AUD 339 AUDITING

TOPIC 1: INTRODUCTION
 AUDITING

Auditing …is a systematic process in the accumulation and

evaluation of evidence about information to determine and report
on the degree of correspondence between the information and
established criteria
- Information (in verifiable form) and established criteria (standards)
- Accumulation and evaluating evidence (info used by auditor)
- Competent (know the types and amount of evidences), independent
person
- Reporting / Audit Report (communicate the findings)
 DEFINITION- WHAT IS AUDITING?

Examining reasonably (on a test basis) the financial

report of an organization – as presented in annual
report – by someone competent; independent of that
organization – then forming a true and fair view( audit
opinion) on whether the financial statement presented in
the F/S taken as a whole, reflects the financial position
& performance of the organization at a given date- in
pursuance of that appointment and in accordance to
relevant statutory requirement

Auditing begin when accounting ends

 DEVELOPMENT OF AUDITING

- Initially for governmental accounting – look at record keeping

-Has been around since the beginning of human civilization – to
detect fraud through extensive detailed examination
-19th-a need for independent review of accounts of small and large
firms –complete review of transactions & preparation of corrected
F/S – later then technique of sampling introduced
-Late 19th –Beginning of modern day auditor- Ascertain Internal
check, examine a representative sample, rather than a detailed
examination
The State of Auditing Today
- Audit is more streamlined & efficient – offer companies
correction in their activities and advise to avoid financial misreport
in the future
 OBJECTIVES-F/S AUDIT

To express opinion to the F/S users as to the

fairness of which the financial statements present
fairly, in all material aspects, the financial results
of operations, and cash flows, in conformity with
generally accepted accounting principle, which
enhances the degree of confidence that intended
users can place

Auditing begin when accounting ends

 AUDITING….ACCOUNTING

Accounting Auditing
The process Involves preparing books of accounts Examine financial statement
to make decision to prove true and fair view of
company’s affairs
Frequency Continuous process throughout a At year-end after the directors
financial period have prepared the financial
statement (though the
planning work is done earlier)
Compliance Act Generally accepted accounting International Standards on
standards Auditing (ISA)
Dependency Accounting is a management function Auditor must be independent
to assist management to run the of all the stakeholders i.e.
business efficiently management
Statutory requirement It is a statutory requirement that all It is a statutory requirement
companies maintain proper accounting that F/S are audited
records
 AUDITING….ACCOUNTING
Accountant
Recording transaction and provide financial
information
Responsible to develop a system to ensure
that transactions are properly recorded
Must understand accounting principles so
that transactions were recorded according
to the accepted standards
Possess expertise to record transactions and
prepare F/S
Auditor
Determine whether recorded information
fairly reflect actual transaction
Responsible to evaluate the system to
determine its effectiveness
Must understand accounting principles so
that he/she would be able to detect non-
compliance by the Accountant
Possess expertise to accumulate and
interpret audit evidence
 MANAGEMENT’S
RESPONSIBILITIES

Management’s:
- Preparing F/S and its contents (the fairness of the
representations in F/S)
- Determine which disclosure it considers necessary to present
in F/S
- Accepting auditor’s advise and the inclusion of suggested
adjustment in F/S (responsible for final decision on the forms
and contents)
- Maintaining proper accounting records
- To furnish all documents requested by auditors
- Appointment of auditors
 AUDITOR’S RESPONSIBILITIES

- Planning and perform the audit and report result

- Provide reasonable assurance that the F/S are free of material
misstatement(exercise reasonable care and skills)
- Assist in the preparation of F/S; to counsel management the
applicability of new accounting principle, and may propose
adjustment to F/S
- Reporting on internal control weakness
- Duties as per Co. Act 1965:
- To enquire
- To report and sign the report
- Maintaining client’s confidentiality
- Detect material misstatement/fraud indication in the F/S
 DEMAND FOR AUDITING

- Required by regulation
- Company act 1965 – Sec 169,174
- Sarbanes Oxley Act
- Bursa – Chapter 9(9.23)
- Banking act –sec 11
- Required by the third parties
- Principal agent relationship-Information risk
THIRD PARTIES
 PRINCIPAL- AGENT RELATIONSHIP

Principal provides capital & hire agents

to manage it

Information asymmetry
Owners/ Conflict of interest
Management
third parties Consequence
Complexity (Agent)
(Principal) Remoteness

Agent is accountable to principal &

prepare F/S

Auditors
 TYPES OF AUDIT

F/S audit/Statutory/External
- Examine the truth and fairness of the F/S of an entity by auditor who is independent of the
organization in accordance with a reporting framework
Compliance
- Specific audit engagement to comply with requirements of particular law and regulation either by
higher management within an entity or regulatory authority i.e. SOX audit
Operational audit
- Examine client’s business operation, (3Es)
- Efficiency (performing work in least possible time)
- Effectiveness (Doing the right thing with least wastage of resources)
- Economy (balance between benefits and costs to run the business)
Forensic audit
- Investigative audit to uncover fraud, missing money and negligence
 TYPES OF AUDITOR

-Chartered Accountants/ External auditors/Independent auditors

- Not employed by the company being audited
- Appointed by the shareholders
- Audit fees as agreed by auditor and management
- [Sec 8 of Co. Act 1965 – FS audit must be performed by approved
company auditors – qualified person approved by MOF, is of good
character & competent to perform duties, a registered member of MIA
with recognized professional qualification& experience]
Internal auditors
- Employed by the organization they audit through interview process
- Review employee performance, compliance with company regulation and
financial and accounting system
- Remuneration fixed by the management
 TYPES OF AUDITORS

Government auditors/ Auditor General

- Review the federal & state accounts, public authorities and statutory bodies
- Remuneration fixed by the government
Forensic Auditor
- Employed by corporations, government agencies, Chartered Accountant
e.t.c.
- Well-trained in detecting, investigating and deterring fraud
 CHARTERED ACCOUNTING FIRMS

There are four large accounting firms (“The Big

Four”) in the world
✓KPMG
✓Ernst & Young
✓Deloitte
✓PricewaterhouseCoopers
 STRUCTURE OF THE FIRM

- Typically organized as partnerships/proprietorships

- Range in size from 2 to 100 of partners & thousands of employees
- Unlimited liability for the partners but Chartered accounting firms are
constantly seeking limitation of exposure to liability
- Components of Audit Teams
- - Partner

- - Manager

- - Senior Associate

- - Associate
 PROFESSIONAL SERVICES

Assurance services ( Issue written communication about reliability of info)

- Audit
- System & process (Advice on the effectiveness of system controls over
Financial info system)
- SOX compliance
- Risk
Non-Assurance services
- Tax service (Prepare tax return & give advice on tax planning)
- Management advisory Services (Give advice on how to improve accounting
system, developing office computer networks)
- Accounting and compilation Service (Prepare F/S, bookkeeping)