Lecture Notes 2.pdf

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University of Toronto Scarborough
Financial Accounting
Julie Mc Donald

Assurance Services Assurance Service – Attestation Services:  Audit – (F/S)  Review - provide some assurance level that don’t require an audit Review can also be completed for other financial information (i.e. verifying sales for lease agreements) Procedures Suggested for reviews: • Obtain knowledge of the client’s business. • Make enquiries of client personnel. • Perform analytical procedures. Have discussions with management concerning information received and the information being reported on. Types of Reviews • Financial statements • Financial information other than financial statements Compliance with agreements and regulations  Specialized Reports: 1. Internal Control over Financial Reporting 2. Attestation Services on Information Technology and other attestation services Compilations – no assurance – but enable accountant to prepare financial statements or tax returns, or compile other types of financial information Procedures Conducted During a Compilation Engagement • The accountant assembles the information. • Ensures that it is arithmetically correct. Although the accountant should not be associated with false or misleading financial statements, it may be difficult to make this determination because of the limited involvement. Engagement letter – contract – P23-6 – P23-7– Review/ P23-10 – Compilation Representation letter – We represent client to contact related parties, on behalf of clients Professional Standards for Compilation Engagements • Should have adequate technical training and proficiency in accounting. • Complete with due care. • Work should be adequately planned and properly executed. • If assistants are employed, they should be properly supervised. Interim Financial Information May be audited, reviewed, or compiled. Estimates may be required to prepare the information on a timely basis. This means the information may not be as reliable as year-end financial information. Future – Oriented Professional Standards With respect to the examination of future-oriented information, it is important that the accountant: Have adequate technical training and proficiency in auditing Requires due care Work adequately planned and assistants properly supervised Sufficient evidence obtained for report issued Prior to Accepting a Future-Oriented Engagement Public accountant needs to ensure that: – There is adequate support for the assumptions used to prepare the financial information – Any hypotheses do not significantly impair the quality of the financial information – Management is willing to disclose all significant assumptions – The period to be covered by the forecast or projection does not extend beyond the point where future results can be reasonably estimated – Any hypotheses are not false or misleading Internal Auditors  Employed by entities to help improve the organization’s operations  Typically use a risk-based approach in consultation with the audit committee to determine work to be completed.  Includes: operational auditing, systems development auditing, fraud auditing, providing assistance with the external audit, and management consulting Professional Standards for Internal Auditors  Internal auditors who are members of other professional organizations (e.g. accounting, information systems audit) would adhere to the standards of those organizations.  In addition, the Institute of Internal Auditors (IIA) provides professional practice attribute and performance standards. Relationship of Internal and External Auditors • External auditors rely on internal auditors using the risk model. • Fee reduction of the external auditor may be substantial when there is a highly regarded internal audit function. • Before relying upon internal auditors, the external auditor must be confident of their competence, independence and objectivity. Differences between Operational and Financial Auditing: Purpose of the Audit Financial Operational Emphasizes whether historical information was Emphasizes effectiveness and efficiency: correctly recorded: oriented towards the past concerns operating performance for the future Differences Between Operational and Financial Auditing: Distribution of the Reports Financial Operational Audit report typically goes to many users, e.g. Intended primarily for management. Will be go to shareholders and bankers. (Report requires well operational and executive management and the defined wording.) audit committee. (Wording of report varies considerably from audit to audit.) Differences between Operational and Financial Auditing: Inclusion of Nonfinancial Areas Financial Operational Limited to matters that directly affect the financial Cover any aspect of efficiency and effectiveness; statements: nonfinancial areas would be addressed involve a wide variety of activities. only to address issues such as going concern.  Effectiveness: the degree to which the organization’s (or the system’s) objectives are achieved  Efficiency: the extent to which costs are reduced without reducing effectiveness Relationship between Operational Auditing and Internal Controls • Recall that the goals of good internal controls include: – Maintaining reliable systems – Safeguarding assets, records – Optimizing the use of resources – Preventing and detecting error and fraud Operational audits can help evaluate these controls. Purpose of Internal Control Evaluation – How could Internal Control influence Financial Auditing and Operational Auditing – Purpose - P24 – 28 / Scope – P24 – 29 Who Performs Operational Audits? • Such audits may be performed by internal auditors, government auditors, or external public accountants/consulting firms • The audit team should be competent in the area being audited, and maintain their independence as best as possible Operational Audit Phases • Planning • Evidence accumulation and evaluation • Reporting and follow-up Operational Audit Planning Steps • Determine the scope of the engagement • Assess risks • Communicate with the organizational unit •
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