Auditing Lecture Notes Ucu, Bullet One.

UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV.
COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
INTRODUCTION
Economic decisions in every society must be based upon the information available at the time the
decision is made. For example, the decision of a bank to advance a loan to a business is based upon
previous financial relationships with that business, the financial condition of the company as
reflected by its financial statements and other factors.
If decisions are to be consistent with the intention of the decision makers, the information used in
the decision process must be reliable.
Unreliable information can cause inefficient use of resources to the detriment of the society and to
the decision makers themselves. In the lending decision example, assume that the bank advances
the loan on the basis of misleading financial statements and the borrower Company is ultimately
unable to repay, as a result, the bank has lost both the principal and the interest. In addition, another
company that could have used the funds effectively was deprived of the money.
As society become more complex, there is an increased likelihood that unreliable information will
be provided to decision makers. There are several reasons for this: remoteness of information,
voluminous data and the existence of complex exchange transactions.
As a means of overcoming the problem of unreliable information, the decision-maker must

develop a method of assuring him/herself that the information is sufficiently reliable for these
decisions. In doing this he/she must weigh the cost of obtaining more reliable information against
the expected benefits.
A common way to obtain such reliable information is to have some type of verification (audit)
performed by independent person. The audited information is then used in the decision making
process on the assumption that it is reasonably complete, accurate and unbiased.
ORIGIN AND EVOLUTION OF AUDITING

The term audit is derived from the Latin term ‘audire,’ which means to hear. In early days an
auditor used to listen to the accounts read over by an accountant in order to check them.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia,
Greece, Egypt. Rome, U.K. among others
The original objective of auditing was to detect and prevent errors and frauds.
Auditing evolved and grew rapidly after the industrial revolution in the 18th century. With the
growth of the joint stock companies, the ownership and management became separate. The
shareholders who were the owners needed a report from an independent expert on the accounts of
the company managed by the board of directors who were the employees.
The objective of audit shifted and audit was expected to ascertain whether the accounts were true
and fair rather than detection of errors and frauds.
In conclusion, it can be said that auditing has come a long way from hearing of accounts to taking
the help of computers to examine computerized accounts.
DEFINITION OF AUDITING
The term auditing has been defined by different authorities.
Prof. L.R.Dicksee. "Auditing is an examination of accounting records undertaken with a view to
establish whether they correctly and completely reflect the transactions to which they relate.
The international auditing practices committee defines auditing as “the independent examination
of financial information of any entity whether profit oriented or not and irrespective of size/legal
form when such an examination is conducted with a view to express an opinion thereon”.
Spicer and Pegler: "Auditing is such an examination of books of accounts and vouchers of
business, as will enable the auditors to satisfy him/herself that the statement of financial position
is properly drawn up, so as to give a true and fair view of the state of affairs of the business and
that the profit and loss account gives true and fair view of the profit/loss for the financial period,
according to the best of information and explanation given to him and as shown by the books; and
if not, in what respect he is not satisfied."
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Auditing is a systematic and scientific examination of the books of accounts and records of
business to enable the auditor to satisfy him/herself that the profit and loss account and the balance
sheet are properly drawn up so as to exhibit a true and fair view of the financial state of affairs of
the business and profit or loss for the financial period.
AN AUDITOR
In the modern world today, the understanding of an auditor is quite different from the early days.
An auditor is an independent person or firm (group of persons) who is required to examine the
accounting records and financial statements of the business in order to form an opinion and submit
the report to the management and shareholders.
Accountancy body established in the United Kingdom under the Companies Act of 1985 Section
161, For a certified accountant (Auditor), he/she should attain one of the courses from the
recognized Accounting Bodies in the world like:
 Association of Chartered Certified Accountants (ACCA)
 Association of Certified Accountants (ACA)
 Certified Public Accountants (CPA)
 Institute of Chartered Secretaries (ICS)
 Certified Institute of Secretaries (CIS)
SCOPE OF AUDIT.
An audit-ISA 200 on the general principles, nature, scope and objectives of an audit defines an
audit authoritatively as “Independent examination of and expression of an opinion on the financial
statements of the reporting entity by an appointed auditor in pursuance to his appointment and
in compliance with any other relevant statutory obligations.”
The scope of audit is increasing with the increase in the complexities of the business. It is said that
long range objectives of an audit should be to serve as a guide to the management future decisions.
Today, most of the economic activities are largely conducted through public finance. The auditor
has to see whether these larger funds are properly used. The scope of audit encompasses
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verification of accounts with an intention of giving opinion on its reliability. Hence, it covers cost
audit, management audit, social audit etc.
It should be remembered that an auditor just expresses his/her opinion on the authenticity of the
account.
He/she has no power to take action against anybody. In this regard it’s said that “an auditor is a
watch dog but not a blood hound”.
AUDIT FIRMS
Audit firm means either the partners of a firm providing audit services or sole practitioner
providing audit services as appropriate.
The common and international practicing audit firms in
Rwanda include;
(a) Ernst and Young (EY)
(b) Pricewaterhousecoopers (PWCs)
(c) KPMG Uganda
(d) PKF Uganda
(e) Delloitte & Touché
(f) Among others.
An audit firm registered may practice as;
(a) Sole practitioner
(b) Partnership
(c) Company
SERVICES PROVIDED BY AUDIT FIRMS

(a) Financial and accountancy services like writing up the books of accounts, balancing off
the accounts, preparing the final accounts, drafting appropriate notes to the accounts and
advising the clients management finances matter, investment and effective planning and cash
control.
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(b) Taxation services like completing the annual tax returns on behalf of the client, assisting
the company secretary to complete the tax liability, lodging on behalf of the client any tax appeals
with the commissioner of Income Tax and educating the client about the management,
computations and payments of VAT, PAYE and corporation taxes.
(c) Audit and related services like background information about the client, planning for
the audit of the client, analytical review procedures, obtaining audit evidence, completing
the audit and reporting the finding.
(d) Management and consultancy services like recruitment of management trainees on behalf
of the client, organizing seminars and training workshops for the client employees, preparing
training schemes manual for the staff of the client among others.
(e) Technical and manpower development. The firm would assist the client in setting up
and maintaining a computerized systems, ensuring for effective changes in the systems and
assisting the management for full implementations of the new system.
STRUCTURES OF AN AUDIT FIRM

Partner
Manager
Accountant-in-charge
Audit Staff
Assistants Clerks Trainees
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DUTIES AND RESPONSIBILITIES OF DIFFERENT OFFICERS IN THE AUDIT FIRM
(A) AUDIT PARTNER

 Plan and manage audit engagements.
 Writes and signs the audit reports
 Understand client business and provide appropriate audit services to meet client expectations.
 Maintain up-to-date knowledge about company standards, policies and regulations
 Address client concerns and escalate complex issues to management for immediate resolution.
 Maintain positive and long-term relationships with clients.
 Provide support to ensure timely completion of audit projects.
 Manage expenses and staffing to increase revenue.
 Assist in developing company standards to improve effectiveness and quality of deliverables.
 Build highly-skilled and achievement-oriented team environment.
 Develop new client contacts for business growth.
 Attend client meetings and stay abreast with industry trends.
(B) AUDIT MANAGER
 Plan and schedule audit programs.
 Ensure completion of audits on time.
 Review and assess completion of audits.
 Coordinate with clients about auditing practices.
 Train and mentor audit assistants and other audit staff.
 Analyze financial data, records, reports and statements.
 Initiate internal audit controls for effective financial management.
 Maintain and update financial databases including audit findings.
 Coordinate with the management to take necessary action on audit findings.
 Integrate best practices and systems into the audit programs.
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(C) ACCOUNTANT-IN-CHARGE
 Invoices the clients for the completed audit work.

 Prepares the accounts for the firm.
 Receives cheques and bank them for the firm
 Determines whether an assignment for the firm is economical or not.
(D) AUDIT STAFF

 Assist in development and execution of audit programs.
 Perform auditing for corporate operations, finances and compliances with regulatory
requirements.
 Evaluate and recommend improvements to business processes and controls.
 Maintain positive working relationships with management and audit teams.
 Perform assigned audit activities timely and effectively.
 Interview business units to obtain information required for auditing.
 Notify audit issues to Managers in a timely fashion.
 Prepare reports of audit findings and recommendations to management.
 Maintain all audit work papers and reports for reference purposes.
(E) AUDIT ASSISTANT
 Execute audit assistant functions to check the accuracy of accounting systems and
procedures.
 Review, assess and recommend changes in accounting systems and controls of a business
unit.
 Verify and inspect accounts receivable and payable ledgers and general ledger for its
accuracy.
 Check, inspect and reconcile bank deposits and payments.
 Inspect, test and assess software and hardware systems for its failure.
 Check all accounting and clients’ databases are updated and functioning properly.
 Study, inspect and assess, budgets, balance sheets and other related financial statements and
records.
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 Review and recommend changes in internal audit controls.

 Check and verify accounting books and records are in conformity with industry practices and
corporate policies.
 Ensure compliance of regulatory guidelines and generally accepted auditing standards
(F) AUDIT CLERK
 Perform audit checks on customer balances and vendor payments.

 Perform audit checks and verify correctness of all expenses accounts.
 Compile data and organize for audit reports and statements.
 Compute and verify ledger balances and other books of accounts.
 Detect discrepancies in financial statements, reports and records.
 Organize all financial data for the senior audit team.
 Verify computation of taxes.
 Process and verify bank deposits and bank payments.
 Process and verify accounts payable and accounts receivable records.
 Reconcile bank and other financial records.
OBJECTIVES OF AUDITING.
Auditors are basically concerned with verifying whether the accounts exhibit true and fair view of
the business. The objectives of auditing depend upon the purpose of his appointment.
PRIMARY OBJECTIVE.
The primary objective (duty) of an auditor is to report to the owners whether the business (balance
sheet) gives a true and fair view of the state of affairs of the business and the profit and loss A/C
gives a correct figure of profit or loss for the financial year. It should be remembered that in case
of a company, he reports to the shareholders who are the owners of the company and not to the
directors The auditor is also concerned with verifying how far the accounting system is successful
in correctly recording transactions. He has to see whether accounts are prepared in accordance
with recognized accounting policies and practices and as per statutory requirements.
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SECONDARY OBJECTIVES:
The following objectives are incidental to the main objective of auditing.
(1) Detection and prevention of errors: Errors are mistakes committed unintentionally because
of ignorance, carelessness. Errors are of many types:
Errors of Omission: These are the errors which arise on account of transaction into being recorded
in the books of accounts either wholly partially. If a transaction has been totally omitted it will not
affect trial balance and hence it is more difficult to detect. On the other hand if a transaction is
partially recorded, the trial balance will not agree and hence it can be easily detected.
Errors of Commission: When incorrect entries are made in the books of accounts either wholly,
partially. Eg: wrong entries, wrong Calculations, postings, carry forwards etc such errors can be
located while verifying.
Compensating Errors: when two/more mistakes are committed which counter balances each
other. Such an error is known as Compensating Error. Eg: if the amount is wrongly debited by Frw
100 less and Wrongly Credited by Frw 100 such a mistake is known as compensating error.
Error of Principle: These are the errors committed by not properly following the accounting
principles. These arise mainly due to the lack of knowledge of accounting. Eg: Revenue
expenditure may be treated as Capital Expenditure.
Clerical Errors. A clerical error is one which arises on account of ignorance, carelessness,
negligence etc.
LOCATION OF ERRORS:
It is not the duty of the auditor to identify the errors but in the process of verifying accounts, she/he
may discover the errors in the accounts. The auditor should follow the following procedure in this
regard.
 Check the trial balance.
 Compare list of debtors and creditors with the trial balance.
 Compare the names of account appearing in the ledger with the names of account in the trial
balance.
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 Check the totals and balances of all accounts and see that they have been properly shown in
the trial balance.
 Check the posting of entries from various books into ledger.
 Make sure that all accounts from the ledger are taken into accounts.
 Compare the various items from the trial balance with that of the previous year.
 Find out the amount of difference and see whether an item of half or such amount is entered
wrongly.
 Check differences involving round figures as Frw 1,000; Frw 100 etc .
 See where there is misplacement or transposition of figures that is 45 for 54; or 81 for 18 etc.
 See that no entry of the original book has remained un posted.
(2) Detection and Prevention of Fraud. A fraud is an Error committed intentionally to deceive/
to mislead/ to conceal the truth/ the material fact. Frauds may be of 3 types.
(i) Misappropriation of Cash. This is one of the major frauds in any organization. It normally
occurs in the cash department. This kind of fraud is either by showing more payments/ less receipt.
The cashier may show more expenses than what is actually incurred and misuse the extra cash.
E.g. showing wages to dummy workers. Cash can also be misappropriated by showing less receipt.
E.g. not recording cash sales. Not allowing discounts to customers.
The cashier may also misappropriate the cash when it is received. Cash received from 1st customer
is misused and when the 2nd customer pays, it is transferred to the 1st customer’s account. When
the 3rd customer pays it goes forever. Such a fraud is known as “Teeming and Lading”.
TEEMING AND LADING

Teeming and Lading also refers to the misappropriation of cash received by false records of
subsequent transactions which is known as Carry over Frauds or Lapping.
To prevent such frauds (teeming and lading), the auditor must check in detail all books and
documents, vouchers, invoices etc.
Teeming and lading is practiced where the following weaknesses occur;
 The cashiers’ works are not checked by the chief accountant or management.
 Supervision is lacking in the cash office.
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 The duties of the cashiers are not properly segregated.

 Bank reconciliation statements are not prepared regularly.
 Cashiers and sales staff are not rotated regularly.
 Cashiers are allowed to be in access of the sales ledger.
Auditing procedures for teeming and lading;
Detective procedures
 Examine the sales ledger
 Check if cashiers are allowed to access the sales ledger.
 Check if the duties of the cashier are properly segregated and whether the sales staff and book-
keepers are rotated regularly.
 Prepare a bank reconciliation statement to detect any teeming and lading.
Preventive procedures
 Institute a strong internal control system in particular internal check system over cash receipts.
 The cashiers and the sales staff should be rotated regularly.
 Customers should be requested to demand their official receipt upon payment of their balances.
 Monthly statements should be sent to customers to update them on their accounts balances.
 Bank statements should be regularly prepared to detect and prevent this fraud.
 Proper remuneration to the cashiers in order to avoid temptations by them
(ii) Misappropriation of Goods. Here, records may be made for the goods not purchased or not
issued to production department. Goods may be used for personal purpose. Such a fraud can be
deducted by checking stock records and physical verification of goods.
(iii) Manipulation of Accounts. This is finalizing accounts with the intention of misleading
others. This is also known as “WINDOW DRESSING”. It is very difficult to locate because it’s
usually committed by higher level management such as directors. The objective of WD may be to
evade tax, to borrow money from bank, to increase the share price etc.
WAYS OF WINDOW DRESSING (MANIPULATION OF A/C)
 Inflation of sales by including fictitious invoices for credit sales, etc
 Inflating gross profit by omitting purchases or wages or other manufacturing expenses.
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 Reduction in purchases by entirely omitting certain invoices, post dating certain purchases
invoices. Etc
 Over valuation of company’s assets and liabilities
 Showing revenue expenditure as capital expenditure and vice versa.
 By creating a secret reserve only known by the directors under finances from under valuing
the company’s assets, under provision for depreciation and doubtful debts.
 Showing better financial state of affairs of the balance sheet than what it actually reflected by
the accountant.
 Provision of none or less depreciation so as to reflect high profit, more tax, large working
capital
WHY PEOPLE COMMIT FRAUD (THE CAUSES OF FRAUD TODAY)
Fraud is a common risk that should not be ignored.

The incidence of fraud is now so common that its occurrence is no longer remarkable, only its
scale.
Any entity that fails to protect itself appropriately from fraud should expect to become a victim of
fraud, or rather, should expect to discover that it is a victim of fraud.
There is no such thing as an accidental fraud. What separates error from fraud is intent; the
accidental from the intentional.
 Poor internal controls
 Lack of proper authorization
 No separation of authorization, custody, record keeping
 No independent checks on performance
 Lack of clear lines of authority
 Inadequate documentation
 Management override of internal controls
 Collusion between employees and 3rd parties
 Collusion between employees and management
 Poor or non-existent of ethics policy
 Limited, unclear or no policies and procedures to direct business function processes
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REASONS AUDITORS FAIL TO DETECT FRAUD

 Over reliance on client representations
 Lack of awareness or failure to recognize that an observed condition may indicate a material
fraud
 Lack of experience
 Personal relationships with clients
HOW TO REDUCE/CONTROL FRAUD

Most frequently achieved with internal controls
 Segregation of duties
 Authorizations
 Independent checks
 Physical safeguards
 Adequate documents and records
THE AUDITOR SHOULD PERFORM THE FOLLOWING DUTIES IN RESPECT OF

FRAUD;
 Examine all aspects of the finance.
 Vouch all the receipts from the counterfoils or carbon copies or cash memos, sales mart reports
etc.
 Check thoroughly the salary and wages register (payroll).
 Verify the methods of valuation of stocks.
 Checkup stock register, goods inwards notes, goods out wards books and delivery notes etc
 Calculate various ratios in order to detect fraudulent manipulation of accounts
 Go through the details of unusual items.
 Probe into the details of the problems when there is a suspicion.
 Exercise reasonable skill and care while performing the duty.
 Make surprise visit to check the accounts.
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To conclude, it can be said that it is not the main objective of the auditor to discover frauds and
irregularities. He is not an insurance against frauds and errors. But if he finds anything of a
suspicious nature, he should probe it to the fullest.
ADVANTAGES OF AN AUDIT TO SOLE PROPRIETORSHIP
(a) Tax liability. The previous years audited accounts are generally acceptable by the income
tax authority as a basis for ascertainment of tax liability due from the proprietor.
(b) Errors and frauds. The presence of auditors in the business shall help in the detection and
prevention of errors and frauds. This is because during the audit the accountant, bookkeepers
and the cashiers are naturally fearful to the auditor and therefore they will try their level
best to be accurate and update, vigilant and objective in their day record keeping.
(c) Insurance claims. The previous years’ audited statement of financial position and
comprehensive income shall be used by the insurance company to find out and settle on
any insurance claim due from the insurance company to the client business against insurance
risks like fire, theft or burglary.
(d) Loan negotiation. The managers and owners of the business may be intending or willing
to borrow from lenders of financial institutions for expansion programmes and they may be
intending to use the statement of financial position
ADVANTAGES OF AN AUDIT TO PARTNERSHIP

(a) Minimizing disputes among the partners.
(b) Accuracy of the partnership records.
(c) Control of the business
(d) Detection of errors and frauds
(e) Loan from banks
(f) Builds reputation
(g) Proper valuation of assets
(h) Government acceptance
(i) Suggestions for improvement
ADVANTAGES OF AN AUDIT TO PRIVATE AND PUBLIC LIABILITY COMPANIES
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(a) Assurance and credibility

(b) Negotiation for tax liability
(c) Loan negotiations
(d) Dividend payments
(e) Insurance claims
(f) Proper valuation of investments
GENERAL ADVANTAGES OF AUDITING

 Evaluate financial status
 Settlements of claims
 Evidence in court
 Settlement of accounts
 Facilitates calculation of purchase consideration.
 Facilitates taxation
LIMITATIONS/DISADVANTAGES OF AUDITING
Generally the following are the Limitations of auditing
1. Non-detection of errors and frauds. Auditor may not be able to detect certain frauds which
are committed with mollified intentions.
2. Dependence on explanation by others. Auditor has to depend on the explanation and
information given by the responsible officers of the company. Audit report is affected adversely if
the explanation and information prove to be false.
3. Dependence on opinions of others. Auditor has to rely on the views or opinions given by
different experts viz; Lawyers, Solicitors, Engineers, Architects etc. he cannot be an expert in all
the fields
4. Conflict with others. Auditor may have differences of opinion with the accountants,
management, engineers etc. In such a case personal judgment plays an important role. It differs
from person to person.
5. Effect of inflation. Financial statements may not disclose true picture even after audit due to
inflationary trends.
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6. Corrupt practices to influence the auditors. The management may use corrupt practices to
influence the auditors and get a favourable report about the state of affairs of the organisation.
7. No assurance. Auditor cannot give any assurance about future profitability and prospects/going
concern of the company.
8. Inherent limitations of the financial statements. Financial statements do not reflect current
values of the assets and liabilities. Many items are based on personal judgment of the owners.
Certain non-monetary facts cannot be measured. Audited statements due to these limitations
cannot exhibit true position.
9. Detailed checking not possible. Auditor cannot check each and every transaction. He may be
required to do test checking.
TYPES OF AUDIT:
Statutory Audit: any audit carried on as per the requirement of law is called as a statutory audit.
eg: all private and public limited companies that fulfill two out of three of the criteria below
do need the statutory audit.
(a) A turnover in excess of £5.6m (Frw.5.6bn).
(b)A net asset value of £2.8m (Frw2.8bn).
(c) Employ more than 50 people
All entities, registered under Companies’ Act, must get their books of account audited. Various
other bodies require an audit under law, including; Banks, insurance companies, NGOs, among
others.
Advantages of statutory audit

 To give confidence to the many stakeholders of a company. These are people interested in the
financial statements of the company.
 It adds credibility to the financial statements. Managers/directors are accountable to the
shareholders and they give their accountability in the forms of financial statements.
 It helps to settle disputes between managers and shareholders.
 Audited accounts are used by tax authorities to determine the true tax position of the enterprise.
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 Auditors in the course of their work will give advice to the management about the
improvements of the ICS.
 It is important when valuing shares and bonds.
 It eases comparability between two firms or within the financial periods.
Disadvantages/ limitations of statutory audit

 Not purely objective- This is because there is some subjective judgment left to the auditor to
draw conclusions.
 Not all items in the financial statements are checked.
 There are inherent limitations of ICS like collusion, potential human error, bypass of controls
among others.
 Time lag.
 The audit report is criticized for not being “clear” on the position of the auditor with regards
to fraud.
 It disrupts the clients’ work especially if the exercise is done more often. It requires the
attention of staff and management, taking their time.
Periodical/ Annual Audit. It is a kind of audit where the auditor verifies the account at the end of
the financial year. He starts the audit work after the closure of financial year. This is a common
audit and is mostly used by small organizations.
Interim audit. It’s an audit conducted in the middle of the accounting year before the accounts
are closed. In other words any audit conducted between two financial audits is known s interim
audit. The objective is to get periodical results, to declare interim dividend.
Partial Audit. When an auditor is asked to audit only a part of the account system. It’s called
partial audit. E.g. he may be asked to audit only the payment side of cash book.
Statement of financial position audit. It’s a kind of partial audit and is concerned with the
verification of only those items appearing in the statement of financial position. It is more popular
in the USA. Infact, while verifying BS items the auditor verifies/ checks all related items/accounts.
Cost audit. Cost audit is defined as the verification of cost accounting records. Data and
techniques for its accuracy and authenticity. It gets as effective managerial tool for the detection
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of errors and frauds in cost accounting records. The companies act implies the central government
to order cost audit in case of specifies companies.
Management audit. Management audit may be defined as a comprehensive examination of an
organizational structure of a company, institution/government and its plans and objectives it means
of operations and use of human and physical facilities. The main objective of management audit
is to see how far the objectives of management are fulfilled. It aims to ascertain whether sound
management prevails throughout the organisation and evaluates its efficiency in the system of its
operation.
Continuous audit. A continuous audit is one in which the auditor visits his client’s office at
regular intervals throughout the year to verify the account. The objective of CA may be;
 To get final account audited immediately after the closure of accounting year.
 When the business is very large.
 When interval control system is into effective.
 When regular final accounts are required.
THE EXPECTATION GAPS

These are misconceptions/misunderstanding misinterpretation about the role of auditors-the
expectation gap
i) Auditors do not certify the financial statements or guarantee that the financial statements are
correct; they report that in their opinion, they give a true and fair view or present fairly the
financial statements.
ii) Auditors do not bear any responsibility for the preparation and presentation of financial
statements; this is the responsibility of the directors of the company. Auditor’s responsibility
is to express an opinion.
iii) That auditors test everything in the financial statements. It is not true. They simply sample.
iv) That the audit report gives assurance that no fraud has been committed. An auditor does not
have a statutory duty to represent and detect fraud, although many people think he does.
v) That the audit report gives assurance that the figures are absolutely correct.
vi) That the balance sheet valuation represents a fair valuation of the reporting entity.
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vii) That the amounts in the financial statements are stated precisely (materiality is misunderstood).
viii) That a clean audit report means that the entity will continue to exist.
HOW TO REDUCE THE EXPECTATION GAP
 By educating the public on the role of the auditors.
 By auditors improving their performance
 By improving the auditing standards
DIFFERENT STAGES OF AUDIT

Auditing is essentially a practical task. The auditor always needs to reflect the nature of the
circumstances of the entity under audit. It is unlikely that any two audit assignments will ever be
identical. It is however possible to identify a number of standard stages in a typical external audit.
These are as follows:
1. The planning stage
 Know your client
 Internal control system review
 Planning the audit
 Evaluation of the audit risk
 Develop the audit programme
2. The operational stage
Audit testing
Analytical review techniques
Analytical review of financial statements
3. The reporting phase
Preparation and signing of the audit report
The management letter/letter of weaknesses
RELATIONSHIP BETWEEN AUDITING AND ACCOUNTING

Auditing and accounting are closely connected but both are separate activities. The directors of a
company are responsible for establishing books of accounts that will accurately record financial
information and that are used for preparing the annual financial statements. It is similarly the
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responsibility of the directors to adopt consistent and appropriate accounting policies in order to
prepare and present the financial statements. The financial statements have to comply with national
legislative requirements and International Financial Reporting Standards (IFRSs).
Accounting is the process of recording, classifying, summarizing and reporting financial
information in a logical/systematic manner for the purpose of decision making. To provide relevant
& reliable information, accountants must have a thorough understanding of the principles and rules
that provide the basis for preparing the financial statements.
In auditing the financial statements, the concern is with determining whether the presented
financial statements properly (true and fair) reflect the financial information that occurred during
the accounting period. Since auditors are primarily concerned with the end result of this work i.e.
do the financial statements show a true and fair view? In order to arrive at their conclusion the
auditors must have a deep knowledge and understanding of accounting (including applicable
accounting standards) and in practice, the directors will consult with the auditors as to appropriate
accounting policies to follow.
Many financial statement users and members of the general public confuse auditing with
accounting. The confusion results because most auditing is concerned with accounting
information, and many auditors have considerable expertise in accounting matters. The confusion
is increased by giving the title “Chartered Accountant” to individuals performing a major portion
of the audit functions.
DISTINCTION BETWEEN ACCOUNTING AND AUDITING

Points of ACCOUNTING AUDITING
difference
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1. meaning It is recording of all the day to day It is the critical examination of

transactions in the books of accounts the transactions recorded in the
leading to preparation of financial books of accounts.
statements.
2. nature It is concerned with finalization of It is concerned with
accounts. establishment of reliability of
financial statements
3. objects The object is to ascertain the trading The object is to certify the
results. correctness of financial
statements.
4. commencement Accounting commences when book Auditing begins when

keeping ends. accounting ends.
5. scope It involves various financial It depends upon the agreement

statements. It involves maintenance of or upon the provisions of law. It
books of accounts. goes beyond books of accounts.
It does not go beyond books of
accounts.
AUDITING Vs INVESTIGATION
Points of Auditing Investigation
difference
1. definition Auditing is the act of examining books Investigation is the act of detail
of accounts so as to prove true and examination of activities so as
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fairness of operating results and to achieve certain objectives.

financial position of a business. Specially, investigation is made
in suspected places.
2. objects The object is to find out whether It is undertaken to know the
balance Sheet and profit and loss essential facts about a matter
account exhibit a true and fair view of under inquiry. It is done with
business. some special purpose of view
3 period It usually covers one accounting year. It may cover more than one
accounting year.
4 conducted It is conducted for proprietors only. It is carried out on behalf of any
party interested in the matter.
5 scope It is restricted to balance sheet and It is wider in scope. It may be
profit and loss account. carried out beyond balance
sheet.
6. compulsion Audit is legally compulsory for It is voluntary. It is required
companies. under certain circumstances.
7 time It may be conducted at the end of the It may be conducted at any time
year. in case of suspicion about any
transaction.
8. report Form of report is prescribed. It is Form of report is not prescribed.
presented to the shareholders. It is presented to the client.
9. appointment Owners appoint the auditors Even third party can appoint an
investigator.
10. qualification The statutory auditors must possess Even an employee preferably a
proper qualifications. chartered accountant may be
appointed as investigator.
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TRUE AND FAIR VIEW.

An audit of accounts by an independent expert assures the outside users that the accounts are proper
and reliable. The outsiders can rely on the accounts if the auditor reports that the accounts are true
and fair.
TRUE: This means that the information is factual and conforms to reality, not false. In addition,
it conforms to be required standards and law. The accounts have been correctly extracted from the
accounting records.
FAIR: Means that information is free from discrimination and bias and is in compliance with
expected standards/rules. The accounts reflect the commercial substance. Fair, covers three;
property, adequate disclosure and audit obligation.
In the case of accounting standards, propriety implies that statements are drawn up in conformity
with accepted accounting principles so as to portray the realities of operation and financial
conditions of an enterprise.
The accounts are said to be true and fair:
1. When the profit and loss shown in the profit and loss account is true and fair, and
2. Also when the value of assets and liabilities shown in the balance sheet is true and fair. What
constitutes true and fair is not defined under any law.
However the following general guidelines may be laid down in connection with true and fair.
a) Conform to accounting principles: The books of accounts must be kept according to the
normally accepted accounting principles such as the concept of entity, continuity, periodical
matching of costs and revenue, accrual and double entry system etc.
b) No window dressing or secret reserves: The accounts must show the financial position and
the profit or loss as they are. I.e. there is neither an overstatement nor an understatement. There
should be in other words neither window dressing nor secret reserves. In window dressing the
accounts are made in such a way as to show a much better condition than the actual condition. The
profit and the net worth are overstated
The accounts are said to show true and fair view when the accounts show only the actual conditions
as it is. i.e. the profit and the net worth are shown as they are.
23
In order to show a true and fair view the auditor should ensure that:
 The final accounts agree with the books of accounts.
 The provision for depreciation is proper.
 The closing stock is physically verified and valued properly.
 Intangible assets like goodwill, patents, preliminary expenses or other deferred revenue
expenses are written off properly.
 Proper provision is made for bad and doubtful debts.
 Capital expenses are not treated as revenue expenses and vice versa.
 Capital receipts are not treated as revenue receipts.
 Effect of changes in rate of foreign exchange on value of assets and liabilities is recorded in
the books properly.
 Contingent liabilities are not treated as actual liabilities and vice versa.
 Provision is made for all known losses and liabilities
3. Disclose all material facts: The books of accounts must disclose all material facts regarding
revenue, expenses, assets and liabilities. Material means important and essential. The disclosure
of important matters in the accounts helps the users in taking business decisions. There should be
neither suppression of vital facts nor misstatements.
4. Legal requirements: In case of limited company the account must disclose the matters required
to be disclosed under the Companies Act.
Special companies such as banks, insurance, electricity supply companies prepare accounts as
prescribed under special laws. A co-operative society, a trust etc. must also prepare the accounts
as required under relevant laws.
QUALITIES OF AN AUDITOR
Integrity: This is an essential quality of an auditor. He should be honest with his profession and
must abstain from reporting as per the wish of management simply due to fear (for example he
may not be appointed as auditor next year) or favour (auditor should be financially embarrassed,
need to be financially OK, in order to impair independence).
Independence: It means that the auditor should not subordinate his judgment to that of the client.
It is important that the auditor should not only appear to be independent but should be in reality.
24
Objectivity: The auditor’s view point must be complete objectivity that is detached, fair,
impersonal and unbiased. An independent state of mind and an unbiased and objective judgment
are the cornerstones of the profession of auditors.
Logical abilities: The auditors have an ability to analyze logically, to interpret problems and facts
and to draw a logical conclusion.
Communication ability: The auditor must have proficient written and oral communication ability.
Technical competence: The enterprise always expects that professional accountant engage as
auditor command full technical competence. Therefore, the auditor must have full knowledge of
technicalities of accounts, audit, taxation, financial management, economics, other laws,
mathematics, etc.
Continuing awareness of latest developments: The auditor should keep himself aware of
continuing developments in business as well as his profession. The introduction of E-commerce
or E-business and fast developing information technology has changed the business mode globally.
Therefore, the auditor must keep his knowledge level intact through continued professional
education.
BASIC PRINCIPLES OF AUDIT

Auditing standard describes the basic principles, which govern the auditor's professional
responsibilities and which should be complied with whenever an audit is carried out. These are:-
1. Integrity, objectivity and independence:
The auditor should be straightforward, honest and sincere in his approach to his professional work.
He must be fair and must not allow prejudice or bias to override his objectivity. He should maintain
an impartial attitude and appear to be free of any interest which might be regarded.
2. Confidentiality:
The auditor should respect the confidentiality of information acquired in the course of his work
and should not disclose any such information to a third party without specific authority or unless
there is legal or professional duty to disclose. It is remarked that an auditor should keep his ears
and eyes open but his mouth shut.
3. Skill and competence:
25
The audit should be performed and the report prepared with due professional care by person who
have adequate training, experience and competence. This can be acquired through a combination
of general education, technical knowledge obtained through study and formal courses concluded
by a qualifying examination recognized for this purpose and practical experience under proper
supervision.
4. Work performed by others:
When the auditor delegates work to assistant or uses work performed by other auditors or experts,
he will continue to be responsible for forming and expressing his opinion on the financial
information. At the same time, he is entitled to rely on work performed by others provided he
exercises adequate skills and care and is not aware of any reason to believe that he should not have
relied. The auditor should carefully direct, supervise & review work delegated by assistants. He
should obtain reasonable assurance that work performed by other auditors or experts is adequate
for this purpose.
5. Documentation:
The auditor should document matters, which are important in providing evidence that the audit
was carried out in accordance with the basic principles.
6. Planning:
The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner. Plans should be based on knowledge of client's business. They should be further
developed and revised, if required, during the course of audit.
7. Audit evidence:
The auditor should obtain sufficient appropriate audit evidence through the performance of
compliance and substantive test procedure. It will enable him to draw reasonable conclusions there
from on which he has to base his opinion on the financial information.
8. Accounting system & internal control:
26
The auditor should gain an understanding of the accounting system and related internal controls.
He should study and evaluate the operation of those internal controls upon which he wishes to rely
in determining the nature, timing and extent of other audit procedures.
9. Audit conclusions and reporting:
The auditor should review and assess the conclusions drawn from the audit evidence obtained and
from his knowledge of business of the entity as the basis for the expression of his opinion on the
financial information.
ACCOUNTING CONCEPTS RELEVANT TO AUDITING
6.1 MATERIALITY:
ISA 320 audit material states; Information is material if its misstatement or omission could
influence the economic decisions of users taken on the Basis of the financial information.
The assessment of what is material is a matter of professional judgement.
Materiality depends on the size and Nature of the item, judged in the particular circumstances of
its misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary
qualitative characteristic which the information must have if it is to be useful.
The concept of materiality recognizes that some matters, either individually or in the aggregate,
are relatively important for true and fair presentation of financial information in conformity at both
the overall financial information level and in relation to individual account balances and classes of
transactions.
Materiality may also be influenced by other considerations, such as the legal and regulatory
requirements, non-compliance with which may have a significant bearing on the financial
information, and consideration relating to individual account balances and relationships. This
process may result in different levels of materiality depending on the matter being audited.
27
GOING CONCERN:
When planning and performing audit procedures and in evaluating the results thereof, the auditor
should consider the appropriateness of the going concern assumption underlying the preparation
of the financial statements.
The auditor’s report helps establish the credibility of the financial statements. However, the
auditor’s report is not a guarantee as to the future viability of the entity.
An entity’s continuity as a going concern for the foreseeable future, generally a period not to
exceed one year after the balance sheet date, is assumed in the preparation of financial statements
in the absence of information to the contrary.
Accordingly, asset and liabilities are recorded on the normal course of business. If this assumption
is unjustified, the entity may not be able to realize its assets at the recorded amounts and there may
be changes in the amounts and maturity dates of liabilities. As a consequence, the amounts and
classification of assets and liabilities in the financial statement may need to be adjusted.
EXAMINING INDICATORS OF THREATS TO GOING CONCERN:
FINANCIAL INDICATORS
i) Excess of liabilities over assets or having a net current liabilities position.
ii) Inability to pay debts as falls due.
iii) Significant liquidity crisis and inability to raise new finance
iv) Defaults on loans
v) Falling turnover and increasing losses
vi) Loss of key suppliers or customers
vii) High levels of static stock, debtors and creditors
viii) Competition, cheap products
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OPERATIONAL INDICATORS
1. Change in market or technology and an entity is unable to adapt the new market requirements
or technological requirements.
2. Loss of key management or staff
3. Poor management
4. Unproductive workforce
5. Loss of franchise or license to operate.
6. Non-compliance with capital or other statutory requirements
7. Facing a major litigation the outcome of which may affect the entity
8. Changes in the law.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV.

As a means of overcoming the problem of unreliable information, the decision-maker must

ORIGIN AND EVOLUTION OF AUDITING

SERVICES PROVIDED BY AUDIT FIRMS

STRUCTURES OF AN AUDIT FIRM

Assistants Clerks Trainees

DUTIES AND RESPONSIBILITIES OF DIFFERENT OFFICERS IN THE AUDIT FIRM

(A) AUDIT PARTNER

 Invoices the clients for the completed audit work.

(D) AUDIT STAFF

 Review and recommend changes in internal audit controls.

(F) AUDIT CLERK

 Perform audit checks on customer balances and vendor payments.

TEEMING AND LADING

 The duties of the cashiers are not properly segregated.

Fraud is a common risk that should not be ignored.

REASONS AUDITORS FAIL TO DETECT FRAUD

HOW TO REDUCE/CONTROL FRAUD

THE AUDITOR SHOULD PERFORM THE FOLLOWING DUTIES IN RESPECT OF

ADVANTAGES OF AN AUDIT TO PARTNERSHIP

ADVANTAGES OF AN AUDIT TO PRIVATE AND PUBLIC LIABILITY COMPANIES

(a) Assurance and credibility

GENERAL ADVANTAGES OF AUDITING

Advantages of statutory audit

Disadvantages/ limitations of statutory audit

THE EXPECTATION GAPS

DIFFERENT STAGES OF AUDIT

RELATIONSHIP BETWEEN AUDITING AND ACCOUNTING

DISTINCTION BETWEEN ACCOUNTING AND AUDITING

1. meaning It is recording of all the day to day It is the critical examination of

4. commencement Accounting commences when book Auditing begins when

5. scope It involves various financial It depends upon the agreement

fairness of operating results and to achieve certain objectives.

TRUE AND FAIR VIEW.

BASIC PRINCIPLES OF AUDIT

8. Accounting system & internal control:

ACCOUNTING CONCEPTS RELEVANT TO AUDITING

EXAMINING INDICATORS OF THREATS TO GOING CONCERN:

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