ISL458U-AUDITING
Chapter 1: Audit Environment
Introduction
As a result of globalization, increase in international business combinations and the orientation of international investments to developing countries force the enterprises, the dynamo of the economy, to adapt to changing conditions. Namely; in order to increase the competitiveness of enterprises and to easily enter the developing capital markets, it is necessary for the enterprises to make the existing accounting systems more effective, to prepare transparent, comparable, accurate financial statements and to increase their reliability by subjecting them to independent audit.
The accuracy, consistency and reliability of the decisions to be taken by internal and external information users, which are called parties related to the business, is two dimensional. The first dimension is the production and reporting of accounting information using International Financial Reporting Standards (IFRS). The second dimension is that the financial statements are audited independently.
During the historical development of the audit, there have been changes in audit approaches and parties dealing with independent audit. In the first years, the relevant part of the audit was business owners, but over time, the number of people interested in other groups such as lenders, government and capital market investors increased.
The Need for Independent Audit
In the business world, it is almost impossible for information users to access the information they want first hand. When information is obtained from other people, the likelihood of intentional or unintentional misrepresentation increases. When there is a conflict of interest between the requester and the provider of the information, there is a risk that the information presented will be misleading. Information risk reflects the possibility of making mistakes in decisions to be taken regarding the business. Causes of information risk are:
• Being far from the information • Bias of the information provider • Large volume data • Complex accounting operations
Information users need independent audit because they want to access information independently and with an assessed degree of conformity to the determined standards. In addition, it is obligatory to prepare the financial statements of some enterprises and disclose them to the public subject to independent audit within the framework of various legal regulations.
The main goal of businesses is to increase their wealth with the scarce resources they have, and the main goal of investors is to invest their money in the most profitable areas. It is of great importance for businesses and
investors to determine their investment decisions based on financial information in order to achieve their goals.
In order for the economic decisions made by information users to be accurate, reliable and consistent, the financial information that forms the basis of the decisions must be accurate and reliable. Information users outside the business may not find the financial statements issued by the business management reliable. For this reason, the accuracy and reliability of financial statements should be investigated before they are analysed for decision making. However, users outside the business have neither the experience, knowledge, nor opportunity and authority to conduct this research. Therefore, in order to ensure the accuracy and reliability of the financial statements, a third party with experience and authority is required. This person is also an independent accountant and takes the title of “auditor” since she also performs auditing activities in addition to her other duties. As it is performed by an outside expert, this causes the audit to be called “Independent Audit”. In this case, the auditor is called “Independent Auditor”.
Relationship between Accounting and Auditing
Accounting is an information system that records individual changes in assets, foreign and equity at the beginning of the period and reports net final changes at the end of the period according to the beginning of the period in the form of financial statements. The accounting information system consists of Input-Operation-Output stages. In order for the information to be produced and reported accurately and reliably, an internal control system that requires the application of policies and rules determined by the management, especially generally accepted accounting principles, must be established in the company.
Independent auditing and accounting are an integral part of each other. They should be handled in an integrated structure. Information of financial character produced in the company is processed in the accounting information system and becomes the information produced as financial statements and footnotes of the transmission at the end of the accounting period, and these tables and footnotes are presented to internal and external information users. The reliability of these financial statements and footnotes, which are the outputs of the accounting information system, are increased by being subjected to independent audit and are presented to information users in the form of audited financial statements and footnotes, and information users can make more accurate, consistent and reliable decisions.
Independent Audit Concept
The concept of audit is confused with various concepts such as Control, Inspection and Revision. Before defining the concept of audit, let’s define the concepts that lead to this confusion. “Control is the beginning of the audit or the activity that precedes the audit. The measures taken to
achieve the objectives are a control activity.” Certain have the five basic characteristics that are shown in Figure measures are taken to make sure that something turns out 1.7. as desired or to achieve a certain goal. “Inspection is the There are three types of auditors: examination to find out the truth of something or whether things are being carried out well”. It is a more specific 1. Independent (External) Auditors study. Inspection can be defined as an examination to find 2. Internal Auditors out the truth of something, or whether things are being 3. Public Sector Auditors carried out well. While audit is applied to something as a Today, although large-scale independent audit firms can whole, inspection is applied to specific cases within this provide all three audit services, the main field of activity whole. This is also called a conformity check. A standard of independent auditors is the audit of financial or norm has been determined to be applied in any field. statements. The inspection is made to determine whether this is complied with. “Revision is to review, to examine again. Compliance audit is mostly carried out by public auditors It is mostly the examination of financial events and tax and internal auditors. Public Sector Auditors are auditors accounts (documents etc.) ”. It means to review, to who work in the audit (inspection) unit of various public examine again. Revision is mostly used for the institutions, carry out audits on behalf of the state and examination and control of financial events. Often, it submit the audit report to the public unit to which they are means that once the accounting records are completed, the affiliated, e.g. Auditor of the Court of Accounts, Finance compliance of the accounts with the tax laws or other Inspectors. accounting system applied is examined once again. Internal auditors are the auditors who are included in the Independent Audit is a Process. organization chart of the organization they are affiliated with and operate directly under the board of directors or Independent audit is not a single transaction or activity, under the general manager. Today, internal auditors spend but a process that consists of successive stages. The audit a significant amount of their time on activity audit because process consists of successive stages as shown in Figure 1.5. The planned, rational and sampling-based work at all the intense competition conditions prevailing in today’s stages of the audit shows its systematic feature. The fact business environment force businesses to work more efficiently. that the audit serves both parties (business and information users) at the same time requires that the audit process be conducted and concluded in an impartial and objective manner. The fact that the audit serves both parties (business and information users) at the same time requires that the audit process be conducted and concluded in an impartial and objective manner.
Types of Audits and Auditors
It is possible to classify the audit activity according to various criteria. Among these criteria, the most common measures according to the reasons and purposes are used when classifying the audit.
Today, the most common classification is “audit by purpose” and “audit by reason”.
a. Types of Audit by Reason: The types of audit are divided into two according to the reasons for their execution; compulsory audit and optional audit. b. Types of Audit by Purpose: There are three types of audit according to their purposes. These are: Independent audit (financial statement audit); compliance audit and internal audit.
People dealing with audit activity are called auditors. “An auditor is an expert who carries out the audit activity, has professional knowledge and experience, can act independently and has high ethic qualities.” In order to become an auditor, independent auditing standards are expanded as follows. It is a prerequisite for an auditor to