Acca F8 Audit

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LESSON 1

INTRODUCTION TO AUDITING

1. WHAT IS AN AUDIT

An audit is an independent examination of the financial statements of an entity in order to enable the auditor to express an opinion as to whether it gives a true and fair opinion and if it has been properly prepared in accordance with the applicable reporting framework.

2.Under the Companies Act, Cap. 50, private limited companies that satisfy the following conditions are not required to have an audit:

a) number of shareholders are fewer than 20
b) all shareholders are individuals and there are no corporate shareholders c) annual turnover is less than $5m
d) dormant companies, ie no transactions during the year

3.WHY AN AUDIT IS NEEDED

a. because of limited liability privilege whereby the shareholders liability is limited only to the amount of monies that they have invested into the company and the creditors are not allowed to seize their personal assets b. to provide assurance on the stewardship function whereby the directors and the shareholders are different persons and an audit is required to ensure the directors do not abuse their positions c. in a take-over situation, an audit is required to provide a fair value to the purchase price d. an audit could be required when a loan/banking facilities are sought

4.ADVANTAGES OF AN AUDIT

a. provides an independent and impartial opinion on the credibility of the financial statements b. highlights major weaknesses in the internal control systems of an entity. This help to prevent embezzlement and fraud c. helps to minimize misunderstanding esp. in a partnership when dispute arises d. an audit acts as a “watchdog” or deterrent to the client’s staff e. when bank borrowing is required

f. as a basis to reduce disputes between management esp. when upon the calculation of profit-related remuneration

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5.DISADVANTAGES OF AN AUDIT

a) it is expensive
b) it can disrupt the normal business operations of an entity

6.STRUCTURE OF AUDIT FIRMS

Managing Partner

Partner

Audit Principal

Audit Manager

Audit Supervisor/Assistant Manager

Audit Senior

Audit Assistant/Assurance

7.Who are the big 4 auditors

a) Ernst & Young
b) KPMG
c) Deloitte and Touche
d) PriceWaterhouseCoopers

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8.AUDIT PROCESS

Stage 1

Stage 2

Stage 3

Note: Stages 1 and 2 is commonly referred to as an interim audit and it is normally done before the end of the balance sheet date. Stage 3 is the final audit and is done after the balance sheet date.

9.AUDIT REPORT

9.1Key Terms:

(a)reasonable assurance

i) auditors do not test every transaction and they do sample testing ii) no accounting and internal control system is 100% reliable iii) auditors have to use their judgement to assess the estimates made by the directors

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(b)materiality

This refers to those matters in which it will affect the auditor’s judgement and decision.

Several yardsticks have been developed:

i) 5% of profit before tax
ii) 0.5% to 1% of GP
iii) 0.5% to 1 % of turnover
iv) 1% to 2% of total assets
v) 2% to 5% of net assets
vi) 5% to 10% of profit after tax

(c)True and fair opinion

i) True – this means the information in the FS are factual...
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