5. Introduction to Financial
Statements and Audit
We cover in this session the following:
1. Introduction to Financial Statements
2. User’s of financial statements
3. Why do we audit them
6. Introduction to Financial Statements
Purpose of Financial Statements
Financial statements are a structured representation of
the financial position (Balance Sheet) and financial
performance (Income Statement) of an entity.
The objective of financial statements is to provide
information about the financial position, financial
performance and cash flows of an entity that is useful to
a wide range of users in making economic decisions.
7. Introduction to Financial Statements – User of
Financial Statements
User of the financial statements
Interest of the user
Equity investors (existing and potential)
They are interested whether buy, hold or sell the shares in hand
and also enable them in payment of dividends.
Loan creditors ie, existing and potential
holders of debentures and loan stock, and
providers of short-term loans
The amount will be paid when due and for continuation of the
business.
Employees (existing, potential and past)
Interested in stability and profitability for employment
opportunities, remuneration and retirement benefits.
Business contacts including customers,
trade creditors, competitors and potential
take-over bidders
Whether the payment of loan will be made in due dates and
enable sustainability of business for future business with the
enterprise.
Government, including tax authorities,
government departments and local
authorities
Interested in allocation of resources and also to regulate the
activities of an enterprise and determining tax policies and as a
basis for national income.
Public, including tax payers, ratepayers and
environmental groups
Trends and recent development in the prosperity of the entity
and range of it’s activities.
8. Why do we audit them- Need for Audit
Principle provides capital
and hires manager
to manage it.
Principle
(Shareholders)
Information irregularity
and conflict of interest lead
to information risk for the principle
Directors
Director is accountable to Principle;
provides financial reports.
Auditor gathers
evidence to evaluate
fairness of manager
financial statements.
Auditor
Directors hires audit to
report on the fairness of
manager financial
statements. Risk information
irregularity of principle
reduce.
10. Financial statement and audit major
points for discussion
Objective
Types
Complete process
Regulation
Expectation gap
11. Objective
• Verify the Financial statements which are true
and fair
• Compliance with international standards of
reporting (IAS-1)
• International accounting standard1(presentation f/s)
12. Objectives of Auditing
• Primary Objective (main objective)
–To produce a report by the auditor
of his opinion of the truth and
fairness of financial statements so
that any person reading or using
them can have belief in them
@Sako Mayrick 2006
13. Objectives of Auditing
• Secondary
– To detect errors and fraud ( Consider
materiality)
– To prevent errors and fraud by the deterrent
and moral effect of the audit
– To provide spin- off effects. The auditor will
be able to assist his clients with accounting ,
systems, taxation , financial , and other
problems.
@Sako Mayrick 2006
15. Types of Audit
Internal audit not required by law but external
audit is require in some situations.
16. Internal audit do only for in these
situations
• The exercise of special investigations on detection
of fraud.
• The preparation and documentation of internal
procedures and processes in accordance with
client needs and in accordance with regulatory
bodies' requirements.
• The design and implementation of internal audit
programs.
• The preparation of internal audit reports for
management use and for company internal audit
committees.
17. Internal auditing
External auditing
Objectives
To advise management on whether To provide an opinion on whether
the organization has sound
the financial statements provide
systems of internal controls to
a true and fair view
protect the organization against
loss
Legal basis
All
areas of the organization, Financial focus
operational as well as financial
Scope
All
areas of the organization, Financial focus
operational as well as financial
Approach
Increasingly risk base
Assess risks
Evaluate system of controls
Test operation of system
Make
recommendation
improvements
Responsibility To
Increasingly risk based
Test underlying transactions that
form the basis of the financial
statements
for
advice
and
make To form opinion on whether the
recommendations on the internal
financial statements provide a
control
and
corporate
true and fair view.
governance
@Sako Mayrick 2006
18. Statutory
audit
Nonstatutory
audit
• carried because the law requires them.
Statutes include Companies Act,
Parastatal organization Act
• Not compulsory for private
companies
• Only require for the satisfaction of
shares holders
19. Planning of the audit
Complete
process of audit
Assessment of the accounting and internal
control systems and audit risk assessments
Consideration of the ways in which
audit evidence can be sought
Testing of Internal Controls ‘test of
control’
Reduced testing of
transactions and
balances “substantive
procedures’
Extensive testing of transactions
and balances ‘substantive
procedures’
Review of financial statements
@Sako Mayrick 2006
Audit Report
21. AUDITING, ATTESTATION, AND ASSURANCE
SERVICES
• ATTESTATION occurs when a practitioner is engaged to
issue or does issue a written communication that
expresses a conclusion about the reliability of a
written assertion that is the responsibility of another
party.
• Examples:
– The effectiveness of internal control
– Financial information other than the financial
statements
– Future-oriented financial information
– Compliance with statutory, regulatory, or
contractual obligations
– Management’s discussion and analysis
@Sako Mayrick 2006
22. AUDITING, ATTESTATION, AND ASSURANCE SERVICES
ASSURANCE services are independent
professional services that improve the quality
of information, or its context, for decision
makers.
Examples:
Risk assessment
Information system reliability
Electronic commerce
Health care performance measurement
@Sako Mayrick 2006
23. •
IFAC (international federation for accountancy)
IFAC is comprised of 179 members and associates in 130
countries, representing approximately 2.5 million
accountants in public practice, education, government
service, industry, and commerce. IFAC members are
professional accountancy organizations recognized by law
or general consensus within their countries as substantial
national organizations. National organizations may apply to
become an IFAC associate where the organization is
working toward membership.
24. Subsidiary boards
i) IAASB
The International Auditing and Assurance
Standards Board (IAASB) is an independent
standard-setting body that serves the public
interest by setting high-quality international
standards for auditing.
ii) IFRS ( international financial reporting standard)
iii) IAS (international accounting standard
26. Professional ethics
• The International Ethics Standards Board for
Accountants (IESBA) is an independent standardsetting body that serves the public interest by
setting high-quality ethical standards for
professional accountants and by facilitating the
convergence of international and national ethical
standards, including auditor independence
requirements, through the development of a
healthy, internationally appropriate code of
ethics.
28. Principal
• Objectivity ( auditor must be independent)
• Integrity ( auditor must be honest and
punctual)
• Professional competence ( update with
knowledge and standards
• Confidentiality (auditor don’t share the
secrecy of company to others.
• Professional behavior ( auditor behavior must
be the professional.
30. Threats
• interest threat ( auditor must be independent
person, he have no any interest in company
and its profits)
• Advocacy ( he is not doing any work on
company behalf like negotiate with others
organizations and companies)
• Intimation( he is purely independent person)
31. Expectation gap
• Auditor not prepare the financial statements
of that company where he is doing audit.
• Qualified reports are the negative report of
the organization while unqualified reports are
positive reports of the company
• Auditor is not hire for the detection of fraud
while he is hire for opinions on statements,
but if he find any detection he will point out it.