London School of Economics and Political Science (LSE)

Modules

93
Auditing

Prerequisite – 19 Elements of accounting and finance

Reasons for auditing. The concept of accountability. Economic demand for auditing. Auditing as a monitoring device.

Principles and postulates of auditing. Conditions for auditing to be possible. The concept of independence.

The legal and professional environment. Approaches to the regulation of auditing practice, in particular legal rules and professional guidelines. International regulation of auditing. (Note: candidates will be expected to be aware of the range of different approaches to auditor regulation and the general content of such regulations but will not be expected to know the detailed requirements of any specific country’s audit regulations.)

The duties of auditors. The changing responsibilities of auditors for fraud detection and financial statement attestation. The extent of auditors’ duties to primary clients and third parties. The ‘expectations gap’ between what users of financial statements believe the audit provides and what the audit is capable of offering. Auditor liability and the case for and against limiting liability.

Audit planning. Initial assessment of the client. The audit engagement letter. Risk-based approaches. Identification of key audit areas. Analytical review.

Conduct of the audit. The concept of audit evidence. Compliance and substantive testing. The concept of internal control. Identifying key controls and testing them. Statistical and other sampling approaches to audit testing. Specific audit techniques, such as observation, directional testing, cut-off tests, third-party confirmations. The application of audit techniques in the context of the main revenue and cost activities of the enterprise. Auditing the balance sheet. The significance of management representations. Assessment of errors and weaknesses. Documenting the audit, preparation and review of working papers.

Computer-based systems. Auditing ‘round’ and ‘through’ the computer. Internal control in a computer environment. Computer-assisted audit techniques. The use of computers in conducting the audit, in particular spreadsheets, word-processing and automated work papers.

The audit report. The form and content of the audit report. The qualified audit report.

Current developments in auditing. Audit committees. Internal audit. Management audit. The economic value of auditing to society. The spread of auditing into non-financial contexts: the ‘Audit Society’.