Auditing & Assurance Lecture Notes - Introduction to Auditing - PDF

Module name : AUDITING &ASSURANCE Facilitator :Prof Isaie Kadhafi Misago MAIN TOPICS  INTRODUCTION TO AUDITING  LEGAL AND PROFESSION FRAMEWORK OF AUDIT  CONDUCT OF AN AUDIT  REVIEW OF THE STRENGTHS AND WEAKNESSES OF INTERNAL CONTROL SYSTEM  AUDITING EVIDENCE  AUDIT SAMPLING...

Module name : AUDITING &ASSURANCE Facilitator :Prof Isaie Kadhafi Misago MAIN TOPICS  INTRODUCTION TO AUDITING  LEGAL AND PROFESSION FRAMEWORK OF AUDIT  CONDUCT OF AN AUDIT  REVIEW OF THE STRENGTHS AND WEAKNESSES OF INTERNAL CONTROL SYSTEM  AUDITING EVIDENCE  AUDIT SAMPLING  AUDIT OF BALANCE SHEET AND P&L ACCOUNT ITEMS  ERRORS, FRAUD AND IRREGULARITIES.  AUDITING IN A COMPUTERIZED ENVIRONMENT.  AUDIT REPORT  RECEIVERSHIP AND LIQUIDATION  AUDIT OF SPECIALISED INSTITUTIONS CHAPTER 1: INTRODUCTION TO AUDITING 1.1 DEFINITION OF AUDITING  Auditing can be defined as an independent examination of the books of accounts and the vouchers of the business with a view of forming an opinion as to whether these have been kept properly according to the companies’ act and as to whether the statements drawn therefrom of portray a true and fair view of the company’s state of affairs as at a given date. By Prof. Paul N. Manasseh 1.1 DEFINITION OF AUDITING  An audit is an independent examination and an expression of an opinion on the financial statements of an economic entity by appointed auditor in pursuance of that appointment and in compliance with relevant statutory obligation. The objective of an audit is to enable the auditor to express an opinion whether financial statements show a true and fair view of the company state of affairs in accordance with an identified financial reporting framework. (CPA) 1.1 DEFINITION OF AUDITING  Analysis of Manasseh’s definition.  Independent Examination - Qualified account by the Company’s act - It is a legal requirement - No relationship with the parties that have interest in the company. - A requirement from the Accounting professional bodies. 1.1 DEFINITION OF AUDITING  Books of Accounts: - A cash book - Assets register - Ledgers - Shareholders’ register 1.1 DEFINITION OF AUDITING  Vouchers: - A document in support of a transaction - Checked for authorization, date, recording and whether it is for the business.  Opinion - A positive opinion; unqualified opinion. - A negative opinion or qualified. 1.1 DEFINITION OF AUDITING  Statements: - The balance sheet - The profit and loss account - Funds flow statement  True and fair - True for Profit and loss account items - Fair for balance sheet items 1.1 DEFINITION OF AUDITING  Analysis of CPA’s definition  Financial Statements - Balance sheet - Profit and loss account - Notes - Cash-flow statement and - Statement of changes in Equity 1.1 DEFINITION OF AUDITING  Financial Reporting Framework: - International Financial Reporting Standards (IFRS) or IASs. - National Accounting Standards. - Any other authoritative and comprehensive financial reporting framework.  1.2 DISTINCTION BETWEEN AUDITING AND ACCOUNTING. AUDITING ACCOUNTING 1. Examination of books of 1. Preparation of books of Accounts to provide the true and accounts to help management in fair view of the company’s state of decision making. affairs. 2. Auditing is done at the end of 2. Accounting is continuous year. process. 3. Auditing is conditioned on 3. Accounting is not conditional. already prepared books of accounts. 4. Independency from all 4. The management can interested parties in the company. influence the work done by the accountant. 5. Vigilance from professional 5. Only management reviews. bodies 6. Essential for any business 6. Statutory requirement for regardless of the size 1.3 OBJECTIVES OF AUDITING They can be classified into two;  Primary objectives and  Secondary Objectives. 1.3 OBJECTIVES OF AUDITING  Primary objectives: - To prove the true and fair view of the company’s state of affairs. - To find out whether the company has kept proper books of accounts. - To write a report. 1.3 OBJECTIVES OF AUDITING  Secondary Objectives. - To provide advise to management “Management letter” or “letter of internal weakness”. - Detection of errors and frauds. 1.4 TYPES OF AUDIT They can be classified based on; The nature of work and The approach of to the work done. 1.4 TYPES OF AUDIT  According to the nature of work done, there are; - Statutory audits and - Private audits.  1.4 TYPES OF AUDIT DIFFERENCE BETWEEN STATUTORY AUDIT AND PRIVATE AUDIT STATUTORY AUDIT PRIVATE AUDITS 1.It is a legal requirement 1. It is conducted as per the wishes of the owners of the company 2. The scope of the audit is defined 2. The scope is determined by the by agreement between the auditor and the company’s act. the owners of the business. 3. The appointment is done according 3. The appointment is done privately. to the company’s act. 4. The auditor is liable to third parties 4. The auditor may not be liable (Disclaimer opinion). 5. It is done at the end of each 5. This can be done even after three financial year. years.  1.4 TYPES OF AUDIT DIFFERENCE BETWEEN STATUTORY AUDIT AND PRIVATE AUDIT STATUTORY AUDIT PRIVATE AUDITS 6. The auditor’s rights and duties are 6. They can be limited by the client. defined by the law. 7. The auditor is independent. 7. The auditor’s independency can be limited by the client or withdrawn altogether 8. The auditor will perform pure audit 8. The auditor may do both audit and work accounting work. 9. The auditor’s scope is not 9. The audit may be restricted to few restricted areas depending on the interest of the client. 10.The main objective is to prove the 10. The objective is mainly to find out true and fair view. current profit or loss for taxation purposes.  1.4 TYPES OF AUDIT SIMILARITIES BETWEEN STATUTORY AUDIT AND PRIVATE AUDIT - Both are conducted by qualified auditors. - They all aim at providing advise to management. - They both used to detect errors and frauds. - In both audits, the auditor is guided by Audit standards and guidelines.\ - Both audits are used for decision making. - They can all be used by third parties to evaluate the company. 1.4 TYPES OF AUDIT  According to the approach used; - Continuous audits - Interim audits and - Final audits 1.4 TYPES OF AUDIT  Continuous Audits; This is an approach whereby an audit is carried out throughout the financial period usually at predetermined intervals. This approach is ideal for large organizations with tight reporting deadlines. Advantages; - Errors and frauds are discovered earlier - It facilitates the presentation of the report in time. - It helps the auditor to have a clear understanding of the business. 1.4 TYPES OF AUDIT  Continuous audit: - Disadvantages; - This type of audit is very expensive - Figures already may be again manipulated. - Frequent visits by the auditor result into interruptions to the staff. - Questions asked by the auditor may become standard. - The staff may end up depending on the auditor 1.4 TYPES OF AUDIT  Interim Audits; This is an audit carried out halfway through the financial year. It usually precedes the final audit and is a preparation for final audit. It is ideal for dynamic businesses, cheaper compared to continuous audits and enhances keeping of up to date records. 1.4 TYPES OF AUDIT  Final audits; They are usually done at the end of the year.  Other types of Audits; - Procedural Audit; Evaluation of internal controls, accounting policies, and other procedures of a business entity by an independent auditor. Recommendations for improvement in procedures or activities in the system are made. An overall appraisal may be made of the entire business, or the audit may be directed to a particular business segment. 1.4 TYPES OF AUDIT  Other types of Audits; - Management Audit; Analysis and assessment of competencies and capabilities of a company's management in order to evaluate their effectiveness, especially with regard to the strategic objectives and policies of the business. The objective of a management audit is not to appraise individual executive performance, but to evaluate the management team in relation to their competence.  1.5 ADVANTAGES AND DISADVANTGES OF AUDITING  Advantages; - Assurance and credibility of the company’s books of accounts, - It is a detective and preventive measure, - They minimize chances of disputes, - Borrowing finances with financial statements supported by an unqualified audit report becomes easier. - Assists investors who are separated from management.  1.5 ADVANTAGES AND DISADVANTGES OF AUDITING  Disadvantages; - Auditing fees are normally expensive. - The audit exercise interrupts the clients operations. - Company secrets may leak to competitors  1.6 USERS OF AUDITED FINANCIAL STATEMENTS.  Present and potential investors.  Employees.  Lenders.  Suppliers and other trade creditors.  Customers.  Government.  The public.  Lawyers, Competitors, stock brokers, statisticians, Financial journalists, trade- unions and credit-rating agencies.  1.7 INTERNAL AUDIT VERSUS EXTERNAL AUDIT  Definition Of Internal Audit: This is an independent appraisal of activities within an organization aimed at ensuring that management operates efficiently so as to manage the business better. Also it is a management tool which acts as a watchdog over the company’s entire internal control systems, in all it is a recent development in the accounting field.  1.7 INTERNAL AUDIT VERSUS EXTERNAL AUDIT  Activities of the Internal Auditor: - Independent appraisal of activities. - Advice to management - Review of operation for soundness, adequacy, the application of accounts and financial controls and the promotion of such effective controls at reasonable costs  1.7 INTERNAL AUDIT VERSUS EXTERNAL AUDIT  Factors necessitating increase in internal audit; - Increase in business size and complexity. - Dynamic technology. - Legislation and regulation requirements. - Competition.  1.7 INTERNAL AUDIT VERSUS EXTERNAL AUDIT  Differences between External Auditor and Internal auditor; INTERNAL AUDITING EXTERNAL AUDITING 1. It is conducted on behalf of the 1. It is conducted on behalf of the management shareholders 2. It is not regulated by statutes or 2. It is conducted according to the act requirements of the company’s act 3. It is a continuous exercise 3. It is conducted periodically 4. It is conducted by a competent 4. It is conducted by a qualified accountant. accountant by the company’s act. 5. It is conducted by an employee of 5. Conducted by an external the company. professional. 6. Aimed at Strengthening the 6. Aimed at providing the true and internal control system fair view of the state of affairs. INTERNAL AUDITING EXTERNAL AUDITING 7. The scope is determined by 7. The scope is determined by the management. company’s act. 8. The report is strictly used by 8. The report produced is used by management. owners or by third parties. 9. It is not a legal requirement 9. It is a legal requirement. 10. It is the company’s routine work 10. It is conducted to assess the of analyzing and appraising controls company’s performance (Financial).  1.7 INTERNAL AUDIT VERSUS EXTERNAL AUDIT  Similarities of External audit and Internal audit; - Strength of Internal Control Systems - They both carry independent reviews - Both are concerned with the detection and prevention of errors and frauds - Both use similar materials and records - Both ensure the safeguard of the company’s assets. - Both have to ensure that proper books of accounts are kept.  1.7 INTERNAL AUDIT VERSUS EXTERNAL AUDIT  External auditor’s reliance on the work of internal auditor; - The qualifications, experience of the internal auditor and his/her staff. - Internal auditor’s independence - The scope of his/her work - The previous experience - Availability of resources - The strength of the Internal Control system  1.7 INTERNAL AUDIT VERSUS EXTERNAL AUDIT  Advantages of Internal Audit; - It reinforces application of strong internal control system. - It acts as a preventive measure for errors and frauds. - Helps management in implementation of company policies. - It guards company resources. - Assists the company in achieving its objectives. - It facilitates the external auditor - The internal auditor being an employee of the company knows better its problems.  1.7 INTERNAL AUDIT VERSUS EXTERNAL AUDIT  Disadvantages of Internal Audit; - Management overreliance on it. - Management may deny its independence. - It may overshadow accounting department. - Management may ignore its recommendations. - Management may misuses it. - The external auditor may over-rely on the internal auditor. - Its installation is expensive.  1.8 STAGES OF AN AUDIT 1. Negotiation with the client. 2. Communication with the previous auditor. 3. Engagement letter. 4. Initial investigation. 5. Record the system. 6. Evaluate the system. 7. Conduct various tests (Compliance tests, substantive tests, verification etc ). 8. Write the draft report. 9. Discuss the draft report with Management (Letter of representation). 10. Issue of the final report and Management letter.  GROUP ASSIGNMENT Number 1 Question 1: Discuss the legal and profession framework of audit Question 2: For the audit report ,make a detailed note on: 1. Introduction 2. Qualities of a good audit report 3. Content of the audit report 4. Types of audit reports 5. Types of opinions Individual Assignment one  To be submitted at 12h00 The IT application in auditing. Is it a must or optional nowadays? Discuss the above in maximum 4 pages