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AUDITING

Financial Audit

Audit of financial statements and related


information

Auditing

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

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

True

Factual and conforms with reality, not false


Conforms with required standards and law
Accounts have been correctly extracted from
the books and records

Fair

Free from discrimination and bias


In compliance with expected standards and
rules
Accounts should reflect the commercial
substance of the companys underlying
transactions

Objectives of Auditing
1. Primary Objective
a. 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
2. Secondary Objective

a. To detect errors and fraud (consider


materiality)
b. To prevent errors and fraud by the
deterrent and moral effect of the audit
c. To provide spin-off effects. The auditor
will be able to assist his clients with
accounting,
systems,
taxation,
financial, and other problems.
Audit Objectives
1. Validity
2. Completeness
3. Cutoff
4. Ownership
5. Accuracy
6. Valuation
7. Classification
8. Disclosure
Disadvantages of Audit
1. Involves the clients 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.
2. The audit fee the services of an auditor must
be paid for
Reason why few partnership and even
fewer sole trader are likely to have
their accounts audited
The accountants role as the preparer
of financial statements, as tax adviser
and general financial adviser, becomes
much more important to such concerns
Advantages of Audit
1. Directors (Company)
Directors
Assurance
that
statutory
responsibilities concerning accounts
have been carried out
Assistance
with
statutory
responsibilities concerning accounts

2.

3.

4.

5.

Availability of expert professional


advice
The letter of weakness
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
all
directors
remuneration has been disclosed
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.
Provides reliable accounts to regulatory
bodies such as the Companies Registry, the
stock exchange etc.

3. Auditors opinion is not an assurance of


managements effectiveness and efficient
Causes of Limitations
1. The impracticality of examining all items within
an account balance or class of transactions
2. The inherent limitation of any accounting and
control system
3. The
possibility
of
collusion
or
misrepresentation for fraudulent purposes
4. Most audit evidence is being persuasive
rather than conclusive
Professional Skepticism

Duties of Auditors
1. Carry out procedures designed to obtain
sufficient appropriate audit evidence, in
accordance with International Standards of
Auditing,
to
determine
with
reasonableconfidence whether the financial
statements
are
free
from
materials
misstatement
2. 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
3. Issue a report containing a clear expression of
their opinion on the financial statements

Historical Background of Auditing

Limitations of Audit
1. 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.
2. Auditors opinion is not a guarantee of the
future viability of the entity

Recognizing that circumstances may exist


which cause the financial statements to be
materially misstated.
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.
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 ISAs

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
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 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
o 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)
o 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
auditors 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

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