Modern Auditing: Collecting Evidence, Crafting Analysis, Communicating Impact - Softcover

Cosserat, Graham; Rodda, Neil

Softcover

ISBN 10: 0470319739 ISBN 13: 9780470319734

Publisher: Wiley, 2009

Synopsis

Modern Auditing offers the reader a thorough coverage of the practice of auditing in context of auditing theory and concepts, and the professional responsibilities of the independent auditor. The structure of the book develops the auditing process in a logical and sequential manner, enabling students to progressively consolidate their understanding of the concepts and processes without excessive detail or repetition.

About this title

About the Author

Graham Cosserat is now retired following a career that included 30 years’ experience in teaching auditing at Kingston University, the University of Technology, Sydney and Nottingham Trent University.  He also worked as an examiner in auditing for the ACCA (Association of Chartered Certified Accountants).

Neil Rodda is a Senior Lecturer at Manchester Metropolitan University where he has taught courses in auditing and financial reporting since 1991.  He also has considerable professional experience including work as an audit manager for KPMG and as a director of an enterprise agency. Neil Rodda has also worked with the ACCA both as a marker of professional examinations and as an author of various study materials.

From the Back Cover

Modern Auditing has become established as one of the leading textbooks for students taking university and professional courses in auditing. This extensively revised third edition continues to provide the reader with a comprehensive and integrated coverage of the latest developments in the environment and methodology of auditing.

Aimed at introductory level courses in auditing at undergraduate, graduate and professional levels, it develops the auditing process in a logical and sequential manner enabling the reader to progressively consolidate their understanding of the concepts and process.

The book contains a strong pedagogical framework including: chapter overviews, learning objectives and checks, review questions, professional application questions, case studies and a glossary of technical terms.

New features include:

• Updated coverage of developments in companies legislation, regulation and corporate governance
• Discussion of new developments in ethical codes
• Coverage of the latest audit risk standards and the impact of the IAASB’s Clarity Project
• Focus on changes in professional statements and structure and the increasing influence of IFAC

Aimed at introductory level courses in auditing at undergraduate, graduate and professional levels, it develops the auditing process in a logical and sequential manner enabling the reader to progressively consolidate their understanding of the concepts and process.

The book contains a strong pedagogical framework including: chapter overviews, learning objectives and checks, review questions, professional application questions, case studies and a glossary of technical terms.

New features include:

• Updated coverage of developments in companies legislation, regulation and corporate governance
• Discussion of new developments in ethical codes
• Coverage of the latest audit risk standards and the impact of the IAASB’s Clarity Project
• Focus on changes in professional statements and structure and the increasing influence of IFAC

Excerpt. © Reprinted by permission. All rights reserved.

Modern Auditing

By Graham Cosserat

John Wiley & Sons

Copyright © 2009 Graham Cosserat
All right reserved.
ISBN: 978-0-470-31973-4

Chapter One

AUDITING AND THE PUBLIC ACCOUNTING PROFESSION

* THE EVOLUTION OF AUDITING PRACTICES

* The traditional conformance role of auditing

* The development of an enhancing role

* Auditing - a shifting paradigm

* THE ACCOUNTING PROFESSION AND ITS ASSOCIATED ORGANIZATIONS

* Private sector organizations

* Standard setting bodies

* Statutory audit regulation

* SERVICES PROVIDED BY PUBLIC ACCOUNTANTS

* Assurance services

* Nonassurance services

* TYPES OF AUDIT ACTIVITY AND AUDITOR

* Types of audit activity

* Types of auditor

* REGULATORY FRAMEWORK FOR ENSURING QUALITY SERVICES

* Standard setting

* Firm regulation

* Self-regulation

* Independent regulation

* SUMMARY

* NOTES

* FURTHER READING

* MULTIPLE-CHOICE QUESTIONS

* DISCUSSION QUESTIONS

* PROFESSIONAL APPLICATION QUESTIONS

* LEARNING OBJECTIVES

After studying this chapter you should be able to:

1 appreciate how auditing developed

2 discuss the historical and other factors that influence the role of auditors, and the resulting complexities of meeting public expectations

3 explain the scope of auditing within the assurance framework and its relationship with other nonaudit services

4 describe the accounting profession in the United Kingdom and the constituencies that influence the profession and audit practices

5 explain the nature of and scope of assurance services performed by public accountants

6 explain the nature of nonaudit services, and describe several types performed by public accountants

7 distinguish different types of audit activity and auditor

8 explain the regulatory framework for ensuring quality services

9 state the elements of quality control applicable for audits and assurance services.

* PROFESSIONAL STATEMENTS

IAASB International Framework for Assurance Engagements

ISA 200 Objective and General Principles Governing an Audit of Financial Statements

ISA 240 The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements

ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements

ISA 220 Quality Control for Audits of Historical Financial Information

IAPS1010 The Consideration of Environmental Matters in the Audit of Financial Statements

ISQC 1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements

Audit (as well as other assurance services) plays a vital role in business, government and our economy. The nature of this role will be explained in Chapter 2. Evidence of its importance is provided by the fact that all of the following bodies are required to have an annual audit:

* all public and larger private companies

* government departments, local authorities, NHS Health Trusts and local authorities

* registered charities and other 'not-for-profit' organizations, including educational institutions.

It is estimated that well over a million audits annually are conducted in accordance with statutory requirements in the member states of the European Union.

Auditing services have been changing rapidly since the early 1990s. Audit practices have been evolving in response to growing public expectations of accountability and to the complexities in economic and technological advances being made in business organizations. An important recent development has been the challenge of globalization and the need for harmonization of financial reporting in facilitating the most efficient allocation of investment funds globally. Harmonization applies not only to the financial reporting standards applied in preparing financial statements but also to the credibility attached to the audit process. As a vocation, therefore, a career in audit and assurance offers the opportunity to work in a challenging and rewarding dynamic business environment as well as providing the opportunity to develop a thorough understanding of a wide range of professional services and serve the interests of users of financial information.

This chapter traces the conceptual development of auditing over the years. It also provides a broad framework of the accounting and auditing profession and its related associations, a description of the general types of audit activity and a review of the system of quality procedures prescribed for the profession.

The Evolution of Auditing Practices

Auditing has developed from what, in the twelfth century, was primarily a check of the accounting for stocks and revenues by authorized officers of the Exchequer of England into a sophisticated professional assurance service performed by independent accountants in the interests of their clients and other users of financial information. This section describes the development of the auditing role over the years, with particular reference to the nature and objectives of auditing, the responsibilities of auditors and the evolution of the accounting and auditing profession. This historical perspective is particularly relevant given the current shift away from traditional accounting and auditing services to a broad variety of assurance services more relevant to the emerging information revolution.

The traditional conformance role of auditing

The traditional conformance role of auditing first appeared in the United Kingdom during the 1800s. The nature of this role was articulated in major legal case decisions at the end of that century. In fact, the development of the auditing role is very much an outcome of court cases, as is seen in the following sections.

Auditing in the United Kingdom

The word 'auditing' comes from the Latin word audire, meaning 'to hear'. In the late Middle Ages in Britain, accounts of revenue (tax receipts) and expenditure for manors and estates were both 'heard' by an auditor, whose task was to examine such accounts. With the spread of double-entry book-keeping, first described by Luca Pacioli in 1494, associations of accountants were formed, and auditing gradually established an important role.

Auditing as we know it today can be traced back to the development of joint-stock corporations in the United Kingdom during the Industrial Revolution from the early 1800s. The increasing use of the company form of business organization led to growth of a professional class of managers who handled large sums of capital on behalf of shareholders. Recognizing the need for periodic reporting by managers to shareholders, the Joint Stock Companies Registration and Regulation (Joint Stock Companies Act) 1844 stipulated that 'Directors shall cause the Books of the Company to be balanced, and a full and fair Balance Sheet to be made up.' The Act provided for the appointment of auditors who were empowered to examine the accounts of the company.

Regulation 94 of the UK Companies Act 1862 required the auditors to state in their report.

... whether, in their Opinion, the Balance-Sheet is a full and fair Balance-Sheet, containing the particulars required by these Regulations, and properly drawn up so as to exhibit a true and correct view of the State of the Company's Affairs ... such Report shall be read, together with the Report of the Directors, at the Ordinary Meeting.

Table 1.1 shows the development of the audit function through successive Companies Acts. In particular it shows how the audit first became compulsory for all companies in 1900, how the auditors were required to have appropriate professional qualifications from 1948 and how the accounts to be reported on and the wording of the report gradually evolved over time. Sometimes the legislation was revolutionary and designed to curb abuses, such as the introduction of compulsory audits for specific classes of business during the latter part of the nineteenth century. On other occasions the legislation merely confirmed and regularized practices that had become commonplace. By 1900 most companies with significant numbers of outside shareholders were audited and, by 1948, most auditors were professionally qualified.

It is sometimes suggested that the emphasis of the Companies Act auditing requirements has changed over the years from fraud and error detection to attesting the credibility of financial statements for investment purposes. For example, in Lawrence R. Dicksee's book Auditing: A Practical Manual for Auditors, published in 1892, the objective of an audit was said to be threefold:

* the detection of fraud

* the detection of technical errors

* the detection of errors of principle.

The Companies Act 2006 recital of auditors' responsibilities still reflects the unsophisticated methods employed by Victorian directors to mislead their shareholders, notably the requirement to determine whether or not the company's accounts are in agreement with the accounting records. With the increasing sophistication of creative accounting and the development of the securities markets, directors are more likely to defraud investors by producing accounts intended to mislead the securities markets rather than by the simple device of paying dividends out of capital. In recent additions to companies legislation we see an increasing concern with full disclosure and with increasing responsibility being imposed on auditors to determine whether the accounts are indeed fair.

The influence of case law on auditing

While 'hearing' the accounts and checking records were then the predominant functions of auditors, two major audit cases in the late 1800s helped to establish the fundamental principles of auditing. These cases, London and General Bank (1895) and Kingston Cotton Mill Co. (1896), are described in Chapter 4. They make clear that auditing is a professional activity with auditors required to exercise reasonable care and skill, but that what is proper conduct in any set of circumstances is inevitably a subjective question which the court determines with hindsight.

The complexity of accounting and the business environment makes it impossible for auditors to detect all aspects of fraudulent activity in an organization. Hence, the auditors' responsibility for detecting fraud and errors continues to be a much-debated issue. Nonetheless, following these two landmark cases, efforts continued to be made to define the responsibilities of the auditors, with the primary duties being subsequently confirmed in legislation.

The development of auditing in the United States

Auditing in the United States has developed along similar lines to those in the United Kingdom and both the profession and the courts in the United Kingdom closely watch developments in the United States.

In 1931 the Ultramares case in America prompted the accounting profession to clarify that the auditors were expressing an opinion and not giving a guarantee, and that the 'balance sheet and the related statement of income and surplus present fairly ...'

In responding to severe criticism of the financial community and corporate management, the Congress of the United States passed the Securities Act 1933 and the Securities Exchange Act 1934. These Acts contained the requirements for the audit of financial statements of corporations seeking to issue securities, or corporations wanting to register with the Commission for the public trading of securities. The Acts placed a significant responsibility on professional accountants and increased their authority.

The hearings held by the Securities Exchange Commission into the McKesson & Robbins fraud case in 1939 and the findings released the following year had an impact not only on audit procedures, but also on the development of auditing standards and the content of the auditors' report. The confirmation of debtors and the observation of stock-taking procedures were made mandatory.

The development of an enhancing role

Apart from a change in the audit approach, auditors face an increasing demand for more accountability and for more perceived benefits for users. One development has been the issue of formal standards to improve the quality and consistency of auditing. There is also an expectation that auditing, as a professional service, should not only provide assurance for the credibility of financial statements, but also enhance the integrity of financial information and its usefulness in decision making by management and other users.

Defining reasonable care and skill

A number of cases, such as that of Thomas Gerrard & Son Ltd 1967, have indicated that what constitute reasonable skill and care evolve with time. These cases made it clear that auditors should pay due regard to the possibility of fraud and actively investigate that probability should suspicious circumstances arise. The courts also continued to exercise their prerogative to assess the reasonableness of professional standards in specific circumstances and therefore what constitutes reasonable care and skill.

Enhancing the credibility of financial information

In the 1970s, auditors described their role as one of enhancing the credibility of financial information and furthering the operations of an effective capital market. In the New York Times of 6 April 1975, audits were said to affirm the truthfulness of financial statements and ensure that financial statements were 'fairly presented'. This function was loosely linked to various audit practices, including:

* the review and testing of company records and the procedures and controls used to assemble financial information

* the approval to use various accounting principles

* the examination of financial statements to ensure they contained no material misstatements, omissions or misleading presentations of data.

Auditing as a service to provide reasonable assurance to users

The International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) defines an assurance engagement as one

in which a practitioner expresses a conclusion designed to enhance the degree of confidence that intended users can have about the evaluation or measurement of a subject matter that is the responsibility of a party, other than the intended users or the practitioner, against criteria.

The IAASB's International Framework for Assurance Engagements states that an assurance engagement involves the following elements:

* a three-party relationship involving the practitioner, such as the independent auditor, the responsible party, such as the board of directors of a company, and the intended users, such as the company's shareholders

* a subject matter, such as the financial statements, whereby the directors demonstrate their accountability to the shareholders

* suitable criteria, such as truth and fairness in accordance with international financial reporting standards

* sufficient appropriate evidence, such as the company's books and records

* a written assurance report, such as the auditors' report.

Under the Framework, there are two types of assurance engagement: a reasonable assurance engagement and a limited assurance engagement.

The objective of a reasonable assurance engagement (such as an audit) is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner's conclusion.

For example, in an audit engagement the practitioner:

* identifies the risks that the subject matter may be materially misstated

* performs procedures to gather and evaluate evidence in response to those risks to reduce the overall level of risk that the subject matter is materially misstated to an acceptably low level

* expresses a positive opinion with respect to the agreed criteria, such as 'in our opinion the financial statements (the subject matter) give a true and fair view (conform in all material respects with the criteria)'.

(Continues...)

Excerpted from Modern Auditingby Graham Cosserat Copyright © 2009 by Graham Cosserat. Excerpted by permission.
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Edition details

• Publisher: Wiley
• Publication date: 2009
• Language: English
• ISBN 10: 0470319739
• ISBN 13: 9780470319734
• Binding: Paperback
• Edition number: 3
• Number of pages: 748