Concepts of Auditing
ACC 3401 Audit and Professional Ethics
│LECTURE 1│
Concepts of Auditing
Learning Objectives
After the lecture, students should be able to: describe the nature, purpose and scope of an audit; describe various basic principles and concepts of auditing and explain their importance in the actual audit procedures; and describe the professional framework within which auditors must operate.
1.
Accounting vs. Auditing
Accounting - the process of recording, classifying, summarizing and communicating information about an organization’s business activities. It is designed to provide financial information to a wide variety of users.
Auditing – 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 the identified financial reporting framework.
2012-13
© Vocational Training Council, Hong Kong
Lecture 1
Week 1
1
2.
Why are audits necessary for limited companies?
Separation of ownership (shareholders) and management (directors)
The management has to report to the owners about the profit/loss and assets and liabilities of the business (stewardship accounting). But how can the owners make sure that the accounting reports made by the management are reliable?
They can do so by appointing an independent person with sufficient skill to review the stewardship reports and to report his findings based on the review to the owners.
Limited liability enjoyed by limited companies
Creditors (actual or potential) also read the annual accounts of a limited company before they decide whether they will trade (continue to trade) with such a company or whether they will lend (continue to lend) money to the company. How can the creditors be protected if the accounts published by the company are not reliable? Thus, the creditors have to read the auditors’ report attached to the published financial statments to see
│LECTURE 1│
Concepts of Auditing
Learning Objectives
After the lecture, students should be able to: describe the nature, purpose and scope of an audit; describe various basic principles and concepts of auditing and explain their importance in the actual audit procedures; and describe the professional framework within which auditors must operate.
1.
Accounting vs. Auditing
Accounting - the process of recording, classifying, summarizing and communicating information about an organization’s business activities. It is designed to provide financial information to a wide variety of users.
Auditing – 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 the identified financial reporting framework.
2012-13
© Vocational Training Council, Hong Kong
Lecture 1
Week 1
1
2.
Why are audits necessary for limited companies?
Separation of ownership (shareholders) and management (directors)
The management has to report to the owners about the profit/loss and assets and liabilities of the business (stewardship accounting). But how can the owners make sure that the accounting reports made by the management are reliable?
They can do so by appointing an independent person with sufficient skill to review the stewardship reports and to report his findings based on the review to the owners.
Limited liability enjoyed by limited companies
Creditors (actual or potential) also read the annual accounts of a limited company before they decide whether they will trade (continue to trade) with such a company or whether they will lend (continue to lend) money to the company. How can the creditors be protected if the accounts published by the company are not reliable? Thus, the creditors have to read the auditors’ report attached to the published financial statments to see