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Qualification - OTHM Level 6 Diploma in Accounting and Business
Unit Name - Audit and Assurance
Unit Level - Level 6
Unit code - D/617/4378
Unit Credit - 20
Assignment Title - Audit and Assurance
Learning outcome 1: Understand internal audit principles.
Answer:
Internal audit principles are the foundational guidelines that ensure the effectiveness and integrity of an organization's internal audit function. These principles emphasize independence and objectivity, meaning auditors must be free from bias and undue influence to provide impartial assessments. Proficiency and due professional care are also crucial, requiring auditors to possess the necessary knowledge and skills and apply them diligently in their work. Confidentiality is paramount, ensuring that sensitive information obtained during audits is protected. Furthermore, the internal audit function should operate with a systematic and disciplined approach, adhering to established methodologies and professional standards. Finally, a commitment to continuous improvement and quality assurance ensures that the audit process remains relevant, reliable, and adds value to the organization.
Learning outcome 2: Understand current external audit legal and professional requirements.
Answer: External audit is governed by a robust framework of legal and professional requirements designed to ensure the reliability and transparency of financial reporting. Legally, companies, particularly in India, are mandated by acts like the Companies Act, 2013, to undergo statutory audits, with specific thresholds for turnover, paid-up capital, and borrowings determining applicability. These laws also dictate the appointment, tenure, and rotation of external auditors, who must be independent and possess specific qualifications, such as being a Chartered Accountant in India. Professionally, auditors must adhere to Generally Accepted Auditing Standards (GAAS) and Standards on Auditing (SAs) issued by bodies like the ICAI in India, which cover aspects like planning, risk assessment, evidence gathering, internal control evaluation, and reporting. These standards emphasize the auditor's responsibility to obtain reasonable assurance that financial statements are free from material misstatement, whether due to fraud or error, and to express an objective opinion on their "true and fair view." Non-compliance with these legal and professional requirements can result in significant penalties for both the company and the auditors involved.
Learning outcome 3: Understand the risk involved in the external audit process.
Answer: The external audit process inherently carries various risks that can impact the accuracy and reliability of the auditor's opinion on financial statements. These risks are broadly categorized into three types: Inherent Risk, Control Risk, and Detection Risk. Inherent risk refers to the susceptibility of a financial statement assertion to a material misstatement, assuming there are no related internal controls. This risk is often higher in complex transactions, industries with high volatility, or accounts requiring significant judgment (e.g., estimates, valuations). Control risk is the risk that a material misstatement will not be prevented, or detected and corrected, on a timely basis by the entity's internal control system. It arises from weaknesses or failures in the design or operation of internal controls. Finally, detection risk is the risk that the auditor's procedures will not detect a material misstatement that exists and that could be material, either individually or when aggregated with other misstatements. This risk is directly influenced by the effectiveness of the auditor's procedures, including their planning, scope, and execution. Auditors manage these risks through a comprehensive risk assessment process, understanding the client's business and environment, evaluating internal controls, performing analytical procedures, identifying fraud risks, and designing a robust audit plan that focuses on high-risk areas. Ultimately, the goal is to reduce overall audit risk to an acceptably low level to provide reasonable assurance that the financial statements are free from material misstatement.
Learning outcome 4: Understand current external auditing practice.
Answer: Current external auditing practice is characterized by a strong emphasis on independence, objectivity, and adherence to rigorous professional standards. In India, this primarily involves Chartered Accountants conducting statutory audits under the Companies Act, 2013, and other relevant laws, to provide an independent opinion on whether financial statements present a "true and fair view" and comply with applicable accounting standards like Indian Accounting Standards (Ind AS). The audit process typically begins with detailed planning and risk assessment, identifying areas susceptible to material misstatement. Auditors then gather evidence through various procedures, including examining supporting documents, testing internal controls, and performing analytical reviews. The evaluation of internal controls is crucial, as effective controls reduce the likelihood of misstatements. A significant trend in current practice is the increasing adoption of technology, with auditors leveraging data analytics, artificial intelligence, and other digital tools to enhance efficiency, identify patterns, and improve the quality of their work. This technological integration allows for more comprehensive analysis of large datasets, better fraud detection, and more targeted audit procedures. The final stage involves issuing an audit report, which communicates the auditor's findings and opinion to stakeholders, including shareholders, regulators, and the public, thereby enhancing trust and transparency in financial reporting.
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Aim:
This aim of this unit is to develop learners' understanding of both internal and external audit principles. Learners will consider current legal and professional requirements and review the risks involved in the external audit process.
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LO 1
Reasons for internal audit: to maintain systems of control within the business; to document systems of internal control; to evaluate internal control.
Internal audit principles: scope and limitations of internal audit; nature and purpose of internal audit; components of internal control systems; types of controls.
Internal audit techniques: audit strategy; audit assignments (value for money, IT, financial, regulatory, compliance, fraud investigations, customer experience); planning; sampling and testing; communication to management; reporting; recording of systems (notes, flowcharts, internal control questionnaires, evaluation).
Difference between internal and external audit: internal audit for management purposes; external regulatory.
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LO 2
The regulatory environment: laws; rules and regulations which are put in place by the state, or other government entities, to control the behaviour and actions of business activities; appointment of auditors and nature of relationship with organisation.
Professional conduct: the field of regulation of members of professional bodies acting under statutory or contractual powers: rules of professional conduct to ensure proper standards of professional conduct are observed (integrity; objectivity, confidentiality, competency).
Current developments: development and status of international standards; relationship between international and national standards; audit committees' benefits and limitations; responsibilities in relation to governance and corporate social responsibility; impact of global financial crisis.
Value of statutory audit: objectivity of auditors; value to different stakeholders; conflicts of interest; usefulness of auditors report; account preparation and other services provided to the organisation.
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LO 3
Audit risk: components of audit risk model (inherent risk, control risk, detection risk); assessing risk; concept of materiality; calculating materiality levels; legal responsibilities and liability; risks for each item in financial statements.
Minimising risk: preconditions for audit; audit engagement; engagement letters; planning; exercising professional judgement; understanding of entity; using ratios.
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LO 4
Audit processes and techniques: audit planning; audit evidence; audit procedures; sampling and testing; computer assisted auditing techniques; reliance on work of others; auditing not-for-profit organisations; review and reporting; qualification of reports.
Impact of legal requirements: responsibilities and liability of external auditors in relation to auditing, evidence and reporting.
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Learning Outcomes- The learner will:
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Assessment Criteria- The learner can:
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1. Understand internal audit principles.
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Explain the reasons for an internal audit.
Outline internal audit principles.
Review internal audit techniques used by business organisations.
Outline the differences between internal and external audits.
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2. Understand current external audit legal and professional requirements.
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Review the current auditing regulatory environment.
Explain the rules of professional conduct for auditors.
Review current developments in auditing.
Evaluate the value of a statutory audit.
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3. Understand the risk involved in the external audit process.
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Analyse audit risk.
Recommend measures to minimise audit risk.
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4. Understand current external auditing practice.
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Explain audit processes and techniques.
Evaluate the impact of the legal and professional requirements on the performance of an audit.
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