Audit and Assurance Class Notes

THE CONCEPT OF AUDIT AND ASSURANCE Audit is the process and Assurance is the product. We auditors go through the process of testing our client’s financial reports (audit) in order to give our client the confidence that their report is what it seems to be (assurance). The above is based on a business concept often referred to as “agency theory”. The secondary agent (auditor) delivers assurance to the principal (shareholder) that the report (financial statements) provided by the primary agent (director) is what it appears to be (shows a true and fair view). This is quite a sophisticated idea when expressed as above, so it may be worth stepping back and looking at some practical applications of the agency theory. In many situations, there are people who need to be assured about something: ● parents need assurance that schools are suitably educating their children ● diners need assurance that a restaurant is serving food that is safe to eat ● shareholders need assurance that the published Financial Statements of a company are not wrong ● directors need assurance that the systems inside the company they run are working. It is often not possible to check the situation yourself – so you are likely to want to rely on someone else to check it for you: ● schools are checked by government inspectors ● restaurants have health and safety checks ● Annual published Financial Statements are checked by external (statutory) auditors ● Company systems are checked by internal auditors. The objective of external audit External audit is the name given to the formal audit process of auditing financial statements prepared by directors in order to give an opinion on the truth and fairness of those financial statements to shareholders. External audit is by far the most common form of audit but its objective is the same as the objective of any other audit service. The objective of external audit is assurance. The purpose of external audit is the delivery of confidence in financial statements to the shareholders. The development of assurance Audit is ancient. There is evidence of audit going back to the birth of writing 5,000 years ago. But it might be worth noting three more recent rough dates:- Circa 1900: The birth of the company and the idea of compulsory audit of fs. Circa 1980: The development of auditing standards. Circa 1990: the development of those auditing standards to focus on risk. As you might imagine, the above dates are highly debatable, but they may give you a feel for the history.