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Sample lesson

What an audit is, and what it is not

About 6 minutes. No account needed.

Transcript

Read the transcript
  1. 0:00 Welcome to the first lesson.
  2. 0:02 Before anything else,
  3. 0:03 let us be clear about what an audit
  4. 0:05 actually is.
  5. 0:07 A company's directors prepare its financial
  6. 0:09 statements. The auditor does not prepare
  7. 0:11 them. The auditor examines them.
  8. 0:14 The question the auditor answers is
  9. 0:16 simple to say and hard to earn.
  10. 0:19 Can users trust these numbers?
  11. 0:21 Users are the people who rely on the
  12. 0:23 statements. Shareholders,
  13. 0:25 banks, regulators,
  14. 0:27 the tax authority and investors.
  15. 0:29 In Nigeria, a bank considering a loan
  16. 0:32 will usually ask for audited accounts,
  17. 0:34 and so will many regulators.
  18. 0:37 The tax authority reads them closely
  19. 0:38 too, because a company's tax computation
  20. 0:41 starts from its accounting profit.
  21. 0:44 None of these users can check the company's
  22. 0:46 books themselves.
  23. 0:47 So they rely on an independent professional
  24. 0:50 instead.
  25. 0:51 That independent check ends in an opinion.
  26. 0:54 The auditor says whether the statements
  27. 0:56 give a true and fair view.
  28. 0:58 True and fair,
  29. 0:59 in all material respects,
  30. 1:01 in accordance with the financial reporting
  31. 1:03 framework the company uses.
  32. 1:05 Notice the words,
  33. 1:07 in all material respects.
  34. 1:09 The auditor is not saying that every
  35. 1:11 naira is right.
  36. 1:12 The auditor is saying there is nothing
  37. 1:15 wrong that is big enough to change a
  38. 1:18 user's decision.
  39. 1:19 That idea, big enough to matter,
  40. 1:22 is called materiality.
  41. 1:24 You will learn to calculate it later
  42. 1:26 in the course.
  43. 1:27 Now, how much comfort does an audit
  44. 1:29 give? The International Standards on
  45. 1:32 Auditing call it reasonable assurance.
  46. 1:35 Reasonable assurance is a high level
  47. 1:37 of assurance.
  48. 1:39 But it is not absolute,
  49. 1:40 and it is not a guarantee.
  50. 1:42 Why not a guarantee?
  51. 1:44 Because auditors test samples,
  52. 1:46 use judgement,
  53. 1:47 and rely on evidence that persuades
  54. 1:48 rather than proves.
  55. 1:50 And because fraud is designed to stay
  56. 1:52 hidden. Collusion and forged documents
  57. 1:55 can defeat even a well planned audit.
  58. 1:57 So an audit is not a promise that there
  59. 2:00 is no fraud. It is a disciplined,
  60. 2:03 evidence based opinion.
  61. 2:05 The standard behind all of this is ISA
  62. 2:07 200. Every other auditing standard builds
  63. 2:10 on it.
  64. 2:12 Here is the second thing to understand.
  65. 2:14 An audit is only one of several services
  66. 2:17 an accountant can offer.
  67. 2:19 Each one gives a different level of
  68. 2:21 comfort, and the report must say clearly
  69. 2:24 which one was done.
  70. 2:26 At the top is the audit.
  71. 2:27 Reasonable assurance,
  72. 2:29 a full opinion,
  73. 2:29 under the ISAs the FRC has adopted.
  74. 2:32 Next is a review.
  75. 2:34 The accountant mainly asks questions
  76. 2:36 and analyses the figures,
  77. 2:37 and digs further if something looks
  78. 2:40 wrong.
  79. 2:40 A review gives limited assurance.
  80. 2:43 Its conclusion says nothing has come
  81. 2:45 to our attention suggesting the accounts
  82. 2:47 are misstated.
  83. 2:48 Reviews follow ISRE 2400,
  84. 2:51 or 2410 when the company's own auditor
  85. 2:54 reviews interim figures.
  86. 2:56 Then there is a compilation.
  87. 2:58 The accountant uses their skill to help
  88. 3:00 management put the financial statements
  89. 3:02 together.
  90. 3:03 A compilation gives no assurance.
  91. 3:05 The accountant does not verify the numbers,
  92. 3:08 but cannot attach their name to misleading
  93. 3:09 figures.
  94. 3:10 Compilations follow ISRS 4410.
  95. 3:14 In Nigeria they suit small companies
  96. 3:16 that CAMA exempts from audit.
  97. 3:18 Last, agreed upon procedures.
  98. 3:21 The client and the accountant agree
  99. 3:22 specific checks,
  100. 3:23 and the accountant reports what was
  101. 3:25 found.
  102. 3:26 No opinion, no assurance,
  103. 3:28 just findings.
  104. 3:29 For example, confirming that a list
  105. 3:31 of payments matches the bank statements.
  106. 3:34 Agreed upon procedures follow ISRS 4400.
  107. 3:37 The users draw their own conclusions
  108. 3:39 from the findings.
  109. 3:41 Why does this ladder matter?
  110. 3:43 Because clients often ask for an audit
  111. 3:45 when they really need something lighter.
  112. 3:48 And sometimes they ask for a simple
  113. 3:50 set of accounts when the law requires
  114. 3:52 a full audit.
  115. 3:54 Getting this wrong exposes the firm.
  116. 3:57 A report that sounds like an audit,
  117. 3:59 but is not one,
  118. 4:00 misleads its users.
  119. 4:02 So every engagement starts with one
  120. 4:03 question. What service is this,
  121. 4:06 and what will the report actually say?
  122. 4:08 There is one more reason this matters,
  123. 4:11 and it applies to firms that also prepare
  124. 4:13 their clients' accounts.
  125. 4:14 When the same firm prepares a company's
  126. 4:17 accounts and then audits them,
  127. 4:19 it is checking its own work.
  128. 4:21 The ethics code calls this a self review
  129. 4:23 threat. Nigerian company law also has
  130. 4:27 its own rule on this.
  131. 4:28 You will study the company law rule
  132. 4:30 in the next lesson,
  133. 4:31 and the ethics rule in Week 0.2.
  134. 4:35 Let us bring it together.
  135. 4:37 An audit is an independent examination
  136. 4:39 of financial statements that management
  137. 4:42 has prepared.
  138. 4:43 It ends in an opinion on whether they
  139. 4:45 give a true and fair view,
  140. 4:47 in all material respects.
  141. 4:50 It gives reasonable assurance,
  142. 4:51 high but not absolute.
  143. 4:53 It is not a guarantee,
  144. 4:55 and not a guarantee against fraud.
  145. 4:57 A review gives limited assurance.
  146. 4:59 A compilation and agreed upon procedures
  147. 5:01 give none. The report must say which.
  148. 5:04 In the next lesson,
  149. 5:05 we look at who must be audited in Nigeria,
  150. 5:09 and who is allowed to do it.
  151. 5:11 Before then, complete this lesson's
  152. 5:13 short exercise.
  153. 5:15 You will sort five described engagements
  154. 5:17 into the right service.

Try the exercise

Exercise 0.1.1: name the service

For each engagement, name the service (audit, review, compilation or agreed-upon procedures), the level of assurance, and what the report should be called (register D9 to D12).

  1. A company's bank wants an independent professional's opinion on whether the full financial statements give a true and fair view.
  2. A sole trader asks the firm to turn her cash book and bank statements into a set of financial statements for her own use. The firm will not test the figures.
  3. A franchisor asks the firm to agree each month's sales returns submitted by a franchisee to its bank statements and to report any differences. It will draw its own conclusions.
  4. The directors of a subsidiary want some comfort on their half-year accounts for the parent (the firm is not the subsidiary's auditor), mainly from enquiry and analytical procedures, at a lower cost than an audit.
  5. A client asks for "audited accounts" for a tender, but the engagement letter describes the firm assisting management to prepare the statements, with no testing.

Model answers, and marking of your work by a person, come with the course.

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