Financial audit

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NATURE SCOPE AND PURPOSE OF AUDIT

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Financial audit

  1. 1. COURSE OUTLINE <ul><li>FINANCIAL AUDIT </li></ul><ul><li>DAY 1 AND 2 </li></ul><ul><li>TECHNICAL AUDIT </li></ul><ul><li>DAY 3 </li></ul><ul><li>ENTERPRISE RISK MANAGEMENT </li></ul><ul><li>DAY 4 AND 5 </li></ul>
  2. 2. FINANCIAL AUDIT <ul><li>AUDIT OF FINANCIAL STATEMENTS AND RELATED INFORMATION </li></ul>@Sako Mayrick 2006
  3. 3. WHAT DO YOU EXPECT FROM THIS TRAINING? <ul><li>List of expectations……… </li></ul>@Sako Mayrick 2006
  4. 4. OUTLINE <ul><ul><li>Understand the meaning and reason for auditing </li></ul></ul><ul><ul><li>Understand relationship between auditing, attestation and assurance services </li></ul></ul><ul><ul><li>Know the different types of auditors </li></ul></ul><ul><ul><li>Understand the auditor’s role </li></ul></ul><ul><ul><li>Understand the basis for auditing </li></ul></ul><ul><ul><li>Understand the audit process </li></ul></ul>@Sako Mayrick 2006
  5. 5. OUTLINE <ul><li>Understand the importance of ethics and independence of audit function </li></ul><ul><li>Know the basic elements of audit reporting </li></ul><ul><li>Know the auditor’s responsibility for errors, fraud and illegal acts </li></ul><ul><li>Understanding the practical audit process </li></ul>@Sako Mayrick 2006
  6. 6. What is an audit? Auditing? <ul><li>Put your own definition….. </li></ul>@Sako Mayrick 2006
  7. 7. Historical Background of audit <ul><li>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 </li></ul><ul><li>The emphasis was very much on the detection of fraud and other irregularities </li></ul>@Sako Mayrick 2006
  8. 8. Historical Background of audit <ul><li>Emphasis has changed and the role of the auditor becomes much more sophisticated </li></ul><ul><li>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. </li></ul>@Sako Mayrick 2006
  9. 9. DEVELOPMENT OF MODERN AUDITING <ul><li>Concept of a company as a separate legal entity came into existence in the late ninetieth century. </li></ul><ul><li>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 </li></ul>@Sako Mayrick 2006
  10. 10. DEVELOPMENT OF MODERN AUDITING <ul><li>Before 19 th Century </li></ul><ul><ul><li>the appointed auditor duties to discover fraudulent misrepresentations, the detection of fraud and error become the major objective of company audits. </li></ul></ul><ul><li>After ( late 19 th Century) </li></ul><ul><ul><li>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 </li></ul></ul>@Sako Mayrick 2006
  11. 11. DEVELOPMENT OF MODERN AUDITING <ul><li>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 auditor’s 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 </li></ul>@Sako Mayrick 2006
  12. 12. @Sako Mayrick 2006
  13. 13. DISADVANTAGES OF AUDIT <ul><li>The audit involves the client’s 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. </li></ul><ul><li>The audit fee, clearly the services of an auditor must be paid for. It is for this reason that few partnership and even fewer sole trader are likely to have their accounts audited. The accountant’s role as the preparer of financial statements, as tax adviser and general financial adviser, becomes much more important to such concerns. </li></ul>@Sako Mayrick 2006
  14. 14. ADVANTAGES OF AUDIT <ul><li>Companies </li></ul><ul><ul><li>Directors </li></ul></ul><ul><ul><ul><li>Assurance that statutory responsibilities concerning accounts have been carried out </li></ul></ul></ul><ul><ul><ul><li>Assistance with statutory responsibilities concerning accounts </li></ul></ul></ul><ul><ul><ul><li>Availability of expert professional advice </li></ul></ul></ul><ul><ul><ul><li>The letter of weakness </li></ul></ul></ul>@Sako Mayrick 2006
  15. 15. ADVANTAGES OF AUDIT <ul><ul><li>To shareholders </li></ul></ul><ul><ul><ul><ul><li>Assurance that accounts show a true and fair view and comply with statutory requirements </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Assurance that directors have fulfilled their statutory responsibilities for books and accounts, and the safeguarding of assets </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Assurance that directors have fulfilled their statutory responsibilities for books of accounts and the safeguarding of assets </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Assurance that all directors remuneration has been disclosed </li></ul></ul></ul></ul>@Sako Mayrick 2006
  16. 16. ADVANTAGES OF AUDIT <ul><ul><li>Other organization with published accounts </li></ul></ul><ul><ul><ul><li>Assurance to all users of accounts , that the accounts show a true and fair view and comply with statute </li></ul></ul></ul><ul><ul><ul><li>Assurance that ‘stewards’ have fulfilled their accounting and financial responsibilities </li></ul></ul></ul><ul><ul><li>Private organizations such as partnerships </li></ul></ul><ul><ul><ul><li>Assurance that accounts are reliable </li></ul></ul></ul><ul><ul><ul><li>Reasonable assurance that all fraud of consequence has been disclosed. </li></ul></ul></ul><ul><ul><li>In addition they provide reliable accounts to regulatory bodies such as the Companies Registry, the stock exchange etc. </li></ul></ul>@Sako Mayrick 2006
  17. 17. DEVELOPMENT OF MODERN AUDITING <ul><li>In previous years it was part of the appointed auditor duties to discover fraudulent misrepresentations, the detection of fraud and error become the major objective of company audits. 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 </li></ul>@Sako Mayrick 2006
  18. 18. DEVELOPMENT OF MODERN AUDITING <ul><li>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 auditor’s 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 </li></ul>@Sako Mayrick 2006
  19. 19. DUTIES OF AUDITORS <ul><li>Carry out procedures designed to obtain sufficient appropriate audit evidence, in accordance with International Standards of Auditing, to determine with reasonable confidence whether the financial statements are free from materials misstatement </li></ul><ul><li>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 </li></ul><ul><li>Issue a report containing a clear expression of their opinion on the financial statements. </li></ul>@Sako Mayrick 2006
  20. 20. AUDIT AND AUDITING <ul><ul><li>AUDITING) is a 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 communicatin g the results to interested parties. </li></ul></ul>@Sako Mayrick 2006
  21. 21. AUDIT AND AUDITING <ul><li>Audit refers </li></ul><ul><ul><li>to an independent examination of the financial statements of an enterprise, </li></ul></ul><ul><ul><li>conducted with a view to expressing an opinion </li></ul></ul><ul><ul><li>as to whether those statements give a true and fair view </li></ul></ul>@Sako Mayrick 2006
  22. 22. What is true and fair view? <ul><li>We say financial statements shows true and fair view….. What is it? </li></ul>@Sako Mayrick 2006
  23. 23. What is true and fair view? <ul><li>True </li></ul><ul><ul><li>information is factual and conforms with reality, not false. </li></ul></ul><ul><ul><li>In addition the information conforms with required standards and law. </li></ul></ul><ul><ul><li>The accounts have been correctly extracted from the books and records </li></ul></ul>@Sako Mayrick 2006
  24. 24. What is true and fair view? <ul><li>Fair </li></ul><ul><ul><li>information is free from discrimination and bias and </li></ul></ul><ul><ul><li>in compliance with expected standards and rules. </li></ul></ul><ul><ul><li>The accounts should reflect the commercial substance of the company’s underlying transactions. </li></ul></ul>@Sako Mayrick 2006
  25. 25. Objectives of Auditing <ul><li>Primary Objective (main objective) </li></ul><ul><ul><li>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 </li></ul></ul>@Sako Mayrick 2006
  26. 26. Objectives of Auditing <ul><li>Secondary </li></ul><ul><ul><li>To detect errors and fraud ( Consider materiality) </li></ul></ul><ul><ul><li>To prevent errors and fraud by the deterrent and moral effect of the audit </li></ul></ul><ul><ul><li>To provide spin- off effects. The auditor will be able to assist his clients with accounting , systems, taxation , financial , and other problems. </li></ul></ul>@Sako Mayrick 2006
  27. 27. AUDIT OBJECTIVES <ul><ul><ul><ul><ul><li>Validity </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Completeness </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cutoff </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Ownership </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Accuracy </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Valuation </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Classification </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Disclosure </li></ul></ul></ul></ul></ul>@Sako Mayrick 2006
  28. 28. LIMITATION OF AUDIT <ul><li>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. </li></ul><ul><ul><li>Auditors opinion is not a guarantee of the future viability of the entity </li></ul></ul><ul><ul><li>Auditors opinion is not an assurance of management’s effectiveness and efficient </li></ul></ul><ul><li>Causes of limitations </li></ul><ul><ul><li>The impracticality of examining all items within an account balance or class of transactions </li></ul></ul><ul><ul><li>The inherent limitation of any accounting and control system </li></ul></ul><ul><ul><li>The possibility of collusion or misrepresentation for fraudulent purposes </li></ul></ul><ul><ul><li>Most audit evidence is being persuasive rather than conclusive </li></ul></ul>@Sako Mayrick 2006
  29. 29. PROFESSIONAL SCEPTICISM <ul><li>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 ISA’s </li></ul>@Sako Mayrick 2006
  30. 30. PROFESSIONAL SCEPTICISM <ul><li>In carrying out his work the auditor should adopt an attitude of professional skepticism, recognizing that circumstances may exist which cause the financial statements to be materially misstated. </li></ul><ul><li>The 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. </li></ul>@Sako Mayrick 2006
  31. 31. LEGAL FRAMEWORK OF AUDITING <ul><li>The work of an auditor is regulated by two sources </li></ul><ul><ul><li>Statues, the Companies Act No.12 of 2002 </li></ul></ul><ul><ul><ul><li>The Act also requires auditors to have a recognized professional qualification, as well as laying down minimum disclosure levels as per accountants and auditors Act (Registration) of 1973 as amended </li></ul></ul></ul><ul><ul><li>Professional pronouncements on Auditing ( issued by NBAA and IFAC) </li></ul></ul><ul><ul><li>Professional pronouncements include the rules of professional conduct issued by NBAA and IFAC, </li></ul></ul><ul><ul><li>The ethical principles that govern auditors’ responsibilities are </li></ul></ul><ul><ul><ul><li>Integrity Objectivity </li></ul></ul></ul><ul><ul><ul><li>Independence Professional competence an due care </li></ul></ul></ul><ul><ul><ul><li>Professional behavior confidentiality </li></ul></ul></ul>@Sako Mayrick 2006
  32. 32. TYPES OF AUDIT <ul><li>Statutory Audit, carried because the law requires them. Statutes include Companies Act, Parastatal organization Act </li></ul><ul><li>Private audits, because of auditor’s desire and not because of law e.g. sole trader and partnership </li></ul><ul><li>Internal audits, is the one conducted by an employee of a business into any aspect of its affairs. </li></ul><ul><li>Management audit, an inquiry into efficiency and effectiveness of management </li></ul><ul><li>Public sector audit, contract audit , computer audit etc </li></ul>@Sako Mayrick 2006
  33. 33. TYPES OF AUDITS -Financial statements audit -Compliance audits -Operational audits -Comprehensive audits -Forensic audits TYPES OF AUDITORS -External auditors -Internal auditors -Government auditors -Forensic auditors ISSUES AFFECTING THE PROFESSION -Expanded services -Globalization -Litigation -Independence issues @Sako Mayrick 2006
  34. 34. @Sako Mayrick 2006
  35. 35. @Sako Mayrick 2006
  36. 36. @Sako Mayrick 2006 Management Assertions THE RELATIONSHIP OF EVIDENTIAL MATTER TO THE AUDIT REPORT Financial Statements Audit Objectives Audit Procedures Audit Report Evidence
  37. 37. <ul><li>MANAGEMENT ASSERTIONS </li></ul><ul><li>Existence or occurrence </li></ul><ul><li>Completeness </li></ul><ul><li>Rights and obligations </li></ul><ul><li>Valuation and allocation </li></ul><ul><li>Presentation and disclosure </li></ul><ul><li>Existence or occurrence </li></ul><ul><li>Completeness </li></ul><ul><li>Rights and obligations </li></ul><ul><li>Valuation and allocation </li></ul><ul><li>Presentation and disclosure </li></ul>@Sako Mayrick 2006
  38. 38. KEY STAGES OF AUDIT <ul><li>Determine audit approach </li></ul><ul><li>Ascertain in the accounting system and internal controls </li></ul><ul><li>Assess the accounting system and internal controls </li></ul><ul><li>Test the accounting system and internal controls </li></ul><ul><li>Test the financial statements ( substantive testing) </li></ul><ul><li>Review the financial statements </li></ul><ul><li>Express an opinion </li></ul><ul><li>OR </li></ul>@Sako Mayrick 2006
  39. 39. KEY STAGES OF AUDIT <ul><li>Client acceptance and continuance </li></ul><ul><li>Establish the terms of the engagement </li></ul><ul><li>Plan the audit </li></ul><ul><li>Consider internal control </li></ul><ul><li>Conduct substantive audit procedures </li></ul><ul><li>Complete the audit </li></ul><ul><li>Issue audit report </li></ul>@Sako Mayrick 2006
  40. 40. <ul><li>ATTESTATION occurs when a practitioner is engaged to issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. </li></ul><ul><li>Examples: </li></ul><ul><ul><li>The effectiveness of internal control </li></ul></ul><ul><ul><li>Financial information other than the financial statements </li></ul></ul><ul><ul><li>Future-oriented financial information </li></ul></ul><ul><ul><li>Compliance with statutory, regulatory, or contractual obligations </li></ul></ul><ul><ul><li>Management’s discussion and analysis </li></ul></ul>@Sako Mayrick 2006 AUDITING, ATTESTATION, AND ASSURANCE SERVICES
  41. 41. ASSURANCE ENGAGEMENT <ul><li>According to ISA, Audit client is an entity in respect of which a firm conducts an audit engagement. When the audit client is a listed entity, audit client will always include its related entities. Audit engagement (An assurance engagement) to provide a high level of assurance that financial statements are free of material misstatement, such as an engagement in accordance with International Standards on Auditing. This includes a statutory audit which is an audit required by national legislation or other regulation. </li></ul><ul><li>ISA 100 Assurance Engagements, an 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 the subject matter. It is important to distinguish between the levels of assurance given by an audit ( which gives a high level of assurance) to that given by other assurance engagements which , depending on the nature of the engagement, may give a lower level of assurance. </li></ul>@Sako Mayrick 2006
  42. 42. ASSURANCE ENGAGEMENT <ul><li>There is a broad range of assurance engagements , including any combination of the following : </li></ul><ul><ul><li>Engagements to report on a broad range of subject matters covering financial and non-financial information. </li></ul></ul><ul><ul><li>Engagements intended to provide high or moderate levels of assurance </li></ul></ul><ul><ul><li>Attest and direct reporting engagements </li></ul></ul><ul><ul><li>Engagements to report internally or externally </li></ul></ul><ul><ul><li>Engagement in the private or public sector. </li></ul></ul><ul><li>ISA 910 states that the objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, any thing has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting frame work (negative assurance) </li></ul>@Sako Mayrick 2006
  43. 43. @Sako Mayrick 2006 AUDITING, ATTESTATION, AND ASSURANCE SERVICES <ul><li>ASSURANCE services are independent professional services that improve the quality of information, or its context, for decision makers. </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Risk assessment </li></ul></ul><ul><ul><li>Information system reliability </li></ul></ul><ul><ul><li>Electronic commerce </li></ul></ul><ul><ul><li>Health care performance measurement </li></ul></ul>
  44. 44. THE RELATIONSHIP BETWEEN AUDITING, ATTESTATION, AND ASSURANCE SERVICES @Sako Mayrick 2006 Attestation Auditing Assurance
  45. 45. -Materiality -Audit risk -Evidence @Sako Mayrick 2006 THREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDIT
  46. 46. THREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDIT <ul><li>Materiality A misstatement or the aggregate of all misstatements in financial statements is considered to be material if, in light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities ( the user), would be changed or influenced by such misstatement or the aggregate of all misstatements. </li></ul><ul><li>Audit risk is the risk that the auditor will fail to express a reservation in his or her opinion on financial statements that are materiality misstated </li></ul>@Sako Mayrick 2006
  47. 47. THREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDIT <ul><li>Evidence Evidential matter supporting the financial statements consists of the underlying accounting records and all corroborating information available to the auditor. Relevance refers to whether the evidence relates to the specific audit objective being tested. Reliability refers to the whether or not a particular type of evidence can be relied upon to signal the true state of the assertion or audit objective . </li></ul>@Sako Mayrick 2006
  48. 48. INTERNAL AUDITING <ul><li>An internal audit is an independent activity established by management to examine and evaluate the organization’s risk management process and systems of control, and to make recommendations for the achievement of company objectives. </li></ul>@Sako Mayrick 2006
  49. 49. INTERNAL AUDITING <ul><li>The internal audit staffs may also engage in number of other activities : </li></ul><ul><ul><li>Examination and evaluation of financial and operating information within the organization- in certain organization this can form a type of continuous auditing and may involve sophisticated information systems that capture monitoring of risk and evidencing of controls </li></ul></ul><ul><ul><li>Review of economy, efficiency and effectiveness of operations </li></ul></ul><ul><ul><li>Review of compliance with external laws and regulations and internal policy and procedures </li></ul></ul><ul><ul><li>Review and advice on the development of key organizational systems and on the implementation of major change. </li></ul></ul>@Sako Mayrick 2006
  50. 50. INTERNAL AUDITING CONT… <ul><li>The current focus of internal audit is on adding value to an organization through risk control and reviewing all types of risk and recommending relevant controls. The institute of internal Auditors definition has changed the focus of internal audit toward a more risk-based, consultancy type activity. The internal audit can be referred as </li></ul><ul><ul><li>An independent, objective assurance and consulting activity </li></ul></ul><ul><ul><li>Designed to add value and improve an organization’s operations </li></ul></ul><ul><ul><li>Helps the organization accomplish its objectives </li></ul></ul><ul><ul><li>Bring systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. </li></ul></ul>@Sako Mayrick 2006
  51. 51. INTERNAL AUDITING cont… <ul><li>There are four major areas of importance for internal audit that are addressed </li></ul><ul><ul><li>Corporate governance </li></ul></ul><ul><ul><li>Risk management </li></ul></ul><ul><ul><li>Organizational control </li></ul></ul><ul><ul><li>Corporate objectives </li></ul></ul>@Sako Mayrick 2006
  52. 52. INTERNAL AND EXTERNAL AUDITING It is important to understand and recognize the differences and commonalities between internal and external audit. Internal and external auditor should work closely together, in particular to coordinate activity and maximize effectiveness and where appropriate external audit may rely on the work of internal audit. However, there are number of fundamental differences in their objectives, scope and responsibility. @Sako Mayrick 2006
  53. 53. @Sako Mayrick 2006 Internal auditing External auditing Objectives To advise management on whether the organization has sound systems of internal controls to protect the organization against loss To provide an opinion on whether the financial statements provide a true and fair view Legal basis All areas of the organization, operational as well as financial Financial focus Scope All areas of the organization, operational as well as financial Financial focus Approach Increasingly risk base Assess risks Evaluate system of controls Test operation of system Make recommendation for improvements Increasingly risk based Test underlying transactions that form the basis of the financial statements Responsibility To advice and make recommendations on the internal control and corporate governance To form opinion on whether the financial statements provide a true and fair view.
  54. 54. ISA 610, “CONSIDERING THE WORK OF INTERNAL AUDITING” <ul><li>ISA 610 requires external auditors to consider the activities of internal auditors and their effect, if any, on the nature, timing, and extent of the external auditor’s procedures. The external auditor considers the organizational status of the internal audit function, the scope of its function, the technical competence of its members and the professional care they exercise when assessing the work of the department. </li></ul><ul><li>The auditing process is very similar between the external and internal auditors however; the audit objectives are often very different. </li></ul>@Sako Mayrick 2006
  55. 55. ISA 610, “CONSIDERING THE WORK OF INTERNAL AUDITING” <ul><li>There are number of factors to consider for an auditor to rely on the </li></ul><ul><li>work of internal auditor: </li></ul><ul><li>(a) Organizational status: Specific status of internal auditing in the entity and the effect this has on its ability to be objective. In the ideal situation, internal auditing will report to the highest level of management and be free of any other operating responsibility. Any constraints or restrictions placed on internal auditing by management would need to be carefully considered. In particular, the internal auditors will need to be free to communicate fully with the external auditor. </li></ul><ul><li>(b) Scope of function: The nature and extent of internal auditing assignments performed. The external auditor would also need to consider whether management acts on internal audit recommendations and how this is evidenced. </li></ul><ul><li>(c) Technical competence: Whether internal auditing is performed by persons having adequate technical training and proficiency as internal auditors. The external auditor may, for example, review the policies for hiring and training the internal auditing staff and their experience and professional qualifications. </li></ul><ul><li>(d) Due professional care: Whether internal auditing is properly planned, supervised, reviewed and documented. The existence of adequate audit manuals, work programs and working papers would be considered. </li></ul>@Sako Mayrick 2006
  56. 56. OUTSOURCING OF IA FUNCTION <ul><li>The National Board of Accountants and Auditors’ Governing Board at its 132nd meeting held on 11th April 2005, among other issues, deliberated on the above professional issue and resolved that the outsourcing of the Internal Audit function in the country is a relatively new phenomenon, which needs some guidance. In view of this, it was agreed that institutions wanting to outsource the Internal Audit function may only do so under the following conditions: </li></ul><ul><li>(1) That the service be provided in the form of a consultancy by competent, qualified accountants registered with the Board in the registration category of CPA-PP. </li></ul><ul><li>(2) That the outsourced Internal Auditor be distinct from the External Auditor of the entity. </li></ul><ul><li>(3) That the institution seeking such professional services should have in place an Audit Charter. </li></ul><ul><li>(4) That such professional services be guided by very clearly worked out “Terms of Reference” showing: </li></ul><ul><li>– the scope of the audit </li></ul><ul><li>– the number of man-days to be used </li></ul><ul><li>– the reporting requirement including the types and frequencies of reports to be prepared </li></ul><ul><li>– the price of the consultancy </li></ul>@Sako Mayrick 2006
  57. 57. OUTSOURCING OF IA FUNCTION <ul><li>(5) That the consultancy be for a specified time frame after which there should be need to change the internal auditor. </li></ul><ul><li>(6) That the client (procuring entity) shall have the powers to pre-maturely terminate the consultancy contract on unsatisfactory performance of the outsourced Internal Auditor (Consultant). </li></ul><ul><li>(7) That the Internal Audit process should be guided by programmes and detailed working papers which should be available for AQR purposes, should need arise. </li></ul><ul><li>(8) That the outsourcing of the Internal Audit function should avoid any kind of conflict of interest among the parties. </li></ul><ul><li>(9) That the Internal Auditor should exercise the pre-requisite independence when rendering such professional services. </li></ul><ul><li>(10) That such professional services should be procured based on competitive bidding processes. </li></ul><ul><li>All organizations / entities operating in Tanzania and the general public are required to note this development and observe the above guidelines. </li></ul>@Sako Mayrick 2006
  58. 58. SHIFT OF EMPHASIS OF AUDIT <ul><li>The emphasis in approaching an audit has shifted from detailed checking of individual items towards an overall review of the systems in operation; followed by an examination of the records and the financial statements prepared from them. Amongst the reason for this major shift of emphasis are: </li></ul><ul><ul><li>The increasing size and complexity of modern enterprises </li></ul></ul><ul><ul><li>The development of more accurate and sophisticated computerized systems </li></ul></ul><ul><ul><li>The requirement that the auditor should also report on the profit and loss account, which entails a review of all transactions during the period, not simply of year-end balances as before. </li></ul></ul>@Sako Mayrick 2006
  59. 59. INTERNAL AUDITING WORKED EXAMPLE <ul><li>TPDC, parastatal organization dealing with industrial research development has recently decided to appoint a small internal audit team. The Chief Accountant has sent to you as statutory auditor for a number of years for your comment on the following job specification for the team </li></ul><ul><li>Job specification- internal audit </li></ul><ul><li>Your role is to </li></ul><ul><ul><li>Review accounting systems and related internal controls </li></ul></ul><ul><ul><li>Examine financial and operating information for management, including detailed testing of transactions and balances </li></ul></ul><ul><ul><li>Review the economy , efficiency and effectiveness of operations and of non financial controls </li></ul></ul><ul><ul><li>Review the implementation of corporate policies, plans and procedures. </li></ul></ul><ul><li>TPDC also state that the new internal audit team should enable the statutory auditors to reduce the amount of testing they undertake and thus, to increase overall efficiency and reduce the cost of the statutory audit. </li></ul>@Sako Mayrick 2006
  60. 60. INTERNAL AUDITING WORKED EXAMPLE <ul><ul><li>Describe the objectives and scope of internal audit function according to ISA 610 </li></ul></ul><ul><ul><li>Comment briefly on the four items in the internal audit job specification indicating with examples the extent, which they might impinge upon the work of the statutory auditor. </li></ul></ul><ul><ul><li>List and explain five criteria which you would have to consider accordance to ISA 610, before deciding how much reliance you could place on the work done by the internal auditor </li></ul></ul><ul><ul><li>Outline the response, which you would make to TPDC regarding a possible reduction in the cost of the statutory audit. </li></ul></ul><ul><ul><li>If the management of TPDC decided to outsource the internal audit services. Comment briefly on possible advantages and disadvantages of the procedure. </li></ul></ul><ul><ul><li>Describe major ethical matters in accordance to ISA which external auditors to TPDC should consider in case they decide to undertake the external audit assignment </li></ul></ul>@Sako Mayrick 2006
  61. 61. AUDIT AS A COMMUNICATION MEDIUM <ul><li>According to ISA 700, the objective of any audit is for the auditor to obtain sufficient appropriate audit evidence to be able to express an opinion on the financial statements. </li></ul><ul><li>ISA 700, provides authoritative guidance on audit reporting. </li></ul><ul><li>Audit report is the primary means of communication between the auditor and the shareholders of the company. </li></ul><ul><li>In order to convey information of a succinct form, the audit report has become an extremely formalized group of phrases, each of which has special significance. These are similar to legal phrases know as “terms of art’. Such phrases do not mean merely what they appear to mean on the face of it , and have significance much greater that they first appear to. Any deviation from the standard format is regarded by accountants as being significant and may provide more important extra information. </li></ul>@Sako Mayrick 2006
  62. 62. THE AUDITOR'S STANDARD UNQUALIFIED AUDIT REPORT <ul><li>This is the most common type of audit report. </li></ul><ul><li>The standard unqualified audit report contains seven important elements: </li></ul><ul><ul><li>Title </li></ul></ul><ul><ul><li>Addressee </li></ul></ul><ul><ul><li>Introductory paragraph </li></ul></ul><ul><ul><li>Scope paragraph </li></ul></ul><ul><ul><li>Opinion paragraph </li></ul></ul><ul><ul><li>Name of auditor </li></ul></ul><ul><ul><li>Date of report </li></ul></ul>@Sako Mayrick 2006
  63. 63. Example of unqualified report <ul><li>AUDITOR’S REPORT TO ..... </li></ul><ul><li>We have audited the financial statements of ABC Company for the year ended December 31, 19X0, from which the summarized financial statements were derived, in accordance with International Standards on Auditing (or refer to relevant national standards or practices). In our report dated March 10, 19X1 we expressed an unqualified opinion on the financial statements from which the summarized financial statements were derived. </li></ul><ul><li>In our opinion, the accompanying summarized financial statements are consistent, in all material respects, with the financial statements from which they were derived. </li></ul><ul><li>For a better understanding of the Company’s financial position and the results of its operations for the period and of the scope of our audit, the summarized financial statements should be read in conjunction with the financial statements from which the summarized financial statements were derived and our audit report thereon. </li></ul><ul><li>AUDITOR </li></ul><ul><li>Date </li></ul><ul><li>Address </li></ul>@Sako Mayrick 2006
  64. 64. QUALIFIED REPORT <ul><li>A qualified report is less common and is where an auditor disagrees with the view presented in the accounts, or if he has not been able to form an opinion because of inadequate evidence.A sample of it can be obtained on ISA 800 appendix 643 as an appendix 4. </li></ul><ul><li>Reasons for qualification </li></ul><ul><ul><li>A departure from IFRS </li></ul></ul><ul><ul><li>Scope limitation </li></ul></ul><ul><ul><li>The auditor is not independent </li></ul></ul>@Sako Mayrick 2006
  65. 65. Example of qualified report <ul><li>AUDITOR’S REPORT TO ..... </li></ul><ul><li>We have audited the financial statements of ABC Company for the year ended December 31, 19X0, from which the summarized financial statements were derived, in accordance with International Standards on Auditing (or refer to relevant national standards or practices). In our report dated March 10, 19X1 we expressed an opinion that the financial statements from which the summarized financial statements were derived gave a true and fair view of (or presented fairly, in all material respects) ...except that inventory had been overstated by .... </li></ul><ul><li>In our opinion, the accompanying summarized financial statements are consistent, in all material respects, with the financial statements from which they were derived and on which we expressed a qualified opinion. </li></ul><ul><li>For a better understanding of the Company’s financial position and the results of its operations for the period and of the scope of our audit, the summarized financial statements should be read in conjunction with the financial statements from which the summarized financial statements were derived and our audit report thereon. </li></ul><ul><li>AUDITOR </li></ul><ul><li>Date </li></ul><ul><li>Address </li></ul>@Sako Mayrick 2006
  66. 66. Other reports <ul><li>In summary the audit report must contain; the heading which shows the independence of the auditor, the fact that the report is addressed to the shareholders and the name of the company; Respective responsibilities of directors and auditors; the basis of opinion and the opinion . (Please visit google search on the Internet for various samples of audit report). </li></ul><ul><li>Other forms </li></ul><ul><ul><li>Qualified </li></ul></ul><ul><ul><li>Denial/Disclaimer </li></ul></ul><ul><ul><li>Adverse </li></ul></ul>@Sako Mayrick 2006
  67. 67. AUDIT QUALIFICATION MATRIX @Sako Mayrick 2006 Nature of Circumstance Material but not fundamental Fundamental Limitation of Scope Except for ..might Disclaimer Disagreement Except for Adverse opinion
  68. 68. AUDIT QUALIFICATION MATRIX… cont. <ul><li>Except for ..might auditors disclaim an opinion on a particular aspects of the accounts which is not considered fundamental </li></ul><ul><li>Disclaimer of Opinion- Auditor state they are unable to form an opinion in the truth and fairness </li></ul><ul><li>Except for , auditor expresses adverse opinion on particular aspects of accounts which is not considered fundamental </li></ul><ul><li>Adverse opinion, auditors state that accounts do not give a true and fair view. </li></ul>@Sako Mayrick 2006
  69. 69. AUDIT QUALIFICATION MATRIX … cont <ul><li>Limitation of Scope, </li></ul><ul><ul><li>Absence of accounting records </li></ul></ul><ul><ul><li>Ownership of material assets </li></ul></ul><ul><li>Disagreement </li></ul><ul><ul><li>Inappropriate accounting policies </li></ul></ul><ul><ul><li>Facts /amount </li></ul></ul><ul><ul><li>Manner or extent of disclosure </li></ul></ul><ul><ul><li>Failure to comply with legislation </li></ul></ul>@Sako Mayrick 2006
  70. 70. REPORTING UNCERTAINITY <ul><li>Inherent uncertainty, an uncertainty whose resolution is dependent upon uncertain future event outside the control of the reporting entity’s directors at the date financial statement are approved. </li></ul><ul><li>Fundamental Uncertainty, is an inherent where the magnitude of its potential impact is so great that, without a clear disclosure of nature and implication of uncertainty the view given by the f/s would be seriously misleading. </li></ul><ul><ul><ul><li>E.g. Going concern </li></ul></ul></ul><ul><ul><ul><li>Major litigation </li></ul></ul></ul>@Sako Mayrick 2006
  71. 71. Worked Example <ul><li>During the course of your audit of the fixed assets of NEDCO LTD at 31 March 2004 two problems have arisen. </li></ul><ul><li>The calculations of the cost of direct labour incurred on assets in course of construction by the company’s employees have been accidentally destroyed for the early part of the year. The direct labour cost involved is Tshs. 10,000,000/= </li></ul><ul><li>The company has received a government grant of Tshs25, 000,000/= towards the cost of plant and equipment acquired during the year and expected to last for ten years. The grant has been credited in full to the profit and loss account as exceptional income. </li></ul><ul><li>Other relevant financial information is as follows. </li></ul><ul><li> Tshs. </li></ul><ul><li>Profit before tax 100,000,000/= </li></ul><ul><li>Fixed asset additions 133,000,000/= </li></ul><ul><li>Assets constructed by company 34,000,000/= </li></ul><ul><li>Fixed asset at net book value 666,667,000/= </li></ul>@Sako Mayrick 2006
  72. 72. Worked Example <ul><li>Required: </li></ul><ul><li>List the general forms of qualification available to auditors in drafting their report and state the circumstance in which each is appropriate. </li></ul><ul><li>State whether you feel that a qualified audit report would be necessary with respect to the treatment of the government grant, draft the section of the report describing the matter (the whole report is not required). </li></ul><ul><li>On the assumption that you decide that a qualified audit report is necessary with respect to the treatment of the government grant, draft the section of the report describing the matter (the whole report is not required). </li></ul><ul><li>Outline the auditor’ general responsibility with regard to the statement in the directors’ report concerning the valuation of land and buildings. </li></ul>@Sako Mayrick 2006
  73. 73. MISCELLANEOUS MATTERS <ul><li>Timing of Audit work </li></ul><ul><ul><li>At or after year end- suitable for small business </li></ul></ul><ul><ul><li>Interim and final audit- </li></ul></ul><ul><ul><ul><li>Interim – test of controls, planning </li></ul></ul></ul><ul><ul><ul><li>Final - Substantive balance sheet audit </li></ul></ul></ul><ul><ul><li>Continuous audit – the auditor is present throughout the year , suitable for the large client </li></ul></ul><ul><li>Responsibilities of directors </li></ul><ul><ul><li>Safeguard assets </li></ul></ul><ul><ul><li>Prevent fraud and errors </li></ul></ul><ul><ul><li>Ensure proper accounting records as per Companies act </li></ul></ul><ul><ul><li>Prepare financial statements </li></ul></ul><ul><ul><li>Prepare company’s return to registrar of companies </li></ul></ul><ul><ul><li>Set up system of IC </li></ul></ul><ul><ul><li>Directors are responsible to adopt consistent and appropriate accounting policies for f/s, they must comply with Companies act and comply with accounting standards </li></ul></ul>@Sako Mayrick 2006
  74. 74. Miscellaneous Issues cont… <ul><li>Responsibilities of Auditors </li></ul><ul><ul><li>End result work for f/s on their true and fairness </li></ul></ul><ul><li>The auditor’s should have </li></ul><ul><ul><li>Deep understanding and knowledge of accounting </li></ul></ul><ul><ul><ul><li>Directors will consult auditors of accounting policies to adopt </li></ul></ul></ul><ul><ul><ul><li>Ultimately auditors must stand back from accounting function </li></ul></ul></ul><ul><li>Social Audit </li></ul><ul><ul><li>In Narrow sense it is a financial audit </li></ul></ul><ul><ul><ul><li>It adds value </li></ul></ul></ul><ul><ul><ul><li>Efficiency of markets and investment funds </li></ul></ul></ul><ul><ul><li>Measuring social, ethical and Environmental conduct to ensure </li></ul></ul><ul><ul><ul><li>CSR, accountability and transparency </li></ul></ul></ul><ul><ul><li>Ensures that in an ever competitive corporate environment management do not sacrifice their social value in quest for higher profitability </li></ul></ul>@Sako Mayrick 2006
  75. 75. <ul><li>AGENCY THEORY </li></ul><ul><li>Principal- Agent to perform task on his behalf </li></ul><ul><li>Agent will not act against the interest of the principal </li></ul><ul><li>Directors are like agents to shareholders </li></ul>@Sako Mayrick 2006
  76. 76. LETTER OF ENGAGEMENT <ul><li>It is a letter send by an auditor before commencing any professional work, it show an agreement in writing, the precise scope and nature of the work to be undertaken </li></ul><ul><li>Purpose </li></ul><ul><ul><li>To define clearly the extent of the auditor’s responsibilities </li></ul></ul><ul><ul><li>To minimize misunderstandings between auditor firm and client </li></ul></ul><ul><ul><li>To confirm in writing the verbal agreement </li></ul></ul><ul><ul><li>To confirm acceptance by the auditor of his engagement </li></ul></ul><ul><ul><li>To inform and educate the client </li></ul></ul><ul><ul><li>Avoidance of implied contracts arising out of the articles of Association or previous conduct of the auditor </li></ul></ul>@Sako Mayrick 2006
  77. 77. LETTER OF ENGAGEMENT <ul><li>Timing </li></ul><ul><ul><li>To all new clients before any professional work has been started </li></ul></ul><ul><ul><li>To all existing clients who have not previously had such a letter </li></ul></ul><ul><ul><li>Whenever there is significance changes of circumstances ( e.g. new ISA’s , major change in management. </li></ul></ul><ul><ul><li>The letter should be reviewed every year to see if there is a need for revised letter </li></ul></ul><ul><ul><li>To each member of the company of the group ( if it is a group) </li></ul></ul>@Sako Mayrick 2006
  78. 78. Procedures and Content <ul><li>Before acceptance discuss the precise terms with the management( board for a company) </li></ul><ul><li>Draft and sign the letter before commencing any part of an assignment </li></ul><ul><li>Receive the client’s written acceptance </li></ul><ul><li>Every year review the letter and consider if revision is necessary </li></ul>@Sako Mayrick 2006
  79. 79. CONTENTS OF LETTER OF ENGAGEMENT <ul><li>The Board’s responsibilities according to company Act </li></ul><ul><li>The auditor’s responsibilities to report on f/s and consistency of view of directors report </li></ul><ul><li>The scope of auditor’s work </li></ul><ul><ul><li>Auditing standards </li></ul></ul><ul><ul><li>Accounting systems review </li></ul></ul><ul><ul><li>Collection of audit evidence </li></ul></ul><ul><ul><li>Tests and reliance on internal controls </li></ul></ul><ul><li>Sending of letter of weakness to the management </li></ul><ul><li>Any special factors </li></ul><ul><ul><li>Relation with internal audit </li></ul></ul><ul><ul><li>Audit of division and branches </li></ul></ul><ul><ul><li>Any overseas location problems </li></ul></ul><ul><ul><li>Other auditors if any </li></ul></ul><ul><ul><li>Significance reliance on supervision of the directors in small proprietary companies </li></ul></ul>@Sako Mayrick 2006
  80. 80. CONTENTS OF LETTER OF ENGAGEMENT <ul><li>Any special factors </li></ul><ul><ul><li>Relation with internal audit </li></ul></ul><ul><ul><li>Audit of division and branches </li></ul></ul><ul><ul><li>Any overseas location problems </li></ul></ul><ul><ul><li>Other auditors if any </li></ul></ul><ul><ul><li>Significance reliance on supervision of the directors in small proprietary companies </li></ul></ul><ul><li>The need for a letter of representation from the management </li></ul><ul><li>Irregularities and fraud – the directors’ primary responsibility </li></ul><ul><ul><li>The auditor’s planning of his audit to have a reasonable expectation of discovering material misstatement in accounts- non reliance on the auditor to uncover irregularities and frauds </li></ul></ul><ul><li>Any agreement for the auditors to carry out work of a bookkeeping or accounting nature- this could be covered on separate letter </li></ul>@Sako Mayrick 2006
  81. 81. CONTENTS OF LETTER OF ENGAGEMENT CONT…. <ul><li>Any agreement to provide taxation services – this could be a separate letter </li></ul><ul><li>The CHINNESE WALL IDEA; where accounting and tax services are carried out the staff may be different from those engaged on audit work and so information given to tax or accounting staff is not thereby given to audit staff. </li></ul><ul><li>The fees and the basis on which they are charged </li></ul><ul><li>A request for written acknowledgement of the letter and that it creates a contractual obligations. In the case of a company the letter of acknowledgement should be signed on behalf of the board </li></ul>@Sako Mayrick 2006
  82. 82. CONCEPT OF MATERIALITY <ul><li>According to ISA 320, the auditor should consider materiality and its relationship with audit risk when conducting an audit. Also glossary number 139 defines materiality as Materiality—Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cutoff point rather than being a primary qualitative characteristic which information must have if it is to be useful. </li></ul>@Sako Mayrick 2006
  83. 83. CONCEPT OF MATERIALITY <ul><li>Auditors hope that their audit procedures will uncover any large errors in the financial statements they are auditing. Materiality should be considered by the auditor when: </li></ul><ul><ul><li>Determining the nature, timing and extent of audit procedures; </li></ul></ul><ul><ul><li>Evaluating the effect of misstatements. </li></ul></ul><ul><li>Materiality is defined as the expression for the relative significance or importance of a particular matter in the context of financial statements as a whole. A matter is material if its omission or misstatement would reasonably influence the decisions of an addressee of the auditor’s report. Materiality is not capable of the general mathematical definition as it has both qualitative and quantitative aspects. </li></ul>@Sako Mayrick 2006
  84. 84. CONCEPT OF MATERIALITY CONT… <ul><li>Auditors’ responsibility is to plan and perform their audit to provide reasonable assurance that the financial statements are free of material misstatement and give a true and fair view. From audit point of view anything that would distort the view given by accounts must lead to qualification but only if it is material. </li></ul><ul><li>Example things that will fit the above definition include </li></ul><ul><ul><li>Inclusion of deferred revenue expenditure, such as advertising costs, in debtors and prepayments </li></ul></ul><ul><ul><li>A loan which could not quickly be recalled shown under money at call at short notice </li></ul></ul><ul><ul><li>Omission of an item of stock </li></ul></ul>@Sako Mayrick 2006
  85. 85. CONCEPT OF MATERIALITY CONT… <ul><li>The key problem in practice is that of how ‘large’ an item has to be for it to be considered as material. </li></ul><ul><li>An initial assessment of materiality during audit planning assists in the determination of an efficient and effective audit approach. The preliminary materiality assessment helps auditor to decide such factors as what items to examine and whether to use sampling techniques and which ones. This enables them to select audit procedures that will reduce audit risk to an acceptable level. </li></ul>@Sako Mayrick 2006
  86. 86. MATERIALITY CONCEPT CONT…. <ul><li>Auditors must use their professional judgment in coming to a decision as to whether an item is, or is not, material. Important points to take into consideration are as follows: </li></ul><ul><ul><li>What qualitative aspects are involved, such as the inaccurate or inadequate description of an accounting policy? </li></ul></ul><ul><ul><li>Relatively small amounts, such as a small error in a month end procedure, can cumulatively have a material effect, if repeated. </li></ul></ul><ul><ul><li>Materiality is relative factor and should be considered in relative terms. Shs.1,000,000 may be absolutely immaterial in the accounts of a larger company , whereas in a small organization the reverse would probably be true. Further, under this heading and amount must considered in relation to:- </li></ul></ul>@Sako Mayrick 2006
  87. 87. MATERIALITY CONCEPT CONT…. <ul><ul><ul><li>Items in the overall financial statement level </li></ul></ul></ul><ul><ul><ul><li>Items at individual account balance or transaction level </li></ul></ul></ul><ul><ul><ul><li>Statutory and other disclosure requirements which may require disclosure regardless of value , such as those relating to directors’ emoluments. </li></ul></ul></ul><ul><ul><ul><li>The corresponding amount in previous years </li></ul></ul></ul><ul><ul><li>What degree of latitude is allowable in deciding on the amount attributable to a particular item? Some items, such as directors’ fees, are capable of exact definition; other, such as depreciation and provisions for obsolete or damaged stock, are at best an intelligent estimate. The overriding consideration must be whether the accounts disclose a true and fair view. It is also clearly important that such items are consistently treated from year to year. </li></ul></ul>@Sako Mayrick 2006
  88. 88. Materiality Cont….. <ul><li>Auditors must use their professional judgment in deciding whether or not an item is material. They must consider: </li></ul><ul><ul><ul><li>Qualitative aspects </li></ul></ul></ul><ul><ul><ul><li>The cumulative effect of small amounts </li></ul></ul></ul><ul><ul><ul><li>The relative nature of materiality </li></ul></ul></ul><ul><ul><ul><li>The degree of latitude that is allowable. </li></ul></ul></ul><ul><li>According to ISA 320:400, in evaluating whether the financial statements give a true and fair view, auditors should assess the materiality of the aggregate of uncorrected misstatements. This indicates that the overall effect of misstatements should be evaluated. </li></ul>@Sako Mayrick 2006
  89. 89. Materiality Cont….. <ul><li>If the auditor believes that the aggregate of uncorrected misstatement may be material, they may wish to extend their audit testing to obtain more audit evidence in the relevant area, or request the directors to adjust the financial statements according to ISA 260 “Communication of audit matters to those who are charged with Governance”. In practice, once the directors have been informed of the misstatements in the draft accounts, they are likely to be happy for accounts to be adjusted. If the directors refuse any adjustments, the auditor should consider the implications for the audit report. </li></ul>@Sako Mayrick 2006
  90. 90. Materiality Cont….. <ul><li>The following are some of audit tests to determine whether an item is material. </li></ul><ul><ul><li>Who are the relevant users? </li></ul></ul><ul><ul><li>What are their decision making needs? </li></ul></ul><ul><ul><li>For a given item, what is the appropriate context for assessing its materiality? </li></ul></ul><ul><ul><li>In what range of values do items become critical in terms of materiality </li></ul></ul>@Sako Mayrick 2006
  91. 91. Materiality Cont….. <ul><li>The following are some of audit tests to determine whether an item is material… </li></ul><ul><ul><li>For a given item, what is the appropriate context for assessing its materiality? </li></ul></ul><ul><ul><li>Securities and Exchange Commission in US (main regulator of US securities Laws) takes the following rule of thumb for materiality. </li></ul></ul><ul><ul><ul><ul><li>Errors over 10% - material </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Errors between 5% and 10% may be material </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Errors less than 5% - not material. But note that these are figures as guidelines only, judgment is required. </li></ul></ul></ul></ul>@Sako Mayrick 2006
  92. 92. General Principles of an Audit <ul><li>The auditor should comply with the Code of Ethics for Professional Accountants issued by the International Federation of Accountants. Ethical principles governing the auditor’s professional responsibilities are: </li></ul><ul><ul><li>Independence; Integrity; </li></ul></ul><ul><ul><li>Objectivity; </li></ul></ul><ul><ul><li>Professional competence and due care; </li></ul></ul><ul><ul><li>Confidentiality; Professional behavior; and </li></ul></ul><ul><ul><li>Technical standards . </li></ul></ul>@Sako Mayrick 2006
  93. 93. <ul><li>• Integrity </li></ul><ul><ul><li>A professional accountant should be straightforward and honest in performing professional services.* </li></ul></ul><ul><li>• Objectivity </li></ul><ul><ul><li>A professional accountant should be fair and should not allow prejudice orbias, conflict of interest or influence of others to override objectivity. </li></ul></ul><ul><li>• Professional Competence and Due Care </li></ul><ul><li>A professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation and techniques. </li></ul><ul><li>• Confidentiality </li></ul><ul><li>A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose. </li></ul>@Sako Mayrick 2006 General Principles of an Audit
  94. 94. <ul><li>• Professional Behavior </li></ul><ul><li>A professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. The obligation to refrain from any conduct which might bring discredit to the profession requires IFAC member bodies to consider, when developing ethical requirements, the responsibilities of a professional accountant to clients, third parties, other members of the accountancy profession, staff, employers, and the general public. </li></ul><ul><li>• Technical Standards </li></ul><ul><li>A professional accountant should carry out professional services in accordance with the relevant technical and professional standards. </li></ul><ul><li>Professional accountants have a duty to carry out with care and skill, the instructions of the client or employer insofar as they are compatible with the requirements of integrity, objectivity and, in the case of professional accountants in public practice. In addition, they should conform with the technical and professional standards promulgated by: </li></ul><ul><ul><li>. IFAC (e.g., International Standards on Auditing); </li></ul></ul><ul><ul><li>. International Accounting Standards Board; </li></ul></ul><ul><ul><li>. The member’s professional body or other regulatory body; and </li></ul></ul><ul><ul><li>. Relevant legislation. </li></ul></ul>@Sako Mayrick 2006 General Principles of an Audit
  95. 95. PROFESSIONAL SCEPTICISM <ul><li>The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated </li></ul><ul><li>An attitude of professional skepticism means the auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that contradicts or brings into question the reliability of documents or management representations </li></ul><ul><li>In planning and performing an audit, the auditor neither assumes that management is dishonest nor assumes unquestioned honesty. (Remember Mautz and Sharaf audit postulates). </li></ul><ul><li>Accordingly, representations from management are not a substitute for obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. </li></ul>@Sako Mayrick 2006
  96. 96. SCOPE OF AUDIT <ul><li>The term “scope of an audit” refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit. The procedures required to Conduct an audit in accordance with ISAs should be determined by the auditor having regard to the requirements of ISAs, relevant professional bodies, legislation, regulations and, where appropriate, the terms of the audit engagement and reporting requirements. </li></ul><ul><li>An audit in accordance with ISAs is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement. Reasonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole. Reasonable assurance relates to the whole audit process. </li></ul>@Sako Mayrick 2006
  97. 97. SCOPE OF AUDIT <ul><li>REASONABLE ASSURANCE Vs ABSOLUTE ASSURANCE </li></ul><ul><li>An auditor cannot obtain absolute assurance because there are inherent limitations in an audit that affect the auditor’s ability to detect material misstatements. These limitations result from factors such as: </li></ul><ul><ul><li>The use of testing. </li></ul></ul><ul><ul><li>The inherent limitations of internal control (for example, the possibility of management override or collusion). </li></ul></ul><ul><ul><li>The fact that most audit evidence is persuasive rather than conclusive. </li></ul></ul>@Sako Mayrick 2006
  98. 98. REASONABLE Vs ABSOLUTE ASSURANCE….. <ul><li>Also, the work undertaken by the auditor to form an audit opinion is permeated by judgment, in particular regarding: </li></ul><ul><li>The gathering of audit evidence, for example, in deciding the nature, timing, </li></ul><ul><li>and extent of audit procedures; and </li></ul><ul><li>The drawing of conclusions based on the audit evidence gathered, for </li></ul><ul><li>example, assessing the reasonableness of the estimates made by management </li></ul><ul><li>in preparing the financial statements. </li></ul>@Sako Mayrick 2006
  99. 99. QUALITY CONTROL <ul><li>According to ISA 220, the audit firm should implement quality control policies and procedures designed to ensure that all audits are conducted in accordance with ISAs or relevant national standards or practices. The nature, timing and extent of an audit firm’s quality control policies and procedures depend on a number of factors such as the </li></ul><ul><ul><li>size and nature of its practice , </li></ul></ul><ul><ul><li>its geographic dispersion, </li></ul></ul><ul><ul><li>its organization and </li></ul></ul><ul><ul><li>appropriate cost/benefit considerations. </li></ul></ul>@Sako Mayrick 2006
  100. 100. QUALITY CONTROL <ul><li>The firm’s general quality control policies and procedures should be communicated to its personnel in a manner that provides reasonable assurance that the policies and procedures are understood and implemented. Further, The auditor should implement those quality control procedures, which are, in the context of the policies and procedures of the firm, appropriate to the individual audit. </li></ul>@Sako Mayrick 2006
  101. 101. OBJECTIVES OF QC <ul><li>(a) Professional requirements: </li></ul><ul><li>Personnel in the firm are to adhere to the principles of independence, integrity, objectivity, confidentiality and professional behavior. </li></ul><ul><li>(b) Skills and competence: </li></ul><ul><li>The firm is to be staffed by personnel who have attained and maintain the technical standards and professional competence required to enable them to fulfill their responsibilities with due care. </li></ul><ul><li>(c) Assignment: </li></ul><ul><li>Audit work is to be assigned to personnel who have the degree of technical training and proficiency required in the circumstances. </li></ul><ul><li>(d) Delegation: </li></ul><ul><li>There is to be sufficient direction, supervision and review of work at all levels to provide reasonable assurance that the work performed meets appropriate standards of quality. </li></ul>@Sako Mayrick 2006
  102. 102. OBJECTIVES OF QC <ul><li>(e) Consultation: </li></ul><ul><li>Whenever necessary, consultation within or outside the firm is to occur with those who have appropriate expertise. </li></ul><ul><li>(f) Acceptance and retention of clients: </li></ul><ul><li>An evaluation of prospective clients and a review, on an ongoing basis, of existing clients is to be conducted. In making a decision to accept or retain a client, the firm’s independence and ability to serve the client properly and the integrity of the client’s management are to be considered. </li></ul><ul><li>(g) Monitoring: </li></ul><ul><li>The continued adequacy and operational effectiveness of quality control policies and procedures is to be monitored. </li></ul>@Sako Mayrick 2006
  103. 103. PRINCIPLES OF DELEGATION IN QC…. <ul><li>Any delegation of work to assistants would be in a manner that provides reasonable assurance that such work will be performed with due care by persons having the degree of professional competence required in the circumstances. In due course the following matters will be considered: </li></ul><ul><ul><ul><li>Direction </li></ul></ul></ul><ul><ul><ul><li>Supervision </li></ul></ul></ul><ul><ul><ul><li>Review </li></ul></ul></ul>@Sako Mayrick 2006
  104. 104. Principles of Delegation in QC <ul><ul><li>Direction </li></ul></ul><ul><ul><ul><li>Assistants to whom work is delegated need appropriate direction. Direction involves informing assistants of their responsibilities and the objectives of the procedures they are to perform. It also involves informing them of matters, such as the nature of the entity’s business and possible accounting or auditing problems that may affect the nature, timing and extent of audit procedures with which they are involved. The audit program is an important tool for the communication of audit directions. Time budgets and the overall audit plan are also helpful in communicating audit directions. </li></ul></ul></ul>@Sako Mayrick 2006
  105. 105. PRINCIPLES OF DELEGATION IN QC….. <ul><li>Supervision </li></ul><ul><li>Supervision is closely related to both direction and review and may involve elements of both. Personnel carrying out supervisory responsibilities perform the following functions during the audit: </li></ul><ul><ul><li>Monitor the progress of the audit to consider whether: </li></ul></ul><ul><ul><ul><li>Assistants have the necessary skills and competence to carry out their assigned tasks; </li></ul></ul></ul><ul><ul><ul><li>Assistants understand the audit directions; and </li></ul></ul></ul><ul><ul><ul><li>The work is being carried out in accordance with the overall audit plan and the audit program; </li></ul></ul></ul><ul><ul><li>Become informed of and address significant accounting and auditing questions raised during the audit, by assessing their significance and modifying the overall audit plan and the audit program as appropriate; and </li></ul></ul><ul><ul><li>Resolve any differences of professional judgment between personnel and consider the level of consultation that is appropriate. </li></ul></ul>@Sako Mayrick 2006
  106. 106. PRINCIPLES OF DELEGATION IN QC…. <ul><li>Review </li></ul><ul><li>The work performed by each assistant needs to be reviewed by personnel of at least equal competence to consider whether: </li></ul><ul><ul><li>The work has been performed in accordance with the audit program; </li></ul></ul><ul><ul><li>The work performed and the results obtained have been adequately documented; </li></ul></ul><ul><ul><li>All significant audit matters have been resolved or are reflected in audit conclusions; </li></ul></ul><ul><ul><li>The objectives of the audit procedures have been achieved; and </li></ul></ul><ul><ul><li>The conclusions expressed are consistent with the results of the work performed and support the audit opinion. </li></ul></ul>@Sako Mayrick 2006
  107. 107. THINGS TO BE REVIEWED ON TIMELY BASIS <ul><li>The overall audit plan and the audit program; </li></ul><ul><li>The assessments of inherent and control risks, including the results of tests of control and the modifications, if any, made to the overall audit plan and the audit program as a result thereof; </li></ul><ul><li>The documentation of the audit evidence obtained from substantive procedures and the conclusions drawn there from, including the results of consultations; and </li></ul><ul><li>The financial statements, proposed audit adjustments and the proposed auditor’s report. </li></ul><ul><li>The process of reviewing an audit may include, particularly in the case of large complex audits, requesting personnel not otherwise involved in the audit to perform certain additional procedures before issuing the auditor’s report. </li></ul>@Sako Mayrick 2006
  108. 108. CONTEMPORARY AUDIT ISSUES AS PART OF AQR <ul><li>Adhering generally to auditing standards and Guidelines </li></ul><ul><li>Obtaining confirmation direct from the company’s bankers of bank balances and other important matters known to the bankers. </li></ul><ul><li>Obtaining direct confirmation of balances owed by debtors </li></ul><ul><li>Attendance at stocktaking. </li></ul>@Sako Mayrick 2006
  109. 109. REGULATORY FRAMEWORK OF AUDITING IN TANZANIA <ul><li>The work of auditor today is regulated by mainly three sources: </li></ul><ul><ul><li>Statutes, Companies Act is the most important and </li></ul></ul><ul><ul><li>Professional pronouncements on auditing which are issued by the NBAA. </li></ul></ul><ul><ul><li>For public accounts, legal framework is in the Public Finance Act No. 6 of 2001 and Public Procurement Act No.21 of 2004. Sections 26 reads “there shall continue in existence of public national audit office which shall be headed by the Controller and Auditor –General appointed by the president. The Controller and Auditor General shall , in addition to terms and conditions specified in the Constitution , hold the office on such terms and conditions as may be provided in any written law or as may be determined by the President and set out in instrument of his appointment. Section 30 of the Public finance Act has set out the functions of the CAG .( this shall be discussed in Public Sector Audit topic) </li></ul></ul><ul><ul><li>The constitution of the United Republic of Tanzania Section 143 (1) through (6) </li></ul></ul><ul><ul><li>Income Tax Act, 2004 </li></ul></ul><ul><ul><li>Auditors and Accountants (Registrations) Act.; Act No. 33 of 1972 ( as amended) </li></ul></ul><ul><ul><li>The Cooperatives Societies Act No.15 of 1991 ( as amended) </li></ul></ul><ul><ul><li>Local Government Finance Act No.9 of 1982 ( as amended) </li></ul></ul>@Sako Mayrick 2006
  110. 110. LEGAL FRAMEWORK OF AUDITING COMPANIES ACT NO.12 OF 2002 <ul><li>Requirement of the company to prepare accounts( Directors’ Responsibility)- Section 151 -160 </li></ul><ul><li>Sect.151 </li></ul><ul><ul><li>Books of accounts in Swahili or English to show and explaining the company’s transactions </li></ul></ul><ul><ul><ul><li>Timely and accurate transactions </li></ul></ul></ul><ul><ul><ul><li>The Financial statements complies with requirements of the Act </li></ul></ul></ul><ul><ul><li>Books of accounts to be kept in a registered office available for inspection by directors </li></ul></ul><ul><ul><li>The books of accounts to be preserved for six years </li></ul></ul>@Sako Mayrick 2006
  111. 111. Sect.151 … cont <ul><ul><li>Failure to comply with the section on conviction liable to imprisonment or fine or both </li></ul></ul><ul><li>Sect.152 </li></ul><ul><ul><li>Accounting period to be more than six months but not more than 18 months from the date of incorporation </li></ul></ul><ul><ul><li>On subsequent periods should be 12 month </li></ul></ul><ul><li>Sect.153 </li></ul><ul><ul><li>Accounts should be prepared and indicates </li></ul></ul><ul><ul><ul><li>A profit and loss account or, in the case of a company not trading for profit , an income and expenditure account; </li></ul></ul></ul><ul><ul><ul><li>A balance sheet as at the last day of the accounting period </li></ul></ul></ul><ul><ul><ul><li>A cash flow statement </li></ul></ul></ul>@Sako Mayrick 2006
  112. 112. Companies Act…. Cont…. <ul><li>Sect.154 </li></ul><ul><ul><li>The financial statement shall give a true and fair view of the state of affairs of the company as at the end of its accounting period. </li></ul></ul><ul><ul><li>The financial statement shall comply with requirement specified in regulations prescribed by the Minister, or the NBAA or such other body as the Minister may decide, having regard in either case to generally accepted principles of accounting, and the regulations in this section. </li></ul></ul><ul><ul><li>If special circumstances compliance with any requirements above is inconsistent with the requirement of true and fair view, the directors shall depart from such requirements to the extent necessary to give a true and fair view. Particulars of any such departure, the reasons for it and its effect shall be given in the not to accounts. </li></ul></ul><ul><ul><li>Failure to comply with requirements of this section by directors , they are liable for fine or imprisonment </li></ul></ul>@Sako Mayrick 2006
  113. 113. Companies Act…. Cont…. <ul><li>Sect.155 </li></ul><ul><ul><li>Duty to prepare group accounts </li></ul></ul><ul><ul><ul><li>Consolidated financial statements </li></ul></ul></ul><ul><ul><ul><li>Financial statements must give a true and fair view </li></ul></ul></ul><ul><li>Sect.156 </li></ul><ul><ul><li>Exemption for preparation of group accounts </li></ul></ul><ul><ul><ul><li>If it is a subsidiary of another company that prepares group account </li></ul></ul></ul><ul><li>Sect. 157 </li></ul><ul><ul><li>Registrar may allow the company to extend its accounting period to match with that of holding company including submission of relevant returns. </li></ul></ul><ul><li>Sect. 158 </li></ul><ul><ul><li>Company annual accounts to be approved by the BoD and signed on behalf by the director </li></ul></ul><ul><ul><li>Every copy of Balancer sheet shall be laid before the general meeting or circulated or issued and state the name of a person who signed the balance sheet </li></ul></ul><ul><ul><li>A copy of Balance Sheet to be delivered to Registrar </li></ul></ul><ul><ul><li>Failure to comply with requirement is liable to fine. </li></ul></ul><ul><ul><li>Defined “annual accounts” </li></ul></ul><ul><li>Sect.159 </li></ul><ul><ul><li>Directors of a company should prepare Directors’ report giving a a fair review of the development of the business of the company and its subsidiaries during the accounting period and their position at the end of it and the amount if any that should be paid by the way of dividend </li></ul></ul><ul><ul><li>Failure to comply results into fine or imprisonment. </li></ul></ul>@Sako Mayrick 2006
  114. 114. Companies Act… cont.. <ul><li>Sect.159 </li></ul><ul><ul><li>Directors of a company should prepare Directors’ report giving a a fair review of the development of the business of the company and its subsidiaries during the accounting period and their position at the end of it and the amount if any that should be paid by the way of dividend </li></ul></ul><ul><ul><li>Failure to comply results into fine or imprisonment. </li></ul></ul><ul><li>Sect.160 </li></ul><ul><ul><li>Directors report laid before the company meeting shall state the name of the person who signed it on behalf of the Board </li></ul></ul><ul><ul><li>The report must be signed by the director and secretary of the company. </li></ul></ul><ul><ul><li>Failure to comply or false information is guilty of an offence and liable to a fine. </li></ul></ul>@Sako Mayrick 2006
  115. 115. Auditor’s Report as per CA <ul><li>Sect. 161 </li></ul><ul><ul><li>The auditor shall make a report to the company’s members on all annual accounts of which copies are laid bere the company in the general meeting during their tenure in the offiece </li></ul></ul><ul><ul><li>The report shall state </li></ul></ul><ul><ul><ul><li>Whether in Auditor’s opinion the annual accounts have been properly prepared in accordance with the Act. </li></ul></ul></ul><ul><ul><ul><li>Whether a true and fair view is given </li></ul></ul></ul><ul><ul><ul><ul><li>Balance sheet – state of affairs of the the company at the end of the accounting period </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Profit and Loss Account </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cash flow statement </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Group accounts – consolidation as a whole </li></ul></ul></ul></ul><ul><ul><ul><li>Information in the Directors Report for the accounting period for which the annual accounts are prepared and are consistent with those accounts ; and if they ar of opinion that it is not , they shall state the fact in their report </li></ul></ul></ul>@Sako Mayrick 2006
  116. 116. Auditor’s Report as per CA <ul><li>Sect.162 </li></ul><ul><ul><li>The Auditor’s Report shall state the names of auditors and be signed by them </li></ul></ul><ul><ul><li>Every copy of the auditors’ Report shall state names of the Auditors </li></ul></ul><ul><ul><li>If no name of the auditor is give the company and every officer who is default shall be liable to a fine </li></ul></ul><ul><ul><li>Signature by the auditors are where the office of auditor is held by a body corporate or partnership to signature in the name of the body corporate or partnership by a parson authorized to sign on its behalf </li></ul></ul>@Sako Mayrick 2006
  117. 117. Auditor’s Report as per CA <ul><li>Section 163 </li></ul><ul><ul><li>In preparing company’s report the auditors shall carry out such investigations as will enable them to form opinion as to </li></ul></ul><ul><ul><ul><li>Whether proper accounting records have been kept by the company and proper return adequate for their audit have been received from branches not visited by them </li></ul></ul></ul><ul><ul><ul><li>Whether the company’s individual accounts are in agreement with the accounting records and returns. </li></ul></ul></ul><ul><ul><li>Any departure must be stated in fact in the auditors report </li></ul></ul><ul><ul><li>Any failure to obtain information necessary for purpose of audit must be stated </li></ul></ul><ul><ul><li>If the requirements of section 206 relating to disclosure of information on emoluments and other benefits of directors and others are not complied with in the annual accounts, the auditors shall include in their report , so far as they are reasonably able to do so , a statement giving required particulars. </li></ul></ul>@Sako Mayrick 2006
  118. 118. Auditor’s Report as per CA <ul><li>Sect.164 </li></ul><ul><ul><li>A copy of annual accounts, directors report and auditors report shall not less than 21 days before the date general meeting be sent to every member of the company , every holder of debenture of the company and all persons other then members or holders of debenture of the company being a person so entitled. </li></ul></ul><ul><ul><li>Failure to comply results into fine </li></ul></ul><ul><li>Sect. 165 </li></ul><ul><ul><li>Every other member of the company whether or not is entitled, shall be furnished on demand without charge a copy of last annual accounts of the company, together with a copy of Director’s Report and the Auditor’s Report , within 7 days. </li></ul></ul>@Sako Mayrick 2006
  119. 119. Auditor’s Report as per CA <ul><li>Sect.166 </li></ul><ul><ul><li>The directors, in respect of each accounting period must lay before the company in the general meeting eh annual accounts, the directors report and Auditors report on those accounts within seven months for a public company and ten months for the private from the completion of accounting period </li></ul></ul><ul><ul><li>Failure to the above is guilty of offence by every officer or director and liable to a fine and for continued contravention, to daily fine. </li></ul></ul><ul><ul><li>It is a defence to prove that a person took reasonable steps to comply before the end of the period BUT it is not a defence to prove that the documents in question were not in fact prepared as required by this part. </li></ul></ul>@Sako Mayrick 2006
  120. 120. Auditor’s Report as per CA <ul><li>Sect. 167 </li></ul><ul><ul><li>Directors should deliver to Registrar within each accounting period a copy of annual accounts, auditors reports and directors reports </li></ul></ul><ul><ul><li>Exemption for private company according to section 171 </li></ul></ul><ul><ul><li>Failure to which every person who immediately before the end of that period was a director of the company is guilty of an offence and liable to fine and continued contravention , to a daily default fine </li></ul></ul><ul><ul><li>If the directors fails to make good the default within 14 days after service of the note of compliance, the court may on the application of any member of creditors of the company or of the Registrar , make an order directing the directors to make good the default within such time as may be specified in the order.. And the court may provide that all costs of and incidental to the application shall be born by the directors. </li></ul></ul>@Sako Mayrick 2006
  121. 121. Auditor’s Report as per CA <ul><li>Sect.168 </li></ul><ul><ul><li>Any problems on non-compliance with the act on submitted returns the Minister may give notice to the Directors on the same. </li></ul></ul><ul><ul><li>The notice shall specify the period of not less than one month for the directors to give him an explanation of the accounts or prepare revised accounts. The minister may apply to the court for the company to prepare and have audited the revised accounts </li></ul></ul><ul><li>Section 169 </li></ul><ul><ul><li>Set out conditions for unlimited company not to submit the required reprots </li></ul></ul>@Sako Mayrick 2006
  122. 122. Auditors as per CA <ul><li>Section 170 </li></ul><ul><ul><li>The company shall at each general meeting appoint an auditor or auditors </li></ul></ul><ul><ul><li>Hold office from the conclusion of annual meeting to the conclusion of the next </li></ul></ul><ul><ul><li>The retired auditor shall deem to be re-appointed ( however appointed) without any resolution being being passed unless </li></ul></ul><ul><ul><ul><li>He is not qualified for re-appointment </li></ul></ul></ul><ul><ul><ul><li>A resolution is passed at the meeting appointing somebody instead of him or providing expressly that he shall not be re-appointed </li></ul></ul></ul><ul><ul><ul><li>He has given the company notice in writing of his unwillingness to be re-appointed </li></ul></ul></ul>@Sako Mayrick 2006
  123. 123. Auditors as per CA <ul><li>Where at the general meeting at which accounts are laid no auditors are appointed or re-appointed , the Registrar may appoint a person to fill the vacancy. </li></ul><ul><li>The first auditors of the company may be appointed by the directors at any time before the firs annual general meeting, and the auditors so appointed shall hold office until the conclusion of the meeting; provided that the company at a general meeting remove any such auditor and appoint in their place any other persons who have been nominated for appointment by any member of the company and whose nomination notice has been given to the members of the company not less than fourteen days before the date of the meeting </li></ul><ul><li>If the directors fail to exercise their powers under this subsection, the company in general meeting may appoint the firs auditors, and thereupon the said powers of the directors shall cease. </li></ul><ul><li>The directors may fill any casual vacancy in the office of auditor,but while any such vacancy continues, the surviving or continuing Auditor may act. </li></ul>@Sako Mayrick 2006
  124. 124. Auditors as per CA <ul><li>Sect. 170(7) </li></ul><ul><ul><li>The company may by ordinary resolution at any time remove an auditor from office,notwithstanding anything in any agreement between him and it. </li></ul></ul><ul><ul><li>HOWEVER, where such a resolution is passed, the company shall within fourteen days give notice of that fact in the prescribed form to the Registrar, failing with the company and every officer of it who is n default shall be guilty of an offence and liable to a fine and default fine. </li></ul></ul>@Sako Mayrick 2006
  125. 125. Auditors as per CA <ul><li>The remuneration of the the auditor may be fixed by the directors or the Registrar </li></ul><ul><li>Subject to foregoing paragraph </li></ul><ul><li>Sect.171 </li></ul><ul><ul><li>A private company shall be exempt form the requirement to appoint auditor under section 170 under the following conditions </li></ul></ul><ul><ul><ul><li>In the case of the company first accounting period , in that period </li></ul></ul></ul><ul><ul><ul><li>In case of any subsequent accounting period, in that period or preceding period </li></ul></ul></ul><ul><ul><li>The qualifying conditions shall be met in the accounting period which the following requirement are satisfied </li></ul></ul><ul><ul><ul><li>Turnover and gross assets as specified in either case in regulations prescribed by the Minister having regard to GAAS </li></ul></ul></ul>@Sako Mayrick 2006
  126. 126. Auditors as per CA <ul><li>The conditions above does not apply for banks or insurance company or dealer or investment adviser </li></ul><ul><ul><li>The company is , or was at any time during the period , a member of an ineligible group </li></ul></ul><ul><li>Sect.172 </li></ul><ul><ul><li>The company is not entitle to the exemption above unless its balance sheet contains a statement by the Directors </li></ul></ul><ul><ul><ul><li>That for the accounting period in question , the company satisfied the qualifying conditions specified above </li></ul></ul></ul><ul><ul><ul><li>That no notice has been deposited in relation to accounts for the accounting period </li></ul></ul></ul><ul><ul><ul><li>The directors acknowledges their responsibilities for </li></ul></ul></ul><ul><ul><ul><ul><li>Ensuring that the company keeps books so account which comply with section 151 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Preparing accounts which gives a true and fair view of the state of affairs of the company in accordance with section 153 and 154 </li></ul></ul></ul></ul>@Sako Mayrick 2006
  127. 127. Auditors as per CA <ul><li>A company satisfying the qualifying conditions set out in section above shall annex the appropriate certificate to its annual returns as provided for in section 132 </li></ul><ul><ul><li>The directors’ statement and certificate under this section shall be submitted for verification by the auditors appointed by the company for that purpose no less than once in every five consecutive accounting periods </li></ul></ul><ul><ul><li>False certificate or statement in material way is liable to imprisonment , fine or both </li></ul></ul>@Sako Mayrick 2006
  128. 128. Auditors as per CA <ul><li>Sect.173 </li></ul><ul><li>Any member o the company holding the aggregate than 10% in nominal value of the issued share capital or any class or 10% of members, may by notice in writing deposit at the registered office of the company during an accounting period by not later than one month before the end of that accounting period, require the company to obtain an audit of its accounts for that accounting period. </li></ul><ul><li>If the notice have been deposited , the company shall be obliged to appoint an auditor in respect of the accounting period to which the notice relates </li></ul>@Sako Mayrick 2006
  129. 129. Auditors as per CA <ul><li>Sect.174 </li></ul><ul><ul><li>Special notice for resolution shall be required for a resolution at general meeting at which accounts are laid </li></ul></ul><ul><ul><ul><li>Appointing as auditor a person other than a retiring auditor; </li></ul></ul></ul><ul><ul><ul><li>Providing expressly that a retiring auditor shall not be re-appointed </li></ul></ul></ul><ul><ul><ul><li>Filling the casual vacancy in the office of the auditor </li></ul></ul></ul><ul><ul><ul><li>Removing an auditor before the expiration of his term of office </li></ul></ul></ul><ul><ul><li>On receipt of notice of such an intended resolution as above , the company shall immediately send a copy the thereof to the retiring auditor ( if any) or , as the case may be , the auditor to be removed </li></ul></ul><ul><ul><li>The copy of representation by the auditor will sent to every member of the company, if too late shall be read out in a meeting </li></ul></ul><ul><ul><li>An auditor is liable for the cost for any defamatory statements causing injury to the company </li></ul></ul>@Sako Mayrick 2006
  130. 130. Auditors as per CA <ul><li>Section 175 </li></ul><ul><ul><li>A person or firm shall not be qualified for appointment as auditor of a company unless he, or in the case of a firm , every partner is a CPA- defined by NBAA </li></ul></ul><ul><ul><li>Unqualified persons include </li></ul></ul><ul><ul><ul><li>The officer or employee of the company </li></ul></ul></ul><ul><ul><ul><li>A person who is a partner of or in the employment of an officer or employee of the company </li></ul></ul></ul><ul><ul><ul><li>This is not a reference for an auditor </li></ul></ul></ul><ul><ul><ul><li>If any unqualified person is appointed the company and every officer is default and the person acting as an auditor shall be liable to a fine </li></ul></ul></ul>@Sako Mayrick 2006
  131. 131. Auditors as per CA <ul><li>Sect.176- rights to information </li></ul><ul><ul><li>Auditor shall have rights to access o books of accounts and vouchers of the company and entitled to require form the officers of the company such information and explanations as he thinks necessary for the performance of the duties of the auditors </li></ul></ul><ul><ul><li>Any misleading information by the officer of the company is an offence and liable to imprisonment or fine or bothe </li></ul></ul><ul><ul><li>The auditor of a company shall be entitled to attend any gneral meetint of the company and to receive all notices of and other communication relating to any general meeting which they attend on part of the business of the meeting which concerns them as auditors. </li></ul></ul>@Sako Mayrick 2006
  132. 132. Auditors as per CA <ul><li>Sect.177 </li></ul><ul><ul><li>The auditor of the company may resign his office by depositing a notice in writing to that effect a the company’s registered office </li></ul></ul><ul><ul><li>The notice is not effective unless accompanied by the statement by section 179 </li></ul></ul><ul><ul><li>The company within 14 days must sent to the registrar of companies the notice , contravention results into a fine and default fine </li></ul></ul><ul><li>Sect.178 </li></ul><ul><ul><li>applicable where the notice of resignation is accompanied by a statement of circumstances which he considers should be brought to the attention of members or creditors </li></ul></ul><ul><ul><ul><li>It can call an extraordinary meeting for explanation of the circumstances. </li></ul></ul></ul>@Sako Mayrick 2006
  133. 133. Auditors as per CA <ul><li>The directors must act within 21 days otherwise will be liable for a fine. </li></ul><ul><li>The copies of statement need not be sent out an the statement need not be read out at the meeting if , on application of the company or of any other person who claims to be aggrieved, the court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter; and the court may order the company’s costs on such an application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to that application </li></ul>@Sako Mayrick 2006
  134. 134. Auditors as per CA <ul><li>Sect.179 </li></ul><ul><ul><li>Where an auditor ceases for any reason, to hold office , he shall deposit at the company’s registered office a statement of any circumstances connected with his ceasing to hold office which he considers should be brought the the attention of the members or creditors of the company or , if he considers that there are no such circumstances, a statement that there are none. </li></ul></ul><ul><ul><li>In case of resignation , the statement shall be deposited along with the notice of resignation; in the case of failure to seek re-appointment , the statement shall be deposited not less than 14 days before the end of the time allowed for next appointing auditors; not later than the end of the period of 14 days beginning the date he ceases to hold office </li></ul></ul>@Sako Mayrick 2006
  135. 135. NATURE AND SOURCE OF AUDIT EVIDENCE <ul><li>ISA defines audit evidence as all of the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements and other information. Auditors are not expected to address all information that may exist. Audit evidence, which is cumulative in nature, includes </li></ul><ul><ul><li>audit evidence obtained from audit procedures performed during the course of the audit and </li></ul></ul><ul><ul><li>may include audit evidence obtained from other sources such as </li></ul></ul><ul><ul><ul><li>previous audits and </li></ul></ul></ul><ul><ul><ul><li>a firm’s quality control procedures for client acceptance and continuance. </li></ul></ul></ul><ul><li>The auditor seeks to obtain sufficient appropriate audit evidence at the class of transactions, account balance, and disclosure level in such a way that enables the auditor, at the completion of the audit, to express an opinion on the financial statements taken as a whole at an acceptably low level of audit risk. Auditors use various approaches to accomplish that objective. </li></ul>@Sako Mayrick 2006
  136. 136. AUDIT EVIDENCE CON.. <ul><li>Accounting records generally include the records of initial entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures. The entries in the accounting records are often initiated, recorded, processed and reported in electronic form. In addition, the accounting records may be part of integrated systems that share data and support all aspects of the entity’s financial reporting, operations and compliance objectives. </li></ul><ul><li>Management is responsible for the preparation of the financial statements based upon the accounting records of the entity. </li></ul><ul><li>The auditor obtains some audit evidence by testing the accounting records, for example, through analysis and review, reperforming procedures followed in the financial reporting process, and reconciling related types and applications of the same information. Through the performance of such audit procedures, the auditor may determine that the accounting records are internally consistent and agree to the financial statements. </li></ul><ul><li>However, because accounting records alone do not provide sufficient audit evidence on which to base an audit opinion on the financial statements, the auditor obtains other audit evidence. </li></ul><ul><li>Other information that the auditor may use as audit evidence includes minutes of meetings; confirmations from third parties; analysts’ reports; comparable data about competitors (benchmarking); controls manuals; information obtained by the auditor from such audit procedures as inquiry, observation, and inspection; and other information developed by, or available to, the auditor that permits the auditor to reach conclusions through valid reasoning </li></ul>@Sako Mayrick 2006
  137. 137. SUFFICIENCY,APPROPRIATENESS AND RELIABILITY OF EVIDENCE <ul><li>An auditor has to obtain sufficient, appropriate and reliable audit evidence as to a material financial statement assertion. </li></ul><ul><ul><li>Sufficiency is the measure of the quantity of audit evidence. </li></ul></ul><ul><ul><li>Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related assertions. </li></ul></ul><ul><ul><li>The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required). Accordingly, the sufficiency and appropriateness of audit evidence are interrelated. However, merely obtaining more audit evidence may not compensate for its poor quality. </li></ul></ul><ul><ul><li>For example, inspection of records and documents related to the collection of receivables after the period end may provide audit evidence regarding both existence and valuation, although not necessarily the appropriateness of period-end cutoffs. </li></ul></ul><ul><ul><li>On the other hand, the auditor often obtains audit evidence from different sources or of a different nature that is relevant to the same assertion. For example, the auditor may analyze the aging of accounts receivable and the subsequent collection of receivables to obtain audit evidence relating to the valuation of the allowance for doubtful accounts. </li></ul></ul><ul><ul><li>Furthermore, obtaining audit evidence relating to a particular assertion, for example, the physical existence of inventory, is not a substitute for obtaining audit evidence regarding another assertion, for example, the valuation of inventory. </li></ul></ul>@Sako Mayrick 2006
  138. 138. FACTORS INFLUENCING RELIABILITY OF AUDIT EVIDENCE <ul><li>The reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained. While recognizing that exceptions may exist, the following generalizations about the reliability of audit evidence may be useful </li></ul><ul><li>• Audit evidence is more reliable when it is obtained from independent sources outside the entity. </li></ul><ul><li>• Audit evidence that is generated internally is more reliable when the related controls imposed by the entity are effective. </li></ul><ul><li>• Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the application of a control). </li></ul><ul><li>• Audit evidence is more reliable when it exists in documentary form, whether paper, electronic, or other medium (for example, a contemporaneously written record of a meeting is more reliable than a subsequent oral representation of the matters discussed). </li></ul><ul><li>• Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles. </li></ul><ul><li>When information produced by the entity is used by the auditor to perform audit </li></ul><ul><li>procedures, the auditor should obtain audit evidence about the accuracy and completeness of the information. </li></ul>@Sako Mayrick 2006
  139. 139. FACTORS INFLUENCING RELIABILITY OF AUDIT EVIDENCE.. <ul><li>The auditor ordinarily finds it necessary to rely on audit evidence that is persuasive rather than conclusive; however, to obtain reasonable assurance, the auditor is not satisfied with audit evidence that is less than persuasive. The auditor uses professional judgment and exercises professional skepticism in evaluating the quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to support the audit opinion. </li></ul>@Sako Mayrick 2006
  140. 140. USE OF ASSERTIONS FOR AUDIT EVIDENCE <ul><li>The auditor should use assertions for classes of transactions, account balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures. The auditor uses assertions in assessing risks by considering the different types of potential misstatements that may occur, and thereby designing audit procedures that are responsive to the assessed risks. Other ISAs discuss specific situations where the auditor is required to obtain audit evidence at the assertion level. </li></ul><ul><li>Assertions used by the auditor fall into the following categories: </li></ul><ul><li>Assertions about classes of transactions and events for the period under audit: </li></ul><ul><ul><li>Occurrence—transactions and events that have been recorded have occurred and pertain to the entity. </li></ul></ul><ul><ul><li>(ii) Completeness—all transactions and events that should have been recorded have been recorded. </li></ul></ul><ul><ul><li>Accuracy—amounts and other data relating to recorded transactions and events have been recorded appropriately. </li></ul></ul><ul><ul><li>Cutoff—transactions and events have been recorded in the correct accounting period. </li></ul></ul><ul><ul><li>Classification—transactions and events have been recorded in the proper accounts. </li></ul></ul>@Sako Mayrick 2006
  141. 141. ASSERTIONS CONT…. <ul><li>Assertions about account balances at the period end: </li></ul><ul><ul><li>Existence—assets, liabilities, and equity interests exist. </li></ul></ul><ul><ul><li>Rights and obligations—the entity holds or controls the rights to assets, and liabilities are the obligations of the entity. </li></ul></ul><ul><ul><li>Completeness—all assets, liabilities and equity interests that should have been recorded have been recorded. </li></ul></ul><ul><ul><li>Valuation and allocation—assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. </li></ul></ul><ul><li>Assertions about presentation and disclosure: </li></ul><ul><ul><li>Occurrence and rights and obligations—disclosed events, transactions, and other matters have occurred and pertain to the entity. </li></ul></ul><ul><ul><li>Completeness—all disclosures

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