Chapter 1 Note Chapter 1: Audit and Assurance Concepts
External Audit
Developed in 19th century with joint-stock companies.
Objective: Express opinion on financial statements (true and fair view).
Mandatory statutory audits; independence of auditors required.
Focus shifted from fraud detection to reasonable assurance.
Internal Audit
Independent assurance to improve risk management, control, governance.
Emerged in early 1900s, expanded role today.
Institute of Internal Auditors founded in 1941.
Assurance Services
Independent services to improve information quality.
Types: audits, reviews, risk assessments, environmental reporting.
Only audits & reviews of historical financial info examined in detail.
Elements of Assurance Engagement
1. Subject matter = financial statements.
2. Three-party relationship (directors, auditor, shareholders).
3. Criteria = reporting framework.
4. Evidence gathering.
5. Conclusion = auditor’s report.
Key Concepts: stewardship, agency, accountability. Auditor’s Report:
Reasonable assurance, materiality, professional judgment, skepticism. Audit
Cycle: Engagement, planning, risk assessment, controls, substantive testing,
review, representations, report.
Chapter 2: Regulation of Audit
External audits are statutory requirements in most jurisdictions.
Purpose: maintain high standards of audit work, public trust.
Sources of Regulation:
Statute (laws).
Licensing & competence (professional qualifications).
Professional ethics (IESBA Code).
Auditing standards (ISAs).
IFAC & Standard Setters:
IAASB: auditing standards (ISAs).
IESBA: ethics standards.
IAESB: education standards.
IPSASB: public sector standards.
Statutory Regulations:
Appointment, rights, duties, removal of auditors defined by law.
Rights: access to records, attend shareholder meetings, require info.
Duties: report to shareholders on accounts, consistency, proper records.
Limitations of Audit:
Nature of financial reporting (judgment, estimates).
Nature of audit procedures (sampling, reliance on management info).
Timeliness and cost constraints.
Key Exam Areas:
Appointment, rights & duties of auditors.
Audit exemption for small companies.
Limitations of audits (sampling, estimates, inherent limitations).
Chapter 3: Corporate Governance
Definition: System by which companies are directed & controlled.
OECD Principles:
1. Fair markets & efficient allocation of resources.
2. Protect shareholders’ rights.
3. Incentives across investment chain.
4. Recognise stakeholder rights.
5. Transparency & disclosure.
6. Board accountability & strategic guidance.
UK Corporate Governance Code:
1. Board leadership & purpose – long-term success, culture, values.
2. Division of responsibilities – Chair vs CEO, independent NEDs.
3. Composition, succession, evaluation – diversity, tenure, re-election.
4. Audit, risk & internal control – audit committee (3 NEDs), fair reporting, risk
management.
5. Remuneration – aligned to long-term success, decided by independent
committee.
Audit Committees:
Monitor financial statements, internal controls, internal audit.
Oversee auditor appointment, independence, non-audit services.
Benefits: independence, confidence, reporting quality.
Drawbacks: recruitment challenges, costs, resistance.
Internal Controls:
Safeguard assets, prevent/detect fraud, protect shareholders.
Directors ultimately responsible; must review & disclose in annual reports.
Case Studies:
Barclays LIBOR scandal (2012) → weak transparency.
Enron (2001) → poor board oversight, led to Sarbanes-Oxley Act.
