Professional Documents
Culture Documents
Be inadvertently misleading
Be deliberately misleading
Regular dividends
Maintenance of value
Agents
Salary and benefits
Maximum bonus
Self-review threats
Advocacy threats
Familiarity threats
Intimidation threats.
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Internal Audit Vs External Audit
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Internal Audit Vs External Audit (Contd)
Relationship: the internal audit function can be outsourced, however, the internal auditor is
largely an employee (officer) of the company appointed by management. The external
auditor is, obviously, independent of the company and is appointed by members
Approach: internal audit is largely risk-based and focuses on evaluating systems of controls
and testing operations and recommending improvements where necessary. with external
audit, the emphasis is on test of underlying transactions that form the basis of financial
statements in an increasingly risk based manner.
Legal basis: internal audit is highly recommended in corporate governance arrangements
but not a legal requirement like the requirement to have external auditors.
In Ghana the Internal Audit Agency Act 2003, Act 658 S 16(1) stipulates: there shall be
established in each MDA, MMDA an internal audit unit which shall constitute a part of the
MDA or MMDA.
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Value for Money (VFM) Audits
Value for money (VFM) audits are concerned with evaluating the three Es:
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Financial Vs Operational Internal Audits
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Undertaking Operational Internal Audits
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Outsourcing the Internal Audit function
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Prevention and Detection of Fraud and
Error
Role of Internal Auditors
Directors responsible for prevention and detection.
Can contribute to prevention by assessing the effectiveness of control
systems.
Existence of Internal Audit department may act as deterrent
Can contribute to detection by reporting suspicions
May be called on to carry out investigation of suspected fraud
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Prevention and Detection of Fraud and
Error
Role of External Auditors
No responsibility for prevention
Limited responsibility for detection
Consider risks of material misstatement
Reasonable assurance that financial statements are free from material
misstatement
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Audit Planning and
Documentation
ISA 300 (revised) Planning an audit of financial statements sets out the basic
reasoning for audit planning: the auditor should plan the audit work so
that the audit will be performed in an effective manner.
Planning' entails developing a general strategy and a detailed approach
for the expected nature, timing and extent of the audit. The auditor
plans to perform the audit in an efficient and timely manner.
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Objectives of Audit Planning
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What determines the form and nature of
planning?
Size of the entity
Complexity of the audit
Auditors experience with the entity
Knowledge of the business
Commercial environment
Method of processing transactions
Reporting requirements
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Audit Documentation
ISA 230: (revised) Documentation states that the auditor should document
matters which are important in providing audit evidence to support the
auditor's opinion and evidence that the audit was carried out in accordance
with ISAs. Working papers are essential:
Assist in the planning and performance of the audit
Assist in the supervision and review of audit work
Enable the audit team to be accountable for its work
Retain a record of matters of continuing significance to future audits; and
Enable quality control reviews to be performed.
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Contents of Working Papers
They Should:
Be sufficiently complete and detailed to enable an experienced auditor with
no previous connection with the audit subsequently to ascertain from them
what work was performed and to support the conclusions reached.
Record information on the auditors planning the audit, the nature, timing
and extent of the audit procedures performed, and the results thereof, and
the conclusions drawn from the audit evidence obtained
capture Auditors reasoning on all significant matters requiring exercise of
judgement, with auditors conclusions thereon
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Types of Documentation
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Custody and Retention of Working papers
The firm should establish policies and procedures designed to maintain the
confidentiality, safe custody, integrity, accessibility and retrievability of
documentation. Some measures include:
Passwords to restrict access to electronic documentation to authorised users
Back-up routines
Confidential storage of hard copy documentation.
Local laws are likely to specify retention periods. These are unlikely to be
shorter than five years.
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Audit Evidence
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Procedure for obtaining audit evidence
Analytical procedures
Evaluations of financial information made by a study of plausible relationships
among financial and non-financial data and the investigation of identified
fluctuations and relationships inconsistent with other information.
Enquiry and Direct Confirmation
Seeking information of knowledgeable persons throughout the confirmation entity
or outside the entity and obtaining representation directly from a third party.
Inspection: Examining records, documents and tangible assets
Observation: Looking at a process or procedure being performed by others
Recalculation: Checking the arithmetical accuracy of documents or records and
the auditor's independent execution of procedures and working of controls.
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Using the Internal Auditors work
The external auditor has to satisfy himself of the quality of internal audit work
before deciding to place reliance on internal audit work. The following
considerations are essential:
the materiality of the areas or items to be tested, and also the information that
can be obtained from the internal audit
the level of audit risk inherent in the areas to be tested
the level of judgment required
the sufficiency of complementary audit evidence
specialist skills possessed by internal audit staff
testing internal audit work
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ISA 620: Using the work of an expert
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ISA 620: Using the work of an Expert
Sampling refers to testing, observing or measuring part of a population in order to be able to form a conclusion
about the population.
WHAT IS AUDIT SAMPLING?
Audit Sampling is the application of audit procedures to less than 100% of items within a population of audit
relevance such that all sampling units have a chance of selection in order to provide the auditor with
reasonable basis on which to draw conclusions about the entire population.
The objective for the use of audit sampling is to enable the auditor select a sample that is truly representative of
the population of items from which it is chosen, so that the auditor can obtain and evaluate audit evidence
concerning the population from which the sample is chosen.
AUDIT SAMPLING-SOME IMPORTANT TERMINOLOGIES (IN ISA 530-
AUDIT SAMPLING)
POPULATION: The entire set of data from which a sample is selected and about which the auditor wishes to draw
conclusions.
Sampling Unit: The Individual item constituting a population.
Stratification: The Process of dividing a population into subpopulations each of which is a group of sampling units
which have similar characteristics (often monetary value).
Statistical Sampling: An approach to sampling that has the following characteristics;
i. Random selection of the sample items; and
ii. The Use of probability theory to evaluate sample results including measurement of sampling risk.
TERMINOLOGIES (CONTD)
Sampling Risk: The risk that the auditors conclusion based on a sample may be different from the
conclusion if the entire population were subjected to the same audit procedure.
Non-Sampling risk: The risk that an auditor reaches an erroneous conclusion for any reason not related to
sampling.
Tolerable Misstatement: A monetary amount set by the auditor in respect of which the auditor seeks to
obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by
the actual misstatement in the population.
Tolerable rate of deviation: A rate of deviation from prescribed internal control procedures set by the auditor
in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of
deviation set by the auditor is not exceeded by the actual rate of deviation in the population.
Anomaly: A misstatement or deviation that is demonstrably not representative of misstatements or
deviations in a population.
TERMINOLOGIES (CONTD)
Reliability Level: This is the complement of sampling risk. For example a 5% sampling risk means a reliability level
of 95%.
Tolerable error: This is the maximum error in the population that the auditor is willing to accept and still conclude
that the audit objective has been achieved.
Representative Sample: This is the one in which the characteristics in the sample of audit interest are
approximately the same as those of the population.
STATISTICAL SAMPLING
The means by which the most practical sample size is determined out of a whole population with sufficient
accuracy in various circumstances.
The basic aim in the use of statistical sampling is to attain a reasonable balance between the complete
examination of all items.
Statistical sampling involves random selection of the sample items
It makes use of probability theory to evaluate sample results including the measurement of sampling risk.
ADVANTAGES OF USING STATISTICAL SAMPLING
Random Selection: This method ensures that all items in the population have equal chance of
selection, for example by the use of random number tables.
Systematic Selection: In this method, the number of sampling units in the population is divided by the
sample size to give a sampling interval, for example 50, and having determined a starting point
within the first 50, each 50th sampling unit thereafter is selected.
Monetary Unit Sampling: This method attempts to place a value on the errors in a population. The
auditor is interested not only in the error rates but also in the monetary effects of these errors.
Haphazard Selection: This is a method in which the auditor selects the sample without following any
structured technique. Although no structured technique is used, the auditor would nonetheless
avoid any conscious bias or predictability.
Block Sampling: This method involves the selection of blocks of contiguous items from within the
population.
Attribute sampling: Used to estimate the proportion of items in a population containing a particular
characteristic.
NON-SAMPLING RISKS AUDITORS MAY FACE
Non-sampling risk is the risk that the auditor reaches an erroneous conclusion for any reason not related to
sampling risk. These may result from factors such as:
Omitting essential audit procedures.
The use of inappropriate audit procedures.
Failure to apply audit procedures properly
Applying audit procedures to inappropriate or incomplete populations.
Failure to draw appropriate conclusions from evidence examined.
NON-SAMPLING RISKS (CONTD)