Professional Documents
Culture Documents
Financial Reports
Notes to Accounts
Accounting methods and policies used Greater details of summarized figures Statutory disclosures Changes in accounting policies / impact Details of off-balance sheet items, if any
Information Function
Stakeholders
Control Function
Board Owners
Planning
Management
Instrument ratings
Shares Bonds
Key Issues
Why would management want its financial statements to be untrue? Consequences of unreliable financial statements Role & independence of external auditors How can reliability be assured?
Misleading Statements
Revenue recognition
Book revenue before earning it to increase profits Defer revenue to reduce profits
Expense recognition
Defer expenses to increase profits Make unreal provisions to reduce profits
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advance from a client/taxes may be credited to revenue. A loan may be channeled through a SPV and treated as income
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The Board Management (including internal auditor) External Auditors External Bodies
Regulators: KSE/SECP Accounting bodies: ICAP/ICMAP Trade associations
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Managements Role
Management draws accounting policies, keep accounts and prepares financial statements. Management has most to gain or lose from the defects of financial statements Hence, management needs highest degree of monitoring in this aspect.
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Every one depends on external auditors report. Independence of external auditors must be assured:
Rotating them regularly Not giving them any other business Granting them full access to all records Limiting their relationship with management
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Only purpose is to obtain an opinion. External auditors is not supposed to fix the financial statements. Report:
Unqualified Qualified Disclaimer Adverse
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Clarify basis of forming an opinion Proper records have been kept Financial statements:
are in accordance with the records reflect a true and fair view of the profit & position comply with the laws
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Basic responsibility to prevent and detect errors/frauds lies with management, not external auditor.
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Auditors Liability
No liability to outsiders
Caparo Industries Case Bannerman Case
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Accounting Standards from IFAC Ethical Standards from ESB Audit Standards from APB (UK) Investigation & Discipline Board (UK) Review Board (UK) Public Company Accounting Oversight Board (Sarbanes-Oxley Act) in USA ICAP and SECP in Pakistan
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Do not rely on one client for major part of firms fee revenue. No linkages with clients Non-audit services should not be given (or at least be restricted) to clients
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Non-Audit Work
Taxation Investigations (for acquisitions, etc.) General consultancy on new projects Systems development Low-balling
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No restriction on audit firms leaving it to their professional judgment. Total prohibition on non-audit work. Partial prohibition on non-audit work, defined either by nature of work, or level of approval.
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Rotation of audit firm as prescribed by Pakistan laws Rotation of partners within the same firm.
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Managing Position
To meet rules and regulations To meet lenders covenants To portray better picture to public
Keep assets or liabilities off balance sheet Window dressing Misclassification of items
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Earnings Management
To keep share price stable, or rising To meet market expectations To maintain dividend payout pattern Smoothening needs
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Creative Accounting
Standards do not cover every thing. There is always more than one correct way of handling things Legitimate and dishonest intentions Outright fraud: double set of books
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Directors Responsibilities
Voluntary Disclosures
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To monitor the integrity of financial statements To review internal controls & audit To review risk management systems To approve terms & remuneration of external auditors To ensure independence of external Auditors
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Verifies suitability of the external auditor Their resources, qualifications, independence, past record Linkages, non-audit work Rotation, former employees of audit firm Audit firms performance, ethics
Ensures independence
Audit Cycle
Audit plan / internal / external Discussion of audit plan with auditors Contact during audit Review of findings, major issues Oversee all correspondence with external auditors
Representations letter Management letter
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Thank you
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