TLDR;
This video provides a comprehensive overview of auditing, covering key aspects such as the definition and objectives of an audit, its scope, advantages, and inherent limitations. It also discusses the elements of a quality control system, ethical requirements for auditors, the audit strategy process, peer review, and the role of the Public Company Accounting Oversight Board (PCAOB).
- Audit is an independent examination to give an opinion on financial statements.
- Auditors provide reasonable assurance, not absolute, due to inherent limitations.
- Ethical requirements ensure integrity, objectivity, and independence in auditing.
Introduction [0:00]
The video begins by defining an audit as an independent examination aimed at providing an opinion on financial statements. It stresses the importance of independence, both in appearance and in mind, for an auditor to perform their duties effectively and impartially. The audit can be conducted for any entity, whether profit-making or non-profit, with the primary objective of expressing an opinion on the financial statements.
Audit and Objective of Auditor [1:06]
The objective of an auditor is to provide an opinion on whether the financial statements are fairly presented and free from material misstatements. Auditors offer reasonable assurance, acknowledging that they do not check every record and cannot provide absolute certainty. This opinion is expressed through an audit report. Auditors must adhere to standards on auditing (SAs), similar to how accounting standards (AS) are followed in accounting practices.
Scope of Audit [7:05]
The scope of an audit includes collecting audit evidence and providing an opinion on the financial statements. This involves assessing whether the information in the financial statements is reliable and whether the financial statements comply with the applicable financial reporting framework (FRF), including accounting standards and company law. It's important to note that the preparation of financial statements and compliance with accounting standards and laws are the responsibilities of the management, not the auditor. The auditor is not a "bloodhound" but a "watchdog".
Aspects Covered Under Audit [11:34]
When conducting an audit, several aspects are covered, including checking the results reported in the profit and loss (P&L) statement to ensure expenses and income are accurately reported. Auditors verify liabilities presented in the balance sheet, often consulting third parties for confirmation. They also verify the authenticity and validity of significant transactions by examining invoices and vouchers. Additionally, auditors compare financial statement items with vouchers and reports and verify the title, existence, and valuation of assets.
Advantages of Audit [16:30]
Audits offer several advantages, including safeguarding the interests of stakeholders by providing reliable financial information. They act as a moral check on employees, deterring fraud and misuse of assets. Audited financial statements can facilitate the settlement of tax liabilities, as assessing officers often accept the expenses reported. Management audits can detect wastage and losses, and government submissions often require audited records.
Inherent Limitations of Audit [19:50]
Audits have inherent limitations that can lead to corporate scandals. According to SA 200, auditors provide reasonable assurance, not absolute, due to test checking and sampling. Financial statements inherently involve judgment and estimates, which can vary and may not always be accurate. Examples include estimating the useful life and scrap value of assets, as well as provisions for doubtful debts. Audit procedures themselves rely on the auditor's judgment, such as determining sample sizes and appropriate procedures.
Elements of System of Quality Control [26:24]
A system of quality control consists of policies and procedures related to leadership responsibilities within an audit firm. This includes ethical requirements, such as ensuring independence when accepting clients. For example, a firm should not audit a company if a partner's relative is a director. Other elements include human resources policies, ensuring competent staff through training, and engagement performance, which involves establishing proper work methods. Documentation and monitoring are also crucial for maintaining quality control.
Ethical Requirements Relating to Audit of Financial Statements [34:35]
Ethical requirements for auditors include integrity, objectivity, professional competence, confidentiality, professional behaviour, and independence. Integrity requires honesty and avoiding fraud. Objectivity means being unbiased and not influenced by others. Professional competence involves having the necessary knowledge and skills. Confidentiality requires maintaining client information securely. Professional behaviour means acting professionally and ethically. Independence requires both independence of mind and appearance, free from undue influence.
Audit Strategy Process [40:50]
The audit strategy process involves several steps. First, determine the scope of the audit, whether it's a tax audit, GST audit, financial audit, or secretarial audit, each requiring a different focus. Next, determine the audit reporting objectives. Identify significant factors that may affect the team's competence. Check factors affecting preliminary engagement activities to identify any potential issues early on. Finally, calculate the nature, timing, and extent of resources required for the audit.
Peer Review [47:25]
Peer review involves a professional of similar standing checking the work done by another professional. This includes a general survey and assessment to ensure the systems and procedures used in the audit are sufficient, appropriate, and comply with auditing standards, technical standards, ethical standards, and professional standards.
PCAOB [54:43]
The Public Company Accounting Oversight Board (PCAOB) is a private, non-profit organisation created by the Sarbanes-Oxley Act of 2002 in the US. It oversees the auditors of public companies to protect investors and the public interest. The PCAOB ensures auditors prepare informative, fair, and independent reports. It requires registration of accounting firms that audit public companies in the US, conducts inspections of auditors, and establishes auditing and attestation standards.
