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Learning outcomes. Can explain what is audit and assurance Evaluate the significance of principal-agent relationship Describe the role of standards Distinguish types of audits. Introduction to auditing and assurance services. Development of audit Purpose of audit Auditing versus accounting

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Learning outcomes
Learning outcomes

  • Can explain what is audit and assurance

  • Evaluate the significance of principal-agent relationship

  • Describe the role of standards

  • Distinguish types of audits

Introduction to auditing and assurance services
Introduction to auditing and assurance services

  • Development of audit

  • Purpose of audit

  • Auditing versus accounting

  • Stewardship, agency theory and accountability

  • Auditing standards

  • Legal framework


  • Auditing framework

  • IFAC

  • MIA

Shuo and yam 1987
Shuo and Yam (1987)

  • Written records show China was the first country in the world to establish an auditing system

  • Emphasised completeness of records (financial) of the imperial kingdom, honesty of government officers in handling public money and property

Early audits
Early audits

  • Looked for errors and fraud

  • Reported to emperor

  • Offenders were sentenced to death

  • Auditors selected by emperor, commanded a prestigious, privileged and powerful position

Auditing today
Auditing today

  • Is not what it started out as

  • Latin “AUDIRE”

  • Examine accounts, read out the report heard by authorities - china

  • Confidence of investors

  • Attests to quality of information

  • Asymmetry of information

  • Auditing versus accounting

Types of audit
Types of audit

  • Audit

  • Review

  • , non-attest service

  • Other professional service requiring accounting and auditing expertise


  • Financial statements audit, compliance audit, internal audit, quality, governments, tax


  • Who

  • Nature of today’s business

  • Agent and principals

  • Need for monitoring

  • Independent expert

Audit today
Audit today

  • Who, what and how

  • Professional

  • Opinion

  • Licensed

  • Assurance about what?

Agency principal and agent
AgencyPrincipal and agent

  • Information asymmetry

  • Agency theory

  • Independent agent

  • Regulation

  • Corporate governance


  • Independent professional services that improve the quality of information for decision makers

  • Many types

  • Service provider knowledgeable, independent, expert in gathering and evaluating evidence

  • Criteria for evaluation e.g. GAAP

Auditing standards
Auditing standards

  • Who sets?

  • Who follows?


  • A process of obtaining and evaluating evidence to support information presented to a third party

  • Attestation: get evidence about assertions

  • Evaluate evidence (using criteria)

  • Communicate conclusion


  • A positive statement about an action, event, condition or performance over a period of time

  • Financial statements?

Why do we need assurance
Why do we need assurance?

  • People not wanting to tell the truth

  • Not telling the whole truth

  • Transactions are so complex, experts are required

  • Potential bias

Greater demand for accountability
Greater demand for accountability

  • Why did the world’s biggest public accounting firm fail?

  • Why did investors lose so much money?

  • Loss of confidence in management, auditing profession

  • Information misleading despite being audited


  • Reports

  • Audit regulation

  • Corporate governance

  • Public expectation

  • Assurance that quality of information is reliable

Issue 1
Issue 1

  • Identify 4 users of audited financial information

  • Primary use

  • Indicate how accounting treatment can benefit one user at expense of another

Issue 2
Issue 2

  • Auditing does not create any new product. Hence it has no added value to a business

Issue 3
Issue 3

  • We hire an auditor so that he can detect any wrong doings in my company