CHAPTER TWO

THE AUDITING PROFESSION

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INTRODUCTION
Profession
•Profession is a vocation of the highest standing.
•It calls on its members to serve the public by offering
to them highly technical and always confidential advise
and services, which require a different standard.

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A profession can satisfy & be characterized by the
following elements: -
Specialized body of knowledge,
Standard of qualification for admission,
Standard of conduct of behavior,
Level of status recognition, and
Acceptance of social responsibility and legal liability
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2.1.WHAT ARE AUDITING STANDARDS?
 Auditing standards are general guidelines to aid auditors in
fulfilling their professional responsibilities in the audit of
historical FSs.
 They include consideration of professional qualities such as
competence (know how) & independence, reporting
requirements, and evidence.

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2.2. GENERALLY ACCEPTED AUDITING STANDARDS
The broadest guidelines available to auditors
are the 10 generally accepted auditing
standards (GAAS), which were developed by
the AICPA.
10 (ten) generally accepted auditing standards
fall into three categories:
1. General standards
2. Standards of field work
3. Reporting standards
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 Cont’d….

Generally Accepted Auditing Standards

2. Field Work 3. Reporting results
1. General
performance of the
qualifications and audit
conduct 1. Whether statements were
prepared in accordance
1. Adequate technical 1. Adequate & Proper planning with GAAP
training and and supervision
2. Circumstances when
proficiency 2. Sufficient understanding of GAAP not consistently
2. Independence in the entity, its environment, followed
mental attitude and its internal control
3.Adequacy of informative
3. Due professional care 3. Sufficient competent evidence disclosures
4. Expression of opinion on
financial statements
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2.2.1. General Standards
1.Adequate technical training & proficiency.
2. The auditor must maintain independence in mental
attitude in all matters relating to the audit.
3. The auditor must exercise due professional care in the
performance of the audit and the preparation of the
report.

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Due care : means that auditors are professionals responsible
for fulfilling their duties diligently and carefully.
Due care includes consideration of the completeness of the
audit documentation, the sufficiency of the audit evidence,
and the appropriateness of the audit report.
As professionals, auditors must not act negligently/carelessly
or in bad faith.

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 2.2.2. Standards of Field Work
1.The auditor must adequately plan the work and must properly
supervise any assistants.

2.The auditor must obtain a sufficient understanding of the entity

and its environment, including its internal control, to assess the risk
of material misstatement of the financial statements whether due to
error or fraud, and to design the nature, timing, and extent of
further audit procedures.
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3. The auditor must obtain sufficient
appropriate audit evidence by performing
audit procedures to afford a reasonable basis
for an opinion regarding the financial
statements under audit.

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 2.2.3. Standards of Reporting
The auditor must state in the auditor’s report:

1.Whether the financial statements are presented in

accordance with generally accepted accounting
principles (GAAP)

2.The audit report must state whether the GAAP has

been consistently applied with that of the preceding
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3. When the auditor determines that informative
disclosures are not reasonably adequate, the auditor
must so state in the auditor’s report.

4. The auditor must either express an opinion

regarding the financial statements, taken as a whole,
or state that an opinion cannot be expressed, in the
auditor’s report.
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
When the auditor cannot express an overall opinion,
the auditor should state the reasons in the auditor’s
report.
In all cases where an auditor’s name is associated with
financial statements, the auditor should clearly indicate
the character of the auditor’s work, if any, and the
degree of responsibility the auditor is taking, in the
auditor’s report. 13
 PROFESSIONAL ETHICS
• Broadly defined, the term ethics represents the
moral principles or values of conduct recognized
by an individual or group of individuals.
• As C.S. Lewis Observed, "Human beings all
over the earth have some sort of agreement as to
what right and wrong are."
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Important parts of ethics in auditing are in relation to:
Maintenance of mental and physical independence
General competence and technical standards
Responsibility to client and colleagues and
Other responsibilities and Practices that have bearing
on ethical conduct include acts discreditable to the
profession, i.e. commission, incompatible occupation,
soliciting etc. 15
 Fundamental Principles
The fundamental principles are:
-Integrity: - Auditors should be straightforward, honest and sincere in his
approach to his professional work.
-Objectivity: - Auditors should be fair and should not allow bias to override his
objectivity.
Professional Competence and Due Care: Auditors 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.
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- Confidentiality: Auditors 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 it.
- Professional Behavior: Auditors must act in a manner consistent
with the good reputation of the profession and refrain from any
conduct which might bring discredit to the profession.
- Technical Standards: Auditors should carry out professional
services in accordance with the relevant technical and professional
standards.
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 • Auditors have a duty to carry out with care and skill, the
instructions of the client or employer in so far 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 to the technical and professional standards promulgated
by:
 International Standards on Auditing;
 International Accounting Standards Board;
 The member’s professional body or other regulatory body; and
• Relevant legislation. 18
 LEGAL RESPONSIBILITY AND LIABILITY OF AUDITORS

The auditor is responsible for his 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. 19
Liable for what?
1. Auditors Legal Liability to client
The most frequent source of lawsuit against CPAs
is from clients.
The suits vary widely including such claims as
failure to complete an unaudited engagement on the
agreed upon date, inappropriate withdrawal from
an audit, failure to discover a defalcation, and
breaching the confidentiality requirements of
CPAs.
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Auditor Liability to Third Party
•A CPA firm may be liable to third parties if a loss was incurred
by the claimant due to reliance on misleading financial
statements.
•Auditors Responsibility for detecting Misstatements :- The
auditors have responsibility to plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement of whether caused
by error or fraud.
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 MATERIALITY
A misstatement in the financial statements can be considered material if knowledge of
the misstatement would affect a decision of a reasonable user of the statements.
Levels of Materiality
Amounts are immaterial: When a misstatement in the financial statement exists but
is unlikely to affect the decision of a reasonable user, it is considered to be immaterial.
Amounts are material but do not overshadow the financial statements as a whole:
misstatement in the financial statement would affect a user’s decision but the overall
statements are still fairly stated and therefore useful.
Amounts are so material or so pervasive that overall fairness of the statements is in
question: highest level of materiality exists when users are likely to make incorrect
decisions if they rely on the overall financial statements when the highest level of
materiality exists
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 Error and Fraud
• Error – An error represents an unintentional
misstatement of the financial statement. It may be
material or immaterial.
- Mistake in gathering and reporting data
- Mistake in application of GAAP
- Unintentional omission of amount
- Informative disclosure on financial statement. 23
Fraud: Fraud represents an intentional
misstatement of the financial statement which can
be material or immaterial. The misstatement due to
fraud may occur due to either of:
1.Misappropriation of assets defalcations or
employee fraud. E.g. theft of cash or another asset.
2.Fraudulent financial reporting often called
management fraud. E.g. intentional misstatement
of sales near the balance sheet date to increase
reported earning. 24
Truth and Fairness
•The term truth and fairness are essential elements of
audit report.
•There is no statutory or professional definition of
truth and fairness.
•Truth and fair is a technical in the phrase to be looked
at as entirely.
•In general, the word "true" means, information is
factual confirms to reality, not false. The information
confirms with standards.
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• Fairness means; clear distinct and plain
- Impartial, not biased or
- Just and equitable
• To show true and fairness accounts must be
prepared
- In accordance with GAAP
- On constant basis so as not to be misleading
- The accounts must be taken from books and
records. 26
 END OF CHAPTER TWO
THANK YOU VERY MUCH

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