LECTURE 1 INTRODUCTION TO AUDITING REGULATORY ENVIRONMENT OF AUDIT & CODE OF ETHICS AND CONDUCT

Auditing Defined Auditing involves collection and evaluation of evidence by an independent appointed auditor in order to provide an opinion on true and fairness of given financial statement The practice of audit date back to medieval times when Tudors and monarchs appoint trusted person to hear (audi) accounts rendered by stewards The phase and method of audit has evolved but its underlying objective remains

Objectives of an audit The objective of an audit depends on the type of engagement General purpose external audit is to provide reasonable assurance (opinion) on true and fairness Review engagements are meant to provide limited assurance Internal audit are to deal with matters regarding internal control Specialised audits also have their predetermined objectives

Types of Audit External (Statutory) versus Internal Audit General purpose audit versus Specialised Audit

The Appointed Auditor The auditor is always appointed under a contract The contract is between the company and the auditor In statutory audit, the auditor is appointed by owners of the business In exceptional circumstances, external auditors may be appointed by persons managing the business or the Registrar of Companies (newly incorporated company, interim auditors) In internal audit, the auditor is appointed by persons managing the business

The Appointed Auditor The remuneration of the auditor is negotiated between the auditor and the appointing person The fees are based on time spent and skill needed to conduct the audit The agreed fees or formulae for determining the audit fees should be mentioned in the letter of engagement

Qualification of an independent Auditor In Ghana, S 134 of the companies Act stipulates persons who can be appointed auditors Member of ICA Ghana or Members of a foreign accounting body registered and approved by ICAG Practicing license granted by ICAG Ghana

Disqualification Despite meeting qualification criteria, the following persons are disqualified to be appointed auditors An officer of the company or any associated company A partner or employee or servant of the company

Powers and Right of Auditors In Ghana, the companies Act conferred on appointed auditors the following powers and rights Right of access, at all times, to all books, documents and vouchers of the company The right to demand explanation from officers of the company on all matters that he deems relevant for performance of the audit The right to receive notices of meetings, attend such meetings as well as to speak at all general meetings on any matters that concerns him as an auditor

Removal of appointed Auditor The auditor can be removed by the appointing person upon following due process External auditor appointed by members can be removed only by the members External auditor appointed by managing board can be removed by the board only before such appointment is ratified by members of the company In ideal situations, internal auditors can be removed only after recommendation by the audit committee of governing board

International Regulatory Framework for Audit and Assurance The audit profession and the work of the auditors have come under serious scrutiny following increasing corporate scandals Enron, WorldCom in US Olympus in Japan Autonomy in UK Discuss briefly the Enron scandals and how auditors are perceived as contributors to the scandal

International Regulatory Framework for Audit and Assurance The Accounting profession has responded by restructuring standard setting boards and Professional Ethic monitoring systems The public oversight systems has also been strengthened

The legal and Professional framework IFAC INTERNATIONAL AUDITING AND ASSURANCE STANDARD BOARD (IAASB) Authoritative (ISA, ISQCs, ISRE,ISRS)- Authoritative Non Authoritative IAPN, Staff notes, Consultation Papers- INTERNATIONAL ETHICS STANDARDS BOARD FOR ACCOUNTANTS (IESBA) Code of Ethics for Professional Accountants See Page 5 for current ISAs

The legal and Professional framework Public Oversight Public Interest oversight Board Monitoring of Standard setting boards Overseeing membership nomination Process Co-operation with national oversight Authorities Others Public Company Accounting oversight board (Sarbanes-Oxley)

CHAPTER 2: CODE OF ETHICS AND CONDUCT Fundamental Principles and the conceptual framework approach Independence Confidentiality Conflict of interest Conflict in application of the financial principles

Fundamental Principles and the conceptual framework approach The Auditor is required to be and be seen to be ethical in his dealing with clients The IESBA of IFAC issues Code of ethics for professional Accountants

IFAC Fundamental Principles Ethical Principles IFAC Fundamental Principles Integrity To be straightforward and honest in all business relationships Objectivity Not to allow bias, conflict of interest or undue influence to override professional judgment Professional Competence and due care To maintain professional knowledge and ensure client receives competent professional service Confidentiality Not to disclose any information to third parties without proper and specific authority unless there is a legal or professional right to disclose Professional Behavior To comply with relevant laws and regulations and to avoid any action that discredit the profession

Threats to Compliance with fundamental Principles Five general sources of threat Self Interest threat Self review threat Advocacy threat Familiarity threat Intimidation threat

Safeguards and breach Two general categories of safeguards Safeguards created by the profession, legislation and regulation Safeguards in the work environment (firm-wide or engagement specific) The IESBA states: Where a firm concludes that a breach of ethical principles, the firm shall terminate, suspend or eliminate the interest or the relationship and address the consequences of the breach

Auditor Independence The auditor must be and to be seen to be independent Independence means Of the mind In appearance Professional Skepticism For Audit, the audit team, the firm and network firm must all be independent For non audit, restricted use engagement, the auditor must not have financial interest Threat to independence include personal interests, self review, disputes and intimidation

Confidentiality Not to disclose any information to third parties without proper and specific authority unless there is a legal or professional right to disclose Exceptions Disclosure permitted by law and authorised by client Disclosure required by law Right or duty to disclose

Conflict of Interest Two kinds of conflict of interest Conflicts between interest of different clients Conflicts between members’ and client’s interest refer to page 50

Money Laundering It is a process by which criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activity, allowing them to maintain control over the proceeds, and ultimately providing a legitimate cover for their source of income

Money Laundering 3 Stages in Money Laundering Placement: Introducing the illegal funds into the financial system (lots of small cash deposits, cash intensive business Layering: Passing the money through a large number of transactions so as to conceal its original source (multiple domestic and international transfers, numerous purchase and sale of investments false sales) Integration: Final integration of funds back into legitimate economy

Money Laundering-Discussion Point Why Launder Money and what makes money laundering difficult for the external Auditor to detect

Auditor’s responsibility on Money Laundering The key responsibility of the independent auditor with respect to Money laundering is client due diligence-KYC The nature of the clients activity Ownership and management Identification of PEPs Risk based approach- Money Laundering risk indicators In-house the auditor should Appoint A Money Laundering Reporting Officer (MLRO) Have policies and procedures on ML Education and training of Staff Money Laundering reporting

Auditor’s responsibility-Compliance to Laws and Regulation Businesses operate in a web of laws and regulation It is management’s responsibility to ensure their company complies with these regulations ISA 250 however requires auditors to perform audit procedures to identify issues of non compliance and discuss same with management and those charged with governance The auditor is to assess effect of non compliance on financial statement and implication for audit opinion

PRACTICAL QUESTIONS TO DISCUSS 1-AUDIT Pg 511 2. FUNDAMENTAL PRINCIPLES Pg 511 3. AVENTURA INTERNATIONAL Pg 511