This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
Mauritius has a dynamic Official Market which plays a vital role in the economic development of the country. The Stock Exchange of Mauritius (SEM) operates two markets: the Official Market and the Development & Enterprise Market (DEM). Currently, there are 37 companies listed on the Official Market representing a market capitalisation of nearly US$ 5,462.10 million and the DEM presently with 50 companies listed on its market with a market capitalisation of nearly US$ 1,856.63 million as at 29 October 2010.
The need for auditing has gained importance with the advent of the separate legal entity concept. This concept stresses on the need to safeguard the interests of owners (shareholders) due to the separation of ownership from control. Over the years, the auditing and reporting requirements for listed companies have increased significantly to enhance credibility in financial statements and transparency to users of accounts.
Therefore International Standards on Auditing (ISA) have been set by the International Auditing and Assurance Standards Board (IAASB) to regulate auditing activities. The standards contribute to enhance quality and uniformity of practice throughout the world, and strengthened public confidence in financial reporting. The purpose of ISA is to establish standards and provide guidance to external auditors in considering the work of internal auditors.
The IAASB recognizes that the implementation of its standards is as important as their development and has committed to a number of activities to facilitate effective implementation.
2.0 Literature Review
International Standards on Auditing
International Standards on Auditing (ISA) are professional standards for the performance of financial audit of financial information. These standards are issued by International Federation of Accountants (IFAC) through the International Auditing and Assurance Standards Board (IAASB).
2.1.1 Importance of ISAs
Auditing Standards set a minimum standard of technical proficiency in auditing, codifying current best practice. They are applicable in each financial statement audit undertaken by independent auditors regardless of the size of the entity, the form of the business organization, the type of industry, or whether the entity is for profit or not for profit. Shareholders and other users are informed in the scope section of the auditors' report that the audit has been conducted in accordance with Auditing Standards.
The professional accounting bodies, as recognized supervisory bodies, are required to have rules and practices as to technical standards to be applied. Auditing Standards constitute an appropriate set of technical standards for this purpose. Furthermore, the professional bodies must have arrangements for monitoring and enforcing compliance with those standards. Failure to comply with Auditing Standards may result in enquiry by the professional body with the possibility of disciplinary action being taken. In law, they provide guidance to a minimum level of care required in performing an audit. Ultimately, though, the courts determine whether the requirements of a standard have been met during a particular engagement.
2.2What to expect from an audit
The overall objective of a financial statement audit is 'to enable the auditors to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework' (ISA 200). To meet this objective, it is necessary to identify specific audit objectives for each transaction class, account balance and disclosure. In preparing the financial statements the management of the entity can be said to be making a set of assertions about each transaction class, account balance or disclosure - referred to as financial statement assertions.
The auditors formulate an opinion on the financial statements as a whole on the basis of evidence obtained through the verification of assertions related to individual account balances, transaction classes or disclosures. The objective is to restrict audit risk at the account balance level so, at the conclusion of the audit, the audit risk in expressing an opinion on the financial statements as a whole will be at an appropriately low level. Thus, the overall audit risk is disaggregated to each account balance, transaction class or disclosure. These are defined in Table 2.11.
2.2.2 Truth and fairness
Company law requires that all limited companies appoint an auditor whose task is to express an independent opinion on the reasonableness of accounts produced by the directors for stewardship purposes. The early Companies Act required the auditor to certify as to the truth and correctness of accounts, the phrase 'true and correct' implying arithmetic accuracy. And this indeed is largely what early audits concentrated upon. But such an approach largely ignores the overall view of the accounts, and would in any event not be feasible with the large multinational corporations of today. Further it is not possible to certify that any one set of accounts is the correct set, because so many accounting areas are susceptible to a wide variety of interpretations and therefore presentations. Hence the concept of fairness is now considered to be far more important than absolute arithmetic accuracy. Now the auditors must enhance the credibility and reliability of the financial statements by providing reasonable assurance from an independent source that they present a true and fair view in all material respects (Michael J. Pratt,1983).
The concept of materiality is closely related to that of truth and fairness. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. In planning the audit, materiality plays a vital role in determining the nature, timing and extent of audit procedures and evaluating the effects of misstatements. Auditors therefore need to establish materiality levels to ensure that material misstatements or omissions in the accounting records are detected. The most important figure in a set of accounts is profit before tax and this is the essential criteria for measuring materiality. It is generally agreed that:
Errors over 10% - material
Errors between 5% and 10% - may be material
Errors under 5% - not material
The term 'error' includes fraud, irregularities and uncertainties.
There is an inverse relationship between materiality and the level of audit risk. The higher the materiality level, the lower the audit risk, and vice versa (Michael J. Pratt,1983).
2.3 Audit Stages
Basically, an audit consists of different stages:
An audit requires the development of a plan for the conduct and scope of the audit. Planning is crucial to a successful audit engagement because it enables auditors to meet their professional responsibilities at a reasonable cost. Adequate planning helps to ensure that the risks of material misstatement are appropriately identified, that the nature, timing and extent of audit procedures are linked to the assessed risks and that work is completed expeditiously. It is also necessary in co-ordinating the work done by other auditors and experts. The audit should be planned with a degree of professional skepticism in relation to matters such as the integrity of management, errors and irregularities, and illegal acts. The amount of planning required in an engagement will vary with the size and the complexity of the entity, and the auditors' knowledge of the business and experience with the entity. Some pre-planning is accomplished when the auditors decided to accept the engagement.
220.127.116.11 Accepting the audit engagement
The initial phase of a financial statement audit involves a decision to accept (or decline) the opportunity to become the auditors for a new client or to continue as auditors for an existing client. In most cases, the decision to accept (or decline) is made several months before the client's financial year-end.
Auditors are not obliged to perform a financial statement audit for any entity that requests it. In accepting an engagement auditors take on professional responsibilities to the public, the client and other members of the public accounting profession. The client's best interests must be served with competence and professional concern.
The decision to accept or continue an audit engagement depends on the client evaluation and ethical considerations. If the audit firm is of opinion that the audit can be completed in accordance with professional standards, then the firm prepares an engagement letter to confirm the auditors' responsibility.
18.104.22.168.1 LETTER OF ENGAGEMENT
A letter of engagement is a letter prepared and sent by the auditors to the client at the beginning of any new audit. It sets out the basis of the content between the auditors and the client to avoid any misunderstanding.
22.214.171.124 Understand the entity's business and industry
To plan an audit, the auditors should obtain sufficient knowledge of the entity's business to understand events, transactions and practices that may have a significant effect on the financial statements. This understanding provides a framework for planning an overall audit approach that responds to the unique characteristics of the entity.
The auditors need knowledge of the economy and industry within which the entity operates. Specifically, the auditors need knowledge about:
The type of industry and its vulnerability to changing economic conditions, and major industry policies and practices;
The type of business, types of product and services, entity locations and operating characteristics of the entity, such as its production and marketing methods;
Government regulations that affect the entity and its industry and reports to be filedwith regulatory agencies;
Accounting policies adopted by the entity;
Recent financial performance of the entity; and
The entity's internal control.
The auditors are interested not only in assessing the direct risks of material misstatements but in appreciating the nature of business risks facing the entity whose financial consequences may indicate a risk of material misstatement.
126.96.36.199 Discussion and documentation
Having obtained an understanding of the entity, members of the audit team should consider the implications for the risks of material misstatements. In the case of business risk, it is important for team members to exchange views as to how and where the financial statements might be susceptible to material misstatement. The discussion serves both to enable more senior team members to pool their knowledge and ensures that more junior team members are made adequately aware of the risks and approach the audit with an appropriate degree of professional scepticism. The understanding of the entity should be documented together with the outcome of the discussion as to assessed risks at both the financial statement and assertion level.
188.8.131.52 Determining the existence of related parties
In the process of obtaining information about the entity it is usually convenient to undertake a search to identify related parties which are the subject of special auditing and financial reporting procedures. Management is responsible for identifying and disclosing related parties and related party transactions. Auditing Standards require that the auditors obtain sufficient appropriate evidence to ensure adequate disclosure of related parties.
The concern about related party transactions results from the realization that 'arm's length' bargaining of terms and conditions of transactions between such parties may not apply. Alternatively, related parties may conspire to enter into transactions intended to obscure financial or other business problems that would otherwise be reflected in the financial statements. Thus, the auditors will ordinarily require more appropriate evidence for related party transactions than for transactions between unrelated parties.
184.108.40.206 Audit programme
Once the auditors have gained sufficient knowledge of the entity's business, assessed associated risk and determined the materiality level, they should develop and document an audit programme covering the nature, timing and extent of planned audit procedures to implement the overall audit plan. The audit programme is a document that records the detailed procedures to be followed during the audit.
220.127.116.11 Assessment of audit risk
Audit risk is the risk that the financial statements are misstated and that the auditors fail to detect such misstatement resulting in the expression of an inappropriate opinion on the financial statements (ISA 200). This arises when the auditors express the opinion that the financial statements are fairly presented when they are misstated.
Audit risk is commonly assessed within three components:
Inherent risk - the susceptibility of an account balance or class of transactions to material misstatements either individually or when aggregated with misstatements in other balances or class, irrespective of related internal controls over the accounting system (Emile Woolf, 1997).
Control risk - the risk that a material misstatement could occur in an account balance or class of transactions, either individually or when aggregated with misstatements in other balances or classes, and not be prevented, or detected and corrected, on a timely basis by the accounting and internal control systems (Emile Wool, 1997).
Detection risk - the risk that the auditors' substantive procedures do not detect any misstatements that occur and are not prevented or detected by internal control (Emile Woolf, 1997). Detection risk is a function of the effectiveness of substantive procedures and their application by auditors. Unlike inherent and control risk, the actual level of detection risk is controllable by auditors through appropriate planning, direction, supervision and review, proper determination of the nature, timing and extent of audit procedures, effective performance of the audit procedures and evaluation of their results.
18.104.22.168 Preparation of working papers
ISA 230 Documentation states that auditors should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit. The term 'working papers' is used to include all documentation stored in paper, film or electronic media. Types of working paper prepared during an audit include:
a working trial balance
schedules and analyses
audit memoranda and documentation of corroborating information
adjusting and reclassifying entries
Working papers should record planning information, the work done and when it was done and results and conclusions. Working papers are generally filed in two main files, namely Permanent Audit File (PAF) and Current Audit File (CAF). The main purposes of PAF are to document information of continuing importance to the audit and to provide audit staff new to the audit information regarding the client's affairs and the nature of audit while CAF are to document information relevant to the current year's audit and to provide evidence that adequate examination of the client's affairs has been made (Michael J. Pratt,1983).