the auditor enhances the
usefulness and value of the financial statements,
and also increases the credibility of other nonfinancial information released by management.
ISA 200 states the objective of an audit of
financial statements 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 and give a true and fair view
of the financial situation of the company.
DEFINITION
An auditor should comply with the
Code of Ethics for Professional
Accountants issued by IFAC (cf.
chapter 2).
An auditor should conduct an audit in
accordance with the International
Standards on Auditing.
Every country has local Auditing Standards
that are more and more inspired by the ISA
WHO APPOINTS AN EXTERNAL AUDITOR?
Legally obliged (according to the
Belgian law)
When two of the following criteria are
fullfilled:
Number of employees > 50
Total revenues > 7,300,000 euro
Total assets > 3,650,000 euro
Or as soon as the company has more than
100 employees
On a voluntary basis (in Belgium,
between 4,500 and 6,000 companies)
ADVANTAGES OF AN EXTERNAL
AUDIT
Increased quality of the financial statements
Increases confidence on behalf of external shareholders
(existing and potential new)
Increased confidence on behalf of banks (easier access
to bank loans and/or lower interest rates)
Increased confidence on behalf of suppliers, customers
and even employees
Recommendations on how to improve the financial
accounting system or the internal control system
Could help to improve the performance of the company
Allows to learn about other companies
INTERNATIONAL AUDITING
STANDARDS
Worldwide
Consistent
Increases confidence in non-domestic
investment
International investors comprehend
financial statements from different
countries
High quality
Non-national standards encourage better
quality, less political influence
SOME GENERAL PRINCIPLES IN
AUDITING
Certain inherent limitations in an audit affect
the auditors ability to detect material
misstatements
Test and sampling
Internal control
Audit evidence
Audit process permeated by judgment
Management is responsible for the financial
statements, accounting, and internal control.
DOES AUDITING MEAN FINDING
FRAUD
NO!
ISA 240: the responsibility for the prevention and
detection of fraud and error rests with both those
charged with the governance and the management.
ISA 210: states that when planning and performing audit
procedures and in evaluating and reporting the results,
auditors should consider the risk of misstatements in
financial statements resulting from fraud.
In planning the audit, the auditor must assess the risk
that material fraud or error has occurred.
The professional regulations in some countries require
the auditor to inform members of the audit committee
or board of directors
INTERNAL VERSUS EXTERNAL
AUDITORS
Internal auditors are employed by
individual companies to investigate and
appraise the effectiveness of company
operations for management.
Independent external auditors are
typically certified either by a
professional organization or
government agency and are only
focused on the quality of the financial
statements.
PROFESSIONAL TITLES
Certified Public Accountant (CPA)
Chartered Accountant (CA)
Rviseur dentreprises
AUDIT PROCES
Phase
Phase
Phase
Phase
I - Client Acceptance
II - Planning
III - Testing and Evidence
IV - Evaluation and Judgment
AUDIT MARKET
The Big Four:
Deloitte, PricewaterhouseCoopers, Ernst &
Young, KPMG
Second tier: BDO, Grant Thornton,
Mazars, PKF, RSM
Small audit firms (up to five external
auditors)
Independent external auditors (working
alone)
AUDIT FEES
Important determinants of audit fees
are:
the
size of the auditee and the
geographical dispersion;
the size of the audit firm (Big Four firms
seem to demand a fee premium);
the quality of the auditee's internal control
system;
the type of fee contract (fixed fee versus
variable fee).
STRUCTURE OF AN AUDIT FIRM