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UNIT 4. EXTERNAL AUDIT

UNIT 4. EXTERNAL AUDIT. BASIS CONCEPTS. 4.1. DEFINITION. GENERAL DEFINITION : A PERIODIC EXAMINATION OF THE BOOKS OF ACCOUNT AND RECORDS OF AN ENTITY. IT IS CARRIED OUT BY AN INDEPENDENT THIRD PARTY (THE AUDITOR)

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UNIT 4. EXTERNAL AUDIT

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  1. UNIT 4. EXTERNAL AUDIT BASIS CONCEPTS Mª ANGELA JIMENEZ

  2. 4.1. DEFINITION • GENERAL DEFINITION: • A PERIODIC EXAMINATION OF THE BOOKS OF ACCOUNT AND RECORDS OF AN ENTITY. • IT IS CARRIED OUT BY AN INDEPENDENT THIRD PARTY (THE AUDITOR) • IF THE BOOKS OF ACCOUNT ARE ACCURATE AND COMPLY WITH ESTABLISED CONCEPTS, PRINCIPLES, ACCOUNTING STANDADS, LEGAL REQUIREMENTS AND GIVE A TRUE AND FAIR VIEW OF THE FINANCIAL STATE OF THE ENTITY Mª ANGELA JIMENEZ

  3. 4.1. DEFINITION • THE OBJECTIVE OF AN AUDIT OF FINANCIAL STATEMENTS IS TO EXPRESS AN OPINION WHETHER THE FINANCIAL STATEMENTS ARE PREPARED, IN ALL MATERIAL RESPECTS, IN ACCORDANCE WITH AN APPLICABLE FINANCIAL REPORTING FRAMEWORK. • AUDITING IS UNDERSTOOD: • AS THE ACTIVITY, • PERFORMED BY A QUALIFIED, INDEPENDENT PERSON, • CONSISTING OF ANALYSIS, USING APPROPIATE REVIEWING AND VERIFICATION TECHNIQUES, OF THE ECONOMIC-FINANCIAL INFORMATION OBTAINED FROM THE ACCOUNTING EXAMINED. Mª ANGELA JIMENEZ

  4. 4.1. DEFINITION • THE KEY WORD OF AUDITING ARE: • TRUE AND FAIR VIEW OF THE FINANCIAL STATEMENT AND THE ASSETS • VERIFICATION OF THE FINANCIAL SITUATION OF THE COMPANY OR BODY AUDITED, • VERIFICATION OF THE RESULTS OF ITS OPERATIONS, • TO COMPLY WITH THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND RULES. Mª ANGELA JIMENEZ

  5. 4.2. GENERAL METHODOLOGY OF AUDITING PROCESS OBJECTIVES AND CONFIGURATION OF WORK AUDITING ENGAGEMENT LETTER OF AUDITING STRATEGY OF WORK> Objective and configuration Size and complexity of company The auditor experience Knowledge of the type of the business Quality of the organization Internal Control of the organization Mª ANGELA JIMENEZ

  6. 4.2. GENERAL METHODOLOGY OF AUDITING PROCESS PLANIFICACION OF AUDITING Scope, configuration and exact date of the beginning of the work GLOBAL PLAN OF AUDITING Planning, Independent expert in other matters Internal auditors Auditing risk methods The internal control Analysis of the probabilistic series of different accounts of the financial statements Mª ANGELA JIMENEZ

  7. 4.2. GENERAL METHODOLOGY OF AUDITING PROCESS AUDITING PROGRAM REVIEW TECHNIQUES TO REACH THE OBJECTIVES PROFESSIONAL AND INDEPENDENT OPINION AUDIT REPOR OF FINANCIAL STATEMENT Mª ANGELA JIMENEZ

  8. 4.3. PLANNING ACTIVITIES • ENVIRONMENTAL MATTERS CAN BE COMPLEX AND MAY THEREFORE REQUIRE ADDITIONAL CONSIDERATION BY AUDITORS. • IT IS IMPORTANT TO CONSIDER THE JUDGMENT’S AUDITOR. • IT USES TO DETERMINE THE NATURE, TIMING AND EXTENT OF AUDIT PROCEDURES WITH RESPECT TO> • KNOWLEDGE OF THE BUSINESS • RISK ASSESSMENTS AND INTERNAL CONTROL • CONSIDERATION OF LAWS AND REGULATIONS • USING THE WORK OF AN EXPERT AND SOME OTHERS Mª ANGELA JIMENEZ

  9. 4.3. PLANNING ACTIVITIES • THE AUDITOR SHOULD DEVELOP AN AUDIT PLAN FOR THE AUDIT IN ORDER TO REDUCE AUDIT RISK TO AN ACCEPTABLE LOW LEVEL. • THE PLAN INCLUDES THE NATURE, TIMING AND EXTENT OF AUDIT PROCEDURES TO BE PERFORMED BY ENGAGEMENT TEAM. • THE AUDITOR RE/EVALUATES THE PLANNED AUDIT PROCEDURES, BASED ON THE REVISED CONSIDERATION OF ASSESSED RISKS FOR ALL OR SOME OF THE CLASSES OF TRANSACTIONS, ACCOUNT BALANCES OR DISCLOSURES. Mª ANGELA JIMENEZ

  10. 4.3. PLANNING ACTIVITIES • THE AUDITOR MAY CONSIDER THE FOLLOWING MATTERS TO ESTABLISH THE PLANN OF AUDITING> • THE FINANCIAL REPORTING FRAMEWORK ON WHICH THE FINANCIAL INFORMATION TO BE AUDITED HAS BEEN PREPARED. • INDUSTRY/SPECIFIC REPORTING REQUIREMENTS SUCH AS REPORTS MANDATED BY INDUSTRY REGULATORS. • THE EXTENT TO WHICH COMPONENTS ARE AUDITED BY OTHERS AUDITORS • THE NATURE OF THE BUSINESS SEGMENTS TO BE AUDITED, INCLUDING THE NEED FOR SPECIALIZED KNOWLEDGE Mª ANGELA JIMENEZ

  11. 4.3. PLANNING ACTIVITIES • GOVERNMENT POLICIES CURRENTLY AFFECTING THE CONDUCT OF THE ENTITY’S BUSSINESS> MONETARY, FISCAL, FINANCIAL INCENTIVES, ETC. • EXTERNAL FACTORS CURRENTLY> GENERAL LEVEL OF ECONOMIC ACTIVITY, INTEREST RATES, INFLATION, CURRENCY REVALUATION, ETC. • IMPORTANT SUPPLIERS OF GOODS AND SERVICES. • RESEARCH AND DEVELOPMENT ACTIVITIES • TRANSACTIONS WITH RELATED PARTIES • ACCOUNTING FOR FAIR VALUES • ACCOUNTING PRINCIPLES AND INDUSTRY SPECIFIC PRACTICES, ETC. Mª ANGELA JIMENEZ

  12. 4.4. ENGAGEMENT LETTER • THIS LETTER CONFIRMS THE AUDITOR’S ACCEPTANCE OF THE APPOINTMENT, THE OBJECTIVE AND SCOPE OF THA AUDIT, THE EXTENT OF THE ADITOR’S REPONSIBILITIES TO THE CLIENT AND THE FORM OF ANY REPORTS. • THIS LETTER IS THE AGREMENT BETWEEN THE AUDITOR AND THE CLIENT. • PRINCIPAL CONTETS> • The objective of the audit of financial statement • Management’s responsibility for the financial statment Mª ANGELA JIMENEZ

  13. 4.4. ENGAGEMENT LETTER • The scope of the audit, including reference to applicable legislation, regulations, or pronouncements • The form of any reports or other communication of results of the engagement • Unrestricted access to wathever records, documentation and other information requested in connection with the audit. • Management’s responsibility for establishing and maintaining effective internal control. • Arrangements concerning the involvement of internal auditors and other client staff. • Arrangements to be made with the predecessor auditor, in any, in the case of an initial audit. Mª ANGELA JIMENEZ

  14. 4.5. AUDITOR’ S OPINION • THE AUDITOR IS RESPONSIBLE FOR FORMING AND EXPRESSING A “TECHNICAL OPINION” ON THE FINANCIAL STATEMENTS WITH REFERENCE TO THE FOLLOWING PARTICULARS: • WHETHER THEY HAVE BEEN PREPARED AND PRESENTED IN ACCORDANCE WITH THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND RULES. • WHETHER SAID PRINCIPLES AND RULES HAVE BEEN APPLIED IN A UNIFORM MANNER AS TO THE PRECEDING FINANCIAL YEAR. Mª ANGELA JIMENEZ

  15. 4.5. AUDITOR’ S OPINION • WHETHER FAILURE TO APPLY ONE OR SEVERAL ACCOUNTING PRINCIPLES OR RULES IS CONSIDERED FITTING, IN APPROPIATE, WITHIN THE TRUE IMAGE THE ANNUAL ACCOUNTS MUST PROVIDE. • AS TO THE EVENTS THAT MAY HAVE ARISEN BETWEEN THE CLOSING DATE OF THE FINANCIAL YEAR AND DRAFTING THE REPORT. Mª ANGELA JIMENEZ

  16. 4.5. AUDITOR’ S OPINION • THE DIFERENTS KINDS OF TECHNICAL OPINION COULD BE: • “QUALIFIED OPINION”: WHEN THERE ARE NO RESERVES IN THE PARTICULAR STATE OF THE PREVIOUS POINTS. • “UNQUALIFIED OPINION” OR “ADVERSE OPINION”: WHEN THE RESERVES EXIST. • “DISCLAIMER OF OPINION”: WHEN THERE ARE IMPORTANT RESERVES ABOUT THE DIFERENT PREVIOUS POINTS AND IT IS NECESSARY COMPLEMENTARY DETAILS AND INFORMATION ABOUT THE ANNUAL ACCOUNTS. Mª ANGELA JIMENEZ

  17. 4.6. AUDITING REPORT • THE TECHNICAL OPINION MUST STATE WHETHER THE ACCOUNTING STATEMENTS OR DOCUMENT ADEQUATELY REPRESENTS THE ECONOMIC EVENTS THAT HAVE ARISEN AT THE COMPANY OR BODY THAT THESE MUST CONTAIN ACCORDING TO THE APPLICABLE ACCOUNTING RULES AND PRACTICE. • THE TECHNICAL OPINION WILL BE WRITTEN AND EXPLAINED IN THE “INDEPENDENT AUDITOR´S REPORT”. Mª ANGELA JIMENEZ

  18. 4.6. AUDITING REPORT • AUDIT REPORT: THE FORMAL DOCUMENT IN WHICH AN AUDITOR EXPRESSES AN CLEAR OPINION AS TO WHETHER THE FINANCIAL STATEMENTS OF AN ENTITY: • SHOW A TRUE AND FAIR VIEW OF: • ITS POSITION AT A GIVEN DATE AND • THE RESULTS OF ITS OPERATIONS FOR THE ACCOUNTING PERIOD ENDED ON THAT DATE • HAVE BEEN PROPERLY PREPARED IN ACCORDANCE WITH THE RELEVANT STATUTORY REQUIREMENTS. • COMPLIANCE WITH CONTRACTUAL AGREEMENTS. • SUMMARIZED FINANCIAL STATEMENTS. Mª ANGELA JIMENEZ

  19. 4.6. AUDITING REPORT • EVALUATION ABOUT THE FINANCIAL STATEMENTS> IT INCLUDES> • THE ACCOUNTING POLICIES SELECTED AND APPLIED ARE CONSISTENT WITH THE FINANCIAL REPORTING FRAMEWORK. • THE ACCOUNTING ESTIMATES MADE BY MANAGEMENT ARE REASONABLE. • THE INFORMATION PRESENTED IN THE FINANCIAL STATEMENTS IS RELEVANT, RELIABLE, COMPARABLE AND UNDERSTANDABLE. • THE FINANCIAL STATEMENTS PROVIDE SUFFICIENT DISCLOSURES TO ENABLE USERS TO UNDERSTAND THE EFFECT OF MATERIAL TRANSACTION AND EVENTS. Mª ANGELA JIMENEZ

  20. 4.6. AUDITING REPORT • AUDIT REPORT: MERCANTILE DOCUMENT. IT CONTAINS: • IDENTIFICATION OF THE COMPANY OR BODY AUDITED. • INDIVIUALS OR CORPORATIONS WHO CARRIED OUT THE AUDIT PROCESS. • IDENTIFICATION OF THE DOCUMENTS TO BE EXAMINED THAT ARE INCLUDED IN THE REPORT. • SUMMARY AND GENERAL DESCRIPTION OF THE TECHNICAL STANDARDS OF AUDITING APPLIED TO THE AUDIT PROCESS. Mª ANGELA JIMENEZ

  21. 4.6. AUDITING REPORT • WHETHER FINANCIAL STATEMENTS CONTAIN ALL THE NECESARY AND SUFFICIENT INFORMATION TO INTERPRET AND UNDERSTAND THE FINANCIAL SITUATION • TECHNICAL OPINION. • SIGNATURE OF THE AUDITOR OR AUDITORS WHO DAFTED THE REPORT. Mª ANGELA JIMENEZ

  22. 4.6. AUDITING REPORT • ELEMENTS OF THE AUDITOR’ S REPORT *ISAS*> • TITLE • ADDRESSEE • INTRODUCTORY PARAGRAPH • MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS • AUDTOR’S RESPONSIBILITY • AUDITOR’S OPINION • OTHER REPORTING RESPONSIBILITIES • AUDITOR’ S SIGNATURE • DATE OF THE AUDITOR’S REPORT • AUDITOR’S AFFRESS Mª ANGELA JIMENEZ

  23. 4.6. AUDITING REPORT • WHEN THE ANNUAL ACCOUNTS ARE DEPOSITED AT THE BUSINESS REGISTRY, THEY SHALL BE ACCOMPANIED, WHEN APPROPIATE, BY THE AUDITOR´S REPORT. • THE REPORT IS REGULATED BY DIFFERENT STANDARD: • INTERNATIONAL • EUROPEAN COMMUNITIES • COUNTRY STANDARD AND ACTS Mª ANGELA JIMENEZ

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