the performance of the audit and the preparation of the report.

1. Chapter three
Recent developments in Audit and
Professional Ethics in audit

2. GAAS vs. ISA
GAAS is the auditing standard developed to
use when auditors perform audit of financial
reports prepared according to U.S GAAP
ISA (International standard on auditing) is a
standards which developed by International
Auditing and Assurance standard board
(IAASB) when auditors perform audit of
financial reports prepared according to IFRS.

3. Cont’d
Current both standard are applicable in
different countries including in Ethiopia
As Ethiopia is in transition from GAAP to
IFRS and as ISA standards are continuously
updated there is some gaps in full
implementation of ISA.

4. Over view of ISA standards
Currently, International Standards on Auditing
have 36 standards:
1. ISA 200: Overall Objectives of the Independent
Auditor and the Conduct of an Audit in Accordance
with International Standards on Auditing
2. ISA 210: Agreeing the Terms of Audit Engagements
3. ISA 220: Quality Control for an Audit of Financial
Statements
4. ISA 230: Audit Documentation

5. Cont’d
5. ISA 240: The Auditor’s Responsibilities Relating to
Fraud in an Audit of Financial Statements
6. ISA 250: Consideration of Laws and Regulations in an
Audit of Financial Statements
7. ISA 260: Communication with Those Charged with
Governance
8. ISA 265: Communicating Deficiencies in Internal
Control to Those Charged with Governance and
Management
9. ISA 300: Planning an Audit of Financial Statements

6. Cont’d
10. ISA 315: Identifying and Assessing the Risks of
Material Misstatement through Understanding the
Entity and Its Environment
11. ISA 320: Materiality in Planning and Performing an
Audit
12. ISA 330: The Auditor’s Responses to Assessed Risks
13. ISA 402: Audit Considerations Relating to an Entity
Using a Service Organization
14. ISA 450: Evaluation of Misstatements Identified
during the Audit

7. Cont’d
15. ISA 500: Audit Evidence
16. ISA 501: Audit Evidence-Specific
Considerations for Selected Items
17. ISA 505: External Confirmations
18. ISA 510: Initial Audit Engagements-Opening
Balances
19. ISA 520: Analytical Procedures
20. ISA 530: Audit Sampling

8. Cont’d
21. ISA 540: Auditing Accounting Estimates,
Including Fair Value Accounting Estimates,
and Related Disclosures
22. ISA 550: Related Parties
23. ISA 560: Subsequent Events
24. ISA 570: Going Concern
25. ISA 580: Written Representations

9. Cont’d
26. ISA 600: Special Considerations-Audits of
Group Financial Statements (Including the
Work of Component Auditors)
27. ISA 610: Using the Work of Internal Auditors
28. ISA 620: Using the Work of an Auditor’s Expert
29. ISA 700: Forming an Opinion and Reporting on
Financial Statements
30. ISA 705: Modifications to the Opinion in the
Independent Auditor’s Report

10. Cont’d
31. ISA 706 Emphasis of Matter Paragraphs and Other
Matter Paragraphs in the Independent Auditor’s
Report
32. ISA 710: Comparative Information-Corresponding
Figures and Comparative Financial Statements
33. ISA 720: The Auditor’s Responsibilities Relating to
Other Information in Documents Containing
Audited Financial Statements
34. ISA 800: Special Considerations-Audits of Financial
Statements Prepared in Accordance with Special
Purpose Frameworks

11. Cont’d
35.ISA 805: Special Considerations-Audits of
Single Financial Statements and Specific
elements, Accounts or Items of a Financial
Statement
36. ISA 810: Engagements to Report on
Summary Financial Statements

12. Discussion
Discussion point:
Recent auditing development in Ethiopia vs.
International developments???

13. Professional ethics in auditing
As indicated by the second general standards
GAAS, ethical behavior and independence on the
part of the auditor are vital to the audit function.
The demand for auditing arose from the need for
a competent, independent person to monitor the
contractual arrangements between principal and
agent.
If an auditor is incompetent or lacks
independence, the parties to the contract will
place little or no value on the service provided.

14. Ethics in auditing
 Ethics refers to a system or code of conduct
based on moral duties and obligations that
indicate how we should behave.
The fundamental purpose of such codes is:
 To provide members with guidelines for
maintaining a professional attitude and
 Conducting themselves in a manner that will
enhance the professional development of
their discipline.

15. Independence auditing
Professional accountants working in
attestation function should be independent of
their clients and maintain an independent
attitude.
For professional accountants in public
practice, the maintenance of objectivity and
independence requires a continuing
assessment of client relationships and public
responsibility.

16. Cont’d
Such a professional accountant who provides
auditing and other attestation services should
be independent in fact and appearance.
A professional accountant, member of
assurance teams and firms should be
independent in the performance of professional
services for the client (Ethiopian Code of Ethics
for Professional Accountants).

17. Cont’d
 Independence requires:
(A) Independence of mind:
The state of mind that permits the provision
of an opinion without being affected by
influences that compromise professional
judgment, allowing an individual to act with
integrity, and exercise objectivity and
professional scepticism.

18. Cont’d
(B) Independence in appearance:
The avoidance of facts and circumstances that
affect independence significantly.
 Informed third party, having knowledge of all
relevant information, including safeguards
applied, would reasonably conclude a firm’s, or
a member of the assurance team’s, integrity,
objectivity or professional scepticism had been
compromised.

19. The Code of Professional Conduct in auditing
The AICPA code of professional conduct
considers the following to be followed by
auditors (accountants) in the conduct of
professional relations with others.
1. Integrity: An Auditor should be
straightforward, honest and sincere in his
approach to his professional work.
2. Objectivity: An Auditor should be fair and
should not allow bias to override his
objectivity. When reporting on financial
statements, which come his review, he should
maintain an impartial attitude.

20. Cont’d
3. Independence: When in public practice, an
Auditor should both be and appear to be free
of any interest.
4. Confidentiality: A professional Auditor
should respect the confidentiality of
information acquired in the course of his work
and should not disclose any such information
to a third party without specific authority or
unless there is a legal or professional duty to
disclose.

21. Cont’d
5. Technical standards: - An Auditor should carry
out his professional work in accordance with
the technical and professional standards
relevant to that work.
6. Professional competence: - An Auditor has a
duty to maintain his level of competence
throughout his professional career. He should
only undertake works, which he or his firm can
expect to complete with professional
competence.
7. Ethical behavior: - An Auditor should conduct
himself with a good reputation of the
profession and refrain from any conduct, which
might bring discredit to the profession.

22. Cont’d
8. Contingent fess: -The code of professional conduct
prohibits from rendering any professional services
on a contingent fee basis.
9. Responsibilities to colleagues: - The auditor should
promote cooperation and good relations with
other members of the profession.
10. Advertising:-The advertising should not be false or
misleading,” should not contravene “professional
good taste,” should not make “unfavorable
reflection on the competence or integrity of the
profession,” and should not” involve a statement
the contents of which” cannot be substantiated.

23. The Auditor’s Responsibility for Errors, Fraud,
and Illegal Acts
Many readers of financial statements believe
that auditors are:
 ultimately responsible for the financial
statements or
 at least that they have a responsibility to
detect all errors, fraud, and illegal acts.
Maintaining fairness of financial statements
are the responsibility of management

24. Cont’d
 The auditor’s responsibility is to express an
opinion that provides reasonable assurance
on the fairness of the financial statements.
 It is important to remember that while
auditors have important responsibilities,
management is primarily responsible for the
fairness of the company’s financial
statements.

25. Cont’d
Auditing standards provide the following
responsibility for auditors:
 To plan and perform the audit to obtain reasonable
assurance about whether the financial statements
are free of material misstatement, whether caused
by error or fraud.
 The auditor has no responsibility to plan and
perform the audit to obtain reasonable assurance
that misstatements, whether caused by errors or
fraud, that are not material to the financial
statements will be detected.

26. Cont’d
If the auditor fails to exercise due
professional care, he or she can be held
liable for civil damages and even criminal
penalties.
The auditor’s responsibility to provide
reasonable assurance with respect to
errors, fraud, and illegal acts clearly shapes
the auditor’s environment.

27. Professional and Legal Liabilities of
Auditors
Legal Responsibility and Liability of Auditors
 The auditor is responsible for his or her
report .
 The auditor then has certain duties to fulfill to
the users of the financial statements that he
reports on.
 Responsibilities impose liabilities if things go
wrong.

28. Cont’d
Liable for what?
 The CPA can be sued under the following legal
concepts.
 Prudent man concept: - The auditor is
responsible for exercising due professional
care, and he is subject to lawsuit if he fails to do
so.
 Liable for acts of others: - The partners are
jointly liable for civil actions against a partner.

29. Cont’d
Definition of Terms
 Negligence: is violation of legal duty to exercise a
degree of care that an ordinary prudent person
would exercise under similar circumstances with
resultant damages to another party.
 Gross negligence: is lack of event slight care. Many
jurisdictions consider gross negligence equivalent
to constructive fraud.
 Fraud: is defined a misrepresentation by a person
of a material fact, known by that person to be
untrue.

30. Cont’d
A. Auditors’ liability to their clients
When CPAs take on any type of engagement,
they are obliged to render due professional
care.
CPAs are liable to their clients for any losses
proximately caused by the CPA’s failure to
exercise due professional care.
That is to recover its losses; an injured client
need only prove that the auditors were guilty of
negligence and that the auditors’ negligence
was the proximate cause of the client’s losses.

31. Cont’d
B. Auditors’ liability to third parties
Bankers and other creditors or investors who
utilize financial statements covered by an audit
report can recover damages from the auditors
if it can be shown that the auditors were guilty
of fraud or gross negligence in the
performance of their professional duties.
The clients (plaintiffs) must prove that they
sustained losses that they relied on the audited
financial statements, which were misleading,
that this reliance was the primate cause of their
losses, and that the auditors were negligent.

32. Cont’d
C. Auditors’ responsibility for the detection of
fraud and error
The detection and prevention of error and
fraud is the management’s responsibility by
designing and implementing appropriate
internal control systems.
The auditor is not responsible for the
prevention and detection of error and fraud.

33. Cont’d
The auditor is responsible to design audit
procedures to reduce the risk of not
detecting a material error or fraud, to an
appropriate level to provide reasonable
assurance.
Accordingly, the auditor must exercise due
care in planning, performing, and evaluating
the results of audit procedures.

34. Other Attest Services
I. Reporting on Internal Control
private companies or other entities
sometimes ask auditors to provide an attest
report on management’s assertions
About the effectiveness of the organization’s
internal control.

35. Cont’d
II. Financial Forecasts and Projections
 Entities often prepare prospective (forward-
looking) financial information and
 request that auditors attest to the information.
 present expected financial results.
 given hypothetical assumptions, financial results for
an entity.
In such engagements, auditors typically attest to the
preparation, Support for assumptions, and
presentation of the prospective financial information.
 They do not offer assurance that the results
forecasted or projected will actually be realized.

36. Other Assurance Services
I. Risk Assessment
Organizations that manage risk well are
more likely to succeed
 Auditors can provide assurance on an
entity’s profile of business risks and can
evaluate whether the entity has
appropriate systems in place to manage
those risks effectively.

37. Cont’d
II. Performance Measurement
Many organizations ask their auditors to
provide assistance in benchmarking their
business processes and performance.
While traditionally this service mainly
involved financial measures, clients now
often seek help with measuring such leading
indicators as customer satisfaction,
effectiveness of employee training, and
product quality.

38. Cont’d
III. Information System Reliability and E-
Commerce
More entities are becoming dependent on
information technology, including e-commerce
applications, to run their businesses.
 As a result, it is critical that such systems be secure,
available when needed, and consistently able to
produce accurate information.
 Auditors can provide assurance on an entity’s
information system and its e-commerce
applications.

39. Other Non-audit Services
I. Tax Preparation and Planning Services
 Assist clients with preparing and filing tax
returns,
 Provide advice on tax and estate planning,
and
 Provide representation on tax issues before
the Revenue authority Service or tax
courts.

40. Cont’d
II. Management Advisory Services
Consulting activities that may involve
providing advice and assistance concerning
An entity’s organization, personnel, finances,
operations, systems, or other activities.

41. Cont’d
III. Accounting and Review
perform a number of accounting services for their
non-public or non-audit clients.
These services include:
 Bookkeeping, payroll processing, and preparing
financial statements.
When a public accounting firm provides non-audit
accounting services relating directly to the financial
statements of companies, the services are known as
compilations or reviews.
These forms of services are less rigorous and
provide less assurance than a financial statement
audit.

42. End of chapter 3