Introduction to Audit
12 October 2017
www.pwc.com/cz
Ondřej Sehnal
Petr Jirásko
PricewaterhouseCoopers Audit, s.r.o.
Agenda
Introduction to Assurance
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October 2017Introduction to Audit
Regulations, ethics
Planning
Questions
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Introduction to Assurance
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Purpose of assurance services
The purpose of assurance services is to:
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Increase the confidence
Reduce the risk
of the user of those services.
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Elements of assurance engagement
1. A three party relationship between
- a practitioner (professional accountant - the auditor)
- a responsible party (preparer of the information)
- a intended user of the information
2. Subject matter
3. Suitable criteria
4. Sufficient appropriate evidence
5. Written report
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External audit
The objective of an external audit engagement is to enable the auditor
to express an opinion on whether the financial statements:
• Give a true and fair view (or present fairly in all material
respects)
• Are prepared, in all material respects, in accordance with an
applicable financial reporting framework.
Audit vs. Review
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Materiality
Information is material if its omission or misstatement could influence
the economic decisions of users taken on the basis of the financial
statements.
True and fair view
‘True’ in accounting terms can be taken to mean not factually
incorrect.
‘Fair’ can have the following meanings:
• Clear
• Unbiased
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Limitations and benefits of statutory audits
Benefits
• High quality, reliable information circulates the market
• Independent verification
• Reduces the risk of management fraud and error
Limitations (why only reasonable assurance is provided)
• Financial information includes subjective estimates and judgemental
matters
• 100% of the transactions is not reviewed – sample basis testing
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Expectation gap
There is a common misconception about the role an auditor plays. This
is often referred to as the 'expectations gap.‘
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a belief that auditors test 100% of transactions and balances
a belief that auditors are required to detect fraud
auditors are responsible for preparing the financial statements
Examples
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Responsibilities
Management’s responsibilities
Management are responsible for ensuring the entity complies with
relevant laws and regulations.
This means:
• monitoring of legal requirements,
• development of systems of internal control (to ensure compliance)
• an effective system of assessing the effectiveness of those
control systems.
Auditor’s responsibilities
The auditor is responsible for obtaining reasonable assurance that the
financial statements are free from material misstatement.
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Regulations, ethics
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ISA
International standards on auditing (ISAs)
• There are currently 36 ISAs
• All audits carried out under the laws of member states of the EU
have had to be conducted under ISAs for all accounting periods
beginning on or after 1 January 2005.
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Criteria for statutory audit applicable in the
Czech Republic
Kritéria pro povinný audit řádných a mimořádných účetních závěrek, dle §20 zákona
o účetnictví od 1. 1. 2016
Dle § 20 jsou povinně auditovanými jednotkami:
• velké účetní jednotky s výjimkou vybraných účetních jednotek, které nejsou subjekty
veřejného zájmu
• střední účetní jednotky
• malé účetní jednotky, pokud jsou akciovými společnostmi nebo svěřeneckými fondy a
překročily nebo dosáhly alespoň 1 ze 3 zákonných (níže uvedených) kritérií za aktuální
účetní období a za období bezprostředně předcházející
1. Aktiva celkem 40 mil. Kč (nově je třeba však brát aktiva v netto nikoliv v brutto
hodnotě)
2. Úhrn čistého obratu 80 mil. Kč
3. Průměrný přepočtený počet zaměstnanců 50
• ostatní malé účetní jednotky, pokud překročí nebo dosáhnou alespoň 2 ze 3
zákonných kritérií za aktuální účetní období a za období bezprostředně předcházející
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Description of categories since 1 January 2016
Kategorizace účetních jednotek od 1. 1. 2016
• mikro účetní jednotka (nepřekračuje alespoň dvě z těchto hraničních
hodnot – 9 mil. Kč aktiva celkem, 18 mil. Kč roční úhrn čistého obratu,
10 průměrný počet zaměstnanců)
• malá účetní jednotka (není mikro účetní jednotkou a nepřekračuje
alespoň dvě z těchto hraničních hodnot – 100 mil. Kč aktiva celkem,
200 mil. Kč roční úhrn čistého obratu, 50 průměrný počet zaměstnanců)
• střední účetní jednotka (není mikro ani malou účetní jednotkou a
nepřekračuje alespoň dvě z těchto hraničních hodnot – 500 mil. Kč aktiva
celkem, 1 mld. Kč roční úhrn čistého obratu, 250 průměrný počet
zaměstnanců)
• velká účetní jednotka (překračuje alespoň dvě z těchto hraničních
hodnot – 500 mil. Kč aktiva celkem, 1 mld. Kč roční úhrn čistého obratu,
250 průměrný počet zaměstnanců).
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Appointment and removal of auditor
Who appoints the auditor and how long for?
• The shareholders of the company by voting them in at the Annual
General Meeting (AGM)
• Generally, appointment runs from the end of the AGM until the end
of the next AGM.
Removing the auditor
• majority at a general meeting
• resignation
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The Auditor’s rights
• Access to the company’s books and records.
• To receive information and explanations necessary for the audit.
• To receive notice of and attend any general meeting of members
of the company.
• To receive copies of any written resolutions of the Company
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Fundamental principles, threats and safeguards
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Acceptance process
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Planning
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Planning process diagram
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The planning process
Preliminary engagement activities
• Evaluating compliance with ethical requirements
• Establishing the terms of the engagement
Planning activities
• Developing the audit strategy
• Developing an audit plan
• Design audit procedures: Planning the nature, timing and extent
of direction and supervision and the review of work
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Audit risk
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Materiality
‘Misstatement, including omissions, are considered to be material
if they, individually or in the aggregate, could reasonably be expected
to influence the economic decisions of users taken on the basis of the
financial statements’.
How is Materiality Determined
• Common measures are:
 ½ – 1% of turnover/revenue
 5 – 10% of profit before tax
 1 – 2% of gross assets
• Overall materiality
• Performance materiality
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Definition
An item can be material:
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Huge amount of money
By
size
amount in not relevant, indicates future developments
or other significant events whose disclosure is
compulsory
By
nature
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Fraud and error
Misstatement in the financial statements can arise either
from
• Fraud – an intentional act involving the use of deception
to obtain an unjust or illegal advantage
• Error – an unintentional mistake and could include accidental
misapplication of accounting policies or oversights
Fraud is a criminal activity but it’s not the role of the auditor
to determine whether fraud has actually occurred. That’s responsibility
of a country’s legal system.
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Questions?
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ondrej.sehnal@pwc.com
petr.jirasko@pwc.com
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