AUDITOR LIABILITY

1. ADVANCED AUDIT AND
ASSURANCE
LECTURE 1
REGULATION & LEGAL MATTERS I
COMPILED BY:
KWAME ODURO AMOAKO (PHD)

2. LECTURE 1
ACC 645: ADVANCED AUDIT & ASSURANCE
INTRODUCTION TO REGULATION & LEGAL MATTERS
Compiled by:
Kwame Oduro Amoako (PhD)

3. What is assurance?
• It is often not possible to check things
for yourself, whether quality, accuracy,
performance or existence: you might
not have the skills or the time, or you
might be in the wrong location.
• Therefore you must rely on someone
else to give you assurance.
• Independent professional services that
improve the quality of information, or
its context, for decision makers.
• You could almost summarize the
process of assurance in the phrase
‘collect evidence that supports
everything that is being claimed’.

4. Assurance Service Elements
Assurance services are (1) independent (2) professional
services that (3) improve the quality of information, or
its context, (4) for decision makers. Assurance services
include many areas of information, including nonfinancial
areas.

5. Need for Assurance Regarding
Information and Operations
A. Understanding a Client’s Business
B. Environmental Conditions
C. Information Risk

6. A. Understanding a Client’s Business
Business risk is the risk that an
entity will fail to meet its
objectives.
Failing to reach objectives can
eventually result in temptation to
misstate financial statements to
avoid business failure.

7. B. Environmental Conditions
• Complexity – Decisions makers are not
trained to collect, compile, and
summarize the key operating information
themselves.
• Time sensitivity – Decisions must often
be made on a moment’s notice.
• Consequences – A drop in investment
value can wipe out one’s life savings.
• Remoteness – Investors are not able to
personally visit locations to check on
investments.
• Global society
• Lack of personal interaction
• Can’t physically inspect goods
• Can’t interview management
• Can’t inspect facility
• Can’t review books and records
I lost my savings
in a bad
investment!

8. C. Information Risk or bias
 Information risk is the probability that the
information circulated by a company will be
false or misleading.
 Client management has an incentive to
make the business appear better than it
actually may be.
 This can create a conflict of interest between
client management and investors.
Potential Bias in Providing
Information
• Sellers
• Management
• Inside information
• Compensation of management
• Stock options held by management
Financial
Statements

9. The elements of an assurance engagement
The following are the five elements of an assurance engagement:
• A three party relationship involving a practitioner, a responsible party,
and intended users.
• Appropriate subject matter (eg the financial statements, a budget, a
take-over target).
• Suitable criteria (eg financial reporting standards)
• Sufficient appropriate evidence.
• A written assurance report in the form appropriate to a reasonable
assurance engagement or a limited assurance engagement.

10. Definition of Auditing cont’d
• The independent
examination of and
expression of opinion on the
financial statements of an
entity by a duly appointed
auditor in pursuit of that
appointment (ACCA, 2019).
• The important words here
are ‘independent’ and
‘opinion’.

11. What is Auditors independence
• Independence is essential and
underlies the value of auditing -
and of all other forms of assurance
• The auditor should
be independent from the client
company, so that the audit opinion
will not be influenced by any
relationship between them.
• The auditors are expected to give
an unbiased and honest
professional opinion on the
financial statements to the
shareholders

12. Auditor’s opinion
• A view or judgement formed about
something, not necessarily based on fact
or knowledge. E.g. "that, in my opinion, is
right"
• An auditor’s opinion is a formal statement
made by an auditor concerning a client’s
financial statements.
• Opinion really means that one auditor or
accountant could look at a set of financial
statements (or a cash budget) and
disagree with the opinion of another.

13. So, an audit opinion…
• is NOT an assurance as to the future viability of
an entity
• is NOT an opinion as to the efficiency or
effectiveness with which its operations, including
internal control, have been conducted
• Is NOT a guarantee that the financial statements
are free of error

14. Types of Audits
1. Financial Statement Audits
 Evaluates correspondence between
financial statements and GAAP
2. Operational Audits
 Evaluates correspondence between org’s
procedures and methods and criteria of
efficiency and effectiveness
3. Compliance Audits
 Evaluates correspondence between org’s
operations and specific procedures or rules

15. Who Performs Audits?
1. Public Accounting Firms
• Independent as external to audit client
• Primarily f/s audits, but can be hired to
perform other types of audits
2. Internal Auditors
• Employees of org. Less
independent:depends on org structure
• Primarily operational and compliance
audits

16. Who Performs Audits?
3. Government Auditors
• Often perform comprehensive audits,
but depends on mandate
4. Revenue Canada Auditors
• Compliance audits

17. Accounting vs. Auditing
1. Accounting
 Recording, classifying and summarizing of
economic events for the purpose of
providing financial information for decision
making
 Requires understanding of IFRS
2. Auditing
 Determining whether recorded information
properly reflects the economic events of the
period
 Requires understanding of IFRS AND of
accumulation and interpretation of audit
evidence

18. Advantages of Auditing
• 1] Assurance to the Owners/Investors
• One of the biggest advantages of auditing is that it offers assurances
to the owners, investors, shareholders etc. The owners of the
business will be assured about the accuracy of their books of
accounts.
• They will be satisfied with the workings of their various departments
and the overall efficiency and profitability of their business
operations.
• It is the same case with investors, who will find assurance in the
books of accounts after auditing.

19. Advantages of Auditing cont’d
• 2] Errors and Frauds
• An error is something that is done without
the intention to fraud the company, it is an
innocent mistake.
• Fraud, on the other hand, is deliberate.
During the process of auditing, both errors
and frauds are discovered.
• Auditing also helps prevent such errors and
frauds. It creates a fear of being detected.
• So auditing helps us minimize the risks of
errors and frauds in our books of accounts but
does not eliminate the risk entirely.
• There is always the chance that the error may
go unnoticed, and the fraud is very cleverly
hidden so may go undetected.

20. Advantages of Auditing cont’d
• 3] Independent Viewpoint
• If the auditor is an external auditor, the business can get a second
opinion on their financial statements and their financial standing as
well.
• An external auditor will closely inspect the books and be completely
true and fair in his opinion as he has no hidden agenda. If he says the
accounts are true and fair, it has a lot of weightage with the company
and the investors.

21. Advantages of Auditing cont’d
4] Moral Check
• One of the other advantages of auditing is that the staff and the workers of
the company do not try to steal or defraud the company.
• They are under constant scrutiny since they know that the accounts will be
audited. Any irregularities can be identified during such an audit, and they
will be caught eventually.
• This helps the staff in being honest and responsible at all times.
5] Stakeholders Confidence
After auditing stakeholders like creditors, investors, banks, debenture
holders etc. can rely on the books of accounts with more confidence. And so
after auditing by an independent authority, the financial statements have
more credibility.

22. Limitations of Auditing
1] Cost Factor: A very thorough and detailed audit would be a costly affair. It
is not cost effective. So the auditor has to limit the scope of his audit and use
techniques like sampling and test checking.
2] Time Factor: Auditors generally work on a very specific timeline.
Sometimes this is due to statutory requirements. This means he has to audit
a whole year’s accounts in a few weeks. Hence insufficient time is one of the
main limitations of auditing.
3] Inconclusive Evidence: Generally, the audit evidence the auditor collects is
persuasive in nature, not conclusive in nature. So there is never cent percent
conclusive evidence in most cases while auditing.
This is one of the major limitations of auditing. There also a lot of use of
estimates in accounting. The auditor cannot measure or comment on the
exact accuracy of these estimates. He has to rely on his knowledge.

23. Relationship between audit and assurance
• Audit is intended to provide reasonable assurance, but
not absolute assurance, that the financial statements
give a true and fair view in accordance with the financial
reporting framework.
• Assurance is a professional service with the aim of
improving the quality and transparency of information,
to reduce the chance of problems occurring from
incorrect information. An audit is a type of assurance
service.
• Assurance services can be regulatory or compliance-
based. They work to ensure that a company or
organisation is following guidelines, rules and policy, and
provide both internal and external confidence for
financial statements.
• audits give assurance over information used by investors
and the capital markets – a responsibility to the public
interest

24. 1-24

25. E. Graphical Representation of Assurance Services
The Relationships Among Auditing, Attestation, and
Assurance Engagements
Assurance Services
Any Information
Attestation Services
Primarily Financial Information
Auditing
Financial Statements

26. Audit and Professional skepticism
• Skepticism means that you don’t know. It
does not mean that the practitioner assumes
everyone is dishonest or that figures have
been deliberately misrepresented. Nor does
it mean that you believe all figures and
statements are correct.
• It means you are aware that we can all be
subject to optimism (perhaps too much),
human error, giving quick answers because
we are short of time, and misunderstanding.
• It also recognizes that sometimes people are
deliberately misleading or dishonest.
• Skepticism means that evidence is required
to test statements or assumptions

27. The expectation gap in audit
• The difference between what the public expects from
the auditing profession and what the auditing
profession actually provides.
• ACCA defines the expectation gap in audit as ‘the
difference between what the general public thinks
auditors do and what the general public would like
auditors to do’.
• The expectation gap in audit is a topic that attracts
attention. It broadly measures public concern about
audit.
• Historically, some in the profession might have
portrayed the gap as being due to the public’s lack of
understanding rather than being a legitimate concern.
• Even though there might be a gap in knowledge, that
doesn’t cancel the calls for auditors to do more or
better.
• Everyone closely connected to the audit profession,
from regulators to the general public, will need to
work together in order to close the expectation gap.

28. Some examples of the misunderstandings inherent
in the public’s expectations are as follows:
• The public believes that the audit
opinion in the audit report amounts to
a ‘certificate’ that the financial
statements are correct and can be
relied upon for all decision-making
purposes.
• The public also believes that the
auditor has a duty to prevent and
detect fraud and that this is one
reason for an audit.
• The public assumes that, in carrying
out his audit work, the auditor tests
100% of the transactions undertaken
during the accounting period.

29. The three gaps
• The performance gap focuses
on areas where auditors do not
do what auditing standards or
regulations require.
• This could be because of
insufficient focus on audit
quality or differences in
interpretation of auditing
standard between practitioners
and regulators.

30. Bridging the audit gap-Proper education
• User of financial statements must understand
that it is not the responsibility of auditor to
detect fraud as public thinks that audit is only
for the purpose to detect fraud.
• Audit work is based on sampling which
means that auditor does not verify all the
transaction so absolute assurance cannot be
given.
• General purpose financial statements are
prepared for general use of the users so
special nature of decision making should not
be made.
• Audit report should mention the nature of
work auditor carried out and that their
opinion is based on the information provided
to them and to the best of their knowledge
and belief.

31. APPOINTMENT AS AN AUDITOR
• Every auditor wants to get more jobs to do, but one must hasten
slowly in accepting new jobs to avoid getting into unforeseen troubles
by getting involved with a client who may be of high risk and damage
your reputation.

32. Marketing professional services
The professional accountant in public practice must be honest and truthful
and must not:
• Make exaggerated claims for services, experience etc or be misleading in other ways.
• Make disparaging references or unsubstantiated comparisons to the work of another.
• Bring the ICA, the accountancy profession or other accountants into disrepute.
• If fees are mentioned, promotional material must state the basis of
charging and great care has to be taken that readers are not mislead about
the services offered and the fees that will be charged.
• It is possible to compare fees with those of other firms provided the
comparison is not misleading.
• If commissions are paid or received (for example, by recommending
software package), full disclosure of the commercial arrangement must be
made.

33. Tendering for professional services
• Often, to obtain new work, accountants will be asked to submit a tender in
competition with other firms.
• Before submitting a tender, contact must be made with the existing or
previous accountant to see if there are any reasons why the appointment
should not be accepted.
• The fees quoted can be whatever the accountant thinks appropriate, but
there can be threats to compliance with the fundamental principles. For
example, if the fee were so low that it would be difficult to carry out the
work to the required standard of competence and due care.
• The IESBA states that:
• Auditors should perform high quality audits irrespective of the audit fee charged.
• Adequate time must be planned and spent to enable the audit to be performed in
accordance with the technical and professional standards.

34. Before you say ‘yes’ (and continuance decisions)
Practical issues
• Timetable suitable?
• Suitable personnel?
• Specialist?
• What work is required?
• Future plans for the entity?
• Why auditors being changed?

36. Communication with existing auditors
• If the auditor is approached by new audit client, if it’s a new business
and this is the first audit there will be no previous auditors to
communicate with and new auditors must make their own decision.
• If it is not a new business and there is an existing auditor then the
new auditor must ask the client for permission to contact the old
auditor.
• If permission is not given, the appointment should be declined.
• Why would permission not given?
• Is a client trying to conceal something?
• Why else would they not allow a new auditor to communicate with the
existing auditor?

37. Communication with existing auditors cont’d
• Assuming permission is given the new auditor will write to the old auditor
for information.
• The old auditor can’t simply send that information to the new auditor
because that is confidential, and the old auditor has to ask the client for
permission in turn.
• If that permission is not given the new auditor should decline the
appointment because again the client is trying to stop communication
between the old and new auditors
• If the old auditor provides information then the new auditor is more fully
equipped to make their accept or reject decision.
• If the existing auditor decides not to provide information the new auditor
should try to persuade the old auditor to provide it, but otherwise might
have to rely on information as been found in other ways.

39. Letter of engagement
• An audit engagement is an arrangement that an auditor has with a client to
perform an audit of the client's accounting records and financial statements.
• The term usually applies to the contractual arrangement between the two
parties, rather than the full set of auditing tasks that the auditor will perform.
• To create an engagement, the two parties meet to discuss the services needed by
the client. The parties then agree on the services to be provided, along with a
price and the period during which the audit will be conducted.
• This information is stated in an engagement letter, which is prepared by the
auditor and sent to the client. If the client agrees with the terms of the letter, a
person authorized to do so signs the letter and returns a copy to the auditor.
• By doing so, the parties indicate that an audit engagement has been initiated.
This letter is useful for setting the expectations of both parties to the
arrangement.

40. Content of letter of engagement
• Description of the objective of an audit: to express an opinion whether or not the
financial statement show a true and fair view.
• Defining responsibilities: management’s are to prepare the financial statements
and to set up a
• system of internal control. It is the auditor’s responsibility to audit the financial
statements.
• Reference to the applicable financial reporting framework. For example, national
legislation (eg companies act) and/or IFRS.
• Emphasis that audits depend on sampling that there are no guarantees. The audit
looks for only material misstatements. It will examine records on a test basis that
can only give a reasonable assurance.
• will state that they expect unrestricted access to the company’s records and they
expect full explanations for any queries they might have.

41. Content of letter of engagement cont’d
• They will state that the auditor’s report is a matter between them and the
addressees of the report (the members of company) and that it should not be
relied upon by other parties.
• There will be certain matters about planning the audit, such as arranging the
interim audit and final audit, attending inventory counts, organising external
confirmation of receivables, and liaison with the internal audit department.
• Almost certainly there will be something about fees, and remember fees should
never be absolute. They should be estimate but subject to the proviso that if
more work needs to be done, it will be done and additional fees will be required.
• Description of the expected relationship between the external auditor and
internal audit; how the work of internal audit might be reviewed and then relied
on by the external auditors.

42. PROFESSIONAL ETHICS IN AUDIT
• One of the key traits of a professional is adherence to a rigorous set of
ethical guidelines. When someone veers too far from ethical
standards, their trustworthiness and judgment come into question.
• Sadly, not everyone who works in the accounting field is trustworthy.
Daily violations of public and private trust occur, and resolving ethical
dilemmas doesn’t always end favorably.

43. Professional Ethics
• The conceptual framework
approach to ethics recognises
that there are:
• Ethical principles to be followed
These are subject to threats
• Accountants should use
safeguards to avoid or to
respond to threats by reducing
them to acceptable levels.

44. • The following are five areas that deserve the attention of anyone
considering working in as an independent accountant.
• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional behaviour

45. Fundamental Principles

46. Integrity
• Demonstrating integrity means being straightforward and honest in
all business and professional relationships.
• Upholding integrity requires that accountants do not associate
themselves with information that they suspect is materially false or
misleading — or that misleads by omission.

47. Confidentiality
• Disclosure of financial information or revealing the disposition of a
potential merger by an accounting professional without express
permission violates the trust that is the foundation of a professional
relationship — unless there is a legal or professional reason to do so.

48. Objectivity
• Members shall not allow bias, conflicts of interest or the undue
influence of others to compromise their professional or business
judgement
• A critical component of trust is making unbiased decisions and
recommendations that benefit the client.
• To remain objective, it is also necessary to ensure that
recommendations are not subject to outside influence.
• An accountant’s professional judgment is compromised if they
subordinate their judgment to someone else’s.

49. Professional Competence
• As technology, legislation and best practices change, a professional
accountant must remain up to date. To exercise sound judgment, an
accountant must stay abreast of developments that could affect a
decision’s outcome.
• Practicing due care means recognizing your skill level and not suggesting
that you have expertise in an area where you do not. Consulting with other
professionals is a standard practice that helps to bond a network of
individuals and generate respect.
• Similar guidelines also apply to accounting professionals who supervise
others. These accountants must ensure that the subordinates receive
proper training and guidance as they carry out their responsibilities.

50. 5. Professional Behaviour
• Ethics require accounting professionals to comply with the laws and
regulations that govern their jurisdictions and their bodies of work.
Avoiding actions that could negatively affect the reputation of the
profession is a reasonable commitment that business partners and
others should expect.

51. Threats to the fundamental principles
(independence)
Advocacy Threat: Occurs when the audit firm,
or a member of the audit team, promotes, or may
be perceived to promote, an audit client's
position or opinion. For example: dealing in, or
being a promoter of, shares or other securities in
an audit client

52. Self-interest
• Financial interests – the provisions of the Code consider who holds the interest, whether the
interest is direct or indirect and materiality. Firms, members of audit teams and immediate family
members cannot hold direct or material indirect financial interests in audit clients. However,
safeguards may be applied where a close family has such an interest.
• Close business relationships – cannot be entered into unless immaterial and insignificant to both
the firm and the client or is management.
• Family and personal relationship – the existence and significance of any threat depends on the
individual’s role in the audit team, the role of the individual within the client and the closeness of
the relationship.
• Loans and guarantees – the existence and significance of any threat depends on whether making
loans is the client’s business, the terms and conditions and to whom it is made.
• Recruiting for client
• Fees – the Code does not prescribe the basis for calculating fees. However:
• Contingent fees – are not permitted for audit engagements
• Relative size – the only benchmark in the Code is 15% of total fees, for two consecutive years, for a PIE client
• Low-balling – quoting a lower fee is not in itself unethical, but must not be so low that it threatens professional
competence and due care
• Overdue fees – may be seen as equivalent to a loan

53. Self-review threats
• Self review threats arise when an auditor does work for a client and
that work may then be subject to self-checking during the subsequent
audit.
• For example, if the auditor prepares the financial statements, and
then has to audit them, or the auditor performs internal audit
services and then has to check that the system of internal control is
operating properly.
• Auditors could obviously be reluctant to criticise the work which their
own firms have earlier undertaken, and this could interfere with
independence and objectivity.

54. Advocacy threats
• Advocacy is where the assurance or audit firm promotes a point of
view or opinion to the extent the subsequent objectivity is
compromised.
• An example would be where the audit firm promotes the shares in a
listed company or supports the company in some sort of dispute (eg
with the tax authorities). Advocacy can interfere with professional
skepticism.
• As always, the audit firm should weigh up the risks to its objectivity,
integrity and independence and should withdraw from performing
further work if those risks are too high.

55. Familiarity threats

57. Intimidation Threat

60. Safeguards within the client’s systems and
procedures
• The client requires persons other than management to ratify or
approve the appointment of a firm to perform an engagement.
• The client has competent employees with experience and seniority to
make managerial decisions.
• The client has implemented internal procedures that ensure objective
choices in commissioning non-assurance engagements.
• The client has a corporate governance structure that provides
appropriate oversight and communications regarding the firm’s
services.

61. Safeguards in the work environment
• Two types of safeguards in the work environment –
• Those that are firm-wide, and
• Those that are engagement-specific

62. Safeguards in the work environment
Firm-wide safeguards include
• Policies and procedures to implement and monitor quality control of engagements.
• Policies and procedures that will enable the identification of interests or relationships
between the firm or members of engagement teams and clients.
• Policies and procedures to monitor and, if necessary, manage the reliance on revenue
received from a single client.
• Using different partners and engagement teams with separate reporting lines for the
provision of non-assurance services to an assurance client.
• Policies and procedures to prohibit individuals who are not members of an engagement
team from inappropriately influencing the outcome of the engagement.
• Advising partners and professional staff of assurance clients and related entities from
which independence is required.
• A disciplinary mechanism to promote compliance with policies and procedures.

63. Safeguards in the work environment
Engagement-specific
• Having a professional accountant who was not a member of the assurance
team review the assurance work performed or otherwise advise as
necessary.
• Consulting an independent third party, such as a committee of
independent directors, a professional regulatory body or another
professional accountant.
• Discussing ethical issues with those charged with governance of the client.
• Disclosing to those charged with governance of the client the nature of
services provided and extent of fees charged.
• Rotating senior assurance team personnel.