History of audit THE ANCIENT AUDITOR Independent arbitrator
appointed by interested parties for accounts to be heard by him and
he in turn gives an opinion by oral report. Audire ( Latin word)
meaning to hear
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Agency theory Shareholders (Principals) as owners invest in
companies and appoint Directors (primary agents). Shareholders
appoint auditors (secondary agents) who provide report about
directors stewardship to them.
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Audit in perspective What? independent examination of F/S Why?
to give/express objective opinion as to the true and fairness of
the F/S in conformity with GAAP. When? after the mgmt has prepared
the F/S. Who? independent and expert external auditor Where? report
audit findings in audit report. How? by performing audit as per
GAAS Note: Mgt is to F/S per GAAP Auditor is to audit report per
GAAS
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Definition of audit Definition by the Auditing standards and
Guidelines of the Auditing Practices Committee (now Board)
Definition; An independent examination of, and expression of
opinion on the financial statements of an enterprise by an
appointed auditor in pursuance of that appointment and in
compliance with the relevant statutory obligation.
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An Audit is an exercise which objective is to enable auditors
to express an opinion whether the financial statements give a true
and fair view of the entitys affairs at the period end and of its
profit and loss for the period then ended, and have been properly
prepared in accordance with the applicable reporting framework.
Definition of audit
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An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditors judgment
including the assessment of the risk of material misstatements of
the financial statement whether due to fraud or error. An audit
also includes evaluating the appropriateness of accounting
estimates made by management, as well as evaluating the overall
presentation of the financial statement. Definition of audit
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Objectives of an audit IAASB issue in Jan 2007 has no
definition audit in glossary but states objectives as; Audit of FS
is to enable the auditor to express an opinion whether the FS as
prepared show true and fair view in all material respects and in
accordance with applicable financial reporting framework. An audit
of FS is an assurance engagement IAASB develops International
Standard on Auditing (ISAs)
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Objectives of an audit Primary Objective The primary objective
of an audit is to enable the auditor to form and express an
independent opinion on the financial statements.
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Subsidiary/Secondary Objectives To detect errors and fraud. To
prevent errors and fraud by the deterrent and moral effect of the
audit and also by assisting clients to institute improved financial
control system. To assist client with accounting systems, taxation,
financial and other problems. Objectives of an audit
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Independent Examination Auditor should be independent in mind
and appearance ( fact or mental attitude) Professional code of
ethics discusses this
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Expression of opinion Auditors opinion enhances the credibility
of FS by providing high, but not absolute level of assurance
(guarantee) Absolute opinion is not attainable because need for
judgment (bias) Lack of precision Use of testing which may not be
100% tested Inherent limitations and internal control systems
Evidence is persuasive but not conclusive
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Financial statement The main 5 FS Other documents; Directors
Report Corporate Governance statements Operating and financial
reviews Five-year trend information Chairmans statement Value added
statement Corporate Social responsibility statement
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The appointed auditor The auditor should have authority vested
in him or her to be able to perform his duties. Such authority is
gained by being appointed under a contract to be able to enjoy the
rights and powers bestowed under the Companies Act. To be eligible
for appointment in Ghana, one must be a member of ICA (Gh)
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Compliance with relevant statutory obligations Auditors duty is
governed by statute (GAAS). Companies Act in Ghana and other
international/relevant standards and guidelines.
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Evidence Evidence should be both Sufficient and appropriate to
draw conclusions. Question Discuss how the sufficiency and
appropriateness of the audit evidence can be mutually reconciled to
be able to draw relevant conclusions.
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Detection of fraud and error This is the Primary responsibility
of the management Auditor should however consider likelihood of
fraud in the conduct of an audit
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Audit related services To provide reasonable and limited levels
of assurance
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True and Fair view Auditor is required to report whether the
F/S show a true and fair view or otherwise True information is not
false but factual and conform with reality. Practically the
information conforms with required standards and law. Fair
information is free from discrimination and bias and is in
compliance with acceptable standards and rules. Practically the
accounts should reflect the commercial substance of the companys
underlying transactions.
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Responsibilities of auditor Primary responsibilities of
Auditing. That accounts have been prepared in accordance with
regulation Accounts are in agreement with accounting records Proper
records have been kept Balance Sheet and Income Statement show a
true and fair view show state of affairs and results for the period
(True and Fair view / or present fairly in all material
respects)
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Responsibilities of auditor Secondary responsibilities of the
auditor Preventing of errors and fraud Exercise reasonable care and
skill ( there should be no preconceived idea that accounts contain
frauds and errors Adhere to objective and general principles of
audit.
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Education/training & proficiency To belong to a
Professional accountancy body Obtain years of practical experience
Become a member under strict supervision Continuing Professional
Development Code of ethics for professional accountancy IFACs
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Advantages of an audit The sale of business as a going concern
is facilitated. It enables the auditor to give constructive advice
to management on improving the efficiency of the business. Give
assurance that statutory responsibilities concerning the accounts
have been carried out e.g. assurance that all directors emoluments
have been disclosed. The auditor may detect errors and fraud during
his audit. Settlement of accounts on the death or retirement of a
partner is facilitated when audited accounts forms the basis.
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It enhances application for fund from third parties. Gives
assurance that the directors have fulfilled their statutory
obligation in keeping proper books of accounts and safeguarding the
assets of the enterprise. Disputes between management may be easily
settled. Give assurance that the accounts show a true and fair view
or otherwise and that it complies with statutory requirements.
Sleeping partners and shareholders who have little or no means of
checking the books obtain a fair idea of the performance of the
directors and of the business. Advantages of an audit
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Advantages of an Audit (Specific) As far as the companys
directors are concerned, the audit gives: Assurance that statutory
responsibilities concerning financial statements have been carried
out. Assistance with statutory responsibilities concerning the
accounts. Availability of expert professional advice that is, the
suggestions which the Auditor is sometimes able to make with regard
to the improvement of the accounting system is of great importance
to the directors and the company as a whole.
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As far as the companys shareholders are concerned it gives:
Assurance that the financial statements show a true and fair view
and complied with statutory requirement. Assurance that the
directors have fulfilled their statutory responsibilities for the
books and accounts and the safeguarding of assets. Assurance that
all directors remuneration has been disclosed. Advantages of an
Audit (Specific)
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Audited accounts is also important to partnership firm in that:
It affords a convenient means of settling accounts between the
partners themselves and so avoiding the possibility of future
dispute. The Auditor can give advice to the management on how to
improve the efficiency of the business. Advantages of an Audit
(Specific)
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Limitations of an audit In spite of the numerous merits of an
audit, its limitations cannot be overlooked. It requires clients
staff and management time in providing information to the auditor.
If not properly carried out, it will lead to wrong decisions made
by management and shareholders. Fraud committed by combined effort
of management and staff may not be detected. Information given by
management to the auditor may not be complete or misleading and
this may cause the audit report to be misleading. The auditors
opinion is not a guarantee of future viability of the entity.
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The auditor does not certify that the accounts is correct or is
not correct. This comes from the fact that: The audit work involves
the exercise of judgments Information given to an auditor by
management may be misleading Inherent limitation of the audit such
as: The impracticality of examining all items within account
balance or class of transaction. The possibility of collusion or
misrepresentation for fraudulent purposes. Limitations of an
audit
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STATUTORY AUDIT These are audits carried out because the law
requires them. Such audits are governed by the Companies Code 1963,
Act 179. The auditor must carry out his work in whatever manner he
considers necessary in order to achieve his statutory duties. The
client has no right to restrict enquiries necessary for the auditor
to perform his audit. It is the audit for an incorporated company
having limited liability status. The auditor has a statutory
obligation to report to members of the company or the appointing
authorities under the statute. Types of audit
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NON STATUTORY (PRIVATE) AUDIT These are those audits carried
out at the request of interested parties. They are not specifically
required by law. It includes audit of sole proprietor, partnership,
joint ventures. The scope of the audit is underlined in the
engagement letter. It is the type of audit contracted by businesses
not incorporated under the Companies Act hence have no legal
obligation as regards the auditing of their accounts.
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Complete audit This is an audit where the auditor is given
unrestricted scope as to the work which he is to perform and in
which he uses his own discretion as to the extent of the detailed
work he is to perform. It must be noted that a complete audit does
not mean thorough examination and checking of every document within
an undertaking. Modern auditing is concerned with assessing
internal controls and evaluating these controls to determine the
extent of reliance to be placed on them.
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Partial audit Is one in which the auditor is restricted to
carry out particular work only or is restricted in a way as to his
power of enquiry or examination.
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System based audit This type of audit applies modern auditing
techniques in a scientific and statistical form to investigate the
system of internal control and its operations backed by test to
substantiate the accuracy and reliability of the records. It was
considered necessary, formerly, to check a great number of
transactions and vouch many documents as it was as though the
greater the amount of work undertaken the more efficient will be
the audit and the more reliable will the auditors report.
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Risk based audit Risk-based auditing refers to the development
of auditing techniques which are responsive to risk factors in an
audit. The auditor applies judgment to determine what level of risk
pertains to different areas of a clients system and devises
appropriate audit tests. This approach should ensure that the
greater audit effort is directed at the areas the auditor considers
critical, so that the chance of detecting errors is improved and
time is not spent on unnecessary testing of safe areas.
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The increasing use of risk based auditing reflects two factors:
1. The growing complexity of the business environment increases the
danger of fraud or misstatement; factors such as the developing use
of computerized systems and the growing internationalization of
businesses are relevant. Pressures by audit clients for the auditor
to keep fee levels down while providing an improved level of
service. The increasing use of risk based audit
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Management audit It is concerned with the examination of
procedures laid down by management and of the efficiency of
management itself. Its objective is to form and express opinion on
the efficiency of management rather than on the financial
statements. Such audit may be carried out by the internal auditors
of the company.
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The suitability, practicality and present compliance or
otherwise of the organization with its designated objects and aims.
The relationship of business with its own shareholders and the
investing public in general. The current standing of the
organization in relation to the general public and within its own
particular industrial or commercial field. The relationship between
management and staff of the business Financial policies and
controls. The ratio of operating returns on sales as compared with
the particular industry and the rate of return on capital. Areas of
Management audit
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Types of auditors External auditors They are independent
auditors appointed under either the private or statutory audit
arrangements with no connection with the company. Internal auditors
They are auditors who are employed by an enterprise and who use the
same techniques employed by the external auditors.
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Methods of audit Interim audit Continuous audit Final or
completed audit
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Interim audit is one that is conducted to cover a certain time
or up to a certain date within a financial period. It is carried
out at specific time intervals. This approach is more often carried
out in the case of large clients so as to cut down on the immense
volume of work. Interim audit
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Advantages; Dividend payment Application for extra finance All
advantages of continuous audit Disadvantages Alteration of figures
after the audit work by the client
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Continuous audit This audit is carried out throughout the
financial year. It starts from the beginning of the accounting
period to the end. It is appropriate for big companies where volume
of transactions are high and also where internal controls are weak.
In this case, the auditors staff will either make several visits to
the client throughout the year or as in the case of very large
companies, some of the audit staff will be present at the clients
premises virtually all the time.
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Advantages Extensive and detailed audit work can be carried
out. Errors and fraud and other weaknesses are likely to be
revealed promptly Moral check/deterrent on clients staff due to
continuous/regular attendance Audit can be completed more speedily
after year end of client. This allows for early presentation of
financial statements. The auditors work is more evenly spread over
the year which helps relieve pressures on staff. Continuous
audit
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Disadvantages Deliberate alteration of figures by clients staff
Continuous attendance as a nuisance to clients staff Familiarity
may reduce independence Audit staff expected to solve clients
problems The auditors staff may fail to follow up transaction and
answers to queries not be completed at the previous visit. Strict
control is needed to ensure that this does not happen particularly
where the audit staff assigned to the audit has changed. More time
is taken over the audit. Continuous audit
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Measures to minimise the disadvantages of continuous audit All
necessary corrections to be made to figures audited must be by way
of journal. Totals at the end of a period should be recorded in the
audit note book and be verified at the next audit. Errors and
queries should be cleared or dealt with as soon as necessary. The
audit of impersonal and private ledgers should be left until the
final audit.
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Final or completed audit Final audit is one in which the work
is undertaken in a single period following the end of the companys
financial year. The auditor starts the audit after the end of the
accounting period of his client and undertakes the audit through to
completion.
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Advantages Efficient planning of the audit and proper
arrangement of timetable. Work is done at one stretch hence no need
to return to uncompleted work. Alteration of figures is avoided No
interruption of clients accounting staff (as compared to continuous
audit) Disadvantages Difficulty in allocating audit staff Delays in
submitting annual accounts to shareholders Final or completed
audit
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Interim Audit and Final Audit Compared The difference between
interim audit and final audit is essentially one of timing. The
interim Audit will normally take place approximately three quarters
of the way through the financial year. During interim audit, the
focus is mainly on systems work while the final audit concentrates
on balance sheet work. However, it will be necessary to complete
some systems work during the final audit so that transactions
between the time of the interim and final audit do not escape the
auditors attention. Similarly, some substantive testing is very
likely to be carried out during the interim audit.
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The concept of expectation gap There is a perception of the
public of the role of the auditor although this has been defined by
the auditing profession and regulated by statute. There are some
common misconceptions in relation to the role of the auditor even
among financially aware people. Many people think that the auditor
reports to the Directors of a company rather than to members. Some
think that a qualified audit report is more favorable than an
unqualified audit report whereas the converse is true. There is a
perception that it is the auditors duty to detect fraud, when in
fact the detection of fraud is the responsibility of the directors.
These findings highlight the expectation gap between what auditors
do and what people in general think that they do.
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Value for money audit Economy Effectiveness Efficiency
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Regulatory framework ISAs by IFAC Companies Act ACCA Rules of
Professional Conduct IFACs Professional Bodies; IAASB ISAs ISAE
ISRE ISQC
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QUIZ Attempt all questions; 1. All accountants are auditors.
True or False 2. All auditors are accountants. True or False 3.
State in full the following abbreviations; GAAP GAAS. 4. Construct
a definition of an audit based on the answers to the basic
questions of audit as in; what, why, when, who, where and how.
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Exercise Read the text below and fill in the missing words,
making your choice from the words given. You will not need to use
all the words. WORDS AS OPTIONS Internal, threat, profession,
revision, demands, sensitive, future, power, interest, promise,
reject, accountability, dynamic, mend, mechanism, competence,
changing, mobile, needs, role, expectation, groups, social and
society.
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Text/Passage The audit is a (a).. control(b)..for securing the
(c)..of the company and its directors. The audit function is a
product of the (d)..of (e)..and as such it is a (f)..not a static
one. The profession must continue to be (g)..to the (h)..needs of
the various(i)..groups. The emergence of the kind of (j)..gap to
which reference has already been made, represents a potential
(k)..to the future of the (l).. As auditors and the apparent users
of audited financial statement change, society may (m)..roles
formerly considered acceptable. Professional groups, such as
auditors, must continually be alert to the desirability of
(n)..modification and (o).
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Review Questions 1. Define auditing 2. State the prime
objective of an audit 3. Discuss the advantages and limitations of
an audit 4. Explain the concept of expectation gap 5. Distinguish
between the following; Statutory audit and non statutory audit
Interim and final audit Partial and complete audit 6. Write briefly
on the following: Management audit System based audit