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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
Slide 2.4
Agency theory
• A company is viewed as the result of ‘contracts’, in
which several groups make some kind of contribution
to the company, given a certain ‘price’.
• Management is seen as the ‘agent’, trying to obtain
contributions from ‘principals’ such as bankers,
stockholders and employees.
• Management tries to do what is best for management
and has a considerable advantage over the principals
regarding information about the company (information
asymmetry).
• Costs of an agency relationship are monitoring costs,
bonding costs and residual loss.
Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
Slide 2.5
Audits required
• In most countries, audits are now legally required
for some types of companies (statutory audits).
• For example, listed companies, companies
receiving government money, certain industries.
• Major bourses (including NYSE, NASDAQ,
London Stock Exchange, Tokyo NIKKEI and
Frankfurt DAX) have listing rules that require all
companies to have an audited annual report.
Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
Slide 2.6
Audit regulation
Although there is regulation around the world,
two that may be the most influential are:
• The Sarbanes–Oxley Act of 2002 required the
US Securities and Exchange Commission (SEC)
to create a Public Company Accounting
Oversight Board (PCAOB).
• European Union Eighth Council Directive
84/253/EEC and EU Directive 2006/43/EC.
Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
Slide 2.7
Independent oversight
• International Forum of Independent Audit
Regulators (IFIAR)
• In Australia – Financial Reporting Council
• In the UK – The Review Board
• In the Netherlands – Authority for the Financial
Markets (AFM)
• France – Autorité des marchés financiers (AMF)
• USA – Public Company Accounting Oversight
Board
Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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US classes
Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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COSO report
The COSO report was published by the Committee
of Sponsoring Organizations of the Treadway
Commission. The COSO report envisaged:
1. harmonising the definitions regarding internal control
and its components;
2. helping management in assessing the quality of
internal control;
3. creating internal control benchmarks, enabling
management to compare the internal control in their
own company to the state-of-the-art;
4. creating a basis for the external reporting on the
adequacy of the internal controls.
Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
Slide 2.32
Combined Code UK
• In 1998 London Stock Exchange published a
new Listing Rule together with related Principles
of Good Governance and Code of Best Practice
(called ‘the Combined Code’).
• The combined code combines the
recommendations of the so-called Cadbury,
Greenbury and Hampel committees on corporate
governance.
Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014