The document provides an overview of the history and concepts of auditing. It discusses how auditors were originally independent arbitrators appointed to hear accounts and provide opinions. It also covers agency theory where shareholders appoint directors as agents to manage companies, and then appoint auditors as secondary agents to report on the directors' stewardship. The objectives of an audit are also summarized as enabling the auditor to provide an independent opinion on whether financial statements are fairly presented in accordance with standards. Key aspects of an audit like compliance, evidence, and the detection of fraud and errors are also briefly discussed.

1. Lecture 1
The nature and issues of audit

2. History of audit
 THE ANCIENT AUDITOR
 Independent arbitrator appointed by interested parties
for accounts to be heard by him and he in turn gives an
opinion by oral report.
 Audire ( Latin word) – meaning to hear

3. Agency theory
 Shareholders (Principals) as owners invest in
companies and appoint Directors (primary agents).
 Shareholders appoint auditors (secondary agents) who
provide report about directors’ stewardship to them.

4. Audit in perspective
 What? – independent examination of F/S
 Why? – to give/express objective opinion as to the true
and fairness of the F/S in conformity with GAAP.
 When? – after the mgmt has prepared the F/S.
 Who? – independent and expert external auditor
 Where? – report audit findings in audit report.
 How? – by performing audit as per GAAS
 Note:
 Mgt is to F/S per GAAP
 Auditor is to audit report per GAAS

5. Definition of audit
 Definition by the “Auditing standards and Guidelines”
of the Auditing Practices Committee (now Board)
 Definition;
 “An independent examination of, and expression of
opinion on the financial statements of an enterprise by
an appointed auditor in pursuance of that
appointment and in compliance with the relevant
statutory obligation”.

6.  An Audit is an exercise which objective is to
enable auditors to express an opinion
whether the financial statements give a true
and fair view of the entity’s affairs at the
period end and of its profit and loss for the
period then ended, and have been properly
prepared in accordance with the applicable
reporting framework.
Definition of audit

7.  An audit involves performing procedures to obtain
audit evidence about the amounts and disclosures in
the financial statements. The procedures selected
depend on the auditor’s judgment including the
assessment of the risk of material misstatements of
the financial statement whether due to fraud or error.
 An audit also includes evaluating the appropriateness
of accounting estimates made by management, as well
as evaluating the overall presentation of the financial
statement.
Definition of audit

8. Objectives of an audit
 IAASB issue in Jan 2007 has no definition audit in
glossary but states objectives as;
 “Audit of FS is to enable the auditor to express an
opinion whether the FS as prepared show true and fair
view in all material respects and in accordance with
applicable financial reporting framework.
 An audit of FS is an assurance engagement
 IAASB develops International Standard on Auditing
(ISA’s)

9. Objectives of an audit
 Primary Objective
 The primary objective of an audit is to enable the
auditor to form and express an independent opinion
on the financial statements.

10.  Subsidiary/Secondary Objectives
 To detect errors and fraud.
 To prevent errors and fraud by the deterrent and
moral effect of the audit and also by assisting
clients to institute improved financial control
system.
 To assist client with accounting systems,
taxation, financial and other problems.
Objectives of an audit

11. Independent Examination
 Auditor should be independent in mind and
appearance ( fact or mental attitude)
 Professional code of ethics discusses this

12. Expression of opinion
 Auditors opinion enhances the credibility of FS by
providing high, but not absolute level of assurance
(guarantee)
 Absolute opinion is not attainable because
 need for judgment (bias)
 Lack of precision
 Use of testing which may not be 100% tested
 Inherent limitations and internal control systems
 Evidence is persuasive but not conclusive

13. Financial statement
 The main 5 FS
 Other documents;
 Director’s Report
 Corporate Governance statements
 Operating and financial reviews
 Five-year trend information
 Chairman’s statement
 Value added statement
 Corporate Social responsibility statement

14. The appointed auditor
 The auditor should have authority vested in him or her
to be able to perform his duties. Such authority is
gained by being appointed under a contract to be
able to enjoy the rights and powers bestowed under
the Companies Act.
 To be eligible for appointment in Ghana, one must be a
member of ICA (Gh)

15. Compliance with relevant statutory
obligations
 Auditors duty is governed by statute (GAAS).
Companies Act in Ghana and other
international/relevant standards and guidelines.

16. Evidence
 Evidence should be both Sufficient and appropriate to
draw conclusions.
 Question
 Discuss how the sufficiency and appropriateness of the
audit evidence can be mutually reconciled to be able to
draw relevant conclusions.

17. Detection of fraud and error
 This is the Primary responsibility of the management
 Auditor should however consider likelihood of fraud in
the conduct of an audit
 ISA 240 is an international auditing stardard that deals with an auditors
responsibility relating to fraud in an audit of financial statements.
 The objectives of his standard therefore are,
 To identify and assess the risks of material misstatement f the financial statements
due to fraud.
 To respond appropriately o fraud or suspected fraud identified during the audit.

18. Detection of fraud and error cont’d
 Therefore according to ISA 240, An error is an
unintentional mistake n the financial statement.
 For example,
 Posting figured wrongly which at involve errors of omission and commission.
 Misapplication of accounting policies.
 Misreporting of figures.
 A fraud is an international misrepresentation of financial information by one or
more individuals among the management or employees.

19. Detection of fraud and error cont’d
 For example, Manipulation of records and documents
 Misappropriation of assets especially cash for personal use
 Misapplication of accounting policies.
 The following are the differences between errors and frauds
 Errors are in intentional while frauds are intentional.
 Errors are easier to detect where as frauds are difficult to
detect since most of the information is destroyed .

20. Detection of fraud and error cont’d
 Errors are committed by lower level staff while frauds are committed by
knowledgeable person's in most cases management.
 The following are the instances that indicate the presence of frauds
 Where the company is managed by one person r a small group of people fraud
will exist in this case due to collision or misuse of power.
 Where there is high turnover of key accounting personel, this will lead to fraud
arising from lack of accountability.

21. Detection of fraud and error cont’d
 Where the company's business is collapsing and
failures of business are increasing, this may be fraud
arising from misuse of company's assets.
 Where there is inadequate working capital to
support the company's capital requirements.
 The unreasonable response by management to
audit questions may be due to cover up of fraud.

22. Detection of fraud
 The responsibility of management
 Management is responsible for making all financial records and relevant
information available to the auditor.
 Management is primarily responsible for the prevention and detection of
fraud and errors.it should design and operate appropriate accounting and internal
control system that safeguards the entity’s assets and thus reduces the possibility
of fraud and error.
 The board of directors, the managers and internal audit should consider fraud
and error in their risk assessment and corporate governance procedures. Internal
auditors normally carry out detailed procedures to minimize the like hood of fraud
and error occurring or remaining uneducated,
 In the observance of generally accepted auditing standards the independent
auditors must exercise misjudgment in determining which is auditing procedures
necessary in the circumstances to afford a reasonable basis for his opinion.

23. Detection of fraud
The external auditor’s responsibilities
 Under statutory audits, the internal auditor has no specific responsibility for
prevention of fraud and error, however the auditors should assess the risk and
fraud or error may cause the financial statements and design appropriate audit
tests.
Investigation
 The auditors should accept the evidence he gets during the audit unless they are
suspicious circumstances.
 An audit should design audit procedures to obtain reasonable assurance that the
material fraud and errors have not occurred or that if they have either been
corrected or properly disclosed in the financial statements.

24. Detection of fraud
Auditor’s ability to fraud.
 The auditor is probably liable if he fails to detect material fraud and
error, he may be exonerated if the fraud is difficult to detect.
 He may be held negligent in case of material fraud and error where:
 He finds immaterial fraud while carrying out his normal procedures
and does not report it to the company’s management.
 He carries out audit procedures on immaterial items and these
procedures are carried out satisfactorily and consequently fail to
create the immaterial fraud.
 He carries out audit procedures an immaterial item at the specific
request of the company’s management and then fails to detect.

25. Audit – related services
 To provide reasonable and limited levels of assurance

26. Concepts of accountability, stewardship and agency
 Different people are interested in the financial statements
of a company and are referred to as stakeholders (users
of financial information). These include shareholders,
management, customers ,auditors and employees.
 Stewardship is to show shareholders that their funds are
safe and are being used wisely by the directors. lt is the
responsibility of shareholders to appoint directors to run
and manage the company on their behalf.
 Agency relationship is where the principal (shareholder)
appoints the agent (director/ manager) and delegate
some decision making authority to them.

27. Concepts of accountability, stewardship and agency
 The shareholder entrusts resources(raw materials,money) to
managers.
 The manager prepares periodic reporting on how he used the
resources through financial statements.
 The independent expert(Auditor) verifies financial
statements.
 Share holders are the owners of the business and they get
what is transpiring in the business once in a year in the AGM.
 Directors are appointed by shareholders to manage the
business on their behalf .They are responsible for preparing
accounts that show a true and fair view.

28. True and Fair view
 Auditor is required to report whether the F/S show a
true and fair view or otherwise
 True information is not false but factual and conform
with reality. Practically the information conforms with
required standards and law.
 Fair information is free from discrimination and bias
and is in compliance with acceptable standards and
rules. Practically the accounts should reflect the
commercial substance of the company’s underlying
transactions.

29. Responsibilities of auditor
 Primary responsibilities of Auditing.
 That accounts have been prepared in accordance with
regulation
 Accounts are in agreement with accounting records
 Proper records have been kept
 Balance Sheet and Income Statement show a true and
fair view show state of affairs and results for the period
 (True and Fair view / or present fairly in all material
respects)

30. Responsibilities of auditor
 Secondary responsibilities of the auditor
 Preventing of errors and fraud
 Exercise reasonable care and skill ( there should be no
preconceived idea that accounts contain frauds and
errors
 Adhere to objective and general principles of audit.

31. Education/training & proficiency
 To belong to a Professional accountancy body
 Obtain years of practical experience
 Become a member under strict supervision
 Continuing Professional Development
 Code of ethics for professional accountancy – IFACs

32. Benefits of an audit
 Audits give confidence to many stakeholders of a company these are
people interested in the financial statements of the company.
Shareholders, directors, creditors, employees. The tax authorities
and the public. Managers have control over assets in which other
parties have an interest.
 Audit adds credibility to the financial statements. Managers or
directors are accountable to the shareholders and they give their
credibility in the forms of financial statements, if an auditor
expresses an opinion on those financial statements then their
credibility is improved.
 A rigorous audit process will, almost invariably, also identify insights
about some areas where management may improve their controls
or processes. In certain circumstances the auditor may be required
to communicate control deficiencies to management and those
charged with governance. These communications add value to the
company and enhance the overall quality of business processes.

33. Benefits of an audit
 Audited accounts are used by tax authorities to
determine the true tax position of the enterprise.
 Audits are important when valuing shares and
bonds.
 Audited financial statements ease comparability
between two firms or within the financial periods.
 Audits make it more effective for management to
make decisions.

34. Advantages of an audit
 The sale of business as a going concern is facilitated.
 It enables the auditor to give constructive advice to
management on improving the efficiency of the business.
 Give assurance that statutory responsibilities concerning
the accounts have been carried out e.g. assurance that all
directors’ emoluments have been disclosed.
 The auditor may detect errors and fraud during his audit.
 Settlement of accounts on the death or retirement of a
partner is facilitated when audited accounts forms the
basis.

35.  It enhances application for fund from third parties.
 Gives assurance that the directors have fulfilled their
statutory obligation in keeping proper books of accounts
and safeguarding the assets of the enterprise.
 Disputes between management may be easily settled.
 Give assurance that the accounts show a true and fair view
or otherwise and that it complies with statutory
requirements.
 Sleeping partners and shareholders who have little or no
means of checking the books obtain a fair idea of the
performance of the directors and of the business.
Advantages of an audit

36. Advantages of an Audit (Specific)
 As far as the company’s directors are concerned, the
audit gives:
 Assurance that statutory responsibilities concerning
financial statements have been carried out.
 Assistance with statutory responsibilities concerning the
accounts.
 Availability of expert professional advice – that is, the
suggestions which the Auditor is sometimes able to
make with regard to the improvement of the accounting
system is of great importance to the directors and the
company as a whole.

37.  As far as the company’s shareholders are concerned it
gives:
 Assurance that the financial statements show a true and
fair view and complied with statutory requirement.
 Assurance that the directors have fulfilled their statutory
responsibilities for the books and accounts and the
safeguarding of assets.
 Assurance that all directors’ remuneration has been
disclosed.
Advantages of an Audit (Specific)

38.  Audited accounts is also important to partnership
firm in that:
 It affords a convenient means of settling accounts
between the partners themselves and so avoiding the
possibility of future dispute.
 The Auditor can give advice to the management on how
to improve the efficiency of the business.
Advantages of an Audit (Specific)

39. Limitations of an audit
 Audits are not purely objective. There is some subjective judgement left to the
auditor to draw conclusions.
 Not all items in the financial statements are checked.
 There are inherent limitations of internal control systems that is collusion, potential
human error, by pass of controls.
 The audit report is criticized for not being clear on the position of the auditor with
regards to fraud.
 It disrupts the clients’ work especially if the exercise is done more often.
 It requires the attention of staff and management, taking their time. An audit
should therefore be planned well in advance so that he minimizes the disturbances
of the client work.

40. Limitations of an audit
 In spite of the numerous merits of an audit, its limitations
cannot be overlooked.
 It requires client’s staff and management time in providing
information to the auditor.
 If not properly carried out, it will lead to wrong decisions
made by management and shareholders.
 Fraud committed by combined effort of management and staff
may not be detected.
 Information given by management to the auditor may not be
complete or misleading and this may cause the audit report to
be misleading.
 The auditor’s opinion is not a guarantee of future viability of
the entity.

41.  The auditor does not certify that the accounts is
correct or is not correct. This comes from the fact that:
 The audit work involves the exercise of judgments
 Information given to an auditor by management may be
misleading
 Inherent limitation of the audit such as:
 The impracticality of examining all items within
account balance or class of transaction.
 The possibility of collusion or misrepresentation for
fraudulent purposes.
Limitations of an audit

42.  STATUTORY AUDIT
 These are audits carried out because the law requires them.
Such audits are governed by the Companies’ Code 1963, Act
179. The auditor must carry out his work in whatever
manner he considers necessary in order to achieve his
statutory duties. The client has no right to restrict
enquiries necessary for the auditor to perform his audit.
 It is the audit for an incorporated company having limited
liability status. The auditor has a statutory obligation to
report to members of the company or the appointing
authorities under the statute.
Types of audit

43. Types of audit
 NON STATUTORY (PRIVATE) AUDIT
 These are those audits carried out at the request of
interested parties. They are not specifically required by
law. It includes audit of sole proprietor, partnership,
joint ventures. The scope of the audit is underlined in
the engagement letter.
 It is the type of audit contracted by businesses not
incorporated under the Companies Act hence have no
legal obligation as regards the auditing of their
accounts.

44. Complete audit
 This is an audit where the auditor is given
unrestricted scope as to the work which he is to
perform and in which he uses his own discretion as to
the extent of the detailed work he is to perform.
 It must be noted that a complete audit does not
mean thorough examination and checking of every
document within an undertaking. Modern auditing is
concerned with assessing internal controls and
evaluating these controls to determine the extent of
reliance to be placed on them.

45. Partial audit
 Is one in which the auditor is restricted to carry out
particular work only or is restricted in a way as to his
power of enquiry or examination.

46. System based audit
 This type of audit applies modern auditing techniques
in a scientific and statistical form to investigate the
system of internal control and its operations backed by
test to substantiate the accuracy and reliability of the
records.
 It was considered necessary, formerly, to check a great
number of transactions and vouch many documents as
it was as though the greater the amount of work
undertaken the more efficient will be the audit and the
more reliable will the auditor’s report.

47. Risk based audit
 Risk-based auditing refers to the development of
auditing techniques which are responsive to risk
factors in an audit. The auditor applies judgment to
determine what level of risk pertains to different areas
of a client’s system and devises appropriate audit tests.
This approach should ensure that the greater audit
effort is directed at the areas the auditor
considers critical, so that the chance of detecting
errors is improved and time is not spent on
unnecessary testing of ‘safe areas’.

48.  The increasing use of risk based auditing reflects two
factors:
 1. The growing complexity of the business
environment increases the danger of fraud or
misstatement; factors such as the developing use of
computerized systems and the growing
internationalization of businesses are relevant.
 Pressures by audit clients for the auditor to keep fee
levels down while providing an improved level of
service.
The increasing use of risk based
audit

49. Management audit
 It is concerned with the examination of
procedures laid down by management and of the
efficiency of management itself.
 Its objective is to form and express opinion on
the efficiency of management rather than on
the financial statements.
 Such audit may be carried out by the internal
auditors of the company.

50.  The suitability, practicality and present compliance or
otherwise of the organization with its designated objects and
aims.
 The relationship of business with its own shareholders and
the investing public in general.
 The current standing of the organization in relation to the
general public and within its own particular industrial or
commercial field.
 The relationship between management and staff of the
business
 Financial policies and controls.
 The ratio of operating returns on sales as compared with the
particular industry and the rate of return on capital.
Areas of Management audit

51. Types of auditors
 External auditors
 They are independent auditors appointed under either
the private or statutory audit arrangements with no
connection with the company.
 Internal auditors
 They are auditors who are employed by an enterprise
and who use the same techniques employed by the
external auditors.

52. Methods of audit
 Interim audit
 Continuous audit
 Final or completed audit

53.  Interim audit is one that is conducted to cover a
certain time or up to a certain date within a financial
period. It is carried out at specific time intervals.
 This approach is more often carried out in the case of
large clients so as to cut down on the immense volume
of work.
Interim audit

54. Interim audit
 Advantages;
 Dividend payment
 Application for extra finance
 All advantages of continuous audit
 Disadvantages
 Alteration of figures after the audit work by the client

55. Continuous audit
 This audit is carried out throughout the financial year.
It starts from the beginning of the accounting period
to the end. It is appropriate for big companies where
volume of transactions are high and also where
internal controls are weak.
 In this case, the auditor’s staff will either make several
visits to the client throughout the year or as in the case
of very large companies, some of the audit staff will be
present at the client’s premises virtually all the time.

56.  Advantages
 Extensive and detailed audit work can be carried out.
 Errors and fraud and other weaknesses are likely to be
revealed promptly
 Moral check/deterrent on clients staff due to
continuous/regular attendance
 Audit can be completed more speedily after year end of
client. This allows for early presentation of financial
statements.
 The auditor’s work is more evenly spread over the year
which helps relieve pressures on staff .
Continuous audit

57.  Disadvantages
 Deliberate alteration of figures by clients staff
 Continuous attendance as a nuisance to clients staff
 Familiarity may reduce independence
 Audit staff expected to solve clients problems
 The auditor’s staff may fail to follow up transaction and
answers to queries not be completed at the previous visit.
Strict control is needed to ensure that this does not happen
particularly where the audit staff assigned to the audit has
changed.
 More time is taken over the audit.
Continuous audit

58. Measures to minimise the
disadvantages of continuous audit
 All necessary corrections to be made to figures audited
must be by way of journal.
 Totals at the end of a period should be recorded in the
audit note book and be verified at the next audit.
 Errors and queries should be cleared or dealt with as
soon as necessary.
 The audit of impersonal and private ledgers should be
left until the final audit.

59. Final or completed audit
 Final audit is one in which the work is undertaken in a
single period following the end of the company’s
financial year.
 The auditor starts the audit after the end of the
accounting period of his client and undertakes the
audit through to completion.

60.  Advantages
 Efficient planning of the audit and proper arrangement of
timetable.
 Work is done at one stretch hence no need to return to
uncompleted work.
 Alteration of figures is avoided
 No interruption of client’s accounting staff (as compared to
continuous audit)
 Disadvantages
 Difficulty in allocating audit staff
 Delays in submitting annual accounts to shareholders
Final or completed audit

61. Interim Audit and Final Audit
Compared
 The difference between interim audit and final audit is
essentially one of timing. The interim Audit will
normally take place approximately three quarters of
the way through the financial year. During interim
audit, the focus is mainly on systems work while the
final audit concentrates on balance sheet work.
However, it will be necessary to complete some
systems work during the final audit so that
transactions between the time of the interim and final
audit do not escape the auditor’s attention. Similarly,
some substantive testing is very likely to be carried out
during the interim audit.

62. The concept of expectation gap
 There is a perception of the public of the role of the auditor
although this has been defined by the auditing profession
and regulated by statute.
 There are some common misconceptions in relation to the
role of the auditor even among ‘financially aware’ people.
 Many people think that the auditor reports to the Directors of a
company rather than to members.
 Some think that a qualified audit report is more favorable than an
unqualified audit report whereas the converse is true.
 There is a perception that it is the auditor’s duty to detect fraud,
when in fact the detection of fraud is the responsibility of the
directors.
 These findings highlight the ‘expectation gap’ between
what auditors do and what people in general think that
they do.

63. Value for money audit
 Economy
 Effectiveness
 Efficiency

64. Regulatory framework
 ISA’s by IFAC
 Companies Act
 ACCA Rules of Professional Conduct
 IFACs Professional Bodies;
 IAASB
 ISAs
 ISAE
 ISRE
 ISQC

65. QUIZ
 Attempt all questions;
 1. All accountants are auditors. True or False
 2. All auditors are accountants. True or False
 3. State in full the following abbreviations;
 GAAP
 GAAS.
 4. Construct a definition of an audit based on the
answers to the basic questions of audit as in; what,
why, when, who, where and how.

66. Exercise
 Read the text below and fill in the missing words,
making your choice from the words given. You will not
need to use all the words.
 WORDS AS OPTIONS
 Internal, threat, profession, revision, demands,
sensitive, future, power, interest, promise, reject,
accountability, dynamic, mend, mechanism,
competence, changing, mobile, needs, role,
expectation, groups, social and society.

67. Text/Passage
 The audit is a …(a).. control…(b)..for securing the …(c)..of
the company and its directors. The audit function is a
product of the …(d)..of …(e)..and as such it is a …(f)..not a
static one. The profession must continue to be …(g)..to the
…(h)..needs of the various…(i)..groups. The emergence of
the kind of …(j)..gap to which reference has already been
made, represents a potential …(k)..to the future of the …(l)..
As auditors and the apparent users of audited financial
statement change, society may …(m)..roles formerly
considered acceptable. Professional groups, such as
auditors, must continually be alert to the desirability of
…(n)..modification and …(o)….

68. Review Questions
 1. Define auditing
 2. State the prime objective of an audit
 3. Discuss the advantages and limitations of an audit
 4. Explain the concept of expectation gap
 5. Distinguish between the following;
 Statutory audit and non statutory audit
 Interim and final audit
 Partial and complete audit
 6. Write briefly on the following:
 Management audit
 System based audit