Chapter 1 -introduction to auditing
- 1. FACULTY OF MANAGEMENT SCIENCE BACHELORS’ – PROGRAMME Subject: Principles of Auditing By: Buyera Saidi E-mail: buyera.saidi@yahoo.com Phone: +252634172883
- 2. This is the official examination and verification of accounts and records, especially of financial accounts. What is auditing?
- 3. An auditor is someone who is responsible for evaluating the validity and reliability of a company or organization’s financial statements. An accountant who checks another accountant/s Who is an Auditor?
- 4. An accountant is a practitioner of accounting or accountancy, which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resource(s). Who is an accountant?
- 5. “Methodical and independent check of financial statements by an auditor and to make an expert opinion on the results in the audit report”
- 6. An exercise whose objective is to enable auditors to express an opinion on whether the financial statements give a true and fair view (or equivalent) of the entity’s affairs at the period end and of its profit or loss (or income and expenditure) for the period then ended and have been properly prepared in accordance with the applicable reporting framework (e.g. relevant legislation and applicable accounting standards) or where statutory or other specific requirements prescribe the term, whether the financial statements “present fairly”.
- 7. Audit has a well established role in society Auditor reports to the shareholders of the company Report on the truth and fairness of the financial statements High level of assurance Usually as a result of a statutory requirement SAS’s provide guidance on how to undertake an audit An audit is required for all companies with a turnover a certain amount. An audit is required by all PLC’s, banks or insurance companies or a company registered under the Financial Services Act.
- 8. Assignment whereby a professional accountant is required to evaluate or measure a subject matter that is the responsibility of another party against identified suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about that subject matter.
- 9. Assurance is a relatively new concept Auditor reports to the persons requesting the assurance May be a low/moderate level of assurance Non statutory No standards available for guidance. Examples of assurance engagements- internal control review, report on compliance with relevant laws and regulations, debt management, etc.
- 10. An audit helps to identify weaknesses in the accounting systems and enables us to provide suggestions for improvements An audit assures directors, who are not involved in the accounting functions on a day-to-day basis, that the business is running in accordance with the information they are receiving. An audit also helps reduce the risk of fraud and poor accounting.
- 11. An audit facilitates the provision of advice that can have real financial benefits for a business, including how the business is running, what margins can be expected, and how these can be achieved. Advice can cover anything from the tightening of internal controls, to tax planning or reducing the risk of fraud. An audit will enhance the credibility and reliability of the figures being submitted to prospective investors. If an owner is planning on attracting investment or selling shares in the next three years, carrying out regular audits is highly beneficial.
- 12. Credit ratings may be affected by not having an audit. Suppliers may not be prepared to give appropriate credit limits. Banks and trade suppliers rely in part on credit rating agencies’ assessment of the company, and will look more favourably on companies that have an audit. In the event of insurance claims, loss adjusters often have more faith in audited accounts. An audit provides assurance to shareholders (if they are not directors closely involved in the business) that the figures in the accounts show a true and fair view
- 13. Frauds by management Auditing fails to check planned frauds. The management can play tricks to manipulate the accounts in order to conceal their inefficiencies. The audited accounts could not show the true view. Wrong certificate Auditing is based on many certificates taken from management and other persons. Auditing may fail to provide the desired results. When certificates provides wrong information.
- 14. False clarification Auditing fails to disclose correct information. The management may not provide correct clarification. The auditor is bound to present his report even of the clarification is not true. Absence of true picture The auditing does not present true picture. Auditing fails to disclose true picture when figures have been manipulated. No correct view Auditing fails to present correct view. There are limitations of accounting so figures are not facts. These figures are based on opinion. Thus auditing is unable to disclose correct view.
- 15. No suggestion Auditing is not concerned with the management policies. The auditor cannot guide management for better use of capital. He is unable to suggest what should have been done. Absence of honesty Honesty and independence are highly essential traits. The auditor must certify what is true. The absence of honesty and independence means failure of audit purpose.
- 16. Bias of auditor The auditing fails to present fair view due to bias of an auditor. It is the quality of an auditor that he should be independent. The bias auditing fails to help many people. High cost The audit work is completed without cost. The cost of audit should not exceed of errors and frauds. Auditing fails to serve million of business entities. Previous action Auditing is nothing more than checking of past activities. It is not concerned with present or future. The audit fees increase the cost of business. Such cost does not help to improve market standing of enterprises.
- 17. Provided by the Auditing Practices Board-APB The board aims to Establish high standards of auditing Ensure public confidence in the auditing process Meet the developing needs of users of the financial statements.
- 18. In order to meet these aims the APB issues the following forms of guidance for auditors Form Nature Authority Statements of Auditing Standards (SAS’s) Basic principals and essential procedures Explanatory material to assist in interpreting and applying the above Mandatory-failure to comply could lead to disciplinary action.
- 19. Practice Notes (PN’s) Guidance to assist auditors in applying SAS’s to particular industries or circumstances Persuasive but not prescriptive. Indicative of good practice Bulletins Provide up to date guidance on new or emerging issues Persuasive but not prescriptive (rigid). Indicative (revealing) of good practice.
- 20. Consider; Legal issues, Ethical issues, practical issues and substantive testing Ascertain document and confirm accounting and internal control system Planning Preliminary evaluation of internal controls Weak Internal controls Overall review of financial statements Audit report