1. Introductory Questions: How is the audit role understood and interpreted in the market place? Is there a conflict in the market understanding of services offered by accountants? What is an audit? What is the role and services of the auditor? 2

2. A friend of yours, an investor in the NZX, has just received the annual financial report of FredenHeim Ltd., a listed company. He made the following comment: I see the auditors have issued a clear report on the company. I can therefore invest a further amount of money into the company, as there will be no risk that I will lose my money owing to mismanagement. Your comments on this statement? 3 3. Audit enhances credibility. Will not guarantee future viability. Does not guarantee efficiency and effectiveness. Gives reasonable but not absolute assurance. Inherent limitations in audit could affect auditors ability to detect fraud. Audit work open to subjective judgement. 4. Fraud Detection. Predicting Company Failure. Detecting & Reporting illegal acts. Balance Sheet valuations. Duty of care and independence. 5 5. Enron, Worldcom.,HIH, Lehman Brothers, Fannie Mae Bernard Madoff, AIG Bonusses, Bank of America/ Merrill lynch, Bear Stearns South Canterbury Finance, 6 6. Definition as per American Accounting Association Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. (AAA 1973) 7. YouTube - The Audit 8 8. Tax advice, fraud investigations, business advisory services, independent audit, provision of forecasts. Three main types of engagements: Financial statement audits. Assurance services. All professional engagements. 9 9. Internal Auditors Certified Fraud Auditors Computer Auditors (EDP) Government Auditors 10 10. NZ Law requires an auditor to form an opinion on the financial accounts. Opinion based on accounts being true and fair and that they comply with accepted accounting principles. (IFRS) IAS200.02 says it is to enable auditor to express an opinion whether fin. Statements are prepared in all material aspects in accordance with an identified financial reporting framework. 11. 1. Conflicts of Interest. 2. Remoteness. 3. Complexity. 4. Consequence of error. 12 12. Credibility of Accounts In general due to 3 forms of control an audit imposes: Preventative control. Detective control. Reporting control. To shareholders. To economic markets. For small and medium enterprises. Statutory Audits. Management Audits. 13 13. Conceptual benchmark of an audit. Not defined in the Companies Act 1993 nor by Courts. Broad terms has come to mean : auditor is judging the reasonableness of the information being presented. In NZ Sec 16 of FRA (1993)requires an auditor to express an opinion that accounts show a true and fair view and comply with GAAP. 14 14. NZICA imposes professional standards on its members. Operates as a standard setting organisation with the power to censure, suspend members not complying with its Standards. Audit and assurance NZICA adopting the international standards issued by through IFAC (IAASB). Has monopoly on certain NZ Audits. the MED report in 2005 recommends regulation of auditors by government (rather than profession). 15 15. Australia(AuSB) International Audit profession(IAASB) UK (APB) Canada(CICA) INTOSAI 16 16. Level of assurance : Positive vs. Negative. Positive assurance high but not absolute confidence. Negative assurance moderate level of assurance. 17 17. What the engagement includes, and what it does not include. NZ specific terms described on p 11 of text. Reporting engagement Attest audit Review engagement Agreed-upon procedures Service engagements Advisory engagements 18 18. Proposals to resolve these gaps include: Audit report changes. Educate the report user. Improve the audit process. Independently regulate the profession. Reduce auditor conflicts of interest. 19 19. 20 20. Introductory Questions: What does accountability mean? What is the primary purpose of accounting and auditing according to different theories? 21. Essentially, the auditors role serves (or may be intended to serve) the accountability of management or the company to users including shareholders, some 3rd parties and others. 22. Neo Classical economics Serves market players Agency and Transaction cost Theories monitors agents such as managers Social Accountability Theory serves the broader public interest in information; opinion is a public good 23. Accountability is owed to providers of capital. Reason why markets and industry are interested in audited financial statements. Purchased Insurance. 24. Accountability is owed to the general public Offers an expanded social role for auditing carbon emissions trading Auditor to protect society from poor managers 25. Threat of audit should improve quality of statements Help to evaluate and decide on board appointments.