financial audit

COURSE OUTLINECOURSE OUTLINE

FINANCIAL AUDITDAY 1 AND 2

TECHNICAL AUDIT DAY 3

ENTERPRISE RISK MANAGEMENT DAY 4 AND 5

FINANCIAL AUDITFINANCIAL AUDIT

AUDIT OF FINANCIAL STATEMENTS AND RELATED INFORMATION

@Sako Mayrick 2006@Sako Mayrick 2006

WHAT DO YOU EXPECT WHAT DO YOU EXPECT FROM THIS TRAINING?FROM THIS TRAINING?

• List of expectations………


OUTLINEOUTLINE

– Understand the meaning and reason for auditing

– Understand relationship between auditing, attestation and assurance services

– Know the different types of auditors

– Understand the auditor’s role

– Understand the basis for auditing– Understand the audit process


OUTLINEOUTLINE

• Understand the importance of ethics and independence of audit function

• Know the basic elements of audit reporting• Know the auditor’s responsibility for errors,

fraud and illegal acts

• Understanding the practical audit process


What is an audit? Auditing?What is an audit? Auditing?

Put your own definition…..



Historical Background of auditHistorical Background of audit

• The role of auditor goes back many hundreds of years. There are records from ancient Egypt and Rome, showing that people were employed to review work done by tax collector and estate managers

• The emphasis was very much on the detection of fraud and other irregularities


Historical Background of auditHistorical Background of audit

• Emphasis has changed and the role of the auditor becomes much more sophisticated

• Stewardship requires an outsider with sufficient independence and objectively to review the accounts of stewardship and to express an opinion as to their honesty or otherwise.


DEVELOPMENT OF MODERN AUDITINGDEVELOPMENT OF MODERN AUDITING

• Concept of a company as a separate legal entity came into existence in the late ninetieth century.

• This led to the separation of ownership (shareholders) from control (directors) and consequent need to safeguard the interests of the owners, who in all but the smallest of business where shareholders and directors were on and the same) were not involved in the day to day decisions made by the management



• Before 19th Century– the appointed auditor duties to discover fraudulent

misrepresentations, the detection of fraud and error become the major objective of company audits.

• After ( late 19th Century)– However in later part of nineteenth century, there

was a growing school of thought that the prevention of fraud and error (as opposed to its detection) should be the major objective of the auditor (both external and internal) and that the management of a company should play a greater part and accept a larger degree of responsibility in this respect



• The Kingston Cotton Mill case of 1896, established the fact that the auditor should not be responsible for finding every fraud and error. Here, the judgment pronounced that the auditor’s role should be likened to that of a watchdog rather than bloodhound, and that what was required of auditors was that they should act with such reasonable care and skill as was appropriate circumstances


DISADVANTAGES OF AUDITDISADVANTAGES OF AUDIT

• The audit involves the client’s staff and management in giving time to providing information to the auditor. Professional auditors should therefore plan their audit carefully to minimize the disruption, which their work will cause.

• The audit fee, clearly the services of an auditor must be paid for. It is for this reason that few partnership and even fewer sole trader are likely to have their accounts audited. The accountant’s role as the preparer of financial statements, as tax adviser and general financial adviser, becomes much more important to such concerns.


ADVANTAGES OF AUDITADVANTAGES OF AUDIT

• Companies

–Directors

• Assurance that statutory responsibilities concerning accounts have been carried out

• Assistance with statutory responsibilities concerning accounts

• Availability of expert professional advice

• The letter of weakness


ADVANTAGES OF AUDITADVANTAGES OF AUDIT– To shareholders

–Assurance that accounts show a true and fair view and comply with statutory requirements

–Assurance that directors have fulfilled their statutory responsibilities for books and accounts, and the safeguarding of assets

–Assurance that directors have fulfilled their statutory responsibilities for books of accounts and the safeguarding of assets

–Assurance that all directors remuneration has been disclosed


ADVANTAGES OF AUDITADVANTAGES OF AUDIT

– Other organization with published accounts• Assurance to all users of accounts , that the

accounts show a true and fair view and comply with statute

• Assurance that ‘stewards’ have fulfilled their accounting and financial responsibilities

– Private organizations such as partnerships• Assurance that accounts are reliable• Reasonable assurance that all fraud of

consequence has been disclosed.– In addition they provide reliable accounts to

regulatory bodies such as the Companies Registry, the stock exchange etc.



• In previous years it was part of the appointed auditor duties to discover fraudulent misrepresentations, the detection of fraud and error become the major objective of company audits. However in later part of nineteenth century, there was a growing school of thought that the prevention of fraud and error (as opposed to its detection) should be the major objective of the auditor (both external and internal) and that the management of a company should play a greater part and accept a larger degree of responsibility in this respect



• The Kingston Cotton Mill case of 1896, established the fact that the auditor should not be responsible for finding every fraud and error. Here, the judgment pronounced that the auditor’s role should be likened to that of a watchdog rather than bloodhound, and that what was required of auditors was that they should act with such reasonable care and skill as was appropriate circumstances


DUTIES OF AUDITORSDUTIES OF AUDITORS• Carry out procedures designed to obtain

sufficient appropriate audit evidence, in accordance with International Standards of Auditing, to determine with reasonable confidence whether the financial statements are free from materials misstatement

• Evaluate the overall presentation of the financial statements, in order to ascertain whether they have been prepared in accordance with relevant legislation and IFRS/IAS

• Issue a report containing a clear expression of their opinion on the financial statements.


AUDIT AND AUDITINGAUDIT AND AUDITING

AUDITING) is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested parties.


AUDIT AND AUDITINGAUDIT AND AUDITING

Audit refersAudit refers– to an independent examination

of the financial statements of an enterprise,

– conducted with a view to expressing an opinion

– as to whether those statements give a true and fair view


What is true and fair What is true and fair view?view?

• We say financial statements shows true and fair view….. What is it?


What is true and fair view?What is true and fair view?

• True– information is factual and

conforms with reality, not false. – In addition the information

conforms with required standards and law.

– The accounts have been correctly extracted from the books and records


What is true and fair view?What is true and fair view?• Fair

– information is free from discrimination and bias and

– in compliance with expected standards and rules.

– The accounts should reflect the commercial substance of the company’s underlying transactions.


Objectives of AuditingObjectives of Auditing

• Primary Objective (main objective)–To produce a report by the

auditor of his opinion of the truth and fairness of financial statements so that any person reading or using them can have belief in them


Objectives of AuditingObjectives of Auditing• Secondary

– To detect errors and fraud ( Consider materiality)

– To prevent errors and fraud by the deterrent and moral effect of the audit

– To provide spin- off effects. The auditor will be able to assist his clients with accounting , systems, taxation , financial , and other problems.


AUDIT OBJECTIVESAUDIT OBJECTIVES•Validity•Completeness•Cutoff•Ownership•Accuracy•Valuation•Classification•Disclosure


LIMITATION OF AUDITLIMITATION OF AUDIT

• The responsibility for preparation and presentation of the financial statements is that of directors of the entity. The audit does not relieve the directors of any of their responsibilities.– Auditors opinion is not a guarantee of the future viability of

the entity– Auditors opinion is not an assurance of management’s

effectiveness and efficient• Causes of limitations

– The impracticality of examining all items within an account balance or class of transactions

– The inherent limitation of any accounting and control system

– The possibility of collusion or misrepresentation for fraudulent purposes

– Most audit evidence is being persuasive rather than conclusive


PROFESSIONAL SCEPTICISMPROFESSIONAL SCEPTICISM

• Material misstatement may exist in financial statement and auditors should plan their work on this basis, i.e. professional skepticism, ISA, makes it clear that, even where auditors assess that the risk of litigation or adverse publicity as very low , they must still perform sufficient procedures according to auditing standards, ie there can never be a reason for carrying out an audit of a lower quality than that demanded by the ISA’s



• In carrying out his work the auditor should adopt an attitude of professional skepticism, recognizing that circumstances may exist which cause the financial statements to be materially misstated.

• The purpose of the independent audit is to ensure that the financial statements are OBJECTIVE, FREE from BIAS and MANIPULATION and RELEVANT to the need of users.


LEGAL FRAMEWORK OF AUDITINGLEGAL FRAMEWORK OF AUDITING

• The work of an auditor is regulated by two sources– Statues, the Companies Act No.12 of 2002

• The Act also requires auditors to have a recognized professional qualification, as well as laying down minimum disclosure levels as per accountants and auditors Act (Registration) of 1973 as amended

– Professional pronouncements on Auditing ( issued by NBAA and IFAC)

– Professional pronouncements include the rules of professional conduct issued by NBAA and IFAC,

– The ethical principles that govern auditors’ responsibilities are

• Integrity Objectivity

• Independence Professional competence an due care

• Professional behavior confidentiality


TYPES OF AUDITTYPES OF AUDIT

• Statutory Audit, carried because the law requires them. Statutes include Companies Act, Parastatal organization Act

• Private audits, because of auditor’s desire and not because of law e.g. sole trader and partnership

• Internal audits, is the one conducted by an employee of a business into any aspect of its affairs.

• Management audit, an inquiry into efficiency and effectiveness of management

• Public sector audit, contract audit , computer audit etc


TYPES OF AUDITSTYPES OF AUDITS-Financial statements audit -Compliance audits-Financial statements audit -Compliance audits-Operational audits -Comprehensive audits-Operational audits -Comprehensive audits-Forensic audits-Forensic audits

TYPES OF AUDITORSTYPES OF AUDITORS-External auditors -External auditors -Internal auditors -Internal auditors-Government auditors-Government auditors -Forensic auditors-Forensic auditors

ISSUES AFFECTING THE PROFESSIONISSUES AFFECTING THE PROFESSION-Expanded services-Expanded services -Globalization -Globalization-Litigation-Litigation -Independence issues -Independence issues


Presentation of the systems audit

Determine the audit approach

Ascertain relevant systems and controls

Document relevant systems and controls

Confirm operation of systems and controls

Evaluate operation of systems and controls

Submit Interim mgt and letter Select and perform test of controls

Carry out final review

Report to members

Select and perform substantive procedures

Select and perform restricted substantive procedures

Submit final management letter


Planning of the audit

Assessment of the accounting and internal control systems and audit risk assessments

Consideration of the ways in which audit evidence can be sought

Testing of Internal Controls ‘test of control’

Extensive testing of transactions and balances ‘substantive procedures’

Reduced testing of transactions and balances “substantive procedures’

Review of financial statements

Audit Report


ManagementAssertions

THE RELATIONSHIP OF EVIDENTIAL MATTER TO THE AUDIT REPORT

FinancialStatements

AuditObjectives

AuditProcedures

AuditReport

Evidence


MANAGEMENT ASSERTIONS

• Existence or occurrence

• Completeness• Rights and obligations

• Valuation and allocation

• Presentation and disclosure• Existence or occurrence• Completeness• Rights and obligations• Valuation and allocation• Presentation and disclosure


KEY STAGES OF AUDITKEY STAGES OF AUDIT

• Determine audit approach• Ascertain in the accounting system and internal

controls

• Assess the accounting system and internal controls

• Test the accounting system and internal controls

• Test the financial statements ( substantive testing)

• Review the financial statements • Express an opinion

OR


KEY STAGES OF AUDITKEY STAGES OF AUDIT

• Client acceptance and continuance

• Establish the terms of the engagement

• Plan the audit

• Consider internal control

• Conduct substantive audit procedures

• Complete the audit

• Issue audit report


• ATTESTATION occurs when a practitioner is engaged to issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.

• Examples:– The effectiveness of internal control– Financial information other than the financial

statements– Future-oriented financial information– Compliance with statutory, regulatory, or

contractual obligations– Management’s discussion and analysis

AUDITING, ATTESTATION, AND ASSURANCE SERVICESAUDITING, ATTESTATION, AND ASSURANCE SERVICES


ASSURANCE ENGAGEMENTASSURANCE ENGAGEMENT• According to ISA, Audit client is an entity in respect of which a

firm conducts an audit engagement. When the audit client is a listed entity, audit client will always include its related entities. Audit engagement (An assurance engagement) to provide a high level of assurance that financial statements are free of material misstatement, such as an engagement in accordance with International Standards on Auditing. This includes a statutory audit which is an audit required by national legislation or other regulation.

• ISA 100 Assurance Engagements, an assignment whereby a professional accountant is required to evaluate or measure a subject matter that is the responsibility of another party against identified suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about the subject matter. It is important to distinguish between the levels of assurance given by an audit ( which gives a high level of assurance) to that given by other assurance engagements which , depending on the nature of the engagement, may give a lower level of assurance.


ASSURANCE ENGAGEMENTASSURANCE ENGAGEMENT• There is a broad range of assurance engagements ,

including any combination of the following :– Engagements to report on a broad range of subject matters covering

financial and non-financial information.– Engagements intended to provide high or moderate levels of

assurance– Attest and direct reporting engagements– Engagements to report internally or externally– Engagement in the private or public sector.

• ISA 910 states that the objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, any thing has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting frame work (negative assurance)


AUDITING, ATTESTATION, AND ASSURANCE SERVICES

ASSURANCE services are independent professional services that improve the quality of information, or its context, for decision makers.Examples:

Risk assessmentInformation system reliabilityElectronic commerceHealth care performance measurement


THE RELATIONSHIP THE RELATIONSHIP BETWEEN AUDITING, BETWEEN AUDITING, ATTESTATION, AND ATTESTATION, AND

ASSURANCE SERVICESASSURANCE SERVICES

AttestationAuditing Assurance


-Materiality-Materiality

-Audit risk-Audit risk

-Evidence-Evidence

THREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDITTHREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDIT



• Materiality A misstatement or the aggregate of all misstatements in financial statements is considered to be material if, in light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities ( the user), would be changed or influenced by such misstatement or the aggregate of all misstatements.

• Audit risk is the risk that the auditor will fail to express a reservation in his or her opinion on financial statements that are materiality misstated



• Evidence Evidential matter supporting the financial statements consists of the underlying accounting records and all corroborating information available to the auditor.Relevance refers to whether the evidence relates to the specific audit objective being tested.Reliability refers to the whether or not a particular type of evidence can be relied upon to signal the true state of the assertion or audit objective.


INTERNAL AUDITINGINTERNAL AUDITING

• An internal audit is an independent activity established by management to examine and evaluate the organization’s risk management process and systems of control, and to make recommendations for the achievement of company objectives.


INTERNAL AUDITINGINTERNAL AUDITING• The internal audit staffs may also engage in

number of other activities :– Examination and evaluation of financial and

operating information within the organization- in certain organization this can form a type of continuous auditing and may involve sophisticated information systems that capture monitoring of risk and evidencing of controls

– Review of economy, efficiency and effectiveness of operations

– Review of compliance with external laws and regulations and internal policy and procedures

– Review and advice on the development of key organizational systems and on the implementation of major change.


INTERNAL AUDITING CONT…INTERNAL AUDITING CONT…

• The current focus of internal audit is on adding value to an organization through risk control and reviewing all types of risk and recommending relevant controls. The institute of internal Auditors definition has changed the focus of internal audit toward a more risk-based, consultancy type activity. The internal audit can be referred as

– An independent, objective assurance and consulting activity

– Designed to add value and improve an organization’s operations

– Helps the organization accomplish its objectives– Bring systematic, disciplined approach to evaluate and

improve the effectiveness of risk management, control and governance processes.


INTERNAL AUDITING cont…INTERNAL AUDITING cont…

• There are four major areas of importance for internal audit that are addressed

–Corporate governance

–Risk management

–Organizational control

–Corporate objectives


INTERNAL AND EXTERNAL AUDITINGINTERNAL AND EXTERNAL AUDITING

It is important to understand and recognize It is important to understand and recognize the differences and commonalities between the differences and commonalities between

internal and external audit. Internal and internal and external audit. Internal and external auditor should work closely external auditor should work closely

together, in particular to coordinate activity together, in particular to coordinate activity and maximize effectiveness and where and maximize effectiveness and where

appropriate external audit may rely on the appropriate external audit may rely on the work of internal audit. However, there are work of internal audit. However, there are number of fundamental differences in their number of fundamental differences in their objectives, scope and responsibility.objectives, scope and responsibility.


Internal auditing External auditing

Objectives To advise management on whether the organization has sound systems of internal controls to protect the organization against loss

To provide an opinion on whether the financial statements provide a true and fair view

Legal basis All areas of the organization, operational as well as financial

Financial focus

Scope All areas of the organization, operational as well as financial

Financial focus

Approach Increasingly risk baseAssess risksEvaluate system of controlsTest operation of systemMake recommendation for

improvements

Increasingly risk basedTest underlying transactions that

form the basis of the financial statements

Responsibility To advice and make recommendations on the internal control and corporate governance

To form opinion on whether the financial statements provide a true and fair view.


ISA 610, “CONSIDERING THE WORK OF INTERNAL AUDITING”ISA 610, “CONSIDERING THE WORK OF INTERNAL AUDITING”

• ISA 610 requires external auditors to consider the activities of internal auditors and their effect, if any, on the nature, timing, and extent of the external auditor’s procedures. The external auditor considers the organizational status of the internal audit function, the scope of its function, the technical competence of its members and the professional care they exercise when assessing the work of the department.

• The auditing process is very similar between the external and internal auditors however; the audit objectives are often very different.


ISA 610, “CONSIDERING THE WORK OF INTERNAL AUDITING”ISA 610, “CONSIDERING THE WORK OF INTERNAL AUDITING”There are number of factors to consider for an auditor to rely on the

work of internal auditor:• (a) Organizational status: Specific status of internal auditing in the entity

and the effect this has on its ability to be objective. In the ideal situation, internal auditing will report to the highest level of management and be free of any other operating responsibility. Any constraints or restrictions placed on internal auditing by management would need to be carefully considered. In particular, the internal auditors will need to be free to communicate fully with the external auditor.

• (b) Scope of function: The nature and extent of internal auditing assignments performed. The external auditor would also need to consider whether management acts on internal audit recommendations and how this is evidenced.

• (c) Technical competence: Whether internal auditing is performed by persons having adequate technical training and proficiency as internal auditors. The external auditor may, for example, review the policies for hiring and training the internal auditing staff and their experience and professional qualifications.

• (d) Due professional care: Whether internal auditing is properly planned, supervised, reviewed and documented. The existence of adequate audit manuals, work programs and working papers would be considered.


OUTSOURCING OF IA FUNCTIONOUTSOURCING OF IA FUNCTION• The National Board of Accountants and Auditors’ Governing Board at its

132nd meeting held on 11th April 2005, among other issues, deliberated on the above professional issue and resolved that the outsourcing of the Internal Audit function in the country is a relatively new phenomenon, which needs some guidance. In view of this, it was agreed that institutions wanting to outsource the Internal Audit function may only do so under the following conditions:

• (1) That the service be provided in the form of a consultancy by competent, qualified accountants registered with the Board in the registration category of CPA-PP.

• (2) That the outsourced Internal Auditor be distinct from the External Auditor of the entity.

• (3) That the institution seeking such professional services should have in place an Audit Charter.

• (4) That such professional services be guided by very clearly worked out “Terms of Reference” showing:

• – the scope of the audit• – the number of man-days to be used• – the reporting requirement including the types and frequencies

of reports to be prepared• – the price of the consultancy


OUTSOURCING OF IA FUNCTIONOUTSOURCING OF IA FUNCTION• (5) That the consultancy be for a specified time frame after

which there should be need to change the internal auditor.• (6) That the client (procuring entity) shall have the powers to

pre-maturely terminate the consultancy contract on unsatisfactory performance of the outsourced Internal Auditor (Consultant).

• (7) That the Internal Audit process should be guided by programmes and detailed working papers which should be available for AQR purposes, should need arise.

• (8) That the outsourcing of the Internal Audit function should avoid any kind of conflict of interest among the parties.

• (9) That the Internal Auditor should exercise the pre-requisite independence when rendering such professional services.

• (10)That such professional services should be procured based on competitive bidding processes.

• All organizations / entities operating in Tanzania and the general public are required to note this development and observe the above guidelines.


SHIFT OF EMPHASIS OF AUDITSHIFT OF EMPHASIS OF AUDIT• The emphasis in approaching an audit has shifted

from detailed checking of individual items towards an overall review of the systems in operation; followed by an examination of the records and the financial statements prepared from them. Amongst the reason for this major shift of emphasis are:– The increasing size and complexity of modern

enterprises

– The development of more accurate and sophisticated computerized systems

– The requirement that the auditor should also report on the profit and loss account, which entails a review of all transactions during the period, not simply of year-end balances as before.


INTERNAL AUDITING WORKED EXAMPLEINTERNAL AUDITING WORKED EXAMPLE

• TPDC, parastatal organization dealing with industrial research development has recently decided to appoint a small internal audit team. The Chief Accountant has sent to you as statutory auditor for a number of years for your comment on the following job specification for the teamJob specification- internal auditYour role is to– Review accounting systems and related internal controls– Examine financial and operating information for management,

including detailed testing of transactions and balances– Review the economy , efficiency and effectiveness of operations and

of non financial controls– Review the implementation of corporate policies, plans and

procedures.

TPDC also state that the new internal audit team should enable the statutory auditors to reduce the amount of testing they undertake and thus, to increase overall efficiency and reduce the cost of the statutory audit.


INTERNAL AUDITING WORKED EXAMPLEINTERNAL AUDITING WORKED EXAMPLE

1. Describe the objectives and scope of internal audit function according to ISA 610

2. Comment briefly on the four items in the internal audit job specification indicating with examples the extent, which they might impinge upon the work of the statutory auditor.

3. List and explain five criteria which you would have to consider accordance to ISA 610, before deciding how much reliance you could place on the work done by the internal auditor

4. Outline the response, which you would make to TPDC regarding a possible reduction in the cost of the statutory audit.

5. If the management of TPDC decided to outsource the internal audit services. Comment briefly on possible advantages and disadvantages of the procedure.

6. Describe major ethical matters in accordance to ISA which external auditors to TPDC should consider in case they decide to undertake the external audit assignment


AUDIT AS A COMMUNICATION MEDIUMAUDIT AS A COMMUNICATION MEDIUM

• According to ISA 700, the objective of any audit is for the auditor to obtain sufficient appropriate audit evidence to be able to express an opinion on the financial statements.

• ISA 700, provides authoritative guidance on audit reporting.

• Audit report is the primary means of communication between the auditor and the shareholders of the company.

• In order to convey information of a succinct form, the audit report has become an extremely formalized group of phrases, each of which has special significance. These are similar to legal phrases know as “terms of art’. Such phrases do not mean merely what they appear to mean on the face of it , and have significance much greater that they first appear to. Any deviation from the standard format is regarded by accountants as being significant and may provide more important extra information.


THE AUDITOR'S STANDARD UNQUALIFIED AUDIT REPORTTHE AUDITOR'S STANDARD UNQUALIFIED AUDIT REPORT

• This is the most common type of audit report.• The standard unqualified audit report contains

seven important elements:

– Title– Addressee– Introductory paragraph – Scope paragraph– Opinion paragraph– Name of auditor– Date of report


Example of unqualified reportExample of unqualified report• AUDITOR’S REPORT TO .....• We have audited the financial statements of ABC Company for

the year ended December 31, 19X0, from which the summarized financial statements were derived, in accordance with International Standards on Auditing (or refer to relevant national standards or practices). In our report dated March 10, 19X1 we expressed an unqualified opinion on the financial statements from which the summarized financial statements were derived.

• In our opinion, the accompanying summarized financial statements are consistent, in all material respects, with the financial statements from which they were derived.

• For a better understanding of the Company’s financial position and the results of its operations for the period and of the scope of our audit, the summarized financial statements should be read in conjunction with the financial statements from which the summarized financial statements were derived and our audit report thereon.

• AUDITOR• Date• Address


QUALIFIED REPORTQUALIFIED REPORT

• A qualified report is less common and is where an auditor disagrees with the view presented in the accounts, or if he has not been able to form an opinion because of inadequate evidence.A sample of it can be obtained on ISA 800 appendix 643 as an appendix 4.

• Reasons for qualification– A departure from IFRS– Scope limitation– The auditor is not independent


Example of qualified reportExample of qualified report• AUDITOR’S REPORT TO .....• We have audited the financial statements of ABC Company for

the year ended December 31, 19X0, from which the summarized financial statements were derived, in accordance with International Standards on Auditing (or refer to relevant national standards or practices). In our report dated March 10, 19X1 we expressed an opinion that the financial statements from which the summarized financial statements were derived gave a true and fair view of (or presented fairly, in all material respects) ...except that inventory had been overstated by ....

• In our opinion, the accompanying summarized financial statements are consistent, in all material respects, with the financial statements from which they were derived and on which we expressed a qualified opinion.

• For a better understanding of the Company’s financial position and the results of its operations for the period and of the scope of our audit, the summarized financial statements should be read in conjunction with the financial statements from which the summarized financial statements were derived and our audit report thereon.

• AUDITOR• Date• Address


Other reportsOther reports

• In summary the audit report must contain; the heading which shows the independence of the auditor, the fact that the report is addressed to the shareholders and the name of the company; Respective responsibilities of directors and auditors; the basis of opinion and the opinion. (Please visit google search on the Internet for various samples of audit report).

• Other forms– Qualified– Denial/Disclaimer– Adverse


AUDIT QUALIFICATION MATRIXAUDIT QUALIFICATION MATRIX

Nature of Circumstance

Material but not fundamental

Fundamental

Limitation of Scope

Except for ..might

Disclaimer

Disagreement Except for Adverse opinion


AUDIT QUALIFICATION MATRIX… cont.AUDIT QUALIFICATION MATRIX… cont.

• Except for ..might auditors disclaim an opinion on a particular aspects of the accounts which is not considered fundamental

• Disclaimer of Opinion- Auditor state they are unable to form an opinion in the truth and fairness

• Except for , auditor expresses adverse opinion on particular aspects of accounts which is not considered fundamental

• Adverse opinion, auditors state that accounts do not give a true and fair view.


AUDIT QUALIFICATION MATRIXAUDIT QUALIFICATION MATRIX … cont … cont

• Limitation of Scope,– Absence of accounting records

– Ownership of material assets

• Disagreement– Inappropriate accounting policies

– Facts /amount– Manner or extent of disclosure– Failure to comply with legislation


REPORTING UNCERTAINITYREPORTING UNCERTAINITY

• Inherent uncertainty, an uncertainty whose resolution is dependent upon uncertain future event outside the control of the reporting entity’s directors at the date financial statement are approved.

• Fundamental Uncertainty, is an inherent where the magnitude of its potential impact is so great that, without a clear disclosure of nature and implication of uncertainty the view given by the f/s would be seriously misleading.

• E.g. Going concern• Major litigation


Worked ExampleWorked Example• During the course of your audit of the fixed assets of NEDCO

LTD at 31 March 2004 two problems have arisen.• The calculations of the cost of direct labour incurred on assets

in course of construction by the company’s employees have been accidentally destroyed for the early part of the year. The direct labour cost involved is Tshs. 10,000,000/=

• The company has received a government grant of Tshs25, 000,000/= towards the cost of plant and equipment acquired during the year and expected to last for ten years. The grant has been credited in full to the profit and loss account as exceptional income.

• Other relevant financial information is as follows. Tshs.

• Profit before tax 100,000,000/=• Fixed asset additions 133,000,000/=• Assets constructed by company 34,000,000/=• Fixed asset at net book value 666,667,000/=


Worked ExampleWorked Example

• Required:• List the general forms of qualification available to

auditors in drafting their report and state the circumstance in which each is appropriate.

• State whether you feel that a qualified audit report would be necessary with respect to the treatment of the government grant, draft the section of the report describing the matter (the whole report is not required).

• On the assumption that you decide that a qualified audit report is necessary with respect to the treatment of the government grant, draft the section of the report describing the matter (the whole report is not required).

• Outline the auditor’ general responsibility with regard to the statement in the directors’ report concerning the valuation of land and buildings.


MISCELLANEOUS MATTERSMISCELLANEOUS MATTERS

Timing of Audit work– At or after year end- suitable for small business– Interim and final audit-

• Interim – test of controls, planning• Final - Substantive balance sheet audit

– Continuous audit – the auditor is present throughout the year , suitable for the large client

• Responsibilities of directors– Safeguard assets– Prevent fraud and errors– Ensure proper accounting records as per Companies act– Prepare financial statements– Prepare company’s return to registrar of companies– Set up system of IC– Directors are responsible to adopt consistent and appropriate

accounting policies for f/s, they must comply with Companies act and comply with accounting standards


Miscellaneous Issues cont…Miscellaneous Issues cont…

• Responsibilities of Auditors– End result work for f/s on their true and fairness

• The auditor’s should have– Deep understanding and knowledge of accounting

• Directors will consult auditors of accounting policies to adopt• Ultimately auditors must stand back from accounting function

• Social Audit– In Narrow sense it is a financial audit

• It adds value• Efficiency of markets and investment funds

– Measuring social, ethical and Environmental conduct to ensure

• CSR, accountability and transparency

– Ensures that in an ever competitive corporate environment management do not sacrifice their social value in quest for higher profitability


AGENCY THEORY

• Principal- Agent to perform task on his behalf

• Agent will not act against the interest of the principal

• Directors are like agents to shareholders


LETTER OF ENGAGEMENTLETTER OF ENGAGEMENT

• It is a letter send by an auditor before commencing any professional work, it show an agreement in writing, the precise scope and nature of the work to be undertaken

• Purpose– To define clearly the extent of the auditor’s

responsibilities– To minimize misunderstandings between auditor firm and

client– To confirm in writing the verbal agreement– To confirm acceptance by the auditor of his engagement– To inform and educate the client

– Avoidance of implied contracts arising out of the articles of Association or previous conduct of the auditor


LETTER OF ENGAGEMENTLETTER OF ENGAGEMENT

• Timing – To all new clients before any professional

work has been started– To all existing clients who have not previously

had such a letter– Whenever there is significance changes of

circumstances ( e.g. new ISA’s , major change in management.

– The letter should be reviewed every year to see if there is a need for revised letter

– To each member of the company of the group ( if it is a group)


Procedures and ContentProcedures and Content

• Before acceptance discuss the precise terms with the management( board for a company)

• Draft and sign the letter before commencing any part of an assignment

• Receive the client’s written acceptance

• Every year review the letter and consider if revision is necessary


CONTENTS OF LETTER OF ENGAGEMENTCONTENTS OF LETTER OF ENGAGEMENT

• The Board’s responsibilities according to company Act• The auditor’s responsibilities to report on f/s and consistency

of view of directors report• The scope of auditor’s work

– Auditing standards– Accounting systems review– Collection of audit evidence– Tests and reliance on internal controls

• Sending of letter of weakness to the management• Any special factors

– Relation with internal audit– Audit of division and branches– Any overseas location problems– Other auditors if any– Significance reliance on supervision of the directors in small proprietary

companies


CONTENTS OF LETTER OF ENGAGEMENTCONTENTS OF LETTER OF ENGAGEMENT

• Any special factors– Relation with internal audit– Audit of division and branches– Any overseas location problems– Other auditors if any– Significance reliance on supervision of the directors in small

proprietary companies

• The need for a letter of representation from the management

• Irregularities and fraud – the directors’ primary responsibility– The auditor’s planning of his audit to have a reasonable expectation

of discovering material misstatement in accounts- non reliance on the auditor to uncover irregularities and frauds

• Any agreement for the auditors to carry out work of a bookkeeping or accounting nature- this could be covered on separate letter


CONTENTS OF LETTER OF ENGAGEMENT CONT….CONTENTS OF LETTER OF ENGAGEMENT CONT….

• Any agreement to provide taxation services – this could be a separate letter

• The CHINNESE WALL IDEA; where accounting and tax services are carried out the staff may be different from those engaged on audit work and so information given to tax or accounting staff is not thereby given to audit staff.

• The fees and the basis on which they are charged• A request for written acknowledgement of the letter

and that it creates a contractual obligations. In the case of a company the letter of acknowledgement should be signed on behalf of the board


CONCEPT OF MATERIALITYCONCEPT OF MATERIALITY

• According to ISA 320, the auditor should consider materiality and its relationship with audit risk when conducting an audit. Also glossary number 139 defines materiality as Materiality—Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cutoff point rather than being a primary qualitative characteristic which information must have if it is to be useful.


CONCEPT OF MATERIALITYCONCEPT OF MATERIALITY

• Auditors hope that their audit procedures will uncover any large errors in the financial statements they are auditing. Materiality should be considered by the auditor when:

– Determining the nature, timing and extent of audit procedures;

– Evaluating the effect of misstatements.• Materiality is defined as the expression for the

relative significance or importance of a particular matter in the context of financial statements as a whole. A matter is material if its omission or misstatement would reasonably influence the decisions of an addressee of the auditor’s report. Materiality is not capable of the general mathematical definition as it has both qualitative and quantitative aspects.


CONCEPT OF MATERIALITY CONT…CONCEPT OF MATERIALITY CONT…

• Auditors’ responsibility is to plan and perform their audit to provide reasonable assurance that the financial statements are free of material misstatement and give a true and fair view. From audit point of view anything that would distort the view given by accounts must lead to qualification but only if it is material.

• Example things that will fit the above definition include

– Inclusion of deferred revenue expenditure, such as advertising costs, in debtors and prepayments

– A loan which could not quickly be recalled shown under money at call at short notice

– Omission of an item of stock


CONCEPT OF MATERIALITY CONT…CONCEPT OF MATERIALITY CONT…

• The key problem in practice is that of how ‘large’ an item has to be for it to be considered as material.

• An initial assessment of materiality during audit planning assists in the determination of an efficient and effective audit approach. The preliminary materiality assessment helps auditor to decide such factors as what items to examine and whether to use sampling techniques and which ones. This enables them to select audit procedures that will reduce audit risk to an acceptable level.


MATERIALITY CONCEPT CONT….MATERIALITY CONCEPT CONT….

• Auditors must use their professional judgment in coming to a decision as to whether an item is, or is not, material. Important points to take into consideration are as follows:

– What qualitative aspects are involved, such as the inaccurate or inadequate description of an accounting policy?

– Relatively small amounts, such as a small error in a month end procedure, can cumulatively have a material effect, if repeated.

– Materiality is relative factor and should be considered in relative terms. Shs.1,000,000 may be absolutely immaterial in the accounts of a larger company , whereas in a small organization the reverse would probably be true. Further, under this heading and amount must considered in relation to:-


MATERIALITY CONCEPT CONT….MATERIALITY CONCEPT CONT….

• Items in the overall financial statement level• Items at individual account balance or

transaction level• Statutory and other disclosure requirements

which may require disclosure regardless of value , such as those relating to directors’ emoluments.

• The corresponding amount in previous years– What degree of latitude is allowable in deciding on

the amount attributable to a particular item? Some items, such as directors’ fees, are capable of exact definition; other, such as depreciation and provisions for obsolete or damaged stock, are at best an intelligent estimate. The overriding consideration must be whether the accounts disclose a true and fair view. It is also clearly important that such items are consistently treated from year to year.


Materiality Cont…..Materiality Cont…..

• Auditors must use their professional judgment in deciding whether or not an item is material. They must consider:

• Qualitative aspects• The cumulative effect of small amounts• The relative nature of materiality• The degree of latitude that is allowable.

• According to ISA 320:400, in evaluating whether the financial statements give a true and fair view, auditors should assess the materiality of the aggregate of uncorrected misstatements. This indicates that the overall effect of misstatements should be evaluated.



• If the auditor believes that the aggregate of uncorrected misstatement may be material, they may wish to extend their audit testing to obtain more audit evidence in the relevant area, or request the directors to adjust the financial statements according to ISA 260 “Communication of audit matters to those who are charged with Governance”. In practice, once the directors have been informed of the misstatements in the draft accounts, they are likely to be happy for accounts to be adjusted. If the directors refuse any adjustments, the auditor should consider the implications for the audit report.



• The following are some of audit tests to determine whether an item is material.

– Who are the relevant users?

– What are their decision making needs?

– For a given item, what is the appropriate context for assessing its materiality?

– In what range of values do items become critical in terms of materiality



• The following are some of audit tests to determine whether an item is material…

– For a given item, what is the appropriate context for assessing its materiality?

– Securities and Exchange Commission in US (main regulator of US securities Laws) takes the following rule of thumb for materiality.

– Errors over 10% - material

– Errors between 5% and 10% may be material

– Errors less than 5% - not material. But note that these are figures as guidelines only, judgment is required.


General Principles of an AuditGeneral Principles of an Audit • The auditor should comply with the Code of

Ethics for Professional Accountants issued by the International Federation of Accountants. Ethical principles governing the auditor’s professional responsibilities are:– Independence; Integrity;– Objectivity;– Professional competence and due care;– Confidentiality; Professional behavior; and– Technical standards.


• • Integrity– A professional accountant should be straightforward and honest in

performing professional services.*• • Objectivity

– A professional accountant should be fair and should not allow prejudice orbias, conflict of interest or influence of others to override objectivity.

• • Professional Competence and Due CareA professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation and techniques.

• • ConfidentialityA professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose.

General Principles of an AuditGeneral Principles of an Audit


• Professional BehaviorA professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. The obligation to refrain from any conduct which might bring discredit to the profession requires IFAC member bodies to consider, when developing ethical requirements, the responsibilities of a professional accountant to clients, third parties, other members of the accountancy profession, staff, employers, and the general public.

• • Technical StandardsA professional accountant should carry out professional services in accordance with the relevant technical and professional standards.

• Professional accountants have a duty to carry out with care and skill, the instructions of the client or employer insofar as they are compatible with the requirements of integrity, objectivity and, in the case of professional accountants in public practice. In addition, they should conform with the technical and professional standards promulgated by:– . IFAC (e.g., International Standards on Auditing);– . International Accounting Standards Board;– . The member’s professional body or other regulatory body; and– . Relevant legislation.

General Principles of an AuditGeneral Principles of an Audit



• The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated

• An attitude of professional skepticism means the auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that contradicts or brings into question the reliability of documents or management representations

• In planning and performing an audit, the auditor neither assumes that management is dishonest nor assumes unquestioned honesty. (Remember Mautz and Sharaf audit postulates).

• Accordingly, representations from management are not a substitute for obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.


SCOPE OF AUDITSCOPE OF AUDIT

• The term “scope of an audit” refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit. The procedures required to Conduct an audit in accordance with ISAs should be determined by the auditor having regard to the requirements of ISAs, relevant professional bodies, legislation, regulations and, where appropriate, the terms of the audit engagement and reporting requirements.

• An audit in accordance with ISAs is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement. Reasonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole. Reasonable assurance relates to the whole audit process.


SCOPE OF AUDITSCOPE OF AUDIT

REASONABLE ASSURANCE Vs ABSOLUTE ASSURANCE

• An auditor cannot obtain absolute assurance because there are inherent limitations in an audit that affect the auditor’s ability to detect material misstatements. These limitations result from factors such as:– The use of testing.– The inherent limitations of internal control (for

example, the possibility of management override or collusion).

– The fact that most audit evidence is persuasive rather than conclusive.


REASONABLE Vs ABSOLUTE ASSURANCE…..REASONABLE Vs ABSOLUTE ASSURANCE…..

• Also, the work undertaken by the auditor to form an audit opinion is permeated by judgment, in particular regarding:

• The gathering of audit evidence, for example, in deciding the nature, timing,

• and extent of audit procedures; and• The drawing of conclusions based on the

audit evidence gathered, for • example, assessing the

reasonableness of the estimates made by management

• in preparing the financial statements.


QUALITY CONTROLQUALITY CONTROL

• According to ISA 220, the audit firm should implement quality control policies and procedures designed to ensure that all audits are conducted in accordance with ISAs or relevant national standards or practices. The nature, timing and extent of an audit firm’s quality control policies and procedures depend on a number of factors such as the – size and nature of its practice, – its geographic dispersion,– its organization and– appropriate cost/benefit considerations.


QUALITY CONTROLQUALITY CONTROL

• The firm’s general quality control policies and procedures should be communicated to its personnel in a manner that provides reasonable assurance that the policies and procedures are understood and implemented. Further, The auditor should implement those quality control procedures, which are, in the context of the policies and procedures of the firm, appropriate to the individual audit.


OBJECTIVES OF QCOBJECTIVES OF QC• (a) Professional requirements:

Personnel in the firm are to adhere to the principles of independence, integrity, objectivity, confidentiality and professional behavior.

• (b) Skills and competence:The firm is to be staffed by personnel who have attained and maintain the technical standards and professional competence required to enable them to fulfill their responsibilities with due care.

• (c) Assignment:Audit work is to be assigned to personnel who have the degree of technical training and proficiency required in the circumstances.

• (d) Delegation:There is to be sufficient direction, supervision and review of work at all levels to provide reasonable assurance that the work performed meets appropriate standards of quality.


OBJECTIVES OF QCOBJECTIVES OF QC• (e) Consultation:

Whenever necessary, consultation within or outside the firm is to occur with those who have appropriate expertise.

• (f) Acceptance and retention of clients:An evaluation of prospective clients and a review, on an ongoing basis, of existing clients is to be conducted. In making a decision to accept or retain a client, the firm’s independence and ability to serve the client properly and the integrity of the client’s management are to be considered.

• (g) Monitoring:The continued adequacy and operational effectiveness of quality control policies and procedures is to be monitored.


PRINCIPLES OF DELEGATION IN QC….PRINCIPLES OF DELEGATION IN QC….

• Any delegation of work to assistants would be in a manner that provides reasonable assurance that such work will be performed with due care by persons having the degree of professional competence required in the circumstances. In due course the following matters will be considered:

• Direction• Supervision• Review


Principles of Delegation in QCPrinciples of Delegation in QC– Direction

• Assistants to whom work is delegated need appropriate direction. Direction involves informing assistants of their responsibilities and the objectives of the procedures they are to perform. It also involves informing them of matters, such as the nature of the entity’s business and possible accounting or auditing problems that may affect the nature, timing and extent of audit procedures with which they are involved. The audit program is an important tool for the communication of audit directions. Time budgets and the overall audit plan are also helpful in communicating audit directions.


PRINCIPLES OF DELEGATION IN QC…..PRINCIPLES OF DELEGATION IN QC…..

• SupervisionSupervision is closely related to both direction and review and may involve elements of both. Personnel carrying out supervisory responsibilities perform the following functions during the audit:– Monitor the progress of the audit to consider whether:

• Assistants have the necessary skills and competence to carry out their assigned tasks;

• Assistants understand the audit directions; and• The work is being carried out in accordance with the overall audit

plan and the audit program;– Become informed of and address significant accounting

and auditing questions raised during the audit, by assessing their significance and modifying the overall audit plan and the audit program as appropriate; and

– Resolve any differences of professional judgment between personnel and consider the level of consultation that is appropriate.


PRINCIPLES OF DELEGATION IN QC….PRINCIPLES OF DELEGATION IN QC….

• ReviewThe work performed by each assistant needs to be

reviewed by personnel of at least equal competence to consider whether:– The work has been performed in accordance with the

audit program;– The work performed and the results obtained have

been adequately documented;– All significant audit matters have been resolved or

are reflected in audit conclusions;– The objectives of the audit procedures have been

achieved; and– The conclusions expressed are consistent with the

results of the work performed and support the audit opinion.


THINGS TO BE REVIEWED ON TIMELY BASISTHINGS TO BE REVIEWED ON TIMELY BASIS

• The overall audit plan and the audit program;• The assessments of inherent and control risks, including the

results of tests of control and the modifications, if any, made to the overall audit plan and the audit program as a result thereof;

• The documentation of the audit evidence obtained from substantive procedures and the conclusions drawn there from, including the results of consultations; and

• The financial statements, proposed audit adjustments and the proposed auditor’s report.

The process of reviewing an audit may include, particularly in the case of large complex audits, requesting personnel not otherwise involved in the audit to perform certain additional procedures before issuing the auditor’s report.


CONTEMPORARY AUDIT ISSUES AS PART OF AQRCONTEMPORARY AUDIT ISSUES AS PART OF AQR

• Adhering generally to auditing standards and Guidelines

• Obtaining confirmation direct from the company’s bankers of bank balances and other important matters known to the bankers.

• Obtaining direct confirmation of balances owed by debtors

• Attendance at stocktaking.


REGULATORY FRAMEWORK OF AUDITING IN TANZANIAREGULATORY FRAMEWORK OF AUDITING IN TANZANIA

• The work of auditor today is regulated by mainly three sources:

– Statutes, Companies Act is the most important and – Professional pronouncements on auditing which are issued by the

NBAA.– For public accounts, legal framework is in the Public Finance Act

No. 6 of 2001 and Public Procurement Act No.21 of 2004. Sections 26 reads “there shall continue in existence of public national audit office which shall be headed by the Controller and Auditor –General appointed by the president. The Controller and Auditor General shall , in addition to terms and conditions specified in the Constitution , hold the office on such terms and conditions as may be provided in any written law or as may be determined by the President and set out in instrument of his appointment. Section 30 of the Public finance Act has set out the functions of the CAG.( this shall be discussed in Public Sector Audit topic)

– The constitution of the United Republic of Tanzania Section 143 (1) through (6)

– Income Tax Act, 2004 – Auditors and Accountants (Registrations) Act.; Act No. 33 of 1972

( as amended)– The Cooperatives Societies Act No.15 of 1991 ( as amended)– Local Government Finance Act No.9 of 1982 ( as amended)


LEGAL FRAMEWORK OF AUDITINGLEGAL FRAMEWORK OF AUDITINGCOMPANIES ACT NO.12 OF 2002COMPANIES ACT NO.12 OF 2002

• Requirement of the company to prepare accounts( Directors’ Responsibility)- Section 151 -160

• Sect.151– Books of accounts in Swahili or English to show and

explaining the company’s transactions• Timely and accurate transactions• The Financial statements complies with requirements of the Act

– Books of accounts to be kept in a registered office available for inspection by directors

– The books of accounts to be preserved for six years


Sect.151Sect.151… cont… cont

–Failure to comply with the section on conviction liable to imprisonment or fine or both

•Sect.152Sect.152–Accounting period to be more than six months but not more than 18 months from the date of incorporation–On subsequent periods should be 12 month

•Sect.153Sect.153–Accounts should be prepared and indicates

•A profit and loss account or, in the case of a company not trading for profit , an income and expenditure account;•A balance sheet as at the last day of the accounting period•A cash flow statement


Companies Act…. Cont….Companies Act…. Cont….

• Sect.154– The financial statement shall give a true and fair view of the

state of affairs of the company as at the end of its accounting period.

– The financial statement shall comply with requirement specified in regulations prescribed by the Minister, or the NBAA or such other body as the Minister may decide, having regard in either case to generally accepted principles of accounting, and the regulations in this section.

– If special circumstances compliance with any requirements above is inconsistent with the requirement of true and fair view, the directors shall depart from such requirements to the extent necessary to give a true and fair view. Particulars of any such departure, the reasons for it and its effect shall be given in the not to accounts.

– Failure to comply with requirements of this section by directors , they are liable for fine or imprisonment


Companies Act…. Cont….Companies Act…. Cont….

• Sect.155– Duty to prepare group accounts

• Consolidated financial statements• Financial statements must give a true and fair view

• Sect.156– Exemption for preparation of group accounts

• If it is a subsidiary of another company that prepares group account

• Sect. 157– Registrar may allow the company to extend its accounting period

to match with that of holding company including submission of relevant returns.

• Sect. 158– Company annual accounts to be approved by the BoD and

signed on behalf by the director– Every copy of Balancer sheet shall be laid before the general

meeting or circulated or issued and state the name of a person who signed the balance sheet

– A copy of Balance Sheet to be delivered to Registrar– Failure to comply with requirement is liable to fine.– Defined “annual accounts”

• Sect.159– Directors of a company should prepare Directors’ report giving a

a fair review of the development of the business of the company and its subsidiaries during the accounting period and their position at the end of it and the amount if any that should be paid by the way of dividend

– Failure to comply results into fine or imprisonment.


Companies Act… cont..Companies Act… cont..

• Sect.159– Directors of a company should prepare Directors’ report giving a

a fair review of the development of the business of the company and its subsidiaries during the accounting period and their position at the end of it and the amount if any that should be paid by the way of dividend

– Failure to comply results into fine or imprisonment.

• Sect.160– Directors report laid before the company meeting

shall state the name of the person who signed it on behalf of the Board

– The report must be signed by the director and secretary of the company.

– Failure to comply or false information is guilty of an offence and liable to a fine.


Auditor’s Report as per CAAuditor’s Report as per CA• Sect. 161

– The auditor shall make a report to the company’s members on all annual accounts of which copies are laid bere the company in the general meeting during their tenure in the offiece

– The report shall state• Whether in Auditor’s opinion the annual accounts have been

properly prepared in accordance with the Act.• Whether a true and fair view is given

– Balance sheet – state of affairs of the the company at the end of the accounting period

– Profit and Loss Account– Cash flow statement– Group accounts – consolidation as a whole

• Information in the Directors Report for the accounting period for which the annual accounts are prepared and are consistent with those accounts ; and if they ar of opinion that it is not , they shall state the fact in their report


Auditor’s Report as per CAAuditor’s Report as per CA

• Sect.162– The Auditor’s Report shall state the names of auditors

and be signed by them– Every copy of the auditors’ Report shall state names

of the Auditors– If no name of the auditor is give the company and

every officer who is default shall be liable to a fine– Signature by the auditors are where the office of

auditor is held by a body corporate or partnership to signature in the name of the body corporate or partnership by a parson authorized to sign on its behalf



• Section 163– In preparing company’s report the auditors shall carry out

such investigations as will enable them to form opinion as to• Whether proper accounting records have been kept by the company

and proper return adequate for their audit have been received from branches not visited by them

• Whether the company’s individual accounts are in agreement with the accounting records and returns.

– Any departure must be stated in fact in the auditors report– Any failure to obtain information necessary for purpose of

audit must be stated– If the requirements of section 206 relating to disclosure of

information on emoluments and other benefits of directors and others are not complied with in the annual accounts, the auditors shall include in their report , so far as they are reasonably able to do so , a statement giving required particulars.



• Sect.164– A copy of annual accounts, directors report and

auditors report shall not less than 21 days before the date general meeting be sent to every member of the company , every holder of debenture of the company and all persons other then members or holders of debenture of the company being a person so entitled.

– Failure to comply results into fine

• Sect. 165– Every other member of the company whether or not is

entitled, shall be furnished on demand without charge a copy of last annual accounts of the company, together with a copy of Director’s Report and the Auditor’s Report , within 7 days.



• Sect.166– The directors, in respect of each accounting period

must lay before the company in the general meeting eh annual accounts, the directors report and Auditors report on those accounts within seven months for a public company and ten months for the private from the completion of accounting period

– Failure to the above is guilty of offence by every officer or director and liable to a fine and for continued contravention, to daily fine.

– It is a defence to prove that a person took reasonable steps to comply before the end of the period BUT it is not a defence to prove that the documents in question were not in fact prepared as required by this part.



• Sect. 167– Directors should deliver to Registrar within each accounting

period a copy of annual accounts, auditors reports and directors reports

– Exemption for private company according to section 171– Failure to which every person who immediately before the

end of that period was a director of the company is guilty of an offence and liable to fine and continued contravention , to a daily default fine

– If the directors fails to make good the default within 14 days after service of the note of compliance, the court may on the application of any member of creditors of the company or of the Registrar , make an order directing the directors to make good the default within such time as may be specified in the order.. And the court may provide that all costs of and incidental to the application shall be born by the directors.



• Sect.168– Any problems on non-compliance with the act on

submitted returns the Minister may give notice to the Directors on the same.

– The notice shall specify the period of not less than one month for the directors to give him an explanation of the accounts or prepare revised accounts. The minister may apply to the court for the company to prepare and have audited the revised accounts

• Section 169– Set out conditions for unlimited company not to

submit the required reprots


Auditors as per CAAuditors as per CA

• Section 170– The company shall at each general meeting appoint

an auditor or auditors – Hold office from the conclusion of annual meeting to

the conclusion of the next – The retired auditor shall deem to be re-appointed

( however appointed) without any resolution being being passed unless

• He is not qualified for re-appointment• A resolution is passed at the meeting appointing somebody

instead of him or providing expressly that he shall not be re-appointed

• He has given the company notice in writing of his unwillingness to be re-appointed



• Where at the general meeting at which accounts are laid no auditors are appointed or re-appointed , the Registrar may appoint a person to fill the vacancy.

• The first auditors of the company may be appointed by the directors at any time before the firs annual general meeting, and the auditors so appointed shall hold office until the conclusion of the meeting; provided that the company at a general meeting remove any such auditor and appoint in their place any other persons who have been nominated for appointment by any member of the company and whose nomination notice has been given to the members of the company not less than fourteen days before the date of the meeting

• If the directors fail to exercise their powers under this subsection, the company in general meeting may appoint the firs auditors, and thereupon the said powers of the directors shall cease.

• The directors may fill any casual vacancy in the office of auditor,but while any such vacancy continues, the surviving or continuing Auditor may act.



• Sect. 170(7)– The company may by ordinary resolution at any time

remove an auditor from office,notwithstanding anything in any agreement between him and it.

– HOWEVER, where such a resolution is passed, the company shall within fourteen days give notice of that fact in the prescribed form to the Registrar, failing with the company and every officer of it who is n default shall be guilty of an offence and liable to a fine and default fine.



• The remuneration of the the auditor may be fixed by the directors or the Registrar

• Subject to foregoing paragraph• Sect.171

– A private company shall be exempt form the requirement to appoint auditor under section 170 under the following conditions

• In the case of the company first accounting period , in that period

• In case of any subsequent accounting period, in that period or preceding period

– The qualifying conditions shall be met in the accounting period which the following requirement are satisfied

• Turnover and gross assets as specified in either case in regulations prescribed by the Minister having regard to GAAS



• The conditions above does not apply for banks or insurance company or dealer or investment adviser– The company is , or was at any time during the period , a

member of an ineligible group

• Sect.172– The company is not entitle to the exemption above unless its

balance sheet contains a statement by the Directors• That for the accounting period in question , the company satisfied the

qualifying conditions specified above• That no notice has been deposited in relation to accounts for the

accounting period• The directors acknowledges their responsibilities for

– Ensuring that the company keeps books so account which comply with section 151

– Preparing accounts which gives a true and fair view of the state of affairs of the company in accordance with section 153 and 154



• A company satisfying the qualifying conditions set out in section above shall annex the appropriate certificate to its annual returns as provided for in section 132– The directors’ statement and certificate under this

section shall be submitted for verification by the auditors appointed by the company for that purpose no less than once in every five consecutive accounting periods

– False certificate or statement in material way is liable to imprisonment , fine or both



• Sect.173• Any member o the company holding the

aggregate than 10% in nominal value of the issued share capital or any class or 10% of members, may by notice in writing deposit at the registered office of the company during an accounting period by not later than one month before the end of that accounting period, require the company to obtain an audit of its accounts for that accounting period.

• If the notice have been deposited , the company shall be obliged to appoint an auditor in respect of the accounting period to which the notice relates



• Sect.174– Special notice for resolution shall be required for a resolution

at general meeting at which accounts are laid • Appointing as auditor a person other than a retiring auditor;• Providing expressly that a retiring auditor shall not be re-appointed • Filling the casual vacancy in the office of the auditor• Removing an auditor before the expiration of his term of office

– On receipt of notice of such an intended resolution as above , the company shall immediately send a copy the thereof to the retiring auditor ( if any) or , as the case may be , the auditor to be removed

– The copy of representation by the auditor will sent to every member of the company, if too late shall be read out in a meeting

– An auditor is liable for the cost for any defamatory statements causing injury to the company



• Section 175– A person or firm shall not be qualified for appointment

as auditor of a company unless he, or in the case of a firm , every partner is a CPA- defined by NBAA

– Unqualified persons include• The officer or employee of the company• A person who is a partner of or in the employment of an

officer or employee of the company• This is not a reference for an auditor• If any unqualified person is appointed the company and

every officer is default and the person acting as an auditor shall be liable to a fine



• Sect.176- rights to information– Auditor shall have rights to access o books of

accounts and vouchers of the company and entitled to require form the officers of the company such information and explanations as he thinks necessary for the performance of the duties of the auditors

– Any misleading information by the officer of the company is an offence and liable to imprisonment or fine or bothe

– The auditor of a company shall be entitled to attend any gneral meetint of the company and to receive all notices of and other communication relating to any general meeting which they attend on part of the business of the meeting which concerns them as auditors.



• Sect.177– The auditor of the company may resign his office by

depositing a notice in writing to that effect a the company’s registered office

– The notice is not effective unless accompanied by the statement by section 179

– The company within 14 days must sent to the registrar of companies the notice , contravention results into a fine and default fine

• Sect.178– applicable where the notice of resignation is

accompanied by a statement of circumstances which he considers should be brought to the attention of members or creditors

• It can call an extraordinary meeting for explanation of the circumstances.



• The directors must act within 21 days otherwise will be liable for a fine.

• The copies of statement need not be sent out an the statement need not be read out at the meeting if , on application of the company or of any other person who claims to be aggrieved, the court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter; and the court may order the company’s costs on such an application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to that application



• Sect.179– Where an auditor ceases for any reason, to hold

office , he shall deposit at the company’s registered office a statement of any circumstances connected with his ceasing to hold office which he considers should be brought the the attention of the members or creditors of the company or , if he considers that there are no such circumstances, a statement that there are none.

– In case of resignation , the statement shall be deposited along with the notice of resignation; in the case of failure to seek re-appointment , the statement shall be deposited not less than 14 days before the end of the time allowed for next appointing auditors; not later than the end of the period of 14 days beginning the date he ceases to hold office


NATURE AND SOURCE OF AUDIT EVIDENCENATURE AND SOURCE OF AUDIT EVIDENCE

• ISA defines audit evidence as all of the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements and other information. Auditors are not expected to address all information that may exist. Audit evidence, which is cumulative in nature, includes

– audit evidence obtained from audit procedures performed during the course of the audit and

– may include audit evidence obtained from other sources such as• previous audits and• a firm’s quality control procedures for client acceptance and

continuance.

• The auditor seeks to obtain sufficient appropriate audit evidence at the class of transactions, account balance, and disclosure level in such a way that enables the auditor, at the completion of the audit, to express an opinion on the financial statements taken as a whole at an acceptably low level of audit risk. Auditors use various approaches to accomplish that objective.


AUDIT EVIDENCE CON..AUDIT EVIDENCE CON..• Accounting records generally include the records of initial entries and supporting

records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures. The entries in the accounting records are often initiated, recorded, processed and reported in electronic form. In addition, the accounting records may be part of integrated systems that share data and support all aspects of the entity’s financial reporting, operations and compliance objectives.

• Management is responsible for the preparation of the financial statements based upon the accounting records of the entity.

• The auditor obtains some audit evidence by testing the accounting records, for example, through analysis and review, reperforming procedures followed in the financial reporting process, and reconciling related types and applications of the same information. Through the performance of such audit procedures, the auditor may determine that the accounting records are internally consistent and agree to the financial statements.

• However, because accounting records alone do not provide sufficient audit evidence on which to base an audit opinion on the financial statements, the auditor obtains other audit evidence.

• Other information that the auditor may use as audit evidence includes minutes of meetings; confirmations from third parties; analysts’ reports; comparable data about competitors (benchmarking); controls manuals; information obtained by the auditor from such audit procedures as inquiry, observation, and inspection; and other information developed by, or available to, the auditor that permits the auditor to reach conclusions through valid reasoning


SUFFICIENCY,APPROPRIATENESS AND RELIABILITY OF EVIDENCESUFFICIENCY,APPROPRIATENESS AND RELIABILITY OF EVIDENCE

• An auditor has to obtain sufficient, appropriate and reliable audit evidence as to a material financial statement assertion. – Sufficiency is the measure of the quantity of audit evidence.– Appropriateness is the measure of the quality of audit evidence; that is, its

relevance and its reliability in providing support for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related assertions.

– The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required). Accordingly, the sufficiency and appropriateness of audit evidence are interrelated. However, merely obtaining more audit evidence may not compensate for its poor quality.

– For example, inspection of records and documents related to the collection of receivables after the period end may provide audit evidence regarding both existence and valuation, although not necessarily the appropriateness of period-end cutoffs.

– On the other hand, the auditor often obtains audit evidence from different sources or of a different nature that is relevant to the same assertion. For example, the auditor may analyze the aging of accounts receivable and the subsequent collection of receivables to obtain audit evidence relating to the valuation of the allowance for doubtful accounts.

– Furthermore, obtaining audit evidence relating to a particular assertion, for example, the physical existence of inventory, is not a substitute for obtaining audit evidence regarding another assertion, for example, the valuation of inventory.


FACTORS INFLUENCING RELIABILITY OF AUDIT EVIDENCEFACTORS INFLUENCING RELIABILITY OF AUDIT EVIDENCE• The reliability of audit evidence is influenced by its source and by its

nature and is dependent on the individual circumstances under which it is obtained. While recognizing that exceptions may exist, the following generalizations about the reliability of audit evidence may be useful • Audit evidence is more reliable when it is obtained from independent sources outside the entity.• Audit evidence that is generated internally is more reliable when the related controls imposed by the entity are effective.• Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the application of a control).• Audit evidence is more reliable when it exists in documentary form, whether paper, electronic, or other medium (for example, a contemporaneously written record of a meeting is more reliable than a subsequent oral representation of the matters discussed).• Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles.

When information produced by the entity is used by the auditor to perform audit procedures, the auditor should obtain audit evidence about the accuracy and

completeness of the information.


FACTORS INFLUENCING RELIABILITY OF AUDIT EVIDENCE..FACTORS INFLUENCING RELIABILITY OF AUDIT EVIDENCE..

• The auditor ordinarily finds it necessary to rely on audit evidence that is persuasive rather than conclusive; however, to obtain reasonable assurance, the auditor is not satisfied with audit evidence that is less than persuasive. The auditor uses professional judgment and exercises professional skepticism in evaluating the quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to support the audit opinion.


USE OF ASSERTIONS FOR AUDIT EVIDENCEUSE OF ASSERTIONS FOR AUDIT EVIDENCE• The auditor should use assertions for classes of transactions, account

balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures. The auditor uses assertions in assessing risks by considering the different types of potential misstatements that may occur, and thereby designing audit procedures that are responsive to the assessed risks. Other ISAs discuss specific situations where the auditor is required to obtain audit evidence at the assertion level.

Assertions used by the auditor fall into the following categories:• Assertions about classes of transactions and events for the period under

audit:– Occurrence—transactions and events that have been recorded have

occurred and pertain to the entity.– (ii) Completeness—all transactions and events that should have been

recorded have been recorded.– Accuracy—amounts and other data relating to recorded transactions and

events have been recorded appropriately.– Cutoff—transactions and events have been recorded in the correct accounting

period.– Classification—transactions and events have been recorded in the proper

accounts.


ASSERTIONS CONT….ASSERTIONS CONT….

Assertions about account balances at the period end:– Existence—assets, liabilities, and equity interests exist.– Rights and obligations—the entity holds or controls the rights to assets, and

liabilities are the obligations of the entity.– Completeness—all assets, liabilities and equity interests that should have

been recorded have been recorded.– Valuation and allocation—assets, liabilities, and equity interests are included

in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

Assertions about presentation and disclosure:– Occurrence and rights and obligations—disclosed events, transactions, and

other matters have occurred and pertain to the entity.– Completeness—all disclosures that should have been included in the

financial statements have been included.– Classification and understandability—financial information is appropriately

presented and described, and disclosures are clearly expressed.– Accuracy and valuation—financial and other information are disclosed fairly

and at appropriate amounts.


AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCEAUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE

• Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels (audit procedures performed for this purpose are referred to in the ISAs as “risk assessment procedures”);

• When necessary or when the auditor has determined to do so, test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level (audit procedures performed for this purpose are referred to in the ISAs as “tests of controls”); and

• Detect material misstatements at the assertion level (audit procedures performed for this purpose are referred to in the ISAs as “substantive procedures” and include tests of details of classes of transactions, account balances, and disclosures and substantive analytical procedures).


TEST OF CONTROLSTEST OF CONTROLS

• Tests of controls are necessary in two circumstances. When the auditor’s risk assessment includes an expectation of the operating effectiveness of controls, the auditor is required to test those controls to support the risk assessment. In addition, when substantive procedures alone do not provide sufficient appropriate audit evidence, the auditor is required to perform tests of controls to obtain audit evidence about their operating effectiveness.

• Examples of tests– Walkthrough tests – this includes taking a few transactions and

following them through every stage of the system, from material requisition to settlement of supplier’s invoice.

– Test of controls- Taking a representative sample of transactions, and testing certain significant controls. For purchases, test control over payments by checking purchases invoices have been authorized before payments

– Substantive procedures – Taking a larger sample of balances, and testing for completeness and accuracy. For creditors, compare suppliers statements with purchases ledger to ensure creditors are stated at their correct amount.


EVIDENCE IN E-COMMERCEEVIDENCE IN E-COMMERCE

• The nature and timing of the audit procedures to be used may be affected by the fact that some of the accounting data and other information may be available only in electronic form or only at certain points or periods in time. Source documents, such as purchase orders, bills of lading, invoices, and checks, may be replaced with electronic messages. For example, entities may use electronic commerce or image processing systems. In electronic commerce, the entity and its customers or suppliers use connected computers over a public network, such as the Internet, to transact business electronically. Purchase, shipping, billing, cash receipt, and cash disbursement transactions are often consummated entirely by the exchange of electronic messages between the parties. In image processing systems, documents are scanned and converted into electronic images to facilitate storage and reference, and the source documents may not be retained after conversion. Certain electronic information may exist at a certain point in time. However, such information may not be retrievable after a specified period of time if files are changed and if backup files do not exist. An entity’s data retention policies may require the auditor to request retention of some information for the auditor’s review or to perform audit procedures at a time when the information is available.


USE OF CAAT TO OBTAIN ELECTRONIC EVIDENCEUSE OF CAAT TO OBTAIN ELECTRONIC EVIDENCE

• When the information is in electronic form, the auditor may carry out certain of the audit procedures described below through CAATs

– Inspection of Records or Documents– Inspection of Tangible Assets– Observation -consider ISA 501, “Audit Evidence—

Additional Considerations for Specific Items” – Inquiry- consider ISA 580, “Management

Representations” for further guidance on written representations.

– Confirmation- consider ISA 505, “External Confirmations” for further guidance on confirmations.

– Recalculation– Reperformance– Analytical Procedures – consider ISA 520,“Analytical

Procedures” for further guidance on analytical procedures.


MANAGEMENT ASSERTIONSMANAGEMENT ASSERTIONS

• Example inventory– Existence- inventory in the balance sheet physically exists.

Inventory is held for sale or use in the ordinary course of business

– Completeness• Inventory quantities include all items on hand, in transit and stored at

outside locations. Inventory listings are accurately included in the inventory accounts.

– Rights and Obligations – the company has legal title or similar rights of ownership to the inventory. Inventory excludes items billed to customers or owned by others..

– Valuation – inventory is properly stated at cost. Valuation is reduced , where appropriate, to the market lower than cost

– Presentation and Disclosure – inventory is properly classified as a current asset. Major inventory categories and their valuation bases are adequately disclosed in notes. Pledge or assignment of inventory as collateral is appropriately disclosed in notes


EXISTENCE TESTS CUT OFF PROCEDURESEXISTENCE TESTS CUT OFF PROCEDURES

Cutoff refers to recognizing assets and liabilities as of a proper Cutoff refers to recognizing assets and liabilities as of a proper date and accounting for revenue, expense and other transactions date and accounting for revenue, expense and other transactions in the proper period.in the proper period.•Simple cut off errors can occur Simple cut off errors can occur

–When last December sales invoices are record for goods not actually shipped until January or when cash receipts are recorded through the end of the week ( e.g.., Friday, January 4) and the last batch for the year should have been processed on December 31–In Auditor’s jargon, the cutoff date refers to the client's year end balance sheet date. Proper cutoff means accounting for all transactions that occurred during the period and neither postponing some recordings to the next period nor accelerating next-period transactions into the current- year accounts.


• The auditors use seven basic types of evidence an seven general procedures to gather it. One or more of these procedures may be sued no matter what account balance , control procedures, class of transactions or other other information is under audit. The auditor arrange the procedures in an AUDIT PROGRAM

Management Assertions and Audit Objectives

Sufficient appropriateEvidence

General Audit procedures

Audit Working papers

GENERAL AUDIT PROCEDURES


TYPES OF EVIDENCE AND RELATED AUDIT PROCEDURESTYPES OF EVIDENCE AND RELATED AUDIT PROCEDURES

TYPES OF EVIDENCE EVIDENCE GATHERING PROCEDURES

Physical observation, inspection Observation and Examination by the Auditor

Auditor’s calculations Recalculation by the auditor

Statement by independent parties Confirmation letter

Statement by client personnel Verbal inquiry and written representations

Documents prepared by independent parties

Examination of documents ( vouching or tracing)

Documents prepared by the client Examination of documents ( vouching or tracing)

Data interrelationship Scanning and Analytical procedures


INTERNAL CONTROLSINTERNAL CONTROLS

• Internal control system is the whole system of controls, financial and otherwise, established by the management in order to carry on the business of enterprise in an orderly and efficient manner ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records.

• Types of internal control– Organizational

• Plan of an organization• Define and allocate responsibilities• Identify lines of reporting

– Authority to purchase items of plant may be vested in BoD

– Segregation of Duties• No one person should be responsible for the recording and

processing of the entire transaction.• Several people reduces the risk of intentional or accidental

manipulation or error• Authorization, execution and custody , recording


INTERNAL CONTROLS….INTERNAL CONTROLS….– Physical

• Limit access to authorized personnel only• Documentation of access• Controls for valuables , portable , exchangeable or desirable assset e.g .locking of securities,in

safe with procedures for the custody and use of keys

– Authorization and approval • Approval by authorized person, limits of authorization should be specified e.g credit sale must be

approved by the credit control dept.– Arithmetical and accounting

• Controls in the recording function which check that the transactions have been authorized, they are all included and that they are correctly recorded and accurately processed.

• Checking the arithmetical accuracy of the records the maintenance and checking of total, reconciliations

– Previews, bank reconciliation

– Personnel• Procedures to ensure that personnel operating a system are competent and motivated to carry out

the task to them as the proper functioning of a system depends upon the competence and integrity of operating personnel

• Appropriate remuneration and promotion and career development prospects, selection of people with appropriate personal characteristics and training , and , assignment to the task of the right level

– Supervision• All actions by all levels of staff should be supervised. Responsibility for supervision should be

clearly laid down and communicated to the persons being supervised.– Management

• Controls exercised by mgt which are outside and over and above the day to day routine of the system

• Overall supervision controls, reviews of mgt controls, comparisons with budgets , internal audits


INTERANL CONTROLS…..INTERANL CONTROLS…..

Other controls

• Acknowledgement of Performance– A person performing data processing

operations should acknowledge their activities by means of signatures, initials , rubber stamps.

• Budgeting– Is a quantitative plan of action

– Budgets can be compared with actual turn and differences investigated


AUDIT TESTINGAUDIT TESTING

• WALK THROUGH TESTS– An auditor must record the accounting system and its associated internal

controls– When the record has been prepared in the previous year or earlier or when it

has been prepared by the staff of the client, it is necessary for the auditor to be sure that the record correctly describes the system as it exists and is operated. To test the correctness of the description, the auditor takes a few transactions of each type. This means tracing the transaction from its initiation to the entry in the books of account, looking at all documents and records produced, the manner of preparation and the internal controls applied. The objective is not to test the effectiveness of the system but that the auditor has a correct description and understanding of the system.

• The walk through test should also be applied– In situation where the auditor has not obtained his description of the system

from a personal investigation of the system by the questioning operating staff and examining documents and records

– At the final audit when he needs to review the system form the date of the interim completion of the year end . She must determine if the system has changed and walk through checks will achieve this.

• COMPLIANCE TESTS– Those tests which seek to provide audit evidence that provides audit evidence

that internal control procedures are being applied as prescribed.


COMPLIANCE TESTSCOMPLIANCE TESTS

• The first stage is preliminary review of the effectiveness of the system by using an internal control evaluation questionnaires which contains key questions.

• E.g. can wage be paid to piecework personnel for work not done?– The system would then be inspected o see if it included procedures to

ensure that this could not happen.– If the system appears to be defective or weak then the auditor may

need to abandon the system approach and apply substantive test. If the system is effective, then the next stage is for the auditor to obtain evidence that the system is effective , then the next stage is for the auditor to obtain evidence that the system is applied as his description at all times. This evidence is obtained by examining a sample of the transactions to determine if each has been treated as required by the system.

• NOTE:• Compliance tests is the application of the system that is being

tested not the transactions although the testing is through the medium of the transactions

• If the discovery is made that the system was not complied with in any particular, then;– She may need to revise his system description and re-appraise its

effectiveness– She will need to determine if the failure of compliance was an isolated

instance or was symptomatic.


SUBSTANTIVE TESTSSUBSTANTIVE TESTS

• Are those tests (other than compliance tests) of transactions and balances and other procedures such as analytical review, which seek to provide evidence as to the completeness , accuracy and validity of the information contained in the accounting records or the financial statements.

• Substantive test is any test which seeks direct evidence of the correct treatment of a transaction, a balance , an asset , a liability, or any item in the books or accounts.

• Examples – Transactions

– A balance e.g. deposit account

– Analytical review– Completeness of information– Accuracy of information

– Validity of information


TECHNIQUES OF AUDIT TESTINGTECHNIQUES OF AUDIT TESTING

– Inspection– Observation– Inquiry– Computation

• ROTATIONAL TESTS– Rotation of audit emphasis – the auditor performs a

systems audit on all areas of the client’s business every year but each year he select one are ( wages, sales, stock control, purchasing) for special in-depth testing

– Visit rotation – where the client has numerous branches , factories, locations, etc, it may be impractical to visit them all each year.


AUDIT WORKING PAPERSAUDIT WORKING PAPERS

• The audit work must be adequately planned, controlled and recorded.• The purpose of working papers

– To control current year’s work, the record of work done is essential for the audit clerk, supervisor, manager and partner and other person who will review the work done.

– To form the basis for the plan of the audit of the following year– Evidence of the work carried out.

• The working papers should contain– Information and documents which are continuing importance to each annual

audit– Audit planning and control information– Details of the client’s system and records with the auditor’s evaluation of

them– Schedules in support of the accounts additional to, or summarizing the detail

in the client’s Books.– Details of the audit work carried out, notes of queries raised with action taken

thereon and the conclusion drawn by the audit staff concerned– Evidence that the wok of the audit staff has been properly reviewed by more

senior people– A summary of significant points affecting the financial statements and the

audit report ( e.g. the guarantee above), showing how these points were dealt with


FORMS OF WORKING PAPERSFORMS OF WORKING PAPERS• The Permanent file

– The permanent file usually contains documents and matters continuing importance which will be required for more than one audit

• Statutory materials- governing conduct, accounts and audit of the enterprise• The rules and regulations of the enterprise , example article and

memorandum of association• Copies of documents of continuing importance such as letter of

engagement, minutes of appointment of auditor; trade, license, and royalty agreements entered into by client, debenture notes, guarantees and indemnities entered into.

• An organization chart; the principal dept and subdivision thereof with note for number of peoples involved; and names of responsible officials

• List of books and other records and where they are kept, names , positions, specimens of signature and initials of persons responsible for books and documents should also be included. Account codes and classifications should also be held

• An outline history of organization – eg. Share capital , reserves, provisions, prospectuses, ; acquisition of subsidiaries and businesses. There should also be a record of important account ratios

• List of accounting matters of importance. E.g. accounting policies for stock, work in progress, depreciation,

– Notes of interviews and correspondence ( internal control matters and all past letters of weakness)

– Clients’ internal audit and accounting instructions– List of directors , their shareholdings and service contracts– List of company’s properties and investments with notes on verification– A list of company advisors, bankers, solicitors, lawyers

It is important that the permanent file is updated on the occasion of each audit.


THE WORKING PAPERS……THE WORKING PAPERS……• The current file

– A copy of accounts being audited, authenticated by director’s signatures– An index of the file– A description of the ICS in the form of an ICQ, flowchart, or written description

together with specimen documents– An audit programme

• A list of work to be carried out by audit staff• A list with details of tests actually carried out• The result so the tests and the conclusions drawn from them• Cross reference to IC record and letter of weakness• Were rotational testing over a period of years is used , reference to appropriate part of

Permanent File– A schedule for each items in the profit and Loss Account showing its make up– Checklist for compliance with statutory disclosure requirements; IAS – A schedule of each item in the Balance sheet. Each schedule should show;

• The item at the beginning of the year, changes during the year and the balance at the end

• Details of how its existence , ownership , value and appropriate disclosure have been verified

• Documents of external verification e.g. bank letter– A record showing queries raised during the audit and coming forward from

previous years. This record will show how the queries have been dealt with, by whom ( i.e. audit clerks, supervisor, manager or partner) and if not satisfactory answered, the treatment adopted which may be a qualification of the auditor’s report, and contingent liabilities.


Current File cont….Current File cont….

– Schedule of important statistics. These will include quantitative matters such as the output, sales composition, employment, and also accounting ratios such as capital employed , gross and net profit rations and liquidity rations. Comparison of these statistics with those of previous years( note din the Permanent File) must be made to determine significant variation. The variations need to be investigated and explanation sought

– A record or abstract from the minutes of • The company• The directors• Any internal committee of the company whose deliberations are

important to the auditor . E.g. internal audit committee, a budget committee, a capital expenditure committee.

– Copies of letters to the client setting out internal control weaknesses

– Letters of Representation- these are letters written by the Directors ( or equivalent in organization other than companies) to the auditors, being written confirmation of information given or opinions expressed by the directors on such matters as the value of stock, value of properties, uncertain obligations


Working papers cont…..Working papers cont…..

• Both the permanent and current files contain material on IC. It a matter of opinion where this data is filed; some audit firms adopt a filing system whereby IC matters are stored in a third file, the Internal Control File.

• Throughout the current file , reference should be as to how each item is used as audit evidence. Conversely , for each type of transactions and balance , the nature of the audit evidence supporting it should be demonstrated. The evidence may be from internal control reliance , substantive testing or from analytical review or form a combination of these sources.


INTERNAL CONTROL QUESTIONNAIRESINTERNAL CONTROL QUESTIONNAIRES

• Functions:– A method of ascertainment of the system– Enabling the auditor to review and assess

the adequacy of the system– Enables the auditor to identify the areas of

weakness– Enabling the auditor to design a series of

tests. In effect this means enabling the auditor to draw up his audit programme

– Enables the auditors staff to familiarize themselves with the system quickly and comprehensively.


I.C.Q CONT….I.C.Q CONT….

• Advantages– The use of standardized I.C.Q. ensures that

all the important questions are asked and the important characteristics of a system are brought out

– The I.C.Q. is a comprehensive , all in , inclusive method of ascertaining , recording g, and evaluating a system of IC

An example of a part of I.C.Q includes separate columns for ; questions, Answers- if possible Yes/N; assessment of IC strength; Disposal of weakness and cress reference to audit programmme


INTERNAL CONTROL EVALUATION QUESTIONNAIRESINTERNAL CONTROL EVALUATION QUESTIONNAIRES

• Some audit firms uses ICQ's exclusively, others prefer to ascertain the system by questioning staff and recording the system by means of flowcharts or by written notes.

• I.C.E.Q is a standardized set of questions which has the advantage, like the I.CQ. , of ensuring all right questions are asked and the strength and weakness of a system are brought about.

• The basic questions in an I.C.E.Q are called control questions, an example from the sale area is “ can sales be invoiced but not recorded in the books? Each control questions requires an answer Yes or No.


FLOWCHARTSFLOWCHARTS

• Flowcharts are a relatively new method of recording internal control system form the auditor's standpoint

• Advantages– It enable the system to be recorded in such a way that it can be understood by

• New staff coming to the audit• Supervisors, managers, and partners• Client staff, who can have weaknesses pointed out more easily

– The overall picture of the firm can be seen , and in particular the auditor can be assured he has the whole picture as slow lines going nowhere can be easily spotted

– Flowcharting is a consistent system of recording– Flowcharting is a disciplined method of recording– Flowcharting highlights relationship between different pats of a system– Weaknesses are easier to spot– Flowcharts are permanent record but are easily updated– In complex cases, flowcharting is the only way to gain an understanding of the

system• Disadvantages

– Time consuming– Can become a fetish i.e. ends in themselves– They are of little use in systems 9 e.g. small concerns) where internal control is

ineffective or very simple– Numerous symbol systems abound which can cause confusion


FLOWCHARTING… CONT….FLOWCHARTING… CONT….

The objective of a flowchart is that it is complete in itself and can be read and understood quickly and comprehensibly.

The following are important in preparing flowcharting• An organization chart is an essential concomitant• Simplicity and clarity are fundamental• It must not be congested• Use only horizontal and vertical lines• Chart the flow of goods and documents on separate charts• Serial number the operations• Cross reference to ICQ, ICEQ, Audit program , letter of weakness• It must show

– Initiation for each document and operation– Sequence of all operational on documents and all copies of documents ,

especially operations of control, inspecting, checking, comparing and approving– To ultimate destination– Sections or individuals who perform the operations– Use chart symbols only , if possible– Specimens of documents should be attached and cross referenced


AUDIT PROGRAMMEAUDIT PROGRAMME

• It is simply a list of work an auditor does on the occasion of his audit. – Example: “vouch three months’” There would be columns for the

periods selected and of the initial of the audit clerk and the date of the test.

• Advantages– They provide a clear se of instructions on the work to be carried

out– They provide a clear record of the work carried out and by whom– Work can be reviewed by supervisors, managers– Work will not be duplicated– No important work will be overlooked– Evidence of work done is available for use in defense actions for

negligence

• Disadvantages– Work may become mechanical– Parts may be executed without regard to whole system.


ACCOUNTANT’S LIENACCOUNTANT’S LIEN

• Accountant’s are considered to have a particular lien over an y books of account, files and papers which their clients have delivered to them and also over any documents which have come into their possession in the course of their ordinary professional work– In particular the lien gives the possessor the

right to retain goods until a debt arising in connection with those goods is paid

• A leading case is Woodworth Vs Conroy 1976


REPORT TO MANAGEMENTREPORT TO MANAGEMENT

• The ISA on IC indicates that the auditor should report to his client's management on all significant weaknesses that they came across in the course of his audit whilst pointing out that there may be other weaknesses which were not discovered.

• The title to the letter to management varies from firm to firm , such titles include ; letter of weakness, management letter, post audit letter, letter of comment, letter of recommendation, internal control letter, follow –up letter


REPORTING TO MGT CONT…..REPORTING TO MGT CONT…..

• Purposes– To enable the auditor to give his comments on the accounting

records, systems and controls– To enable the auditor to bring to the attention of mgt areas of

weakness that might lead to material errors.– In some audit engagements there is a requirement to make a

report. These includes local authorities, stock exchange firms– To enable the management to be right matters that may

otherwise have led to audit report qualification– To enable the auditor to point out areas where management

could be more efficient or more effective or where economies could be made or resources used more effectively. E.g unnecessarily large balances may occur occasionally in the bank.


LETTER OF WEAKNESSLETTER OF WEAKNESS

• Procedures– As weaknesses or breakdowns are identified they

should be discussed in detail with the operating staff included and / or with more senior management. It is vital that the auditor has his facts right

– The report should be written, and then discussed with addressee

– The report should then be sent– An acknowledgement should be obtained form

management stating what they propose to do about the weaknesses

– The weakness should be followed up on the next visit.


LETTER OF WEAKNESS CONTENTSLETTER OF WEAKNESS CONTENTS

• The list of weaknesses in the structure of accounting systems and internal controls

• A list of deficiencies in operation of the records or controls.

• Unsuitable accounting policies and practices• Non-compliance with accounting standards and

legislation• Explanations of the risks arising from each weakness• Comments on inefficiencies as well as weaknesses• Recommendations for improvementThe first to third items may require the auditor to qualify the

report to the MEMBERS as required by statutes ( e.g. company’s Act) on proper accounting records, accounting requirements and true and fair view and professional duty


LETTER OF WEAKNESS - FORMATLETTER OF WEAKNESS - FORMAT

• An opening paragraph explaining the purpose of the report

• A note that it contains only those matters which came to the auditor’s ATTENTION and cannot be a comprehensive list of all weaknesses

• If required that report may be tiered by having major weaknesses separated from minor weaknesses

• A request that management should reply to each point made


TRACING AND VOUCHINGTRACING AND VOUCHING

• Vouching in the examination of documents is the direction of the search for audit evidence. In vouching , an item of financial information is selected from an account( e.g. , the posting of a a sales invoice in a customer’s master file record), then the auditor goes backward through the accounting and control system to find the source documentation that supports the item selected. The auditor finds the journal entry or data input list, the sales summary , the sales invoice copy and the shipping documents, and finally , the customer’s purchase order. Vouching does not provide evidence to show whether all events were recorded . This can be shown by tracing


VOUCHING AND TRACING…VOUCHING AND TRACING…

• Tracing in the examination of documents takes the opposite direction from vouching . When an auditor performs tracing, he or she selects sample items of basic source documents and proceeds forward through the accounting and control system to find the final recording of the accounting transactions. For example, samples of payroll payments are traced to cost and expense accounts , sales invoices to sales accounts , cash receipts to accounts receivable subsidiary accounts, and cash disbursements to accounts payable subsidiary accounts.


AUDIT WORKING PAPERSAUDIT WORKING PAPERS

• Working papers are the auditors’ record of compliance with ISAs

• They should contain support for the decisions regarding procedures necessary in the circumstances and all other important decisions made during the audit.

• Though the auditor is the legal owner of the working papers professional ethics require that they not be transferred without consent of the client because of the confidential information recorded in them.


TYPES OF WORKING PAPERSTYPES OF WORKING PAPERS

• There are three categories– The permanent file papers– Audit administrative papers– Audit evidence papers

• The last two categories are often called the current file because they relate to the audit of one year.


PERMANENT FILE PAPERSPERMANENT FILE PAPERS

• The permanent file contains information of continuing interest over many years’ audits of the same client. This file can be used year after year, while each year’s current audit evidence papers are filed away after they have served their purpose.

• The documents include– Copies or excerpts of the corporate charter and

bylaws, or partnership agreements; – Copies or excerpts of continuing contracts, such

as leases, bond indentures, and royalty agreements;


PERMANENT FILE CONT….PERMANENT FILE CONT….

– A History of the company,its products, and its markets

– Copies of excerpts of stock holders, directors, and committee minutes on matters of lasting interest

– Continuing schedule of accounts whose balances are carried forward for several years, such as owner's equity, retained earnings

– Copies of prior years’ financial statements and audit reports may also be included.

The permanent file is a ready source of information for familiarization with the clients by new personnel on the engagement.


AUDIT PLANNING AND ADMINISTRATIVE WORKING PAPERSAUDIT PLANNING AND ADMINISTRATIVE WORKING PAPERS

• The following items are usually among the administrative working papers in each year’s current working paper file– Engagement letter– Staff assignment– Clients organization chart– Memoranda of conferences with

management– Preliminary analytical review notes– Initial risk assessment notes– Initial materiality assessment notes


CURRENT PAPER FILE CONT….CURRENT PAPER FILE CONT….

– Engagement planning memorandum– Audit engagement time budget– Internal control questionnaire and control

analyses

– Management controls questionnaire– Computer control questionnaire– Internal control system flow chart

– Audit program


ISA REQUIRES AUDIT WORKING PAPERS TO EXHIBITISA REQUIRES AUDIT WORKING PAPERS TO EXHIBIT

• The client’s accounting records agree with or reconcile with the financial statement s

• The work was adequately planned and supervised

• A sufficient understanding of control structure obtained

• Sufficient competent evidential matters was obtained as a reasonable basis for an audit opinion

• Should be able to sufficiently show that the financial statements conforms with IFRS and that the disclosure are adequate.


WORKING PAPERS ARRANGEMENT AND INDEXINGWORKING PAPERS ARRANGEMENT AND INDEXING

• Indexing- each paper is given an index number, like a book page number

• Cross indexing- numbers or memoranda related to to other papers carry the index of the papers so that connections can be followed

• Heading – each paper is titled with the name of the company , audit period and descriptive title of contents of the working paper


WORKING PAPERS ARRANGEMENT AND INDEXINGWORKING PAPERS ARRANGEMENT AND INDEXING

• Signatures and initials the auditor who performs the work and the supervisor who reviews it must sign the papers so personnel can be identified

• Dates of audit work the date of performance and review are recorded on the working papers so reviewers of papers can tell when the work work preformed

• Tick marks and explanations- “tick marks are auditors\s shorthand for abbreviating comments about work performed

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