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UNIT 1 Auditing
UNIT 1 Auditing
UNIT 1 Auditing
When you have studied this unit you should be able to:
describe what auditing is.
describe the nature of financial statement audits.
explain why audits are demanded by society.
describe the various types of audits and types of auditors.
1.1 INTRODUCTION
Without question, the independent audit function plays an important role in both business and
society. Numerous third parties, including investors, creditors, and regulators, depend on the
competence and professional integrity of independent auditors.
Economic decisions are typically based upon the information available to the decision maker.
To obtain the most benefit, users should have economic information that is both relevant and
reliable.
This need for relevant and reliable financial information creates a demand for accounting and
auditing service.
Auditing is the accumulation and evaluation of evidence about information to determine and
report on the degree of correspondence between the information and established criteria.
Auditing should be done by a competent and independent person.
Auditing enable the auditor to express opinion whether the financial statements are prepared,
in all material respects, in accordance with an identified financial reporting framework.
This framework (criterion) might be generally accepted accounting principles (GAAP), or the
national standard of a particular country.
Financial statements include balance sheet, income statement, statement of cash flows, notes and
explanatory material that are identified as being part of financial statements.
The phrases used to express the auditor’s opinion are that the financial statements ‘give a true
and fair view’ or ‘present fairly in all material respective’.
Note that the auditor does not certify the financial statements or guarantee that the financial
statements are correct, he reports that in his opinion they give a ‘true and fair view’, or present
fairly’ the financial position.
There is a need for auditing when ownership is separated from control. At a practical level, it
helps to prevent or detect misstatements-errors or fraud. It may prevent or detect
misstatements on the part of
- the employees who actually handle the money, or
- management.
Auditing is needed to enhance the credibility of financial information prepared by an entity. The
independent audit requirement fulfills the need to ensure that those financial statements are
objective, free from bias and manipulation and relevant to the needs of users.
Accounting is constructive. It starts with the raw financial data to process and produce
financial statements.
Auditing on the other hand is analytical work that starts with financial statement to lend
credibility and fairness of the measurements.
A. Types of Audits
Audits are often viewed as falling into three major types:
(1) Audits of financial statements,
(2) Operational audits, and
(3) Compliance audits.
(4) Forensic audits
1. Audits of financial statements: - The goal is to determine whether the financial statements
have been prepared in conformity with generally accepted accounting principles.
2. Operational audits: - An operational audit is study of some specific unit of an
organization for the purpose of measuring its performance. The operation of a unit can
be evaluated for its effectiveness and efficiency.
3. Compliance audits: - Compliance audit determines whether the specified rules,
regulations, or procedures are being carried out or followed.
B. Types of Auditors
The most known types of auditors are
1. Independent auditors,
2. Internal auditors,
3. Government auditors.
3. Government audit: - The government auditor is paid a salary by the government. He/she is
responsible to the legislature or executive.