Advantages and Disadvantages of Auditing

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Fundamentals of Auditing ACC 311

Lesson 03

FUNDAMENTALS OF AUDITING

AUDITING AN INTRODUCTION

What are the advantages and disadvantages of auditing?

Advantages of an audit

We have seen that the need for an external audit in the case of companies arises primarily from the

existence of split-up of ownership from control. There are however, certain advantages in having financial

statements audited even where no statutory requirement exists for such an audit in the case of a sole-trader-

ship, partnership, or non-profit organizations for example.

These advantages can be summarized as follows:

a) Disputes between management may be more easily settled. For instance, a partnership which has

complicated profit sharing arrangements may require an independent examination of those

accounts to ensure, as far as possible, an accurate assessment and distribution of the profits.

b) Major changes in ownership may be facilitated if past accounts contain an independent audit report,

for instance, where two sole traders merge their business to form a new partnership.

c) Application to lenders/financial institutions for finance may be strengthened by the submission of

audited accounts. However do remember that a bank, for instance, is likely to be far more

concerned about the future of the business and available security, than by the past historical

accounts, audited or otherwise.

d) The audit is likely to involve an in depth examination of the business and so may enable the auditor

to give more constrictive advice to management on improving the efficiency of the business.

Disadvantages of an audit

Like most thing in life, audits are not entirely without their disadvantages. There are two main points to

make here:

b) The audit fee! Clearly the services of an auditor must be paid for. It is for this reason that few

partnerships and even fewer sole traders are likely to have their accounts audited.

c) The audit involves the client's staff and management in giving time to providing information to

the auditor. Professional auditors should therefore plan their audit carefully to minimize the

disruption which their work will cause.

What are the different stages of audit?

Auditing is essentially a practical task. The auditor always needs to reflect the nature of the circumstances of

the entity under audit. It is unlikely that any two audit assignments will ever identical. It is however possible

to identify a number of standard stages in a typical external audit. These are as follows:

Audit appointment

Engagement letter

Initial planning

Knowledge of the business

Risk Assessment

Internal control review (procedures)

Control procedures (authorities/approvals/segregation of duties)

Preparation of the audit plan

Accounting system review

Analytical review techniques (Compliance procedures-Application of control test procedures)

like purchasing are according to the controls established.

Considering the ways in which audit evidence can be sought

Substantive testing (transaction level procedures)

Reasonable assurance

Review of the financial statements (compliance with the standards/material misstatement etc.)

Preparation and signing of report

At the stage of considering the ways of seeking audit evidence the auditor will make a preliminary evaluation

of the entity's control system:

Fundamentals of Auditing ACC 311

1. If the controls are likely to lead to a true and fair set of financial statements the auditor will test

those controls.

2. If they appear weak he will not rely on the controls but carry out extensive testing of the

transactions and balances which appear in the financial statements by means of substantive

procedures.

3. If the controls are operating effectively, the auditor can reduce the amount of substantive testing

described above and adopt a reliance approach.

4. If not then the auditor will be forced into a extensive substantive approach

What are the features of auditing profession?

In Pakistan auditing profession is allied with the Institute of Chartered Accountants of Pakistan (ICAP). It

is an autonomous body incorporated under the Chartered Accountants Ordinance 1961.

ICAP is a regulatory body that enjoys a self regulatory status. Its affairs are run by a council which is elected

by its member (Chartered Accountants).

Only those members of the ICAP are eligible of doing audit who have obtained license for the purpose,

these are known are practicing members.

Management of ICAP

The President is the Chief Executive of the Institute. The administrative head of the Institute is the

Executive Director/Secretary who functions under the directions of the Council, Executive Committee,

The President and the Vice Presidents

The Executive Director in performance of his functions is assisted by:

· Secretary

· Director Technical Services

· Director Professional Standards Compliance

· Director Education & Training

· Director Examinations

· Regional Director North

The prime responsibilities of Executive Director include Personnel Management; Financial Management;

Office Administration; Publications; Information Systems; Conducting and performing Secretarial functions

for the Council and Executive Committee Meetings.

Knowing the audit profession and other services?

Auditing firms do not describe themselves as auditors. They describe themselves as Chartered Accountants.

Auditing firms are composed of accountants who perform audits for their clients. They also perform other

services. The small chartered accountant firms especially may spend more time on other services than on

auditing.

The other services may include:

a. Writing up books of accounts (Book keeping)

b. Balancing books of accounts (Extracting trial balance)

c. Preparing final accounts

d. Tax management

e. Statutory form filling

f. Financial consultancy

g. Management and system consultancy

h. Liquidation and receivership work

i. Investigations (Fraud audit)

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