STUDY SESSION I: DEVELOPMENT AND EXECUTION OF AUDIT STRATEGY

Introduction
Auditors should plan their audit work so as to perform the audit in an effective manner.
Planning entails developing a general strategy and a detailed approach for the expected nature,
timing and extent of the audit.
Auditors formulate the general audit strategy in an overall audit plan which sets the direction for
the audit and provides guidance for the development of the audit programme. The audit
programme sets out detailed procedures required to implement the strategy.
LEARNING OUTCOMES FOR STUDY SESSION I
At the end of this study session, you should be able to:
1.1 State the objectives of the audit planning
1.2 Mention issues for consideration in audit planning
1.3 Explain audit strategy
1.4 Define concept of materiality
1.5 Explain the audit strategy to employ in auditing clients with multiple locations
1.6 Explain consolidated organizations
1.1 OBJECTIVES OF AUDIT PLANNING
Planning is necessary for audits of all sizes. The objective of planning the audit work, which
takes place before the detailed audit work begins include:
i) Assuring that appropriate attention is devoted to the different areas of the audit
ii) Assuring that potential problems are identified and resolved on a timely basis
iii) Facilitating review of work done
iv) To ensure proper assignment of work to members of the audit team and their briefing.
v) To assist in the coordination of work done by other auditors and experts so that the audit may
be performed in an efficient and timely manner.
1.2 ISSUES FOR CONSIDERATON IN AUDIT PLANNING
Audit planning requires a high degree of discipline on the part of the auditor .In order to make
the planning more meaningful, the auditor should take into consideration the following matters in
relation to audit engagement:
a) Preliminary work to be done in addition to the real audit work

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b) Changes in Legislation or any Auditing Standards or Guidelines
c) Analytical Review of Available Managements’ Accounts and Other Management Information
that relate to the Accounts
d) Changes in the Business or Management
e) Changes in the Accounting System
f) Deadlines Established for the submission of Audit Report
g) Use of Rotational Testing and Verification
1.3 CONCEPT OF AUDIT STRATEGY
Audit strategy is directed to the gathering of relevant and reliable audit evidence in order to
support the expression of an opinion on the accounts. In carrying out an audit assignment, the
auditor should:
a) Consider his responsibilities as defined in the terms of engagement
b) Familiarize himself with the client’s business and organization;
c) Obtain a preliminary understanding of the principal features of the client’s accounting system
and internal control procedures;
d) Determine and record the audit strategy to be adopted;
e) Review critically and evaluate those aspects of client’s accounting system, procedures and
internal controls on which he intends to place some reliance;
f) Discuss any weakness in the system with the client in order, inter alia,to ascertain whether they
are compensated by some other controls
g) Test the system to determine whether the controls on which he intends to place reliance were
operating during the period;
h) Report apparent weakness and breakdown in internal control to the client in a management
letter;
i)Obtain a more detailed description of the accounting system and internal control procedures
and review selected transactions to confirm that he has understood and recorded the system
properly where it is proposed to carry out a detailed evaluation of all certain internal controls
with a view to placing reliance on such controls; and
j)Based on the results of the work described above, carry out a programme of audit work to
substantiate the amounts appearing in the accounts and related notes so as to ensure that the
accounts show a true and fair view of the state of affairs and the results of the business’

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1.4 CONCEPT OF MATERIALITY
This is the relative significance of a particular amount, balance, or transaction in relation to the
financial statement as a whole. The Statements of Auditing Standard No 220 states that ‘auditors
should consider materiality and the relationship with the audit risks when conducting an audit.
Materiality is not looked upon in terms of individual items of account but in context of its effect
on the financial statements if misstated, wrongly classified, omitted or not disclosed.
A matter is material in the following circumstances:
1. If its omission would reasonably influence the decision of an addressee of the auditor report
(e.g. shareholders)
2. If a misstatement would have a similar influence
Materiality may also be considered in context of any individual primary statement with the
financial statements or of individual items included in them. Materiality has both quantitative
(amount) and quantitative (nature) aspects.
Consideration of materiality
Auditors plan and perform the audit to be able to provide reasonable assurance that the financial
statements are free of financial misstatement and give a true and fair view. The assessment of
what is material is a matter of professional judgement.
Auditors should consider the possibility of misstatements of relatively small amount that
cumulatively could have a material effect on the financial statements. For example a relatively
small error in a month-end procedure could be an indication of a potential material misstatement
if that error is repeated each month.
Auditors should also be alert on the qualitative aspects of misstatement. Examples of qualitative
misstatements are the inadequate or inaccurate description of an accounting policy when it is
likely that a user of the financial statements could be misled by that description. Materiality
should be considered both in the overall financial statement level and in relation to individual
account balances, classes of transactions and disclosure. Materiality may be influenced by
consideration such as legal and regulatory requirements and considerations relating to individual
financial statement account balances and relationships.
1.4.1 Materiality and audit work
The recommendation of SAS 220 is summarized as follows:
(1)Materiality should be considered when determining the nature, timing, and extent of audit
procedures.
(2)Materiality should be assessed during audit planning based on the latest available financial
information. This will assist in the determination of efficient and effective audit approach by

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indicating items to examine and whether or not to use sampling technique. This will enable
auditors select audit procedure that in combination reduce audit risk to an acceptable low level.
(3)The assessment of materiality during audit planning may differ from that at the time of
evaluating the results of audits procedures. This may be because of a change in circumstances or
a change in the auditor’s knowledge as a result of the audit, for example; if the actual results of
operation and financial position are different from those they expected when the audit was
planned.
(4)If auditors identify factors which result in the revision of their preliminary materiality
assessment, they should consider the implication for their audit approach and may modify the
nature, timing and extent of the planned audit procedures.
1.4.3 Evaluating the effects of misstatements
1) In evaluating whether the financial statements give a true and fair view, auditors should assess
the materiality of the aggregate of uncorrected misstatements.
2. The aggregate of uncorrected misstatements comprises:
(a) Specific misstatements identified by the auditors during the current and previous period (if
they affect the current period’s financial statements) and,
(b) Their best estimate of other misstatement which cannot be quantified specifically
3. If auditors conclude that the misstatements may be material they should consider conducting
audit risk by extending audit procedure or requesting the directors to adjust the financial
statements.
4. If the directors refuse to adjust the financial statements and result of extended audit procedures
do not enable the auditors conclude that the aggregate of uncorrected misstatement immaterial,
they should consider the implications for the report.
1.5 CLIENTS WITH MULTIPLE LOCATIONS
Some organizations have multiple locations in form of branches, depots, and shops either in the
same city or across the nation. The audit strategy to be used for this type of organization in order
not to delay conclusion of the overall client’s audit within the time-table has to be formulated at
the audit planning stage, the following are the considerations:
1. Obtain from client a list of all branches, depots and shops.
2. Attain to clients office to review the accounting systems and controls over the ‘’multiple
locations’’ and the type of returns prepared and submitted to head office.
3. Some organizations require all branches, shops and depots to bank all the sales intact while
cash is remitted from head office for their overheads, salaries and wages. But it is important to
note, that where this is the case, the following should be considered:
(i) A list of all bank accounts and location of the banks.

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(ii)A review of the bank account reconciliation should be made, taking note of the long
outstanding uncleared items for verification when the auditor visits the branch or depot.
Experience has shown that fraud is normally perpetrated in this type of organization by claiming
to have made deposits into the bank which are usually not the case. In this computer age with
online banking deposits it is possible to enter the client’s accounts the same day.
4. Assessment of the work of the internal auditor is vital as this is an area where the internal audit
work ought to be comprehensive. Internal audit coverage would determine the extent of work the
auditor plans to carry out.
5. Arrangement of audit staff’s visit to each branch. This should always be done since the client
will bear the co st. Client should be given the time table for branch audit and made to provide
transport and accommodation.
6. Audit review should be planned for the sight so that the manager attends at the sight so that all
issues are cleared there, before the team returns.
7. Audit time and cost budget for professional fees assessment should be planned and monitored
to ensure that the staff do not overstay at the expense of higher costs to the clients.
8. In the case of overseas branches, it may be necessary for the auditors to arrange for local
auditors to conduct the audit. Such auditors act on behalf of the primary auditors, who must take
full responsibility.
1.6 CONSOLIDATED ORGANISATIONS:-
In the case of group companies, that is, a parent company and its subsidiaries, associated
companies and affiliates .There are two aspects of the consolidation in audit planning and
control.
1) Where the auditor of the holding company (the primary auditor) is also the auditor of the
subsidiaries, associates and affiliates; and
2) Where the subsidiaries, associates and affiliates are audited by other auditors.
Where the primary auditors are also the auditors of the subsidiaries, the audit plan should provide
for the audit of the subsidiaries first before that of the holding company so that data and
information gathered at the subsidiaries audit could be verified when auditing the holding
company. The audit programme should specifically provide overall list of such items possible
under a separate section of the working paper file so as not to be forgotten. In case of an
associated company listed on the Stock Exchange, the published financial statements have to be
made available to the primary auditors to be used for incorporation in the account of the
investing company in accordance with IAS 28. The parent company will have to be informed
well in advance so that the accounts are made available on time.
In the case of subsidiaries audited by other auditors, the following considerations are important
at the audit planning stage:

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i) The use of audit questionnaire for completion by the secondary auditors. Care should be
exercised in using such questionnaire which may not be particularly helpful unless they are:
a) Suitably compiled with the specific circumstances of the group in mind including the degree
of control exercised over the subsidiaries and associated companies.
b) Discussed in advance with the secondary auditors;
c) Properly completed.
(2)Arrangement for consultation with the secondary auditors when the secondary auditors are
planning their audit so that they become aware of the requirements of the primary auditors. Such
consultation should not be deferred until the audit is completed. Such procedure is especially
necessary where overseas firms of auditors are involved.
Among the benefits which may arise from such advance consultation are:
i. that the secondary auditor may be advised as to the standard of audit required to enable their
work to be relied on in the preparation and audit of the group accounts; and
ii. that the secondary auditors will be encouraged to discuss any proposed qualification in their
own reports with the primary auditors.
3. Letting the shareholders know that the accounts of some of the companies, in the group have
been audited by other auditors and the materiality of the companies to the group. A number of
ways in which the information may be included is:
(a) to state in the schedule of principal subsidiaries and associated companies.
(b) in the director’s report
(c) in the notes to the accounts.
Which of those companies have been audited by the other auditors, it is desirable to indicate the
significance in the group of the companies that have been audited by reference to the amount of
their assets, sales or profit or loss before tax.
Note that it is considered inappropriate for the primary auditors to state in their report the
companies in the group not audited by them. Such a reference may be taken to imply a limitation
of the scope of the primary auditor’s opinion.
In Text Question: What is a group company?
In Text Answer: A company that has a parent company and its subsidiaries, associated and
affiliates.
SUMMARY OF STUDY SESSION 1
In this study session, you have learnt that:
1. Objectives of audit planning are to ensure timely completion of the audit assignment

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2. There are issues to be considered by auditor when planning his audit assignment
3. Concept of audit strategy entails auditor gathering evidence in other to support the expression
of audit opinion
4. Materiality is the relative significance of a particular amount, balance, or transaction in
relation to the financial statement as a whole.
5. There are audit strategies to be applied for organisations with multiple locations across the
country in order not to delay conclusion of the overall client’s audit within the time-table
stipulated.
6. Consolidated organisations comprise of a parent company, its subsidiaries, associated
companies and affiliates
SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 1
Now that you have completed this study session, you can assess how well you have achieved its
Learning outcomes by answering the following questions. Write your answers in your study
notebook; discuss them with course-mates and your Facilitator at the next contact session. You
can check your answers with the notes on the Self-Assessment questions at the end of this study
session.
SAQ 1.1(Testing Learning Outcomes 1.1)
List the objectives of audit planning
SAQ 1.2(Testing Learning Outcomes 1.2)
State the matters to be taken into consideration in audit planning
SAQ 1.3(Testing Learning Outcomes 1.3)
Explain the concept of audit strategy
SAQ 1.4(Testing Learning Outcomes 1.4)
Define materiality
SAQ 1.5(Testing Learning Outcomes 1.5)
How can you describe a Client with multiple location?
SAQ 1.6(Testing Learning Outcomes 1.6)
How do you describe a consolidated organization?

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 REFERENCES
E .I. John (2005).ICAN EXAM Distance Learning Pack, Advanced Audit and Assurance,
Lagos: Accountancy Training & Publications Ltd
ICAN Study Pack (2009).Advanced Audit and Assurance, Nigeria: VI Publishers
ICAN Study Pack (2009).Audit and Assurance, Nigeria:VI Publishers
ICAN Study Text (2014).Audit and Assurance,Nigeria: Emile Woolf International

8
STUDY SESSION 2: AUDIT RISK
Introduction
Audit risk is the term given to the risk that the auditor will reach an invalid opinion or conclusion
from his audit work on financial statements.
In this study session, you will learn about definition of audit risk, components of audit risk,
benefits of audit risk assessment, limitations of audit risk assessment and factors that could
minimize audit risks.
LEARNING OUTCOMES FOR STUDY SESSION 2
At the end of this study session, you should be able to:
2.1 Define audit risk
2.2 Explain the components of audit risk
2.3 Discuss the benefits of audit risk assessment
2.4 State and explain the limitations of audit risk
2.5 Outline the factors that could minimize audit risk
2.1 DEFINITION OF AUDIT RISK
SAS 300 defines “Audit risk” as ‘’ the risk that the auditors may give inappropriate audit
opinion on the financial statements’’. Many big international auditing firms have collapsed as a
result of issuing a clean report on financial statements only for such companies to collapse few
months of auditor’s clean report. Arthur Anderson & Co had adverse press publicity and
reproach from the U.S. Congress over its report on Enron Corporation, a US energy giant which
was riddled with mass fraud committed by its top executives but not detected by the auditing
firm. The auditing firm hurriedly arranged to be absorbed by KPMG professional Sevices.
Delloite & Co opted for an out – of – court settlement of about $90m for issuing a misleading
audit report. However, unlike Arthur Anderson & Co, Delloite’s clients did not collapse, but the
bad image created by wide publicity made Delloite merged with another firm’s country by
country basis. Other big firms (like Coopers & Lybrand) also had their image tarnished by
careless or inefficient conduct of audit. All this point to the importance of conducting a thorough
audit and assessing the risk of issuing a false or misleading report on financial statements.
2.2 COMPONENTS OF AUDIT RISK
Audit risk has three components. These are:
(a) Inherent risk

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(b) Control risk; and
(c) Detection risk
Inherent Risk
This is the risk that an account balance may be materially misstated either individually or when
aggregated with misstatement in other balances or classes, irrespective of the related internal
controls. It is derived from the characteristics of the client’s products or services it deals in .It
derives from the type of industry in which the client’s operates and will vary according to the
accounts being examined
Control Risk
This is the risk that a material misstatement could not be prevented or detected and corrected on
timely basis by the accounting and internal control systems. The misstatements could be
individually, by class of transaction or when aggregated with the account balances or classes.
Detection Risk
This is the risk that the audit procedures may not detect a misstatement that exists in an account
balance or class of transactions that could be material either individually or when aggregated in
misstatement or in other account balances or classes.
Audit risk, therefore, is the product of the above stated risks-
(AR=IRXCRXDR) where:
AR= Audit Risk
IR=Inherent Risk
CR=Control Risk
DR=Detection Risk
In-Text Question: Mention three components of audit risk
In-Text Answer: (i) Inherent risk, (ii) Control risk; and (iii) Detection risk
Assessment of inherent risk
To assess inherent risk, auditors should use their professional judgement to evaluate numerous
factors having regard to their experience of the organisation from previous audits, any controls
established by management to compensate for a high level of inherent risk and their knowledge
of any significant changes which have taken place. Risk factors exist at the organisation level
and at the account balance and class of transactions. The factors are.
a). Organisation level
1. The integrity of directors and management;

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2. Management experience and knowledge and changes in management during the period, for
example inexperience may affect the preparation of the financial statements of the entity.
3. Unusual pressure on directors or management such as tight reporting deadlines, market
expectations or other circumstances that might predispose them to misstate the financial
statement, for example, the industry experiencing a large number of business failure or an entity
that is close to breaching borrowing covenants.
4. The nature of the entity’s business, for example the potential for technological obsolescence of
its products and services, the complexity of the capital structure, the significance of related
parties and the number of locations and geographical spread of its production facilities and
5. Factors affecting the industry in which the entity operates, for example economic and
competitive conditions as indicated by financial trends and ratio, regulatory requirements and
changes in technology, consumer demand and accounting practice common to the industry.
b) At the account and class of transactions level
1. Financial statement accounts likely to be susceptible to misstatement, for example accounts
which require adjustment in the previous period or which involve a high degree of estimation.
2. The complexity of underlying transactions and other events, which might require the use of
the work of an expert.
3. The degree of judgement involved in determining account balances.
4. Susceptibility of assets to loss or misappropriation for example assets which are highly
desirable and moveable, such as cash.
5. The completion of unusual and complex transactions, particularly at or near period end and
6. Transactions not subjected to ordinary processing
2.3 BENEFITS OF AUDIT RISK ASSESSMENT
The benefits of audit risk assessment are:
(a) It saves audit cost and fees;
(b) It ensures that the audit work is completed expeditiously and economically;
c) It removes all avoidable pitfalls in the audit procedure;
d) It reduces the possibility of under or over auditing;
e) It results in a more effective and efficient audit work;
f) It focuses the auditor’s attention on factors which are more likely to result in misstatements;
and
g) It facilitates the use of sampling and the attendant benefits derived therefrom.

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In –Text Question: What is audit risk?
In –Text Answer: This is the risk that the auditor will express invalid opinion on the financial
statement
2.4 LIMITATIONS OF AUDIT RISK ASSESSMENT
The limitations of audit risk assessment include the following:
a) Subjective values have to be placed on inherent and control risk
b) It may result in a mechanical approach which leads to a loss of auditor’s judgement.
c) The auditor may spend more time on the mechanic of the process and assignment at the
expense of time spent obtaining audit evidence; and
d) The assignments of risk levels are often not suitably specific which puts into question the
validity of any conclusions reached
2.5 FACTORS THAT COULD MINIMISE AUDIT RISKS
Audit risk may be reduced if some of the following positive factors are identified:
a) The enterprise is financially stable without excessive debt, and is likely to remain so in the
foreseeable future.
b) The enterprise is profitable, if its objective is to make profit.
c) The proprietor, in the case of a private company plays active role in the business.
d) The internal controls are strong and the company’s accounting personnel are competent.
e) The past audit experience has provided evidence of good accounting controls with no major
audit problems; and
f) The enterprise’s relationship with the regulatory authorities has been good.
SUMMARY OF STUDY SESSION 2
In this study session, you have learnt that:
i) Components of audit risk are: inherent risk, control risk and detection risk
2) Audit risk assessment is an important aspect of audit
3) Through audit risk assessment, the auditor will determine the nature, extent and timing of the
auditor’s substantive test programme
4) There are benefits associated with audit risk assessment
5) There are factors that could minimize audit risk

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SELF ASSESSMENT QUESTION (SAQs) FOR STUDY SESSION 2
Now that you have completed this study session, you can assess how well you have achieved its
leaning outcomes by answering the following questions. Write your answers in your study
notebooks; discuss them with course-mates and your Facilitator at the next contact session. You
can check your answers with the notes on the self-assessment questions at the end of this study
session
SAQ 2.1(Testing Learning Outcomes 2.1)
Define audit risk
SAQ 2.2(Testing Learning Outcomes 2.2)
List the components of audit risk
SAQ 2.3(Testing Learning Outcomes 2.3)
Explain the benefits of audit risk assessment
SAQ 2.4(Testing Learning Outcomes 2.4)
Enumerate the limitation of audit assessment
SAQ 2.5(Testing Learning Outcomes 2.5)
Outline the factors that minimize audit risk

REFERENCES
E .I. John (2005).ICAN EXAM Distance Learning Pack, Advanced Audit and Assurance,
Lagos: Accountancy Training & Publications Ltd
ICAN Study Pack (2009).Advanced Audit and Assurance, Nigeri : VI Publishers
ICAN Study Pack (2009).Audit and Assurance, Nigeria:VI Publishers
ICAN Study Text (2014).Audit and Assurance,Nigeria: Emile Woolf International

13
STUDY SESSION 3: STANDARDS FOR ASSURANCE ENGAGEMENT
Introduction
Assurance is a service rendered by Professional Service Providers to improve the quality of
information provided to management and other decision makers within a given firm. It focuses
primarily on improving information rather than providing advice. Therefore, assurance
engagement is often performed or carried out by a professional accountant or auditor so as to
enhance the credibility of information about the subject matter.
LEARNING OUTCOMES FOR STUDY SESSION 3
At the end of this study session, you should be able to:
3.1 Define Assurance Engagement
3.2 State the Concepts of Assurance Engagement
3.3 Discuss the Elements of Assurance Engagements
3.4 Outline the Characteristics of Assurance Engagement
3.5 State types of Assurance Engagement
3.6 State the Peculiarities of Assurance Engagement
3.7 Enumerate the Implications of Assurance Engagement for the Profession
3.1 DEFINITION OF ASSURANCE ENGAGEMENT
Assurance engagement according to the International Standard on Auditing (ISA No. 100 on
Assurance Engagements) is defined “as one in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users, other than the responsible
party, about the outcome of the evaluation or measurement of a subject matter against criteria’’.
Relating the above definition to audit, this shows that an audit is an assurance engagement
exercise aimed at giving an independent opinion on the truth and fairness of financial statements.
The traditional role of auditing has revolved around giving assurance on the assertions made by
the management of an enterprise on the financial statement prepared in respect of that enterprise.
3.2 UNDERLYING CONCEPTS OF ASSURANCE ENGAGEMENT
The fact that ownership and control have been separated has necessitated the need for more
confidence in the report of managers (directors). Therefore, the need for assurance service has
arisen for the following reasons:
(i )Growth in international communication methods especially the proliferation of reporting on
the internet and the use of the worldwide web; and

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ii) Additional areas for which information is required, that is corporate social responsibility,
environment reporting, corporate governance etc.
3.3 ELEMENTS OF ASSURANCE ENGAGEMENT
The various elements which are peculiar to assurance engagement are:
(a) existence of a three party relationship which involves:
(i) the practitioners
(ii) the responsible party: and
(iii) the intended users.
(b) Identification of the subject matter
(c) Existence of suitable criteria.
(d) Availability of sufficient appropriate evidence; and
(e) Written assurance report in appropriate form to include appropriate conclusions.
3.4 CHARACTERISTICS OF ASSURANCE ENGAGEMENT
These are:
(i)Being identifiable
(ii)Being capable of consistent evaluation and measurement
(iii)Being subject to procedure and evidence gathering.
Some of the examples of assurance engagement are:
(a)Statutory Audit
(b) Management performance
(c)Risk assessment
(d)Corporate governance
(e)Performance related data
(f)Systems and control
(g)Corporate social responsibility
(h)Prospective financial information
(i)Environmental Performance
(j) Report for lenders and other investors
(k)Non- Statutory audits and reviews.
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3.5 TYPES OF ASSURANCE ENGAGEMENT
There are basically two types of assurance engagement and they are:
a) An assertion-based engagement, where the accountant declares that a given assertion, that is,
claim or declaration is in his opinion true. A good example is the statutory audit; and
b) A direct reporting engagement, where the accountant reports on issues that have come to his
attention during his evaluation. An example is a management performance report
In –Text Question: Mention the two types of assurance engagement
In-Text Answer: (i) An assertion based engagement; and
(ii) A direct reporting engagement
3.6 PECULIARITIES OF ASSURANCE ENGAGEMENT
These are:
a)Those that vary according to the elements of the engagement. For instance, depending on the
engagement itself, the criteria and the subject matter the level of assurance that the practitioner
can give is either reasonable or limited. It is not possible to give an absolute level of assurance
because of the limitations inherent in the process of carrying out the assignment. There are two
possible levels of assurance and they are:
i) Reasonable, that is high level of assurance, where the practitioner would conclude that the
subject matter materially conforms to the criteria. For example, statutory audit; and
ii) Limited level of Assurance, where the practitioner has no reason to believe that the subject
matter does not confirm to the criteria, that is, he believes that it is possible that the subject
matter conforms to the criteria.
b) Those that depend on the subject matter. The subject matter may fall into any of these three
categories
i) Data (financial statements or forecasts)
ii) Behaviour (corporate governance, corporate social responsibility)
iii) Systems and procedures (computer system or internal control systems)
3.7 IMPLICATIONS OF ASSURANCE ENGAGEMENT FOR THE PROFESSION
Each audit firm should be conscious of the following implications:
a) Increase in potential liability of accountants resulting from a diversity of engagements
b) Need for accountants to acquire a broad skill base in order to meet the requirements of non-
audit assurance services

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c) Possibility of declining audit requirement resulting in decrease in audit fee but compensated
by an increase in fee income from other assurance services
d) There is an increase in expectation gap and possibility of mistaking all other assurance
services as audit in a re-packaged form from the view point of the public
SUMMARY OF STUDY SESSION 3
In this study session, you have learnt that:
1) Statutory audit is an assurance service
2) There are two types of assurance service
3) There are FIVE elements of assurance service. These are
i) Existence of a three party relationship
ii) Identification of the subject matter
iii) Existence of suitable criteria
iv) Availability of sufficient appropriate audit evidence; and
v) Written assurance report in appropriate form to include appropriate conclusion
4) Peculiarities of assurance engagement are: those that vary according to the elements of the
engagement ,and those that depend on the subject matter
SELF ASSESSMENT QUESTION (SAQs) FOR STUDY SESSION 3
Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Write your answers in your study
notebooks; discuss them with course-mates and your Facilitator at the next contact session. You
can check your answers with the notes on the self-assessment questions at the end of this study
session
SAQ 3.1(Testing Learning Outcomes 3.1)
Define assurance engagement
SAQ 3.2(Testing Learning Outcomes 3.2)
State the reasons for assurance service
SAQ 3.3(Testing Learning Outcomes 3.3)
Outline the elements of assurance engagement
SAQ 3.4(Testing Learning Outcomes 3.4)
Mention the characteristics of assurance engagement
SAQ 3.5(Testing Learning Outcomes 3.5)

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Explain the two types of assurance engagement
SAQ 3.6(Testing Learning Outcomes 3.6)
State the peculiarities of assurance engagement
SAQ 3.7(Testing Learning Outcomes 3.7)
What are the implications of assurance engagement on accounting profession
REFERENCES
E .I. John (2005).ICAN EXAM Distance Learning Pack, Advanced Audit and Assurance,
Lagos: Accountancy Training & Publications Ltd
ICAN Study Pack (2009).Advanced Audit and Assurance, Nigeria: VI Publishers
ICAN Study Pack (2009).Audit and Assurance, Nigeria:VI Publishers
ICAN Study Text (2014).Audit and Assurance,Nigeria: Emile Woolf International

18
STUDY SESSION4: QUALITY CONTROL PRACTICES AND PROCEDURES
Introduction
In this study session, you will learn about quality control practices and procedures, advertising
and publicity, fees, tendering, engagement letter, consultation, expectation gap, performance and
reporting standard and about fraud and error.
LEARNING OUTCOMES FOR STUDY SESSION 4
At the end of this study session, you should be able to:
4.1 Explain quality control practices in respect of an individual assurance engagement
4.2 Discuss the rules guiding advertising and publicity as contained in professional conduct for
members
4.3 Explain the basis for charging fees
4.4 Discuss tendering and its important issues of note for a professional accountant
4.5 Explain engagement letter, its purpose and content
4.6 Explain reasons for consultation
4.7 Explain the different types of audit opinion and circumstances leading to each type
4.8 Discuss expectation gap
4.9 Distinguish between fraud and error
4.10 Discuss auditor’s liability
4.1 QUALITY CONTROL PRACTICES AND PROCEDURE
For effective and efficient control, the audit engagement partner who is responsible for each
audit from the beginning to the end with an engagement team should work together to implement
quality control measures that are applicable to each particular audit engagement.
The Quality Control Standard covers the following different sections:
(a) Leadership responsibilities
(b) Ethical requirements
(c) Acceptance/ Continuance of client’s relationship and specific audit
engagement
(d) Assignment of engagement teams.
(e) Engagement Performance: This covers the careful consideration and analysis of the
following factors which an engagement partner is responsible for;

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(i) Direction of the engagement team of their responsibilities, nature of the entity’s business,
risk-related issues, problems that may arise and detailed approach to performance of the
assignment
(ii) Supervision by the engagement partner of the whole assignment but it is usual that within the
team, the senior members supervise the junior ones.
iii) Review of the work done is subjected to constant evaluation to ensure that the objectives of
the engagement procedures are met, and a thorough review must be conducted by the
engagement partner before issuing the audit report
(iv)Consultation on difficult and contentious matters are subjected to appropriate opinion and
must be well documented by the engagement partner
(v) Difference in opinions between the audit staff and their manager or between the entire audit
team and audit engagement partner should be resolved in accordance with the firm’s policy for
such matters
(vi) Quality control review requires the audit engagement partner to appoint a reviewer with
whom he discusses and finalizes all significant matters before issuing the audit report
Monitoring: Engagement partner should refer to the results of monitoring of the results of the
firm’s quality control systems and consider whether such results have any impact on the
particular audit that he is conducting.
4.2 RULES GUIDING ADVERTISING AND PUBLICITY
ICAN recognises the need for members to advertise and seek publicity for their services as
contained in Statement No.8 of the Professional conduct for members. However, the following
guidance on advertising and publicity is recommended to be followed:
(a)Advertisement should be clearly distinguishable as advertisements.
(b)Advertisement should comply with the law and should be legal, decent, clear, honest and
truthful.
(c)Unsolicited promotional or technical material should not be sent to a non-client by facsimile
transmission or other electronic means.
(d)Unsolicited personal visit or telephone call (i.e. cold calling) to a person who is not a client
with a view to obtaining professional works from the non-client should not be made in relation to
audit or other financial reporting work.
(e)Professional material should not make disparaging references to or disparaging g comparison
with the services of others. Reference to size on quality is subjective and should be avoided.
(f)A member is allowed to seek publicity for and advert his/her services achievements and
products in any way consistent with the dignity of the profession.

20
(g)A member should not project an image inconsistent with that of a professional person bound
to high ethical and technical standard.
(h)If reference is made in promotional materials to fees, member should not make comparison in
such material between their fees and the fees of other accounting practices whether members or
not.
4.3 BASIS OF CHARGING FEES
The provisions for fees to be charged by Chartered Accountants as contained in Statement NO.7
in ICAN’s Professional Conduct for Members are highlighted below:
a) A chartered accountant can charge for his/her services:
i) Such specific fee as he/she has agreed with the client; or
ii) A fee calculated in accordance with any agreement with the client; or
iii) A fee calculated by reference to the custom of the profession where there is no agreement
b) Where there is no agreement on the basis of the fee, a member should charge a fee which is
fair and reasonable having regard to:
i) The seniority and professional expertise of the persons necessarily engaged on the work;
ii) The time expended by each of those persons;
iii)The degree of risk and responsibility which the work entails; and
iv)The priority and importance of the work to the client; and any expenses properly incurred.
c) The information on fees is usually provided in the Engagement letter .A member should
inform a client in writing prior to the commencement of the engagement, on the basis upon
which any fee he proposes to charge that client for his services will be calculated.
d) Quoting a fee that is lower than that of another member is not considered improper by ICAN
guidelines. However, such a member should take care to ensure that the client has a full and
complete understanding of:
i) The services to be covered by the fee; and
ii) The basis on which the fee is to be determined both for the current and future years
e ) Audit firms obtaining work having quoted levels of fees which are significantly lower than
those charged by existing auditors or quoted by other tendering firms should be aware that their
objectivity may appear threatened. Such firms should be prepared to demonstrate in the event of
a complaint being made to the Institute that:
i)The work done was in accordance with Auditing Standards and Guidelines; and
ii) The client was not misled to the basis on which fees for the current year and subsequent years
were to be determined.

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f) In cases where fees rendered exceed, without prior agreement, a quotation or estimate or
indication of fees given by a member by more than a reasonable amount, the member should be
prepared to provide the client with a full and detailed explanation of the excess and to take steps
to resolve speedily any dispute which arises.
g) A member whose fees have not been paid may be entitled to retain certain books and papers of
a client upon which he/she has been working, by exercising a lien and may refuse to pass
information to the client or his successor accountant until those fees are paid. Any dispute
relating to the amount of the fee should be resolved by the member.
h) Fees should not be charged on a percentage, contingent, or similar basis in respect of audit
work, reporting assignments and similar non-audit roles incorporating professional opinions
including expert witness assignments. This is because such methods may be perceived as a threat
to objectivity.
i) Cases where percentage, contingent, or similar basis could be used include:
i) Bankruptcies, liquidations, receiverships, administrations, voluntary arrangements and similar
works where percentage of realization/distribution is required either by statutory provisions or by
tradition; and
ii) Advising on a management buy-out, raising of venture capital, acquisition search or sales
mandates, where a contingency basis is applicable.
4.4 TENDERING
It implies an audit proposal made by the auditor to the client. Tendering should commence only
when a firm has been approached by a prospective client, and the auditor has the assurance that
his firm is capable of carrying out the assignment at a reasonable fee.
Whenever, a firm is approached by a prospective client, the auditor will have to consider many
factors including:
a) whether he or she wants to do the work , considering all the necessary ethical factors.
(b)Whether he/she is not disqualified by any statutory provision from carrying out the
assignment.
(c)Whether the firm has available the appropriate caliber of staff for the job, and if not what will
be done to get the appropriate staff.
(d)What fees to quote for the work
(e) Whether non- accounting specialist skills are necessary and if so which ones are required.
(f)Whether staff shall need further training for the work, and if so how much will such training
cost; and
(g)Whether the proposed timetable for the work fits with the firm’s current work plan.

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A tender (which is the audit proposal) does not have a particular format’
In tendering, the auditor must consider some vital matters concerning the prospective client.
These are:
(a)Assessing the needs of the clients e.g. audit, tax, management consulting services and others.
(b)The proposed approach to the engagement;
(c)The fee and the basis on which it has been calculated or estimated;
(d) The assumptions made to support the proposed approach;
(e)A brief outline of the firm.
In-Text Question: A proposal made by the auditor to the client is called-----
In –Text Answer: Tender
4.5 ENGAGEMENT LETTER
The Auditing Guideline on Engagement letter provides for the following principles. They are:
a) The engagement letter should be addressed to the Board of Directors of a client company
b) The purpose of the engagement letter is to define clearly the extent of the auditor’s
responsibilities and so minimize the areas of misunderstanding between the client and the
auditor. It also provides written confirmation of the auditor’s acceptance of his appointment, the
scope of the audit and form of his report.
c) It is in the interest of both the auditor and the client that the contents of the engagement letter
be agreed and discussed upon before being sent to the management, and especially before the
commencement of the audit.
d) Where the company has subsidiary companies, a separate engagement letter should be sent by
the auditor to the Board of Directors of each company in the group which he/she is auditing
e) Where more than one firm of auditors are involved in the audits of the group, the respective
responsibilities of the holding company auditor and the subsidiary companies’ auditors should be
clearly defined in the engagement letter.
f) Where there are joint auditors, the audit engagement should be explained in similar terms by
each auditor.
g)The auditor should request confirmation from the Board of Directors that the terms of the
engagement letter have been accepted; and
h) Once it has been agreed by the client, an engagement letter will, if it so provides, remain
effective from one audit appointment to another until it is replaced.
An engagement letter should contain the following:

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a) Responsibilities and scope of the audit;
b) References to special arrangements, for example, internal auditors, other auditors
c) Representation by Management, if requested before the completion of the audit.
d) Irregularities and fraud-the responsibilities of the management vis-a –vis the auditors on this
should be specified clearly;
e) Accounting and taxation services, if any;
f) Fees and the basis of calculation or estimation; and
g) Agreement of terms to be in written form
4.6 CONSULTATION
For consultation, the audit firm should establish policies and procedures which establishes
reasonable assurances that:
(a)Appropriate consultation takes place on difficult or contentious matters.
(b)Adequate resources are available to accommodate the consultation.
(c)The nature and scope of such consultations are documented: and
(d)Conclusions resulting from consultations are documented and implemented
It should be noted that consultation may involve seeking it externally, outside the shore of the
audit firm. It can be sourced from other firms or from the Institute.
4.7 PERFORMANCE AND REPORTING STANDARD
Audit report is the end product of every audit assignment. Every company registered in Nigeria
has a statutory responsibility to appoint a qualified auditor who has to issue a report at the end of
every financial year to the members of the company as to his opinion on the truth and fairness
view of the financial statement of the company – 359 CAMA 90.
Based on the above brief, the different types of audit opinion and audit report that can be given
and the circumstances leading to each type is stated below:
(a)Unqualified audit opinion – This implies that the accounts show a true and fair view.
(b)Modified audit reports- This implies that the ‘’accounts show a true and fair view except
for…… - when material item(s) in the accounts do not show a true and fair view.
(c)Adverse audit opinion: This implies that the auditor relates in his opinion the accounts do not
give a true and fair view.
(d)Disclaimer of opinion plus any implied opinion – This is issued when the author cannot
confirm whether a true and fair view is given at all, due to a limitation in scope.

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(e)Modified audit report for example:- Accounts show a true and fair view expect for ……, plus
any implied opinion when the auditor cannot confirm whether a true and fair view is given in
respect of material item(s) due to limitations in scope.

OUTLINES OF THE STANDARD AUDIT REPORT

These contain the following elements:
(a)The report is clearly addressed to the members of the company (i.e. the shareholders).
(b)The report contains an introductory paragraph stating what the report refers to.
(c)The report contains paragraphs indicating the respective responsibilities of directors and
auditor
(d)The report contains a paragraph expressing the auditor’s opinion (the opinion paragraph).
(e)In the case of the audit of financial statements of banks, there is usually a paragraph preceding
the opinion paragraph stating contravention of BOFIA and/ or CBN circulars if any.
(f)The report must be signed and dated by the auditor;
(g)The auditor must not sign the report until the Board has approved the financial statements.
In-Text Question: State two reasons for qualifying audit report
In-Text Answer: i) Uncertainty; and ii)Disagreements
4.8 EXPECTATION GAP
Expectation Gap is the difference between what people think auditors do and what auditors really
do in practice arising from the role of external auditors as defined by the auditing profession and
as determined by regulation and by statute.
Causes of expectation gap and how the gap can be reconciled
S/N0 The Audit Profession The Public View Resolution
1. Shareholders appoint the auditors The Management Change of authority
appoint the auditor
2. Auditor’s report and he is liable to Auditor’s report and Educate the public.
the shareholders he is liable to
interested parties
3. Management prepares financial Auditors prepare Educate the public
statements financial statements
4. Ensure financial statements gives a Guarantee financial Educate the public
true and fair view statements are correct
5. Base opinion on past evidence Base opinion on Change objective
future estimate
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 6. Sample of transactions are tested Every transaction is Educate the public
tested
7. Reasonable standards must be Fraud Detection Educate the public
followed

4.9 ERROR, IRREGULARITY AND FRAUD

As decided in ( Rekingston Cotton Mill Co. 1896) the auditor is still merely a watch dog rather
than a bloodhound. Hence, the auditor does not have primary responsibility as regards
presentation and detection of fraud though the detection of fraud may be incidental to his duties.
It is basically the management responsibility for prevention and detection of fraud.
Fraud: This is an intentional misrepresentation of financial information by one or more
individuals among management, employees or third parties. Fraud is a special case of irregularity
as it involves the use of criminal’s deception to obtain an unjust or illegal advantages.
Error:- This is an unintentional mistake in the financial statements. Examples are:
a) Mathematical error or clerical error
b)Genuine Oversight
Irregularity:- the word irregularity is used to refer to intentional distortion of financial
statement for whatever purpose.
Types of Fraud
(a)Fraudulent financial reporting which involves:
Intentional misrepresentation or omission of events or transactions in the financial statements of
accounting records and documents.
b) Misappropriation of asset such as:
i. Stealing of physical assets and or intellectual property (Cash Inventory or Selling data).
ii. Paying for goods not received by an entity.
iii. Embezzlement and using /conversion of assets for personal use.

HANDLING THE POSSIBILITY OF OCCURRENCE OF FRAUD BY AUDITOR

The following guidiance in the auding standard ISA 240 on ‘fraud and Error’’ should be
followed.
(a)The auditor should plan, perform and reduce the audit risk to an acceptably low level and
consider the risk of material misstatement in financial statement due to fraud.

26
(b)The auditor should maintain an attitude of professional skepticism throughout the audit.
(c)Members of the engagement team should discuss the susceptibility of the entity financial
statements to material misstatement due to fraud.
(d)The auditor should make enquiries of those charged with governance to determine whether
they have knowledge of any actual, suspected or alleged fraud affecting the entity.
(e)If the auditor has identified a fraud or has obtained information that indicates a fraud may exit,
The auditor should communicate these matters as soon as practicable to the appropriate level of
management.
(f)It should be noted that when the auditor has identified fraud involving (i) Management (ii)
Employees who have roles to play in internal control or (iii) Others where the fraud results in a
material misstatement in the financial statement, the auditor should communicate these matters
to those charged with governance as soon as practicable
4.10 AUDITOR’S LIABILITY
The fiduciary duties are the duties imposed on the auditor at common law and it includes:
(i)Auditors should exercise due care, diligence and skill in the performance of his duties.
(ii)An auditor should not delegate the authority. This is because the relationship between the
auditor and the shareholders is a personal one.
(iii)The auditor should not disclose confidential information or documents entrusted for him
during the course of the audit.
In line with section 368 of CAMA, liability of auditors for negligence can occur if:
b. A company suffers loss or damage as a result of the failure of its auditor to discharge the
fiduciary duty. Based on this, the directors may institute an action for negligence against the
auditor in the courts and
c. Where the directors fail to institute an action against the auditor, any member may do so
after the expiration of thirty days notice to the company of his intention to institute such action.
It should be noted that the auditor does not owe his duty of care only to the company or the
members of the company; he also owes it to third parties who may rely on his special skill and
judgement .
Negligence is a legal concept that seeks to provide compensation to a person who has suffered
loss due to another person’s wrongful neglect.
For negligence to be proved in court, the following conditions must be met:
(i) A duty of care which is enforceable at law existed;
(ii) This duty of care was breached by the auditor;and

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(iii) The breach caused the injured party loss.

In-Text Question: State three conditions that must be proved in court of law before negligence
can be established against the auditor.
In –Text Answer: (i) A duty of care which is enforceable at law existed
(ii) The duty of care was breached by the auditor
(iii) The breach caused the injured party loss
However, a duty of care exists between a company and its auditor, so this does not need to be
proved by a company bringing an action for negligence against an auditor.
Parties that can institute claim for negligence
(i)The Auditor
(ii)The company
(iii)The shareholders of the company as a body
(iv)The bank as a key financier of the company
(v)Other lenders
vi.Other interested third parties.
Auditor Professional liability under Statute
For certain offences and under certain circumstances auditors may be found guilty.
(a)Under Insolvency Legislation:-Auditor may be charged with criminal offences or found liable
for civil offences in connection with the winding up of a company.
(b)Under Money Laundering Act:- This arises if auditor fails to report a person (whom they
know or suspect of laundering money) to the appropriate authority.
(c)Insider dealing, which is a criminal offence, as they are by virtue of their position always
privy to insider information.
Minimising Claims against the Auditor
Apart from ensuring proper quality control of audit as required by the AOS, ICAEW has advised
its members as follows:
(1)The scope of any professional assignment undertakes by an accountant should always be
agreed with the client and written down.

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(2)Auditors should use a written audit programme and maintain a proper record of work done.
(3)Auditors should not give snap advice.
(4)If the auditor encounters technical accounting problem or matters requiring objective
judgement, he should consult with other knowledgeable accountants and document their views.
(5)Each audit firm should take a professional indemnity insurance where this is available.
(6)Auditor should follow the principles laid down in the auditing standards and in the
International Accounting Standard because the court may regard them as representing current
good practices (CGP) of the profession.
(7)If the scope of the audit work is restricted in any manner, the auditor should put a disclaimer
in the report limiting his liability.
SUMMARY OF STUDY SESSION 4
In this study session, you have learnt that:
1. Quality control procedures and practices are embarked upon in order to guarantee effective
and efficient audit assignment
2. The engagement partner should monitor the quality control systems put in place and whether it
has impact on a particular audit he is conducting
3. Professional accountants are not forbidden for seeking publicity for their achievements and
products
4. There are certain provisions made by ICAN as bases for fees to be charged by members
5. Tender refers to audit proposal
6. One of the reasons for an engagement letter is to minimize the areas of misunderstanding
between the client and the auditor
7. There are misconceptions about the perception of members of the public about the role of the
auditor as against what the statute says
8. Fraud and error are not the same in meaning
SELF ASSESSMENT QUESTION (SAQs) FOR STUDY SESSION 4
Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Write your answers in your study
notebooks; discuss them with course-mates and your Facilitator at the next contact session. You
can check your answers with the notes on the self-assessment questions at the end of this study
session
SAQ 4.1(Testing Learning Outcomes 4.1)
Outline the factors that engagement partner should consider under engagement performance

29
SAQ.4.2 (Testing Learning Outcomes 4.2)
Discuss the rules guiding advertisement of services by a professional accountant

SAQ.4.3 (Testing Learning Outcomes 4.3)

State the basis of charging fees by a professional accountant in a situation where there is no
agreement between the client and the professional?
SAQ.4.4 (Testing Learning Outcomes 4.4)
Enumerate the factors that the auditor will have to consider when his firm is approached by a
prospective client for tender.
SAQ.4.5 (Testing Learning Outcomes 4.5)
Outline the contents of letter of engagement
SAQ.4.6 (Testing Learning Outcomes 4.6)
List the procedures to be put in place by an audit firm before consultation can take place
SAQ.4.7 (Testing Learning Outcomes 4.7)
Enumerate different types of audit report and circumstances leading to each type
SAQ.4.8 (Testing Learning Outcomes 4.8)
Define expectation gap
SAQ.4.9 (Testing Learning Outcomes 4.9)
Distinguish between fraud and error

REFERENCES
E .I. John (2005).ICAN EXAM Distance Learning Pack, Advanced Audit and Assurance,
Lagos: Accountancy Training & Publications Ltd
ICAN Study Pack (2009).Advanced Audit and Assurance, Nigeria: VI Publishers
ICAN Study Pack (2009).Audit and Assurance, Nigeria: VI Publishers
ICAN Study Text (2014).Audit and Assurance, sNigeria: Emile Woolf International

30
STUDY SESSION 5: PUBLIC SECTOR AUDIT
Introduction
Just as auditing is as essential in the private sector of the economy, so also is its importance in
the public sector. In order to have a thorough knowledge of this study session, learners are
advised to read through and revise their Public Sector Accounting and Finance. They should be
familiar with the appointment of the Auditor – General for the Federation, its functions and the
various departments under the Auditor – General’s office. This should be studied because of the
important role played by the Auditor – General in auditing the accounts of public organization.
LEARNING OUTCOMES FOR STUDY SESSION 5
At the end of this study session, you should be able to:
5.1 State and explain the major categories of government auditing
5.1 CATEGORISATION OF GOVERNMENT AUDITING
For the purpose of this study, government auditing can be divided into three major categories.
These are:
5.1.1 Audit of Treasury Accounts
5.1.2 Audit of Ministries/Departments and Agency Accounts;
5.1.3 Audit of accounts of Parastatals.
5.1.1 Audit of the Treasury Accounts
The Treasury Department is headed by the Accountant General of the Federation who is often
regarded as the Chief Accounting Officer of the Federation. Finance Control and Management
Act 1958 refers to him as the Financial Adviser to the Federal Government and he is also the
Treasurer.
Functions of the Treasury Department

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(i)It is the custodian of the Consolidated Revenue Fund, Development Fund, Contingency Fund
and other Public Funds of the Federation.
(ii)It manages the Federation Account and its disbursements to the three tiers of government.
(iii)It supervises the accounts of all Ministries and Extra Ministerial Departments and issues
circulars to them on government accounting and financial control matters.
(iv)It is responsible for the staff training and development of accountants, accounting and
auditing personnel from the three tiers of government.
(v)It is responsible for revenue monitoring and accounting in Ministries and Extra- Ministerial
Departments to ensure that internal controls are put in place.
(vi)It is responsible for recording the financial transactions of the government and reporting there
on through the production and publication of the annual Financial Statements of the Federal
Government in a manner that will show a true and fair view of the financial position of the
federal Government.
(vii)It formulates financial and accounting policies for the Federal Government.
The Main Objectives of Auditing of Treasury Accounts are:
(a)Whether the financial statements have been prepared in accordance with generally accepted
government accounting principles.
(b)Whether the information contained in financial statements are properly classified, reliable,
accurate and complete. The audit is conducted by the Federal Sub- Treasury as a function under
the Treasury Accounts Division of the Ministerial Department in the office of the Auditor
General for the Federation.
5.1.2 Audit of Ministries /Departments and Agency Accounts
In Public Sector, each Ministry or Extra- Ministerial Department is regarded as an Accounting
Unit for the purpose of processing accounts. Accounting units are classified into three groups,
namely;
5.1.2.1Self Accounting Units.
5.1.2.2 Non-Self Accounting units and
5.1.2..3 Sub – Accounting units
5.1.2.1 Self-Accounting Units
These are ministries or extra-ministerial departments where the accounting functions are
delegated to the Accounting Officer and are, therefore, required to:
a) Be approved by the Ministry of Finance to be a self-Accounting Unit

32
b) Write an Accounting Manual or Code which must be approved by the Accountant-General
and Auditor-General
c) Establish an Internal Audit Department;
d) Operate a Central Pay Office
e) Operate two current bank accounts with the Central Bank of Nigeria, one for Revenue account
and the other for Capital expenditure
Examples of self-accounting units are all Federal and State ministries
5.1.2.2 Non-Self Accounting Units
These are ministries or extra –ministerial departments which are required to maintain complete
records of ‘Below-the-line’ payments and receipts (Salary Advance Accounts) but incomplete
records of the ‘Above-the-line’ (Budgetary Accounts) payments and receipts. Consequently all
the financial transactions of this type of unit are conducted through the Federal Sub-Treasury or
Federal Pay Office in the State; to which payment vouchers are presented for checking and
payment.
Examples of non-self –accounting units are the Federal Ministries located in any state of the
Federation.
5.1.2.3Sub-Accounting Units
These are ministries or extra-ministerial departments where the accounting functions are
delegated to the Accounting Officer but the officer is required to render monthly accounts to the
Accountant-General not in details but in Sub-head aggregate form, accompanied by the original
vouchers. These units are also required to:
a) Be approved by the Ministry of Finance to be a self-Accounting Unit
b) Write an Accounting Manual or Code which must be approved by the Accountant-General
and Auditor-General
c) Establish an Internal Audit Department;
d) Operate a Central Pay Office
e) Operate two current bank accounts with the Central Bank of Nigeria, one for Revenue account
and the other for Capital expenditure
Examples of sub-accounting units are all Federal Pay Offices, Customs Area Offices and Police
Pay Offices
In-Text Question: State the three classifications of Accounting Units
In-Text Answer i) Self Accounting Units (ii)Non-self-Accounting Units (iii)Sub –Accounting
Units

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The main objectives of auditing the accounts of ministries/departments and agencies are to
ascertain whether:
(a)All receipts and revenue emanating from the operations of the period under review are
collected and properly accounted for.
(b)The accounting system in operation provides financial information that is reliable and free
from material errors to facilitate the preparation of the accounting and financial statements
required by law.
(c)The activities and programmes are conducted and expenditures are made in an effective and
efficient and economic manner and in compliance with the requirements of applicable laws and
regulations.
(d)The Ministry / Department or Agency is carrying out only those activities or programmes
authorized by the National Assembly and is conducting them in the manner contemplated to
accomplish the objectives intended.
(e)The resources of the ministry / department or agency are adequately controlled and utilized in
an effective, efficient and economic manner.
(f)The financial statements disclosed properly the information required to various groups of both
internal and external users.
5.1.3 Audit of Government Parastatals
Government Parastatals or Public Sector enterprises are governmental units or public agencies
created to perform a single function or a restricted group of related activities. Most of these
parastatals are financed from service charges, fees and tolls and often they have taxing powers.
Government’s Parastatals are referred to variously as corporations. Examples include: Nigerian
Railway Corporation, Nigeria Ports Authority and others. Each of the parastatals was created by
an enabling act that provides for its statutory duties and major functions. In cases where they are
floated as limited liability companies, they are either wholly owned or partly owned by
Government. Some of the government parastatals have been or are in the process of being
privatised or commercialised.
Objectives of auditing government’s parastatals are whether:
(a)Proper accounting records are being kept
(b)All revenues and receipts are duly collected and properly accounted for.
(c)Adequate control exists for the safety and proper use of the organisation funds and assets.
(d)Proper accounts are being prepared in accordance with the financial and accounting clauses as
provided for in the respective legal instruments setting up the corporation.
(e)The organization’s management comply with the general level of probity and public
accountability;

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f) The audited financial statements reflect a true and fair picture of the activities of the Board or
Corporation for a particular period; and
g) The organization’s Chief Executive and other top management carry out only those activities
for which the corporation is established
NOTE: - Section 85(3) of the 1999 constitution provides that the Auditor- General for the
Federation shall not audit the accounts of or appoint auditors for government statutory
corporations, commissions, authorities, agencies including all persons and bodies established by
an Act of the National Assembly, but the Auditor General is authorised to:
(a) provide such bodies with:
(i) a list of auditors qualified to be appointed by them as external auditors and from which the
bodies shall appoint their external auditors.
(ii) guidelines on the level of fees to be paid to external auditors: and
(b) comment on their annual accounts and auditors’ reports thereon.
SUMMARY OF STUDY SESSION 5
In this study session, you have learnt that:
1.Government auditing can be categorized into three ,namely:
a)Audit of treasury account
b)Audit of government ministries, agencies and departments; and
c) Audit of government parastatals
2.Accounting units can be classified into:
a)Self -Acounting Units
b)Non-Self Accounting Units; and
Sub –Accounting units
SELF ASSESSMENT QUESTION (SAQs) FOR STUDY SESSION 5
Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Write your answers in your study
notebooks; discuss them with course-mates and your Facilitator at the next contact session. You
can check your answers with the notes on the self-assessment questions at the end of this study
session
SAQ 5.1(Testing Learning Outcomes 5.1)
List the major categories of government auditing
SAQ 5.2(Testing Learning Outcomes 5.2)

35
Outline the conditions to be met before a Ministry can be granted a Self Accounting Unit status

REFERENCES
E .I. John (2005).ICAN EXAM Distance Learning Pack, Advanced Audit and Assurance,
Lagos: Accountancy Training & Publications Ltd
ICAN Study Pack (2009).Advanced Audit and Assurance, Nigeria: VI Publishers
ICAN Study Pack (2009).Audit and Assurance, Nigeria: VI Publishers
ICAN Study Text (2014).Audit and Assurance, Nigeria: Emile Woolf International

36
STUDY SESSION 6: SPECIALISED PUBLIC SECTOR AUDITS
Introduction
In this study session, you will learn about the special attributes and peculiarities of certain public
sector areas needing special attention by virtue of the mode of operations involved in their
activities.
LEARRNING OUTCOMES FOR STUDY SESSION 6
At the end of this study session, you should be able to:
6.1 (a) Discuss audit of contracts or projects
(b) Discuss Audit of Nigerian Foreign Missions
(c)Explain audit of Defence and Security Agencies
(d) Explain Pension’s audit
6.2 Discuss different types of public sector audit
6.3 Explain Value for Money Audit
6.4 Discuss Due Process Review
6.1 (a) Audit of Contracts or Projects:- This is being handled by the Project Audit Division
under the Projects Monitoring and Evaluation Department of the office of the Auditor-General
for the Federation. This division embarks on a comprehensive or value –for money audit of some
selected large government contracts or projects. The audits are detailed and often involve
conducting investigations in order to determine whether government derives value for the money
spent on them.
6.1(b)Audit of Nigerian Foreign Missions and Agencies:- All over the world ,it is a known
fact that no nation is an island on its own; as nations depend on one another for their growth,
survival and development which could be for economic benefit, political benefit, technological
benefit or other reasons. As a result of these relationships and interdependence, countries
strengthen their ties by establishing foreign missions which are being headed by Ambassadors
and High Commissioners (for commonwealth countries), and from time to time funds are being
released to run the affairs of the foreign missions. It should be noted that Nigeria is not an
exception to this development. The foreign missions are supervised and coordinated by the
Federal Ministry of External Affairs.
The audit of foreign missions falls within the responsibility of the office of the Head of the
Internal Audit in the Federal Ministry of External Affairs and this is conducted regularly from
time to time by sending audit staff to audit the foreign missions. Similarly, the office of the
Auditor – General of the Federation also sends staff to these foreign missions and agencies in
order to conduct the audit of their financial operations and accounts.

37
6.1(c) Audit of Defence and Security Agencies:- The defence and security division under the
Ministerial Department of the office of the Auditor- General for the Federation audit the
transactions and accounts of the Ministry of Defence and Security Agencies such as, Nigeria
Police Force and the Armed Forces of the Federation.
6.1(d) Pension Audit:- The audit is handled by the Pension divisions of the Ministerial
department in the office of the Auditor – General for the Federation. The objectives of Pension
Audit is to ensure that payments of benefits such as gratuities and pensions are carefully
monitored and approved for payments by the office of the Auditor-General for the Federation
before such claims are paid.
Payment of gratuity is approved after the federal Audit on receipt of the retiring officer’s file
and computed benefits from the Pensions Office has:
(a)Verified the debt statement from the details of the officer’s indebtedness to government; and
(b) examine the benefit payable to check if it is in accordance /compliance with the relevant
latest schedule.
For the commencement of the payment of monthly pension, the Pension Section forwards the
following statements to the Federal Ministry of Establishment and Management Services.
(a). Completed Pension Forms (b) Certified true Copy of record of services (c) Debt
clearance certificate (d) Photocopies of Letters of Promotion to the last grade (e) Photocopy of
letter of notice of retirement and acceptance (f) Quadruplicate copy of payment voucher (g)
Quadruplicate copy of computation sheet examined by the Federal Audit and (h) Three recent
passport photographs.
It should be noted that the essence of Federal Audit examining the retiring officer’s computation
sheet and as well as giving approval is to ensure that adequate measure have been taken to
prevent over payment of benefits to such an officer.
6.2 TYPES OF PUBLIC SECTOR AUDIT.
These are:
(i)Regulatory Audit
ii)Financial Audit; and
iii)Value –for-Money -Audit
(i)Regulatory Audit
This is known as compliance audit and is conducted with a view to ensuring that expenditure has
been incurred on approved services and in accordance with the enabling statutory provision and
regulations governing the particular expenditure. Documents required by the auditor in
conducting a regulatory/ compliance audit are:
(a) The Nigerian Constitution (Latest Edition)

38
(b) Civil Service Rules
(c ) Establishment Circular
(d) Treasury Circular
(e) Financial Instruction
(g) Budget and Financial Acts
Example of this type of audit is in respect of project or contract.
(ii) Financial Audit
This is conducted to ensure that the accounting and financial controls systems are efficient and
operating properly and that financial transactions have been correctly authorised and accounted
for (i.e. the financial statements give a true and fair view) of the state of affairs of the
establishment concerned for the period covered by the audit. Example is the audit of Treasury
Accounts of the Federation.
(iii)Value for Money Audit
Value for money audit is carried out with the view to ascertaining whether the establishment
pursues optimal value with adequate consideration for economy, efficiency and effectiveness in
its quest for resources management. Value for money audit is referred to as comprehensive audit
or efficiency audit. It is related to the extent to which funds are spent economically, efficiently
and effectively.
Elements of Value for Money Audit
(1)Economy Audit
This is aimed at examining whether the organisation has acquired the resources required for its
activities and programmes at the lowest cost and to highlight examples of wasteful or
extravagant expenditure.
(2)Efficiency Audit
This is aimed as confirming that there is a positive relationship between the level of services
provided and the resources used to achieve that level, highlighting examples of unrewarding
expenditure.
(3)Effective Audit
This is aimed at examining the extent to which a programme or project or activity undertaken for
the purpose of meeting established policy goals has met the desired result.

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Value for Money Audit Techniques
These are outlined below:
(a)Analysis of Performance indicator such as financial ratios and unit costs of establishment,
with comparative figures for the previous periods and in respect of similar establishments.
(b)Management and system review for the purpose of investigating the ways in which objectives
are established, policies implemented and results monitored.
(c)Analysis of planning and control process for the purpose of ascertaining how the
establishment has been monitoring performance against the plan.
(d)Efficiency Assessment which may involve conducting investigation into a few activities with
high unit cost or poor performance indicators and taking the appropriate remedial actions.
(e)Effectiveness review for the purpose of ascertaining whether or not the activities or
programmers are achieving the objectives for which they have been undertaken.
(f) Reporting on the value for money audit:- The draft report should be discussed in detail with
the officers / service manager and committee members before it is finalised and presented.
Besides the value for money audit techniques, it is important that the auditor pays greater
attention to the areas of waste in the public sector when undertaking effectiveness and efficiency
and stress the need for their elimination if value for money is to take a deep root in the affairs of
government.
Areas of Waste in the Public Sector
(a)Manpower
(b ) Purchasing and Materials Management
(c ) Motor vehicle and transport
(d ) Landed Property
(e ) Fund Management.
Problems of Value for Money Audit in the Public Sector
(1)Lack of commitment in the overall achievement of goals by the managers in the public sector.
(2)Poor internal control and accounting systems in the public sector.
(3)Difficulty in measuring the corporate objectives in the public sector.
(4)Continuous gap in professional requirement for the Auditor – General Office.
(5)Non-use of accrual basis of accounting which brings about lack of a complete view of the
report of activities and state of affairs in the public sector.

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In-Text Question: Mention the three ‘Es’ of value for money audit
In-Text Answer: (i)Economy (ii)Efficiency (iii)Effectiveness
6.4 DUE PROCESS REVIEW
This could be summarily referred to as all measures, efforts which are designed and put into
practice in the public service/sector with the aim of instilling orderliness, and various control
measures in the conduct of government activities. It involves mapping and procedures which
must be followed and complied with in the discharge of government activities such as contract
invitation, contract award and project implementation. Due process simply means the appropriate
way or proper method of doing something.
The objective is to ensure commitment to public policies, good governance and ensure equity,
justice, transparency and accountability. Due process review is a specification of standard and
measure of performance which is geared towards greater competition in the public sector with
more focus on discipline and economy in resource use. The policy of ‘’Due Process review’’ was
initiated and popularised by the Obansanjo Administration.
In strengthening the Due Process review, there was the establishment of the Budget Monitoring
and Price Intelligent Unit (BMPIU) in June,2003.
The objectives of BMPIU are to:
Harmonise existing government polices/practices and update same on public procurement.
Determine whether or not due process has been observed in the procurement of services and
contracts.
Introduce more honesty, accountability and transparency into these procurement process.
Establish and update pricing standards and bench-marks for all supplies to government.
Ensure that only projects which have been budgeted for are admitted for execution.
Monitor the implementation of project during execution with a view to providing information or
performance, output and compliance with specifications and targets.
The BMPIU operates under four main areas as follows:
(a) Regulatory Function (b) Certification function (c) Monitoring Function (d) Training
Advisory Function
Impact of Due Process Review
(1) Recognition of only competent contractors who follow due process
(2)Elimination of ‘’middlemen’’ such as consultants in contract awards.
(3)Re – instatement of rightful contract winners who had been formerly denied contracts.
(4)Improvement in revenue collecting unit of government.

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(5)Restoration of confidence to many local and foreign companies that could not carry on in the
former corruption – ridden culture that had characterised the award of government contracts.
PUBLIC SECTOR INVESTIGATIONS: USE OF PROBE PANELS IN INVESTIGATING
ACTS OF FRAUD AND CORRUPTION
The executive arm of government usually sets a panel of enquiry (popularly refered to as a probe
panel) for the purpose of inquiring into a matter with a view to ascertaining the extent of fraud
and / or corruption perpetrated and those responsible for it. Such a probe is usually handled by a
panel consisting of professional experts, usually involving a judge as Chairman and other
members including an accountant.
Characteristics of the Use of Probe Panel
(a)Appointment of panel members specifying the Chairman and the Secretary
(b)Letter of appointment in which the terms of reference are clearly stated
(c)Indication of the scope of the probe assignment and the time frame for carrying out the
assignment should be clearly indicated in the brief for the probe, usually in writing
(d)Preliminary sittings to set out how to carry out the assignment
(e)Call for memoranda from the public; indicating the deadline for submission of same address
to which they should be sent.
(f)Request the persons suspected of fraud and /or corruption to appear before the panel with
written submissions of their involvement with the case.
(g)Public hearing (at places and on dates clearly stated and communicated to the members of the
public ) during which oral presentations could be taken.
(h) Invitation of persons, officials, experts and auditors considered relevant to the case being
probed to give evidence to the panel on dates and at place clearly communicated to them.
(i)Examining the evidence obtained and searching deeply into the areas requiring additional
attention; and
(j)Writing of the report for submission to the person that appointed the panel: if it is a body
corporate, the report should be submitted to its management.
Outline of the Report of the Probe Panel
(a)Reference to the letter of appointment and the terms of reference.
(b)The mode of operations of or the method used by the panel to conduct the investigation or
probe.
(c)The extent of the evidence gathered and any limitation encountered.
(d)The identity of those found or extent of corruption that has been discovered

42
(f)The internal control weakness that facilitated the fraud and how the weakness can be
eliminated from the system concerned
(g)The effects of fraud and / or corruption on the operations of the organisation concerned and
the periods affected; and
(h)The plea made by those found guilty and any amends that they have promised to make or
have made.
SUMMARY OF STUDY SESSION 6
In this study session, you have learnt that:
1. There are different Specialised Public Sectors whose accounts must be audited
2. Types of Public Sector audit include:
Financial Audit
Regulatory Audit; and
Value for Money Audit
3. Elements of Value for Money Audit are:
Economy
Effectiveness; and
Efficiency
4. Areas of waste in public sector include:
(a)Manpower
(b ) Purchasing and Materials Management
(c ) Motor vehicle and transport
(d ) Landed Property
(e ) Fund Management.
5. The objective of Due Process Review is to ensure commitment to public policies, good
governance and ensure equity, justice, transparency and accountability.
6.In strengthening the Due Process review, there was the establishment of the Budget Monitoring
and Price Intelligent Unit (BMPIU) in June,2003.
7.The executive arm of government usually sets a panel of enquiry (popularly referred to as a
probe panel) for the purpose of inquiring into a matter with a view to ascertaining the extent of
fraud and / or corruption perpetrated and those responsible for it.
SELF ASSESSMENT QUESTION (SAQs) FOR STUDY SESSION 6

43
Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Write your answers in your study
notebooks; discuss them with course-mates and your Facilitator at the next contact session. You
can check your answers with the notes on the self-assessment questions at the end of this study
session .Discuss the audit of specialized public sector areas
SAQ 6.1(Testing Learning Outcomes 6.1)
What is the objective of pension audit?
SAQ 6.2(Testing Learning Outcomes 6.2)
List the different types of public sector audit
SAQ 6.3(Testing Learning Outcomes 6.3)
List the three ‘Es” of Value for Money Audit
SAQ 6.4(Testing Learning Outcomes 6.4)
Briefly explain Due Process Review

REFERENCES
E .I. John (2005).ICAN EXAM Distance Learning Pack, Advanced Audit and Assurance,
Lagos: Accountancy Training & Publications Ltd
ICAN Study Pack (2009).Advanced Audit and Assurance, Nigeria: VI Publishers

44
STUDY SESSION 7: SPECALIZED AUDIT AND INVESTIGATION
Introduction
Specialised audit covers the audit of various types of organisation (business and non-business)
and the different types of the industries in the business group. It involves a thorough
understanding by the auditors of the peculiarities applicable to each type of organisation so as to
able to carry out the audit assignment effectively and efficiently.
LEARNING OUTCOMES FOR STUDY SESSION 7
At the end of this study session, you should be able to:
7.1 Explain the general approach and specific approach for auditing a specific institution
7.2 Discuss the audit of specific institutions
7.3 Explain reasons for joint audit
7.1 GENERAL APPROACH AND SPECIFIC APPROACH
In this regard, the auditor should be conversant with the provisions of the Companies and Allied
Matters Act, 1990. Banks and Other Financial Institutuion Act 25 of 1991. Insurance Act and
Central Bank Nigeria Act, An understanding of these laws enables the auditors to test
compliance or otherwise of his clients with the provisions of the laws. Similarly, the
understanding of these laws by the auditor would guide him in knowing what the law requires of
him as an auditor when auditing any of the intuitions that requires special audit.
There are many business organisations with their different objectives, some are established for
profit making while others might not be established for that purpose. Sequel to this, every type of
organisation has its own peculiar audit problems emanating from the nature of business carried
on. Enterprises/organisations such as; banks, insurance companies and primary mortgage
institutions, charities are subject to specific statutory and regulatory requirements on how their
accounts should be prepared and audited.
When faced with the audit of such institution, the general approach to an audit could consist
of the following:
(a)Setting up of a permanent file
(b)Planning of the audit taking into considerations and documenting the following:
(i)Audit risk
(ii)Reliance on internal control (or not)

45
(iii)Substantive testing and
(iv)Analytical Review

Specific Approach to each Organisation’s Audit

The specific approach to the audit of any of these peculiar organisations could be as follows:
(a) Accounting policies:-Consideration should be given to problem of accounting
measurement which may affect the organisation revenue.
(b) Assets and liabilities:- Consider the types of assets and liabilities which are likely to be
found and consider problems that may arise in verifying for them.
(c) Revenue and Expenses:- Consider the types of revenue and expenses which should be
expected and the particular problem which might arise in controlling and recording them.
(d) Internal control:- Consider any special problem which might arise in respect of any of the
transactions of the organisation
(e) Statutory requirement:- Consider CBN Act 1991, NDIC Act 1988 for Banks and Other
Financial Institutions.
(g) Audit Risk :- Consider matter which might give rise to greater than normal audit risk in
some organisation. E.g. valuation of stocks and Work – in – Progress.
(e) Auditor’s report:- Consider matters which might give rise to greater than normal audit
risk in some organisation. E.g. valuation of stock and Work – in Progress.
(h) Auditor’s report:- Consider the form of report.
7.2 AUDIT OF SPECIFIC INDUSTRIES
As contained in the ICAN professional examination syllabus, the following industries shall be
considered.
(a)Farmers: In auditing the account of farmers, auditor should establish and confirm whether the
farmers are sole proprietors or on the other hand whether the farmers operate the farm as a
company, Where the farm is operated as a company it means the provisions of CAMA are
applicable, in which case the farmer will keep accounting records and prepare financial
statements annually. However, where famers operate as sole proprietor, a lot of records may not
be kept at all. Therefore, the auditor may have to treat the farmer’s account as that of an
‘’incomplete records’’ involving having to prepare the trial balance and final accounts.
Some of the well -known types of farming include:
(i)Arable Farming involving growing of crops
(ii)Pastoral farming involving both crop and livestock

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(iii)Plantation farming involving planting of tree crops such as rubber
(iv)Mixed farming involving both crops and livestock etc.
Other features of farm’s accounts; for example: include crop rotation resulting to fallow crops
and fallow period(s), valuation of livestock, government subsidies (if any) in respect of fertilizers
and extension workers and valuation of crops and stores at the end of the financial year.
The knowledge of columnar and department accounts is useful in respect of the variety of farm
products that may exist.
(b)Professionals: In carrying out the audit of professional, the auditor will need to consider the
type of business organisation set up, the code of conduct of the particular profession and the
statutory guildelines (if any) that may affect the profession.
It should be noted that professionals are in business. Examples include:accountants, lawyers etc.
they can carry on business as sole practitioners, others as partnership and some of them may
even carry out their business as limited liability companies. However, some professions such as
firms of solicitors and accountants are precluded by law or by professional code of conduct from
being incorporated as specified in section 19 of CAMA.
c) Hospitals: Carrying out the audit of a hospital will require knowledge of the type of
organisation it is, whether it is a business enterprise or a government establishment. If it is a
business enterprise, the issue of revenue and expenses is considered from the point of view of
profit motive. However, if it is a government establishment, the audit and approach will lay
emphasis on improving quality and effectiveness of service and value for money that is,
economy, efficiency and effectiveness.
Generally, the code of conduct of each of the professional bodies involved becomes relevant.
(d)Hotels: These belong to a group of business organisation in the hospitality and tourism sector.
They are capital intensive. Some hotels/motels/guest houses are owned, by the government while
some are owned by individuals while the majority are purely in the private sector and operate
usually as incorporated entities. Other are owned and run by government parastatals.
Whatever the type of ownership, the approach to conducting the audit of any hotel will include
identifying the type of ownership structure, any statutory regulations affecting the operations of
the hotel: the internal control structure put in place in relation to the issue of hotel room,
occupying rate, and also granting of free accommodation as public relations gesture. Other issues
to consider are: the state of infrastructural facilities in the hotel, the quality of services rendered.
7.2.1Banks:- In Nigeria, the apex regulatory body/authority for the administration and operation
of banks is the Central Bank of Nigeria (CBN). The administration is done through the various
provisions in the CBN Act (as amended) and BOFIA (as amended) as well as the CBNs
monetary policy circulars issued from time to time.
Some of the provisions as contained in CBN Act and BOFIA Act are highlighted below:
(i)Minimum paid –up share capital requirements

47
(ii)Minimum Capital ratio
(iii)Management of ailing banks
(iv)Returns to be submitted to the CBN by banks on regular basis (e.g. mid-monthly returns,
monthly returns, quarterly returns and semi- annual returns).
(v)Power of the CBN to conduct routine and special examinations.
(vi)Power of the CBN to revoke or vary a bank’s license.
(vii)Minimum holding of cash reserve, specified liquid assets, special deposit and stabilization
securities.
A good example of the CBN Monetary policy circular issued is the prudential guidelines for
licensed banks which was issued in November, 1990 and updated in both May 1991 and July
2001. The objective of the Prudential Guideline is to sanitize the financial and adequate
provisioning for bad and doubtful debts in respect of deposit money banks: and tendencies as
stated in SAS No 10 ‘’ Accounting for Banks and Non-Bank Financial Institutions. To achieve
this, four main areas of concern relating to accounting practices and accounting methods are to
be followed by banks. These include:
(a)Income recognition
(b) Loss recognition
(c)Balance sheet (Statement of Financial Position) classification and
(d) Disclosure requirement.
Income Recognition:- The standard recognises the various sources from which banks earn
their revenue and provide a guide for recognizing income from each of the sources.
Loss Recognition: The standard sets to achieve a uniform approach towards the recognition of
various types of losses. The loan portfolio of each bank is expected to be classified into
‘’performing’’ and ‘’non -- performing’’ loans. A loan is classified as ‘’non – performing ‘’ if
interest or principal is due and unpaid for 90 days or more. Non-performing loans are further
classified into sub – standard, doubtful or lost facilities.

S/N No of days principal and / or interest are Classification

unpaid
1 More than 90 days but less than 180 days Sub – standard
2. At least 180 days but less than 360 days and Doubtful
not secured
3. 360 days or more and not secured Lost

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 The specific provisions for loss on the non- performing loans vary according to classification
shown below:
(a) Sub – standard credit facilities - 10% of the outstanding balance
(b) Doubtful credit facilities - 50% of the outstanding balance
(c) Lost credit facilities - 100% of the outstanding balance
Aside the specific provision stated above, banks should make general loan loss provision of at
least 1% of the risk assets not specifically provided for. The essence is to ensure that provision is
made against the as-yet unidentified losses which are known to exist in any portfolio.
In-Text Question: List the three classifications of Non-Performing Loan
In-Text Answer :(i)Sub-Standard (ii)Doubtful (iii)Lost
Statement of Financial Position:This section is aimed at ensuring that certain methods of
presenting the statement of financial position of banks(which could be described as “window
dressing “ ) are no longer used. These methods usually result in reducing the bank’s reported
credit, or reducing their reported deposit, or improving their reported liquidity; thus giving them
a bloated financial position.
Disclosure Requirements: The Standard set out a number of items which banks should disclose
in their financial statements. These include items in the statement of Accounting Policies,
Income Statement, Statement of financial position,and Notes to the Accounts .
7.2.2 Insurance Companies
Just as banks, insurance companies have their own peculiarities and uniqueness concerning their
mode of operation and administration, their peculiarities are the legal and regulatory
requirements which each insurance company must meet and comply with from time to time.
The legal and regulatory requirement includes the following:
(i)Insurance Act 2003
(ii)Companies and Allied Matters Act 1990 as amended
(iii)Statement of Accounting Standard (SAS) No 16 entitled ‘’ Accounting for Insurance
Business.
(iv)Relevant circulars issued by the National Insurance Commission (NAICOM)
Some of the various sections of the Insurance Act that cover the books of accounts and
appointment of auditors are highlighted below:
(a) Section 2 provides that insurance business shall be divided into two main classes. These are:
(i)Life Insurance Business and (ii) General Insurance Business.

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Life assurance business (otherwise known as long term insurance business ) is sub- divided into
the following three categories.
- Individual life insurance business
- Group life insurance business and
- Health Insurance business
- General insurance business (otherwise known as non-life Insurance business) is sub –
divided into various categories including.
(i)Fire Insurance Business
(ii)General Accident Insurance Business
(iii)Motor Vehicle Insurance Business
(iv)Marine and Aviation Insurance Business; and
(v)Miscellaneous Insurance Business.
Besides the two main classes enumerated above, the Insurance Act also allows for re – insurance
business in respect of any of the two broad classes.
Re- insurance is the practice of insurance companies buying their own insurance against losses
that might be resulting from claims made against them by those insured by them.
In similar manner, section 10 of the Insurance Act provides for the minimum paid up share
capital of the following amounts:
(1)Life Insurance business not less than N2billion
(2)General Insurance business not less than N3billion
(3)Composite (Life and General) insurance business not less than N5billion
It should be noted that paid – up share capital as stated above was recommended for
implementation guideline on consolidation of Insurance business in March 2007.
Section 17 -18 of the Insurance Act provides for the various records which an insurance
company carries on the two classes of insurance business. The receipt of each of those classes of
insurance business shall be entered in a separate and distinct account and shall be carried to, and
forms a separate insurance company such as:
(1)Provision for unexpired risk
(ii)Provision for outstanding claims
(iii)Contingency Reserves
(iv)General Reserve Fund

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(v)Contingency Reserve Fund
Section 25 provides for the various guidelines on how an insurance company shall invest and
hold investment in Nigeria Assets which are equivalent to not less than the amount of policy
holders’ funds. The type of property and security in which policy holders fund can be invested
are also stated.
Section 26 provides that an insurance company shall not later than 30 th June of each year submits
to the National Insurance Commission the following :
(1)A statement of financial position as at the end of last financial year plus the relevant profit or
loss account meant for the presentation to the shareholders at its annual general meeting.
(2)A revenue account applicable to each claim of insurance for which the insurance company is
registered to keep separate account of receipts and payment.
(3)A statement of investments representing the insurance funds.
The section also provides further that insurance company shall in each year after receipt of the
approval of the Commission, publishes its general balance sheet together with its profit and loss
account in at least one newspaper having wide circulation in Nigeria.
As with the case of banks, the auditor should take all the above issues into consideration in
approaching the audit of an insurance company if a thorough audit job is to be carried out. The
auditor‘s report also makes reference to compliance not only with CAMA but also with the
Insurance Act 2003.
7.2.3 Primary Mortgage Institutions (PMIs):- These are organisations engaged in originating,
marketing and serving real estate mortgage loans either as principals or agents. They are
regulated by the provision of section 56 – 59 of BOFIA because they are classified along with
other organisations (such as finance houses, discount houses, Bureau De Change) as other
financial Institutions. Hence, they are also subject to the supervision and examination by the
CBN.
The main activities of Primary Mortgage Institutions are:
(a) Mobilization of savings (b) Lending of funds for the acquisition of real estate (c) Servicing of
Mortgage loans ;(d) Purchase and sale of mortgage loans together with Secondary Mortgage
Institutions(SMIs)
SAS 15 provides guidelines for accounting for Non – Bank Financial Institutions (NBFIs);
among which are PMIs. The standard focuses on the following three main areas.
(a)Income Recognition:- This specifies that PMIs should report each significant item of revenue
separately to enable the user of its financial statements to assess the contribution of that
particular source of revenue.

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(b)Loss Recognition: The standard takes into consideration the various types of transactions
which PMIs could be legitimately involved in and states how losses related to such transactions
can be accounted for.
Classifications and Disclosure Requirements
In addition to the disclosure requirement of SAS No.2, SAS No.15 states that PMIs should also
disclose the following:
(a)The methods and bases by which provisions for loans or securities losses are made;
(b)The nature of off – balance sheet engagements and the methods used to recognise income or
loss thereon;
(c)Total liabilities to National Housing Fund;
(d)Total value of Mortgage Assets and movements thereon;
(e)Other sources of funds apart from share capital and National Housing Fund;
(f)Classification of mortgage loans receivable and mortgage backed securities into those held for
sale and those held for long term investment; and
(g)Detailed breakdown of servicing rights acquired during the year stating the amount
capitalised, the method of amortisation, and the amount amortised.
All the above in addition to all the relevant provisions of CAMA and BOFIA as they relate to
primary mortgage institutions are the areas which an auditor will need to consider in approaching
the audit of PMIs.
7.2.4 Audit of Not-for-Profit Organizations
Not – for –Profit organizations are those entities that receive significant amount of resources
from members of the public, government and organizations that identify with their mission. They
have the following characteristics which distinguish them from business enterprises.
(a)Contributions of significant amount of resources from resource providers who do not expect
commensurate or pecuniary return;
(b)Operating purposes other than to provide goods or services at a profit
(c)Absence of ownership interests like those of business enterprises.
These not – for profit organizations include educational, social, scientific, literacy, cultural,
religious, sporting, charitable, voluntary, health and welfare entities set up in different forms and
sizes. Charities and NGOs given in the syllabus are merely to indicate the types of not – for –
profit organizations, but it is noteworthy that Section 673 of CAMA provides for the trustees of
certain bodies and associations (under part C of CAMA). It is, however optional for the trustees
of any development, cultural, sporting or charitable purpose to apply for registration under
CAMA.

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Some not –for – profit organizations have their own enabling act while some others, are
incorporated as companies limited under CAMA.
For the audit approach, the auditor should first and foremost consider the structure of the
organization. For example, is it a company, an incorporated trustee or an association with only a
constitution or rules and regulations? Whatever the form, the auditor is required to understand it
in detail with particular reference to any auditing standards, principles and guidelines.
Other matters which the auditor should consider carefully are:
(a)Obtain a letter of engagement ensuring that the letter makes it clear who the auditor should
report to
(b)All the sources of fund must be carefully investigated so as to obtain evidence for their
inclusion in the accounts.
(c)Cash collections can be verified for completeness with some commitment on the part of the
internal auditor.
(d)Expenditure can be verified by reference to written evidence and process of authorization.
(e)Non-Current assets should be verified in the usual way.
(f)Some of the funds come through donations, endowments on legacies. The instruments settings
up each of these should be checked and the movement in the accounts of each of these items
should be checked annually.
(g)Finally, the auditor should always prepare a report to be submitted to the person (s) indicated
in the letter of engagement.
7.3 JOINT AUDIT
A joint audit is an audit assignment that is carried out by more than one audit firm at the same
time and for the same financial statements.
Circumstances where joint audit occur are:
(1)Where management or shareholders would like to have more than one assurance on the audit
of their financial statement.
(2)Where the operations of the company are somehow very large or complex that it might
require the combination of the efforts of more than one firm to have an effective and timely
audit. For example, banks
(3)Due to legal requirements particularly in some overseas countries.
(4)Where small firms are unable to supply specialist services, for example in E.D.P statues.
(5)In takeovers, the victim company’s auditors are often asked to remain as joint auditors with
the predators company’s auditors.

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(6)When local expertise or availability is important, for example in cases of remote or foreign
location of subsidiaries.
(7)Reporting or investigating accountants being asked to become joint auditors to continue to
offer their special expertise.
(8)When there is a change in administration. For example when a new chairman wishes to bring
in a firm in whom he has confidence.
As contained in ICAN rules of professional conduct, a member whose firm is nominated as a
joint auditor, should communicate with all existing auditors and be guided by similar principles,
to those set out in relation to nominations as an auditor. Where it is proposed that a joint auditor
appointment becomes a sole appointment, the surviving auditor should communicate formally
with the other joint auditors as though it is for a new appointment (students are reminded to be
familiar with professional etiquette).
The Responsibilities/Liabilities of the joint auditors are:
(a)Ensure that the term of the assignment is clear as being that of joint audit and not that one firm
is doing accounting work and the other an audit;
(b)Meeting(s) should be held by the joint auditors with the client where agreements are reached
on the approach to the work and the responsibility of the auditors;
(c)The joint auditors should also meet to share and agree responsibilities for the work at a
particular time;
(d)Ensure that all agreements as to work division are in writing and are not ambiguous;
(e)There should be periodic review of progress work by partners of the two firms.
(f)There should be exchange of working papers by the two joint auditors so that each firm has a
full set of working papers for the year’s audit.
(g)If possible, the joint auditor should use the same audit programme to ensure that all aspects of
the work are covered.
(h)Financial statements should be jointly reviewed and agreed by the joint auditors before being
presented to management.
NOTE:- The joint auditors are both jointly liable for the joint assignment they undertake as only
a single set of financial statements is signed by both of them at the end of the audit. It does not
matter who audits what aspect during the audit.
SUMMARY OF STUDY SESSION 7
In this study session, you have learnt that:
1.There are general approach and specific approach applicable to the audit of specific industries
2.Loan is classified by banks into Performing and Non-Performing Loan

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3. Insurance business shall be divided into two main classes.
(i)Life Insurance Business; and
(ii) General Insurance Business.
4. The main activities of Primary Mortgage Institutions are:
(a) Mobilization of savings
(b) Lending of funds for the acquisition of real estate
(c) Servicing of Mortgage loans; and
(d) Purchase and sale of mortgage loans together with Secondary Mortgage Institutions(SMIs)
5. Joint audit is an audit assignment that is carried out by more than one audit firm at the same
time and for the same financial statements.
SELF ASSESSMENT QUESTION (SAQs) FOR STUDY SESSION 7
Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Write your answers in your study
notebooks; discuss them with course-mates and your Facilitator at the next contact session. You
can check your answers with the notes on the self-assessment questions at the end of this study
session .Discuss the audit of specialized public sector areas
SAQ 7.1(Testing Learning Outcomes 7.1)
List the issues for consideration under specific approach approach when auditing a specialized
instituton
SAQ 7.2(Testing Learning Outcomes 7.2)
List the major classifications of non-performing loan by banks
SAQ 7.3 ((Testing Learning Outcomes 7.3)
What is joint audit?

REFERENCES
E .I. John (2005).ICAN EXAM Distance Learning Pack, Advanced Audit and Assurance,
Lagos : Accountancy Training & Publications Ltd
ICAN Study Pack (2009).Advanced Audit and Assurance, Nigeria : VI Publishers

55
 STUDY SESSION 8: INVESTIGATION
Introduction
Investigation should not be confused with auditing. Investigation is undertaken with a view to
obtaining information of a special nature usually on behalf of a particular person or group of
persons, with the objective of preparing a report to be presented to him. The object of an audit is
to enable the auditor to report upon the truth and fairness of the financial statements of the
enterprise to the proprietors thereof.
LEARNING OUTCOMES FOR STUDY SESSION 8
At the end of this study session, you should be able to:
8.1 Define Investigation
8.2 Discuss the differences between Auditing and Investigation
8.3 Describe the Classes and Methods of Investigation
8.4 Explain Auditor’s involvement with prospectus
8.5 Explain Forensic Investigation
8.1 DEFINITION OF INVESTIGATION
Investigation is ‘’an act of examining, searching and inquiring into a matter with adequate care
and accuracy, usually undertaken to obtain information of a particular or special nature. It is the
term that implies the examination of accounts for a specific purpose. The examination involves
financial and non-financial information. It is not statutorily required of an auditor.
8.2 DISTINCTION BETWEEN AUDITING AND INVESTIGATION
(1)Auditing is statutory (i.e. conducted in line with CAMA 1990 and any other enabling Act as
appropriate to the organisation involved). For examples, BOFIA 1991, CBN Act 1991 and NDIC
Act 1988 as amended while investigation has different meanings.
(2)By definition – both auditing and investigation have different meanings.

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(3)The auditors are appointed by, and responsible to the shareholders under audit but under
investigation they are appointed by and report to the management
(4)The objectives and scope of the auditors are definitive while those of the accountant under
investigation are as directed by the management.
(5)In audit, provisions such as IAS, SAS, IAG are commonly observed while under
investigation, they may not be required.
(6)Details, the extent of audit is limited to account while that of investigation may be beyond
account.
(7)To be an auditor, a minimum professional qualification of ICAN is required with practicing
certificate whereas under investigation, the accountant may not be a member of ICAN with
practicing licence.
(8)Independence is fundamental to an audit whereas under investigation, independence of the
accountant may not be required.
8.3 NATURE, CLASSES AND METHODS OF INVESTIGATION
The various classes of investigations can be derived from the various reasons for which
assignments are carried out .The following are some of the classes of investigations:
(a) Investigation for the proposed purchase of shares or for the purchase of business
(b)Investigation for a lending banker or financial institution for audit appraisal purpose
(c) Investigation for a prospective partnership participation
(d) Investigation for loan decision
(e)Investigation for the purpose of business re-organisation and reconstruction or for a merger
and acquisition scheme.
(f) Investigation for prospectus reporting
(g)Investigations under statute (ie CAMA) into the affairs of the company S 314 CAMA ’90 and
ownership of the company S 326 CAMA ‘90
(h) Investigation for special situations such as :
a)Fraud (Actual/Suspected) damage caused by fire
(b)Back duty investigation at the instance of Federal Inland Revenue Service or Board of Internal
Revenue.
(c)Loss/ Profit of a product line / segment.
Methods of Investigation :- Three stages are involved:
Stage 1- Preparation – This covers;

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(a)The preliminary review
(b)Obtaining written instruction (i.e. terms of reference from clients)
(c)Planning.

Stage 2- Field Work

(a)Ascertaining the facts and obtaining information from relevant people (i.e. Data collecting/
gathering)
(b)Examination and verification of data obtained.
Stage 3- Reporting
(a)Interpretation and evaluation of evidence (i.e. data analysis)
(b)Writing the report of the assignment.
Above three stages are the general approaches that can be adopted for carrying out any
investigation assignment.
Investigation report should contain the following sections:
(i)Executive Summary
(ii)Detailed report
(iii)Nature of the assignment
(iv)Date on which the client gave his written instructions for the assignment.
(v)Scope of the investigation
(vi)The approach used in carrying out the assignment
(vii)Findings and observations
(viii)Conclusions and recommendation
In-Text Question: State the three stages of carrying out investigation
In-Text Answer:(i) Preparation (ii)Field work (iii) Reporting
8.4 AUDITORS INVOLVEMENT WITH PROSPECTUS AND OTHER OFFER
DOCUMENTS
A prospectus is any circular, advertisement, notices or other invitation offering any shares or
debenture of a company to the public for sales or subscription. Under the listing requirement of
Nigerian Stock Exchange, a prospectus includes a Reporting Accountant report. It should be

58
noted that if a prospectus include a profit forecast, the reporting accountant is required to
comment on the basis of calculation used in preparing the forecast.
A Reporting Accountant is a Chartered Accountant in public practice, who is reporting under
the relevant provisions of CAMA and/or the Listing Requirements of the Nigerian Stock
Exchange. He may be the statutory auditor of the company on which he is reporting or some
other chartered accountants

Contents of Accountant Report in a Prospectus

(1)Summary of the last five (5) years or three (3) years as the case may be of the statement of
financial position.
(2)Full statement of financial position at the end of last accounting year.
(3)Summary of the profit or loss and other comprehensive income for the last five (5) years or
three (3) years as the case may be.
(4)Principal accounting policies of the company e.g. deferred tax,inventory, turnover,
depreciation.
(5)General information, this includes:
(a)Names and identity of promoters
(b)Particulars of any shares capital of the company under option
(c)Particulars of preliminary expenses incurred
(d)The value of land and building distinguishing between freehold and leases
(e)Valuation of all quoted and unquoted investments
(f)A statement that the audited accounts has not been made up to a period later than the last
balance sheet date.
(g)Particular of director’s interest in the purchases of any asset by the company or a subsidiary
within the five (5) years immediately preceding the publication of the prospectus must be stated.
It should be noted that the accountant should adjust the financial statement if relevant and
disclose the accounting policies adopted in preparing the figure in the report particularly those
relating to turnover, stock, deferred tax, depreciation etc and the result of the associated company
if any.
The adjustment necessary in the accountant’s report in a prospectus includes:
(1)Accounting policies
(2)Change in group structure

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(3)Qualified audit report
(4)Reclassification for comparability
(5)Correction of fundamental errors
(6) Events after the reporting period
(7)Adjustments in source of material, revenue and expenses no longer required in the future.
NOTE:-
(1)Stale accounts are not allowed by the stock exchange i.e. there should not be more than nine
(9) months between the balance sheet date and the date of issue of prospectus.
(2)The prospectus is always addressed to two (2) parties the directors of the issuing house and
the director asking the auditor to carry out reporting.
Parties to Prospectus
Reporting Accountant – who must be practicing chartered accountant
Issuing house
NSE
Solicitor to the issue
Solicitor to the company
Tax consultant
In-Text Question: Enumerate the parties to a prospectus
In-Text Answer: Reporting Accountant – who must be practicing chartered accountant
Issuing house
NSE
Solicitor to the issue
Solicitor to the company
Tax consultant
8.4.1 Legal Requirement
The legal requirement relating to the issue of a prospectus as contained in the appropriate
sections and schedules of CAMA are as follows:
(a)Section 550 (1) of CAMA states every prospectus issued by or on behalf of a company shall
set out the reports specified in part II of schedule 15 to the Act.

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(b)Part II of Schedule 15 deals with the reports to be issued by the auditors of the company and
is generally known as the “Accountants Report.”
(c). Although the Act requires the Reports to be issued by the Auditors of the company,
sometimes a firm of chartered accountants other than the auditors is appointed to issue the
reports either as the sole reporting accountant or jointly with the auditors.
(d)Section 554 (1), says the report of the Reporting Accountant is not valid unless:
(i)”he has given and has not, before delivery of a copy of the prospectus for registration,
withdrawn his written consent to the issue thereof with the reports included in the form and
contest in which it is included and
(ii)A statement that he has given and has not withdrawn his consent appears in the prospectus
(i.e. letter of consent)
(e)Section 562 of the Act provides for civil liability for mis-statements in a prospectus. The
Reporting Accountant is by virtue of this section liable to pay compensation to all persons for
any untrue statement made by him as an expert.
Comfort Letter
The reporting accountant may be asked by the sponsor or by the director to prepare report on
other matters. The letter is not for publication and is not required by status or other regulations.
The reasons for it is that the directors must make statement in the prospectus on such matters as:
(a)The adequacy of working capital
(b)Taxation clearances and indemnity
(c)Major acquisition or re-organisation
(d)Any other financial Information anywhere in the prospectus.
(e)The aggregate of borrowing at the latest practicable date
Generally, the directors or sponsors must be sure these matters are correctly stated and thus
asked reporting accountant to investigate and give a comfort letter that all is well.
Procedure to be followed by a Reporting Accountant in Investigation Assignment
A typical outline of the work programme of a Reporting Accountant is shown below:
(1)General Information to be obtained
This includes history and nature of business, management, employees, raw materials, supplies,
sales, property, plant and equipment
(2)Work to be done
This includes preliminary enquiries, profits, taxation and net assets

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(3)Profit forecast and Cash Flow Statement
This includes review of assumptions, forecasting procedures, accounting principles etc
(4)Miscellaneous
This includes prospectus check list, verification checklist, letter of consent, comfort letter,etc
The ICAN Auditing Guideline provides as appendices the following:
1. Contents of a prospectus for companies applying for full listing on the Nigerian Stock
Exchange.
2. Contents of Accountant Report
3. Specimen Profit forecast letter
4. Specimen letter of consent
5. Specimen letter of comfort.
8.4.2 Examination of Financial Forecasts and Projections
This is undoubtedly the most important part of a prospectus. Though, the directors are solely
responsible for the profit forecast and for the assumptions on which it is based, the Reporting
Accountant must ensure strict adherence to the following:
(a)Review of underlying assumptions and outline of the company’s forecasting technique and
methods, for example, the existence of a budget corporate plan and its regular revision.
(b)Review the accounting policies adopted in preparing the forecast and ensure they are
consistent with those normally adopted by the company for preparing its annual account.
(c)Compare the detailed results of the company for, the preceding three years with a view to
ascertaining the trend and assessing the extent to which the company’s past experience in
forecasting indicates that its forecasts can be relied upon.
(d)Compare the forecast under review with any earlier forecast made in respect of the same or
overlapping period and obtain explanations for any material changes.
(e)When reviewing the cash forecast, the following factors must be carefully considered:
i)the assumptions used are the same as those used for the profit forecast
ii) the changes in level of stock and work-in –progress, debtors and creditors, appear reasonable
having regard to the budgeted level of trading or operation;
iii) items such as capital expenditure, investment, taxation and dividends, are included in the
correct period;
iv) recently announced fiscal legislations and regulations have been taken into account; and

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v )the proforma statement of financial position at the end of the profit forecast period reconciles
with both profit and crash forecasts.
8.5 FORENSIC INVESTIGATION AND AUDIT
According to the Webster’s Dictionary, “Forensic” means ‘’belonging to, used in or suitable to
courts of judicature or to public discussion and debate”.
Forensic accounting is therefore seen as providing an accounting analysis that is suitable for the
court and which will form the basis for discussion, debate and ultimately resolution. It is a whole
holistic approach that integrates accounting, auditing and investigative skills that has yielded the
speciality known as forensic accounting
Forensic Accounting encompasses both Litigation Support and Investigative Accounting.
Litigation support provides assistance of an accounting nature in a matter involving existing or
pending litigation. Issues related to the quantification of economic damages are primarily death
with. A good example of a litigation support assignment would be the calculation of the
economic loss resulting from a breach of contract.
Investigative Accounting involves investigation of matters associated with criminal matters.
Examples include: investigation of employees’ theft, insurance fraud, securities fraud, kickbacks
and proceeds of crime investigation.
According to Alam Zysman, ‘’Forensic investigation is the utilization of specialised investigative
skills in carrying out an inquiry conducted in such a manner that the outcome will have
application to a court of law.’’ Therefore, a forensic investigation may be based on various feeds
such as accounting, engineering, medicine or some other disciplines. On the other hand, forensic
audit is an examination of evidence regarding an assertion to determine its correspondence to
established criteria carried out in a manner suitable to the court. An example would be a forensic
audit of income records to determine the quantum of rent owning under a lease agreement which
is the subject of litigation.
Alam Zysman suggests typical approach to a forensic accounting assignment
(a)Meet with the client
(b)Perform a conflict check
(c)Perform an initial investigation
(d)Develop an action plan
(e)Obtain the relevant evidence
(f)Perform the analysis, which in turn will be dependent on the nature of the assignment and may
involve:
(i)Calculating economic damages

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(ii).Summarising a large number of transactions
(iii)Performing a tracing of assets
(iv)Performing present value calculations utilizing appropriate discount rates.
(v)Performing a regression or sensitivity analysis
(vi)Utilizing charts and graphs to explain the analysis
(g)Prepare the report which will include:
(i)Nature of the assignment
(ii)Scope of the investigation
(iii)Approach used
(iv) Limitation of scope and
(vi) Findings and / or opinion, schedule and graphics necessary to support and explain the
findings.
SUMMARY OF STUDY SESSION 8
In this study session, you have learnt that:
1. Investigation is ‘’an act of examining, searching and inquiring into a matter with adequate care
and accuracy, usually undertaken to obtain information of a particular or special nature.
2. The classes of investigation are:
i) Investigation for Investment Decision such as purchase of business, purchase
of shares, partnership participation , loan decision and business reorganization and merger.
3. Reporting Accountant reserves the right to pass adjustments in prospectus where relevant
SELF ASSESSMENT QUESTION (SAQs) FOR STUDY SESSION 8
Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Write your answers in your study
notebooks; discuss them with course-mates and your Facilitator at the next contact session. You
can check your answers with the notes on the self-assessment questions at the end of this study
session .Discuss the audit of specialized public sector areas
SAQ 8.1(Testing Learning Outcomes 8.1)
What is investigation?
SAQ 8.2(Testing Learning Outcomes 8.2)
State and explain differences between auditing and investigation

64
SAQ 8. 3(Testing Learning Outcomes 8.3)
Enumerate different classes of investigation
SAQ 8. 4(Testing Learning Outcomes 8.4)
List adjustments that can be made by a Reporting Accountant in respect of a prospectus
REFERENCES
E .I. John (2005).ICAN EXAM Distance Learning Pack, Advanced Audit and Assurance,
Lagos : Accountancy Training & Publications Ltd
ICAN Study Pack (2009).Advanced Audit and Assurance, Nigeria: VI Publishers

STUDY SESSION 9: INSOLVENCY

Introduction
Payment of obligations as they fall due either on short term basis or long term basis is the
hallmark of any corporate organization or individual. A corporate body is insolvent when it
cannot meet its debts and other financial obligations as and when due. In the same way, an
insolvent debtor is a person or trader who is unable to pay his creditors as and when due.
LEARNING OUTCOMES FOR STUDY SESSION 9
At the end of this study session, you should be able to:
9.1 Explain insolvency
9.2 Outline causes of corporate distress
9.3 Explain receiverships
9.4 Define bankruptcy
9.5Discuss liquidation and modes of winding up
9.6 Explain implications of insolvency for corporate governance and going concern threats
9.1 DEFINITION OF INSOLVENCY
Insolvency is the inability of a particular person (either corporate or not) to pay debts when due.
A corporate body is insolvent when it cannot meet its debts and other financial obligations as and
when due. In the same way, an insolvent debtor is a person or trader who is unable to pay his
creditors as and when due .

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In the case of an individual, if he files a bankruptcy notice against himself or if his creditor does
so, the court would declare him bankrupt ‘’This judicial declaration would free him of his debts
which cannot be paid out of his assets which will be sold and the proceeds used to pay his debts
equitably.
An insolvent company cannot be made ‘’ bankrupt’’ but ‘wound up’ or ‘’Liquidated’’.
9.2 CORPORATE DISTRESS
This occurs or arises when a company cannot meet its financial objectives as well as its non-
financial objectives. Financial objectives of a company involve sustainability of profit as this
guarantees growth and survival while non-financial objectives include marketing objectives and
its social responsibility objectives. Other names for corporate distress are corporate failure or
corporate insolvency.

9.2.1 Causes of Corporate Distress

These could be considered from two perceptives:
(I)Internal Factors: These include bad management, inadequate working capital, high gearing
ratio, adverse current ratio or trend, dividend, tax and other statutory deductions in arrears,
excess of stock and debtors, recurrent operating losses, under capitalization especially where
there is deficiency of working capital. Other symptoms are: loss of key management staff,
prolonged industrial action, continuous use of obsolete machines and substantial dependence on
one or certain projects.
ii)External Factors: These are government policies that affect national and international
economic climate, lack of co-operation by foreign technical partners and natural disaster.
In mitigating corporate distress, the organisation should conduct a detailed review of the
situation with a view to identifying what the actual problems are. Once the problem is identified,
then an appropriate solution can be embarked upon. This could include any of the following:
i. Availability of key persons to fill key position;
ii. Finding alternative market where the principal one is lost;
iii. Making use of alternative market resources;
iv. Diversify to other areas of operations;
v. Making limited reduction in the level of operations.
vi. Restructure debt.

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vii. Raise additional capital by way of right issue
viii. Roll over existing loan facilities:
ix. Lease meet rather than outright purchase.
In-Text Question: Identify two perceptives of corporate distress
In-Text Answer :(i) Internal factors (ii) External factors
9.3 RECEIVERSHIPS
A receiver is a person appointed by the mortgagee or debenture holder for, the purpose of
selling the property covered by the mortgage or repay the loan under the mortgagee while
receivership is the process by which someone (referred to as a receiver of receiver manager) is
appointed in which is vested the legal right to ‘’receive’’ property belonging to the company.
In addition to the right to receive, the receiver may be given power to manage the assets under
his control: in such cases he is known as a receiver/ manager.
In other words, a receiver is an individual appointed to recover sums owing to the holder of a
charge usually referred to as debenture over assets. The receiver may be appointed by the
debenture holder under the terms of the debenture deed giving a fixed and/or floating charge,
over the assets affected, nor dispose any of them without the consent of the debenture holders.
(a) Fixed Charge:- This is a charge on one or more specific assets of the company which should
be clearly identifiable, such as leasehold or freehold property. When any property is subjected to
‘fixed charge. The company cannot deal freely with it and it must not have created any prior
charge on the assets affected, nor dispose any of them without the consent of the debenture
holders.
A fixed charge on any property shall have priority over floating charge affecting that company,
unless the terms on which the floating charge was granted prohibited the company from granting
any later charge having priority over the floating charge and the person in whose favour such
later charge was granted had actual notice of that prohibition at the time when the charge was
granted to him (Section 179 of CAMA)
(b) Floating Charge
This is an equitable charge over the whole or a specified part of the company’s undertakings
and assets, including cash and uncalled capital of the company both present and future (Section
178 of CAMA). A floating charge does not create a charge on any specific assets of the
company, unless an event occurs on the happening of which the charge is deemed to crystallize,
that is become a fixed equitable charge on such of the company’s assets and are subject to the
charge. Examples of events that may occur and cause a floating charge to crystallize.
i) appointment of a receiver and;
ii) Commencement of Liquidation.

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(c) Appointment by a Debenture Holder under a Fixed Charge
Whenever any breach of the debenture term arises, a receiver may be appointed by the debenture
holder. If a company has given a fixed charge only, the charge will probably not confer on a
receiver a power of management of the business as opposed to management of the properties
specifically charged. A fixed charge stipulates certain assets which are pledged as security and
the debenture deed states the events which will give the debenture holder the right to sell those
assets and recover money due to him.
A receiver appointed under a fixed charge is responsible only for the payment of the amounts
owed to his debenture holder which are covered by the debenture together with his own cost.
Therefore, apart from a general duty of care he does not have any responsibility towards, other
classes of creditors (either preferential or not) of the company, other than realised the best
possible price at the time when he chooses to sell the assets.
(d)Appointment by a Debenture Holder Under a Floating Charge
This type of debenture that creates a floating charge is the most common type entered into by a
company and it is usually linked with a fixed charge. This arrangement permits the company to
continue its business upon normal terms without constant reference referral back to the debenture
holders. Once the debenture holders exercise his right to appoint a receiver or a
receiver/manager, over the company assets, the floating charges crystallises. The receiver’s
power of management will be set out in the debenture deed and case must be exercised to ensure
that he does not act outside the power thus conferred on him. It should be noted that his power to
act as agent of the company ceases upon the company being placed in liquidation.
(e)Appointment by the Court
The court may on the application of a person interested appoint a receiver or a
receiver/manager of the property or undertaking of a company if:
i. the principal money borrowed by the company or the interest is in arrears: or
ii. the security or manager of any property of the company is in jeopardy.
A receiver or manager of any property or undertaking of a company appointed by the court shall
be doomed to be an officer of the court and not an agent of the company. He shall be deemed to
be an officer of the court and not an agent of the company. He shall therefore act in accordance
with the directions and instruction of the court.
Disqualification for appointment as Receiver or Manager
In line with section 387 (i) of CAMA, the following categories of people shall not be eligible for
appointment.
(i) An infant (ii) A body corporate (iii) A director or auditor of the company (iv) Any person
found by a competent court to be of unsound and (v) An un-discharge bankrupt (vi) Any person
found convicted of any offence involving fraud, dishonestly, official corruption or moral issues
and who is disqualified under section 254 of CAMA.

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 Action Prior to and Upon Appointment
In other not to render a receivership in effective from its inception, a receiver or manager should
take steps to ensure that the debenture holders has complied with all relevant legal requirements.
These are:
i)Registration of the instrument of charge within 90 days as required by section 197 of CAMA.
ii) Adequate proper final demand notice to the debtor company. Generally, a 21 day final notice
is required after which the appointment of the receiver or manager is justified.
iii) Possession of title document to the assets charge or obtaining such documents from the
debtor company.
iv. Avoidance of hasty appointment – under a fixed charge, the appointment shall not be affected
within 6 month of the creation of the charge, while in the case of a floating charge, the period is
12 month.
Upon appointment, the receiver or manger shall ensure that notice is given to the Corporate
Affair Commission within 14days indicating the terms of and remuneration for the appointment
and every invoice, order for goods or business letter issued by or on behalf of the company the
receiver or manager or the liquidator of the company being a document on or in which the
company name appears shall contain a statement that a receiver or manager has appointed
(section 392 of CAMA).
9.4 BANKRUPTCY
This is a legal proceeding by which an insolvent debtor is declared bankrupt. An insolvent
debtor is a person or a trader who is unable to pay/meet his liabilities that is unable to pay his
creditor, An insolvent debtor does not automatically become a bankrupt, Before such a person
can be declared bankrupt, he/she must have committed an ‘’ Act of Bankruptcy’’ that is an act or
default on the part of such a debtor which is an deemed to be evidence of his insolvency.
In accordance with law, bankruptcy can be voluntary or, involuntary. Voluntary bankruptcy is
when the debtor brings the petition while involuntary bankruptcy is when one or more creditor
petition to have a debtor judged insolvent by a court. In both cases, the purpose is to have an
orderly and equitable settlement of the debtor’s obligations:
9.4.1 Acts of Bankruptcy: Before a bankruptcy petition can be presented the court requires
prima facie evidence of the debtor’s insolvency. The evidence is furnished by proof that the
debtor has committed an act of bankruptcy. these are:
i.) makes a conveyance or assignment of his property to a trustee for the benefit of the creditor
generally:
ii) makes a fraudulent conveyance, gift, delivery, or transfer of his property or any part thereof.
iii) makes any conveyance or transfer of his property or any part thereof or created any charge
thereof which would be void as a fraudulent if he were adjudged bankrupt.

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iv) departs out or make himself absent from Nigeria, or departs from his dwelling house or place
of business or begins to keep house with intent to defeat or delay his creditor:
v) permits execution to been levied against him and allow the goods to be sold or held by the
court bailiff for more than 21 days.
vi) Files a declaration of his inability to pay his debts or files a bankruptcy petition against
himself:

vii) Fails to comply with a bankruptcy notice served upon him and
viii) Gives notice to any of his creditors hat he has suspected or is about to suspend payment of
his debts.
Bankruptcy Laws and Their Objects
Before the bankruptcy Act, 1979 in Nigeria, there was reliance on the Bankruptcy Act 1914 and
the Bankruptcy (Amendment) Act, 1926 both of the United Kingdom. The objects of these
bankruptcy laws are as follows;
i)To distribute his estate equitably among his creditors
ii) To set free a debtor who has become hopelessly involved in financial difficulties and
iii) To release him from all further liabilities in respect of his past debts.
Persons who may be Declared Bankrupt
i)A debtor owing a liquidated sum of at least N2,000 (Two thousand naira only).
ii)A debtor who has committed an act of bankruptcy within 3 months before presentation of
bankruptcy petition.
iii) Any debtor domiciled in Nigeria or who has carried on business in Nigeria by means of an
agent or a manager.
iv)An infant can be adjudged a bankrupt or present a petition against himself in respect of any
debts which are legally enforceable against him. Thus he can be adjudge bankrupt only in respect
of debts arising from contract for necessaries, from a tortuous act or from some other liability
created by statue:
v) Bankruptcy proceedings can be taken against a partnership in respect of acts of bankruptcy
committed in relation to the business of the firm, by a partner or by any person having the
control or management.
NOTE:
The implication of the above is that companies incorporated under CAMA cannot be declared
bankrupt: rather companies are wound up if they commit acts deserving such a treatment.

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Person who may petition a debtor: They are
(i) An unsecured creditor may petition a debtor provided that he satisfies the following creditors.
a) he is owed a liquidated sum of at least N2000(Two thousand naira only)
b) the debtor has committed an act of bankruptcy within three month before the preservation
of the bankruptcy petition and:
c) at the date of the presentation of the petition the debtor must be domiciled / residing in
Nigeria or must carried on business in Nigeria by means of an agent or manager.
ii) A secured creditor may also petition for a Receiving order in respect of his estate, that he
should be adjudge bankrupt. The petition must allege inability to pay his debts.
iv.) A court may also petition if the debtor resides or caries on business for the greater part of
six months preceding the petition or he is not resident in Nigeria, or a creditor cannot ascertain
his residence. In this case, action of bankruptcy can be brought against the debtor in the high
Court of Justice.

9.5 LIQUIDATION
Liquidation can be simply defined or referred to as process of the dismantling a business, paying
off is debts in order of priority, and distributing the remaining assets in cash to the owner. As it
relates to a company. This process is referred to as a winding up and Section 401-536 of CAMA
contain the various provisions on the winding up of companies.
The winding- up of a company involves the realisation of its assets and distribution with a view
to terminating (or liquidation) the affairs of the company, in corporation with its creditors and
bringing its existence to an end.
(a)Modes of Winding Up
The winding up of a company under section 401 of CAMA may be effected by:
i) By the Court – Otherwise Known as compulsory winding up
ii) Voluntarily
iii) Subject to the supervision of the court.
b) Winding Up by the Court
Section 408 of CAMA provides that a company may be wound up by the court if:
i.)the company is unable to pay its debts
ii.)the court is of the opinion that it is just and equitable that the company should be wound up:
iii)the number of member is reduced below two

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iv)default is made in delivering the statutory report to the Corporate Affairs Commission:
v)the company has by special resolution resolved that the company be wound up by the court.
Presentation of as Petition for the Winding Up of a Company by a Court
The following can present petition:
(i) the company (ii) the official receiver (iii) the Corporate Affairs Commission under
section 323 of the Act (iv) a receiver, if authorised by the instrument under which he was
appointed (v) all or any of these parties or separately (vi) a trustee in bankruptcy to or, a personal
representative of a creditor or contributory (vii) a creditor, including a contingent or prospective
creditor of the company.
The consequence of a winding up by the court which normally dates back to the commencement
of the winding up are:
i.)A copy of the winding up order shall be sent at once to the Corporate Affairs Commission
(Section 416)
ii) Once a winding up order is made, all pending actions against the company are suspended and
no fresh proceeding shall be commenced, except with the leave of the court (Section 417).
iii)The official Receiver automatically takes charge of affairs of the company as provisional
liquidator if no liquidator is appointed (Section 422) (3).
iv)Any attachment, sequestration, distress or execution put in force against the estate or effects of
the company after the commencement of the winding up by the court shall be void.
v) If a liquidator is appointed under (section 422), all the powers of the directors shall cease
immediately, except so fair as the court may by order sanction the continuance there of (Section
422(9)).
c) Voluntary Winding Up
Section 457 of CAMA provides for the company to be wound up voluntarily as follows:
i. If the company resolves by special resolution that the company be wound up voluntarily.
ii. When the period, if any, fixed for the duration of the company by the articles of
associations expires, or the event, if any occurs on occurrence of which the articles provided that
the company is to be dissolved and the company in general meeting has passed a resolution
requiring the company to be wound up voluntarily.
The consequences of voluntary winding up are
i. The company must cease to carry on business, except so far as may be required for the
beneficial winding up (Section 460) with effect from the date of commencement.
ii. Any transfer of share made without the sanction of the liquidator and after the
commencement of a voluntary winding up shall be void (Section 461)

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iii. On the appointment of a liquidator by the company in general meeting in the course of a
members ‘’ voluntary winding up, all the powers of the directors shall cease in so far as the
company in general meeting or the liquidator sanction its continuance (Section 464).
(d) Winding up Subject to the Supervision of the Court
A winding up subject to the supervision of the court shall for the purpose of section 413 and 414
of CAMA, be deemed to be winding up by the court (Section 488).
Where an order is made for winding up subject to supervision, the court may, by the same or any
subsequent order, appoint an additional liquidator. This liquidator shall have the same powers, be
subject to the same obligations, and in all respects stand in the same passion as if he had been
duly appointed in accordance with the provision of CAMA with respect to the appointment of
liquidators in a voluntary winding up.
NOTE
In all cases of winding up of a company, the liquidator shall within 14 days after his appointment
publish in the Gazette and in two (2) daily newspapers and deliver to the Corporate Affairs
Commission for registration a notice of his appointment in such form as the Commission may
from time to time approve (Section 491).

In-Text Question: Enumerate modes of winding up of a company

In-Text Answer :(i) By the court (ii) Voluntary winding up (iii) Winding up subject to the
supervision of the court
9.6 IMPLICATIONS OF INSOLVENCY FOR CORPORATE GOVERNANCE AND
GOING CONCERN THREATS
(a)Corporate governance is the system by which business corporations are directed and
controlled. It specifies the distribution of rights and responsibilities among different participants
in the corporation and spells out the rules and procedures for making decisions on corporate
affairs. By doing this, it provides the structure through which the company objectives are set and
the means of attaining those objectives and monitoring performance.
The implications of insolvency for corporate governance can be enormous. The moment there is
corporate insolvency, the position of those charge with corporate governance becomes
threatened. In essence, therefore, insolvency should not occur when corporate governance rules
or regulations and guidelines are carefully and religiously implemented. On the other hand, once
insolvency has set in and it is persistent, there will be little or nothing that the corporate
governance rules, regulations and guidelines can do to bring the company back to business, In a
few cases where restructuring of the company is still possible there may be strong need for the
management and the entire board of directors to be changed.
(b) Going Concern: is defined as ‘’an assumption that the business will operate in perpetuity:
that the business is not expected to be liquidated in the foreseeable future’’

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This concept implies that the directors of a company shall consider the company as a going
concern if the company is capable of earning a reasonable net income and there is no threat from
any source or intention by any person(s) to curtail significantly its line of business in the
foreseeable future. If there is a doubt about the appropriateness of the going concern in the
preparation of financial statements, this should be disclosed by directors. The auditors of the
company should also form their opinion on the appropriateness or otherwise of the going concern
status of the company.
Corporate governance is the system by which the affairs of companies are directed and
controlled by those charged with the responsibility for doing so. It provides the structure through
which the company objectives are set and the means of attaining these objectives and monitoring
performance.
SUMMARY OF STUDY SESSION 9
In this study session, you have learnt that:
1. Insolvency is the inability of a particular person (either corporate or not) to pay debts when
due
2. Corporate distress is caused by internal factors and external factors
3. A receiver is a person appointed by the mortgagee or debenture holder for, the purpose of
selling the property covered by the mortgage or repay the loan under the mortgagee while
receivership is the process by which someone (referred to as a receiver of receiver manager) is
appointed in which is vested the legal right to ‘’receive’’ property belonging to the company.
4. Bankruptcy is a legal proceeding by which an insolvent debtor is declared bankrupt.
5. Liquidation can be simply defined or referred to as process of the dismantling a business,
paying off is debts in order of priority, and distributing the remaining assets in cash to the owner.
SELF ASSESSMENT QUESTION (SAQs) FOR STUDY SESSION 9
Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Write your answers in your study
notebooks; discuss them with course-mates and your Facilitator at the next contact session. You
can check your answers with the notes on the self-assessment questions at the end of this study
session.
SAQ 9.1(Testing Learning Outcomes 9.1)
Explain insolvency
SAQ 9.2(Testing Learning Outcomes 9.2)
What is corporate distress?
SAQ 9.3(Testing Learning Outcomes 9.3)

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Give examples of events that may cause a floating charge to crystallise
SAQ 9.4(Testing Learning Outcomes 9.4)
Enumerate acts of bankruptcy
SAQ 9.5(Testing Learning Outcomes 9.5)
State how the winding up of a company may be effected

REFERENCES
E .I. John (2005).ICAN EXAM Distance Learning Pack, Advanced Audit and Assurance,
Lagos: Accountancy Training & Publications Ltd
ICAN Study Pack (2009).Advanced Audit and Assurance, Nigeria: VI Publishers

STUDY SESSION 10: INTERNATIONAL STANDARDS ON AUDITING

Introduction
This study session contains relevant standards on auditing which guide auditors in the conduct of
audit exercise, having greatly exercised due care, skills and diligence in the discharge of their
audit assignment.
LEARNING OUTCOMES FOR STUDY SESSION 10
At the end of this study session, you should be able to:
10.1 Explain and discuss ISA 200
10.2 Explain and discuss ISA 300
10.3 Explain and discuss ISA 315
10.4 Explain and discuss ISA 320
10.5 Explain and discuss ISA 450

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10.6 Explain and discuss ISA 500
10.7 Explain and discuss ISA505
10.8Explain and discuss ISA 530
10.9 Explain and discuss ISA580
10.10 Explain and discuss ISA 700
10.1 ISA 200: OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE
CONDUCT OF AN AUDIT IN ACCORDANCE WITH INTERNATIONAL
STANDARDS ON AUDIT
The objectives of the auditor are formally specified in ISA 200 as:
To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error.
This allows the auditor to give an opinion on whether the financial statements have been
prepared in accordance with the applicable financial reporting framework.
To report on the financial statements, and communicate as required by the ISAs, in accordance
with the auditor’s findings.

Where the auditor is unable to obtain reasonable assurance and a qualified opinion is insufficient,
the auditor must disclaim an opinion or resign.
ISA 200 requires the audit to:
Comply with all ISAs relevant to the audit
Comply with relevant ethical requirements
Plan and perform an audit with professional scepticism
Exercise professional judgement in planning and performing an audit
Obtain sufficient and appropriate audit evidence to allow him to obtain reasonable assurance.
Scope of an audit
The scope of the statutory audit as described in the independent auditor’s report contains the
following points:
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 judgement, including the assessments, of the
risks of material misstatement of the financial statements, whether due to fraud or error.

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In making those assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements, in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and
reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.

Audit fieldwork is typically performing in two phases:

Interim audit – this is performed before the end of the accounting period and may include:
Discussions with staff and management designed to enhance the auditor’s understanding of the
entity and the environment. This will enable the auditor to more fully plan the audit hopefully
reduce the work performed at year end;
Recording information about the internal control systems that are relevant to the audit;
Performing some preliminary controls testing or substantive procedures.
Final audit – this is performed after the year-end when the draft financial statements are available
and include full-year balances.
Normally the interim audit work is performed by fewer but more senior staff. The final audit is
then much longer and involves the whole audit team.

In-Text Question: State the two phases of performing audit field work
In-Text Answer: (i) Internal audit which is performed before the end of the accounting year:and
(ii) Final audit which is performed after the year-end when the draft financial
statements are available and include full-year balances.
10.2 ISA 300: PLANNING AND AUDIT OF FINANCIAL STATEMENT
The objectives of the auditor, in accordance with ISA 300 which is titled “ Planning an audit of
financial statements” is to plan the audit work so that the audit will be performed in an effective
manner.
Helping the auditor to devote appropriate attention to important areas of the audit
Helping the auditor to identify and resolve potential problems
Helping the auditor to identify organize and manage the audit engagement so that it is performed
in an effective and efficient manner.

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Assisting in the selection of staff with appropriate experience and the proper assignment of work
to them.
Allowing for the direction and supervision of staff and review of their work.
ISA 300 requires the auditor to:
Involve the whole engagement team in planning the audit
(ii) Establish an understanding of the terms of the engagement as required by ISA 210
(iii)Establish an overall strategy for the audit that sets the scope, timing and direction of the audit
and that guides the development of the audit plan
(iv) Develop an audit plan which includes a description of the nature, timing and extent of
planned risk assessment procedures and planned further audit procedures.
(v)Documents the overall audit strategy and the audit plan, including any significant changes
made during the audit.
Contents of the overall audit strategy and the audit plan,
The overall audit strategy sets the scope, timing and direction of the audit and guides the
development of the more detailed audit plan.
The establishment of the overall audit strategy involves the following:
(a)Determining the characteristics of the engagement that define its scope such as:
The financial reporting framework used (for example, international financial reporting standards)
Any industry specific reporting requirements
The location of the components of the entity (for example, there might be overseas branches).
(b) Ascertaining the reporting objectives of the engagement, such as reporting deadlines and the
nature of communications required.
(c)Considering important factors which will determine the focus of the audit team’s efforts, such
as:
Materiality thresholds
High risk areas of the audit
The audit approach (for example, whether the auditor is planning to rely on the entity’s internal
controls).
The above will then allow the auditor to decide on the nature, extent and timing of resources
needed to perform the engagement. In particular the auditor should consider:
(i)Where experienced members of staff may be needed (for example on high risk areas)

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(ii)The number of staff to be allocated to specific areas (for example, extra staff may be needed
or attendance at the year-end inventory count).
(iii)When the resources are needed (or example, are more staff needed at the final audit than at
the interim audit).
(iv)How such resources are to be managed, directed and supervised (for example, the timing of
team briefing meetings and manager and partner reviews of work performed by other members
of the audit term).
The audit plan
Once the overall audit strategy has been established the auditor can develop the more detailed
audit plan.
The audit plan will set out:
(i)The procedures to be used in order to assess the risk of misstatement in the entity’s accounting
records/financial statements, and
(ii)Planned further audit procedures for each material audit area. These audit procedures might
be in response to the risks assessed, or specific procedures to be carried out to ensure that the
engagement complies with ISAs.
The audit procedures to be performed by audit team members will be those needed in order to:
(i)Obtain sufficient appropriate audit evidence, and
(ii)Reduce audit risk to an acceptably low level.

10.3 ISA 315: IDENTIFYING AND ASSESSING THE RISK OF MATERIAL

MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS
ENVIRONMENT
In order to prepare the overall audit strategy and audit plan, the auditor will need to form an
understanding of the entity and its environment. This will involve considering such factors as:
(i)The industry in which the entity operates
(ii)The nature and competence of its management
(iii)The entity’s internal control system
(iv)Its current financial performance
(v)Reporting requirements and deadlines
(vi)Any recent developments

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This is a requirement of ISA 315 identifying and assessing the risks of material misstatement
through understanding the entity and its environment.
The objective of the auditor under ISA 315 is to identify and assess the risks of misstatement,
whether due to fraud or error, through understanding the entity and its environment, including its
internal controls.
This risk assessment process will then provide a basis for designing and implementing responses
to those assessed risks. The responses to the assessed risks will take the form of audit procedures
The auditor should look for factors that could be significant and to which particular attention
should be given by the audit team. For example, the auditor may be aware that there is a
recession in the industry in which the client company operates, but that rising commodity prices
have forced companies to raise the prices of their products and so pass on the higher costs to
customers. In addition, the auditor may also be aware that the client company has a poor track
record in collecting trade receivables. This knowledge of the business might make the auditor
reach the conclusion that the audit should give particular attention to the measurement of trade
receivables, and the estimates for bad and doubtful debts.
ISA 315 requires the auditor’s risk assessment procedures to include the following:
(i)Inquiries of management and others (i.e. asking questions and getting answers).
(ii)Analytical procedures, which involves the study of ratios and trends to identify the existence
of unusual transactions or events or amounts, ratios or trends that might have implications for the
audit (information technology may be of use here in calculating changes to balancers in the
financial statements from previous years and graphing trends).
For example, an analysis of payables days compared to previous years might indicate that the
company is having difficult in paying its debts. As a result, the auditor may plan to do more work
on this area.
(iii)Observation and inspection (for example, inspecting internal control manuals or business
plans).
Each of these procedures or methods will be described in more detail in later chapters that deal
with the techniques of gathering audit evidence as each of them is also a technique for gathering
audit evidence as each of them is also a technique audit evidence. However, they are all used at
this stage to help the auditor identify areas of risk and to plan his audit approach.
With regard to the entity and its environment ISA 315 requires the auditor to obtain an
understanding of the following (requirements in respect of internal controls are considered
below):
(i)Relevant industry, regulatory and other external factors, including the applicable financial
reporting framework.
(ii)The nature of the entity, including its operations, ownership and management structures.

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(iii)The entity’s selection and application of accounting policies, including whether they are
appropriate for its business and consistent with the industry and the applicable financial reporting
framework.
(iv)The entity’s objectives and strategies and those related business risks that may result in risks
of material misstatement.
When the auditor draws on knowledge he has gained from audits of the client in previous years,
it is important that he should take into account any significant changes in circumstances, or
changes in the general environment. He should not routinely follow the same plan as in the
previous year, because a significant change in circumstances may mean that the audit plan used
in the previous year is no longer appropriate.
Business risks are risks occurring as a result of significant conditions, event, circumstances,
actions or inactions that could affect an entity’s to reach its objectives and carry out its strategies.
Business risks can also occur as a result of setting of inappropriate objectives, strategies or
gorals.
Understanding the accounting and internal control systems
ISA 315 requires the auditor to obtain an understanding of internal controls relevant to the audit.
Although most of the entity’s internal controls will relate to financial reporting, not all will be
relevant to the audit.
The auditor should try to reach a judgement about how strong (or weak) the internal controls are,
in order to make a decision about the amount o testing that should be carried out in the audit. He
should consider.
(i)His previous knowledge of the company
(ii)Any recent changes
(iii)Any known problems in the internal controls of the client
(iv)The effect of any new audit or accounting requirement.
The auditor’s assessment of the entity’s internal control systems is dealt with in more detail in
later chapters.
Risk and Materiality
The auditor is required by ISA 315 to identify and assess the risks of material misstatement at
both the financial statement and assertion levels.
The financial statement level refers to risks which are pervasive to the financial statements as a
whole and which potentially affect many assertions (see below). An example might be if
management have a tendency to override internal controls- this would affect all areas of the
accounting systems.

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The assertion level refers to specific objectives of the financial statements, for example, that all
liabilities have been recorded and that recorded assets exist.
The use of financial statement assertions is considered in detail in a later chapter.
For assessment in an important aspect of planning an audit. Issues to consider are:
(i)The areas where risk of misstatement (error) appear to exist and the nature of the risk.
(ii)When an error should be considered material, and when it may be ignored (iii)What aspects of
the audit will be the most difficult to plan because of the high risk of misstatement.
The auditor should consider:
(i)Assessments of inherent risks and control risks, and the identification of significant audit
areas.
(ii)Setting materiality levels
(iii)The possibility of material misstatements, including those arising because of fraud (rather
than unintentional error)
(iv)The identification of complex accounting areas, particularly those involving accounting
estimates. (Areas of accounting where the estimates used will be more difficult to audit.)
The auditor will then focus his work on balances in the financial statements where he considers
there is a material risk of misstatement. High risk/material items will be audited in detail, but low
risk/immaterial items will receives less attention.
In-Text Question: Explain business risk
In-Text Answer: Business risks are risks occurring as a result of significant conditions, event,
circumstances, actions or inactions that could affect an entity’s to reach its objectives and carry
out its strategies. Business risks can also occur as a result of setting of inappropriate objectives,
strategies or goals.

10.4 ISA 320: MATERIALITY IN PLANNING AND PERFORMING AN AUDIT

This is a fundamental concept in both auditing and accounting; and it reflects the act that the
users of financial statements find the statements useful even if they are not 100% accurate.
Normally, financial statements will be useful provided they do not contain ‘material’ errors or
misstatements. The IASB’s Framework for the preparation and presentation of financial
statements states that:
“Information is material if its omission or misstatement could influence the economic decisions
of users taken on the basis of the financial statements”
ISA 320 Materiality in planning and performing an audit states that, in assessing what is or is not
material, auditors are entitled to assume that users:

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(i)Have a reasonable knowledge of business and are willing to study the information in the
financial statements diligently.
(ii)Understanding that financial statements are prepared and audited to levels of materiality.
(iii)Recognize the uncertainties inherent in certain amounts in the financial statements (such as
provisions).
(iv)Make reasonable economic decisions based on the information in the financial statements.
ISA 320 requires the auditor to apply the concept of materiality:
(i)When planning and performing the audit, and
(ii)When evaluating the effect of misstatements on the financial statements and therefore on his
audit opinion.
At the audit planning stage, risk and materiality are the two key factors which determine the
auditor’s answer to the ‘what audit work is be done? Question.
ISA 320 contains the following requirements.
At the planning stage, the auditor must determine materiality for the financial statements as a
whole. This is often referred to as the materiality level or materiality threshold. If lower
thresholds are required or some areas (for example, directors’ remuneration, as discussed below)
these must also be set at this stage.
The auditor must also set what ISA 320 refers to as performance materiality. Performance
materiality recognizes the fact that if all areas of the audit are carried out to detect all
errors/omissions under the (overall) materiality level, that objective could be achieved but when
all the individual immaterial errors/omissions are added together, overall materiality could in fact
be breached. Performance materiality is a way of taking this risk into account and will be set at a
lower figure than overall materiality. There may be one or more performance materiality levels,
as the level could vary by area.
As the audit progresses, the auditor must revise materiality (and, if appropriate, materiality for
particular areas and performance materiality) if he becomes aware of information which would
have caused him to have initially set different levels, had that information been known to him at
the time.
Documentation must include details of all materiality levels set and any revision of these levels
as the audit progresses.

In-Text Question: At what point does an auditor apply the concept of materiality?
In-Text Answer: (i) When planning and performing the audit, and

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 (ii)When evaluating the effect of misstatements on the financial
statements and therefore on his audit opinion.
10.5 ISA 450: EVALUATION OF MISSTATEMENTS
ISA 450 which is Evaluation of misstatement identified during the audit requires a list off the
uncorrected misstatements to be attached to the letter of representation. Such a list is often
referred to as a summary of unadjusted audit differences.
The objective of the auditor in this area, per ISA 450, is to evaluate the effect of:
(i)identified misstatements on the audit, and
(ii)Any uncorrected misstatements on the financial statements.
A misstatement could be in relation to the amount, classification, presentation or disclosure of an
item.
Requirements of ISA 450
ISA 450 requires the auditor to do the following:
(i)Accumulate all misstatements found during the audit, unless they are clearly trivial.
(ii)If the total of misstatements identified during the audit approach (or could approach)
materiality, decide if the overall audit strategy and audit plan need to be revised.
(iii)Communicate all misstatements found during the audit to an appropriate level of
management and request that the misstatements be corrected.
(iv)If management refuses to correct the misstatements obtain the reasons for this and take those
reasons into account when evaluating whether the financial statements as a whole are free from
material misstatement.
(v)Prior to evaluating the effect of uncorrected misstatements reassess materialit5y per ISA 320.
(vi)Decide whether uncorrected misstatements are material, individually, or when added
together. In making this assessment the auditor should take into account the size, nature and
circumstances of the misstatements and the effect of any uncorrected misstatements from prior
periods.
(vii)Communicate to those charged with governance the effect that uncorrected misstatements
may have on the audit report.
(viii)Request a written representation from management as to whether they believe the effect of
uncorrected misstatements are immaterial, individually, or in total (see example letter of
representation above).
(ix)Document:
The amount below which misstatements would be regarded as clearly trivial.

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All misstatements accumulated during the audit and whether they have been corrected.
His conclusion as to whether uncorrected misstatements are material, individually or in total.
10.6 ISA 500: AUDIT EVIDENCE
General principles of gathering audit evidence
The general principles behind the gathering of audit evidence include :
(i)The outcome of an audit is a report, usually expressing an opinion.
(ii)That report and opinion must be supportable by the auditor, if challenged.
(iii)That the auditor will collect evidence on which to base his report and opinion.
(iv)The auditor carries out procedures known as ‘audit tests’ in order to generate this evidence.
(v)These tests, the evidence and the conclusions drawn must be documented in the audit files.
ISA 500 Audit evidence sets out the objective of the auditor as being to design and perform audit
procedures in such a way to enable him to:
(i)Obtain sufficient, appropriate audit evidence
(ii)To be able to draw reasonable conclusions
(iii)On which to base his audit opinion.

Following on from this, the auditor is required by ISA 500 to design and perform appropriate
audit procedures for the purpose of obtaining sufficient, appropriate audit evidence.
Other requirements of ISA 500 are as follows:
(i)Consider the relevance and reliability of the information to be used as audit evidence
(ii)If information to be used as audit evidence has been prepared using the work of a
management’s expert:
Evaluate the competence, capabilities and objectivity of that expert
Obtain an understanding of the expert’s work, and
Evaluate the appropriateness of his report as audit evidence.
(iii)When using information produced by the entity evaluate whether the information is
sufficiently reliable (accurate, complete, precise and detailed).
(iv)Use effective means of selecting items for testing (covered in detail later in this chapter under
ISA 530 Audit sampling).

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(v)If audit evidence from one source is inconsistent with that obtained from another source, or
the auditor has doubts over the reliability of evidence – consider:
What additional audit procedures are needed, and
The effects on any other aspects of the audit.
Sufficient and appropriate audit evidence
Sufficient relates to the quantity of evidence
Appropriate relates to the quality (relevance and reliability) of the eviidence
The auditor will need to exercise professional judgement on both of these aspects; the quantity
and the quality of evidence.
(i)When is there enough evidence to support a conclusion?
(ii)What is the quality of a given piece of evidence, and is this sufficient to justify the audit
opinion?
The two characteristics of quantity and quality are also inter-related:
(i)An auditor may be able to reach a conclusion based on a smaller quantity of high quality
evidence
(ii)But a larger of lower quality evidence may be required to reach the same conclusion.
Deciding how much audit evidence is needed
This is a matter of judgement by the auditor and the quantity of audit evidence required will
depend to a large extent on the quality of that evidence. (The quality will depend on the source of
the evidence and its reliability).
Other factors that the auditor will consider are:
(i)The seriousness of the risk that the financial statements might not give a true fair view: when
this risk is high, more audit evidence will be required
(ii)The materiality of the item
(iii)The strength of the internal controls in the client’s accounting systems
(iv)The sampling method that the auditor will use to obtain the audit evidence: the chosen
method will affect the size of the audit sample that the auditor requires.
The quality of audit evidence
Relevant
There are a number of general principles set out in ISA 500 to assist the auditor in assessing the
relevance of audit evidence.

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(i) Relevance of audit evidence deals with the logical connection with, or bearing upon, the
purpose of the audit procedure, and, where appropriate, the assertion under consideration. E.g.
Relevance may be affected by the direction of testing, say when testing for overstatement in the
existence or valuation of accounts payable, testing the recorded accounts payable may be a
relevant audit procedure.
On the other hand, when testing for understatement, testing the recorded accounts payable would
not be relevant, but rather testing subsequent disbursements, unpaid invoices, suppliers’
statements and unmatched receiving reports may be relevant.
(ii)A given set of audit procedures may provide audit evidence that is relevant to certain
assertions, but not other. E.g. Inspection of documents related to the collection of receivables
after the period end may provide audit evidence regarding existence and valuation, but not
necessarily cut-off.
(iii)Tests controls are designed to evaluate the operating effectiveness of controls in preventing,
or detecting and correcting, material misstatements at the assertion level. Relevant audit evidence
would include identifying conditions that indicate performance of a control, and deviation
conditions. The presence or absence of those conditions can then be tested by the auditor.
(iv)Substantive procedures are designed to detect material misstatements at the assertion level.
Designing substantive procedures includes identifying conditions relevant to the purpose of the
test that constitute a misstatement in the relevant assertion.
Reliable
There are a number of general principles set out in ISA 500 to assist the auditor in assessing the
reliability of audit evidence. These can be summarized as follows:
(i)Audit evidence is more reliable when it is obtained from independent sources outside the
entity under audit. As specified above, ISA 500 requires that the auditor should be satisfied as to
the accuracy and reliability of any internal evidence used in reaching a conclusion. But note that
(ii)Internally generated audit evidence is more reliable when the related controls are effective.
(iii)Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained
indirectly or by inference. For example, observation of the operation of a control by the auditor is
more reliable than inquiry about the operation of that control.
(iv)Audit evidence is more reliable when it exists in documentary form. This could be paper,
electronic or other medium. For example, a written record of a meeting made at the time is more
reliable than a subsequent oral representation of the matter discussed.
(v)Audit evidence provided by original documents is more reliable than audit evidence provided
by photocopies, or documents that have been filmed, or otherwise transformed into electronic
form. This is because the reliability of those other forms may depend on the controls over their
preparation and maintenance.
Procedures for generating audit evidence

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A number of audit testing procedures are available to the auditor as a means of generating audit
evidence. Note that:
(i)More than one procedure may be used in collecting evidence in a particular area.
(ii)Not all procedures may be appropriate to a given objective of the audit.
The auditor should select the most appropriate procedures in each situation. ISA 500 identified
seven main testing procedures for gathering audit evidence:
Inspection (of an item)
Observation (of a procedure)
Inquiry
External conformation
Recalculation
Reperformance
Analytical procedures.
The table below explains these seven main procedures, and gives examples of how they are used
and applied.
Procedure Explanation/application
Inspection * Of tangible assets
(looking at an item) * Of entries in accounting records
* Of documents (e.g. invoice)
Observation * Watching a procedure (e.g. physical inventory counts, distributions of wages,
opening of mail)
* Limited to the point in time when the observation takes place
* The person performing the procedure may act difficultly when being observed.
Inquiry* Seeking information from knowledgeable persons inside or outside the entity.
* Evaluating responses to those enquiries, and
* corroborating those responses with other audit evidence
* in respect of some matters, the auditor may consider it necessary to obtain written
representations from management and/or those charged with governance to confirm responses to
oral inquires. These are covered by ISA 580 which is covered in a later chapter.
External * A specific type of inquiry – seeking confirmation

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confirmation from a third party (e.g. bank or trade receivable)
Recalculation * Checking the mathematical accuracy of documents or records (e.g. adding up
the list of year-end trade receivables).
Reperformance * Independently carrying out procedures or controls, which were
originally performed by the client (e.g. reperforming the aging of year-end trade receivables)
Analytical * Evaluating and comparing financial and/or non-
procedures financial data for plausible relationships and investigating unexpected
fluctuations.
* For example, comparing last year’s gross profit percentage to this year’s and ensuring any
change is in line with expectations.
In-Text Question: List the seven (7) main testing procedures for gathering audit evidence as
contained in ISA 500
In-Text Answer:
(i) Inspection (of an item)
(ii) Observation (of a procedure)
(iii)Inquiry
(iv)External conformation
(v)Recalculation
(vi) Re performance
(vii) Analytical procedures

10.7 ISA 505: EXTERNAL CONFIRMATIONS

The confirmation process is covered by ISA 505 External confirmations. In line with the
generalizations about the reliability of audit evidence in ISA 500, audit evidence in the form of
external confirmations received directly by the auditor are likely to be more reliable than
evidence generated within the client entity.
It is therefore likely that, where it is reasonable to expect customers to respond to requests for
confirmation of their balance, direct confirmation of balances will be a part of the substantive
testing process for trade receivables.
The requirements of ISA 505
The auditor should maintain control over external confirmation requests, including:

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Deciding on the information to be confirmed/requested
Selecting the “confirming party” (e.g. the financial director/controller at the entity contacted)
Designing the confirmation requests (including an instruction for responses to be sent directly to
the auditor)
Sending the requests himself.
Although the letter to customers is sent out by the auditor, it must contain authorization from the
client’s management for the customer to provide the required information direct to the auditor.
(an example of the form that this letter might take is shown later).
If management refuses to allow the auditor to send a confirmation request the auditor should:
Enquire into and validate the reasons for such refusal
Consider the implications of the refusal on risk assessment and other audit procedures.
Perform alternative procedures.
Possible alternative audit procedures are considered in a later section.
Various requirements are set out in relation to the results of the external confirmation
procedures:
If there are doubts the reliability of any response the auditor should obtain further evidence to
resolve those doubts.
If a response is determined not to be reliable, the auditor consider the implications of this on risk
assessment and other audit procedures.
For any non-response, the auditor should perform alternative audit procedures (though for a non-
response to a vital positive confirmation request (see below) the auditor will need to consider the
implications for his audit report).
The auditor should investigate all exceptions to determine whether they indicate misstatements.
They could indicate fraud or a breakdown in internal control or might just be due to timing
differences and therefore not indicative of misstatements.
The auditor should evaluate the results as a whole to decide whether they provide relevant and
reliable audit evidence or whether further evidence is needed.
Audit procedures
Audit procedures relating to confirmation of receivables balances are summarized below, under
the following headings:
(i)Planning the confirmation exercise
(ii)Positive or negative confirmation?

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(iii)Sample selection and performing the confirmation exercise
(iv)Audit procedures following the receipt of replies (with positive confirmation requests)
(v)Preparing a summary and reaching a conclusion
Planning the confirmation exercise
The auditor needs to plan the exercise for the confirmation of balances:
(i)Decide on the timing of the confirmation. Ideally, the confirmation of balances should take
place after reporting period, and should be based on customers’ account balances as at the end of
the reporting period.
However, to reduce the time pressure as the final audit stage, the confirmation process is often
based on balances at an interim date before the end of the financial year (normally no more than
three months before the end of the reporting period). In this case, the auditor will need to check
the changes in the receivables balances between the confirmation date and the end of the
reporting period. This check will consist mainly of checking entries in the receivables control
account with the transactions entered in the books of prime entry during the same period.
(ii)Decide on the number of customer balances to be confirmed. The confirmation process is
normally based on a sampling approach. There are often many customers and the time and effort
required to obtain a confirmation from all of them is not worth the benefit obtained. The auditor
should be able to reach a reasonable conclusion from a representative sample of accounts.
(iii)Decide on the confirmation method to be used. This will be a positive or negative
confirmation request. These methods are explained below.
Positive or negative confirmation?
The confirmation will be either positive or negative. The auditor should decide which type of
confirmation to obtain.

Positive confirmation
A positive confirmation request asks the customer to reply to the auditor whether or not he
agrees with the balances on his account that is in the client company’s accounting records
(receivables ledger) as at the date selected for the confirmation. Positive confirmation can be
obtained in either of two ways:
Method 1. By providing the customer with details of the balance on his account, and asking him
to indicate his agreement that this information is correct, or to indicate that it is wrong.
Method 2. By asking the respondent to provide details of his balance at the selected date, but not
providing any details of the balance in the client company’s receivables ledger.

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This should provide reliable audit evidence. However, there is a risk with Method 1 that a
customer may reply to a confirmation request without checking that the information is correct.
This risk can be reduced by using Method 2. However, with Method 2 there may be a lower
response rate from customers, because they are being asked to do more work to provide the
confirmation.
Negative confirmation
A negative confirmation request asks the customer to reply to the auditor only where he
disagrees with the balance recorded by the company. If no reply is received, there is no explicit
audit evidence in respect of the customer’s balance.
The absence of a reply could mean that the customer agrees with the balances, but is not required
to provide written evidence. On the other hand, the absence of a reply could mean that the
customer has not carried out any check of the balance at all.
The use of negative confirmation requests therefore provides audit evidence that is less reliable
than evidence obtained with positive confirmation requests.
ISA 505 only permits the sole use of negative confirmation where all of the following conditions
are met:
The risk of material misstatement has been assessed as low and controls have been tested.
The population is comprised of a large number of small account balances or transactions
A very low exception rate is expected.
The auditor is not aware of circumstances which would case the respondent to ignore his request
for confirmation.
Sampling risk and statistics sampling
Per ISA 530 Audit sampling the objective of the auditor, when using audit sampling, is to
provide a reasonable basis for the auditor to draw conclusions about the population from which
the sample is drawn. This will mean designing and selecting the sample and evaluating the
results of testing in such a way that sampling risk is kept to the desired level.
The auditor can never be certain that a sample is fully representative of the population. Even if
the auditor tests 999 out of 1,000 invoices and finds no audit problems, it could be that the
remaining single invoice contains a material error or omission. This is the problem of sampling
risk.
10.8 ISA 530: AUDIT SAMPLING
Audit sampling is the application of audit procedures to less than100% of the items within the
account balance. This is done in order to assist the auditor in obtaining and evaluating evidence
about some characteristics of the items selected so as to form or assist in reaching a conclusion
concerning the population which makes up the account balance.

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Sampling risk is the risk that the auditor’s conclusion based on a sample may be different from
the conclusion had he tested the entire population. This will happen if the sample is not
representative of the population as a whole.
Sampling risk can lead to two types of incorrect conclusions:
For tests of controls – that controls are more effective than they actually are and for tests of
details – that a material misstatement does not exist when in fact it does.
For tests of controls – that controls are less effective than they actually are and for tests of details
– that a material misstatement exists when in fact it does not.
The auditor is more concerned with the first type of incorrect conclusion as this type is more
likely to lead to an inappropriate audit opinion.

The usual technique for obtaining a representative sample is random selection.

In this context, ‘random’ means that each item in the sample has an equal chance of selection, so
that there is no bias in the sample selection process.

ISA 530 distinguishes between statistics sampling and non-statistical sampling:

Statistical sampling is any sampling approach that involves random selection and applies
probability theory to the evaluation of the sample results and the measurement of sampling risk.
Non-statistical sampling (also known as judgemental sampling) is any sampling techniques not
based on probability theory. Instead, it is based on a judgemental opinion by the auditor about
the results of the sample.
In Text Question: State the two approaches to sampling in auditing
In Text Answer :(i) Statistical sampling (ii) Non-statistical sampling
Sample design, size and selection of items for testing
If an audit sampling exercise is to be effective – if sampling risk is to be reduced and therefore
detection risk reduced – the sample must be designed in appropriate way.
When designing a sample, the auditor is required by ISA 530 to:
Consider the purpose of the audit procedure and the population from which the sample will be
drawn.
Determine a sample size sufficient to reduce sampling risk to an acceptably low level.
Select items for the sample in such a way that each sampling unit in the population has an equal
chance of selection.

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The auditor will therefore have to make a number of key decisions:
The sampling approach to be used (statistical or non-statistical)
The characteristics of the population from which the sample is to be drawn
The sample selection method
What constitutes a misstatement or deviation
The ‘tolerable’ misstatement or rate of deviation
The ‘expected’ misstatement or rate of deviation
All of the above decisions will influence the sample size required.
Statistical sampling or non-statistical sampling?
Statistical sampling techniques are now widely used in auditing. However, not all audit practices
are convinced of their value and worth.
The benefits of statistical sampling techniques include the following:
(i)Statistical sampling provides an objective, mathematically precise basis for the sampling
process.
(ii)The required sample size can be calculated precisely (using statistical probability techniques).
(iii)There may be circumstances where statistical sampling is the only means of auditing
efficiently (for example, in the case of very large ‘populations’ of items).
(iv)They compel the auditor to consider all relevant factors when planning the audit sample
(v)They promote the standardardization of audit sampling procedures
(vi)The degree of probability of the representatives of the sample can be estimated

The disadvantages of statistical sampling techniques are as follows:

(i)A degree of training and technical expertise is required if auditors are to use statistical
sampling techniques effectively.
(ii)This requires an investment in the necessary training for audit staff.
(iii)Sample sizes may be larger than under a judgemental approach, thus increasing the time (and
the cost) involved in the audit.

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(iv)Some auditors take the view that it is preferable to rely on the skill, experience and
judgement of the auditor, rather than on mathematical/statistical models.
(v)The time spent with mathematics will be better spent on auditing
(vi)They may inhibit the initiative of the auditor
The characteristics of the population from which the sample is to be drawn
The population is defined by ISA 530 as the entire set of data from which a sample is to be
selected and about which the auditor wishes to draw conclusions.
The population from which a sample is to be drawn should be appropriate for the audit objective
to be achieved, and the population should be complete. (in other words, all relevant items must
be included in the population).
For example, if the objective of the audit testing is to confirm the accuracy of trade receivable
balances, the population should include all trade receivables balances as at a specified date.
Alternatively, the audit objective might be more limited in scope – perhaps to confirm the
accuracy of those trade receivables balances in excess of N2m. The population should then
consist of all receivables balances over N2m.
Each individual item in the population (trade receivables in the example above) is referred to as
a sampling unit. It is important that all sampling units should be homogeneous, (have the same
characteristics). In the example of the trade receivables balances above, the auditor would have
to ensure that all the individual balances have been processed by the same accounting methods.
If this is not the case, the population may not be sufficiently homogeneous to allow a valid
sample to be taken. However, it may be possible to turn a non-homogeneous population into two
or more homogeneous populations and then sample from each of these.
For example, suppose that trade receivables balances have been processed through two different
accounting systems (perhaps a computerized accounting system and a manual, paper-based
system). The entire population of receivables could be divided into two segments (or strata) and
a sample could be selected for testing from each segment. This technique is known as stratified
sampling.
The sample selection method
ISA 530 requires auditors to select a sample in such a way that each item in the population (each
‘sampling unit’) has an equal chance of being selected.
A wide range of sample selection methods is available to the auditor:
Random sampling: All items in the population have an equal chance of selection. This is
typically achieved by the use of random numbers of select items for testing.
Systematic sampling: With systematic sampling, a random starting point is chosen from the
population and then items are selected with a standard gap between them (for example, every
10th item). For example, suppose that a sample will be 10% of the items in a population and the
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items in the population can be arranged in a sequence, such as listed in invoice number order, or
account number order or date order. A systematic sample would be to select one of the first 10
items in the list at random, and then to select every 10th item in the list for testing in order to
obtain the 10% sample.
Haphazard sampling: The auditor selects the sample on an arbitrary basis, for example, choosing
any 100 invoices from a file. This is not a scientifically valid method and the resulting sample
may contain a degree of bias. It is therefore not recommended for use with statistical sampling
techniques.
In Text Question: List the methods of selecting samples
In Text Answer :(i) Random sampling (ii) Systematic sampling
(iii) Haphazard sampling
What constitutes a misstatement or deviation
ISA 530’s requirement for the auditor to consider the purpose of the audit procedure means that
the auditor needs a clear understanding of what constitutes a misstatement or deviation.
For example, if the purpose of the audit procedures is to gain evidence on the accuracy of the
statement of financial position figure for trade receivables an, error involving the posting of an
invoice to a wrong customer account does not affect the statement of financial position total and
had no impact on the objective of the testing. (The total trade receivables will not be wrong.
Only the balances on the individual accounts of two customers will be wrong).
The meanings of “misstatement” and “deviation” are only set out in ISA 530 in the context of
“tolerable” misstatements or rates of deviations.
Tolerable misstatement or rate of deviation
Tolerable misstatement is a monetary amount set by the auditor in order to address the risk that
the total of individually immaterial misstatements may cause the financial statements to be
materially misstated. It is the application of performance materiality (as discussed in a previous
chapter) to a particular sampling procedure. A misstatement above “tolerable misstatement”
would therefore be considered material.
Following on from the above, the tolerable rate of deviation is a rate of deviation from prescribed
control procedures which the auditor is prepared to accept and still be able to conclude that the
financial statements are materially correct.
The smaller the tolerable misstatement or rate of deviation, the greater the required sample size.
For example, if the auditor is willing to accept only a small tolerable misstatement in, say, the
amount reported on the statement of financial position for trade receivables, he will need to audit
a large proportion of the receivables balances in order to be able to reach a conclusion that the
financial statements are materially correct. Taking this to its extreme, if the auditor will accept

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no misstatement at all in the receivables balances, he will need to test all the balances in order to
reach the same conclusion.
Expected misstatement or rate deviation
The auditor will also need to form a judgement on the amount of misstatement or rate of
deviation that may be expected to arise in the population.
The higher the expected misstatement or rate of deviation, the greater the required sample size.
The amount of expected misstatement or rate of deviation may be based on such factors:
Experience of the population from previous audits
Experience from the current audit on areas relating to the population. For example, if the auditor
has discovered inaccuracies in the client’s sales invoicing procedures, the expected misstatement
relating to trade receivables will also be high.
Performing audit procedures on the sample
When designing a sample, the auditor is required by ISA 530 to:
Perform appropriate audit procedures on each item selected
If the audit procedure is not applicable to the selected item, the auditor must perform the
procedure on a replacement item. For example, the auditor might select a sample ‘of cheques to
test for evidence of authorization. One of these might be a cheque which has been cancelled.
Provided the cheque has been legitimately and properly cancelled then the auditor may choose
another cheque number to test in its place.
If the auditor is unable to apply the procedure (or a suitable alternative) to the selected item (for
example, because a document has been lost), that item must be treated as a
misstatement/deviation.
The auditor is also required to:
Investigate the nature and cause of any misstatement/deviations and evaluate their possible
effect.
If the auditor consider the misstatement or deviation to be an anomaly he must obtain a high
degree of certainty about this and perform additional audit procedures to obtain sufficient
evidence that the misstatement or deviation does not affect the rest of the population.
Investigation of the nature and cause of the misstatement/deviations may lead the auditor to
conclude that the problem lies within one time period, type of transaction, or location (for
example, perhaps when a temporary member of staff was being employed). In this case he might
decide to extend audit procedures performed on that time-period/type of transaction/location.
An anomaly is defined by ISA 530 as a misstatement or deviation that is demonstrably not
representative of misstatement or deviations in a population.

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 Projecting misstatements and evaluating the results of audit sampling
The auditor is required to evaluate:
The results of the sample. For tests of details this will include projecting the misstatements found
in the sample to the entire population.
Whether the use of audit sampling has provided a reasonable basis for conclusions about the
population that has been tested. If the conclusion is that it has not then the auditor will need to
consider carrying out additional audit procedures.
The auditor wants to reach a conclusion about the population as a whole from the results of the
sample. As required above, for tests of details this will mean using the sample results to estimate
the likely misstatement that exists in the population. This is done by extrapolating the error found
in the sample.
10.9 ISA 580: WRITTEN REPRESENTATION
10.9.1 Definition and objectives
Written representation is a written statement by management provided to confirm certain matters
or to support other audit evidence.
The objectives of the auditor in this area, per ISA 580, are to:
(i)Obtain written representations from management that it has fulfilled its responsibilities in
respect of the financial statements and the audit evidence
(ii)Respond appropriately to written representations provided by management or if management
refuse to provide the written representations requested.
ISA 580 requires appropriate written representations from management (often referred to as
“management representations”) to be in the form of a letter of representation, addressed to the
auditor.
These written representations may be an important source of audit evidence.
Written representations as audit evidence
If the auditor considers that written representations are needed to support other audit evidence he
is required to request such other written representations.
During the course of the audit, management will make many representations to the auditor. Some
of these will be unsolicited but some will be given in response to specific enquires from the
auditor. The auditor will have recorded such verbal discussions with management in the audit
working papers. However, verbal evidence is not strong audit evidence. In order to improve the
quality of this evidence, the auditor will ask for any significant discussions to be confirmed in
writing.
Such representations are likely to be needed:

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(i)To support the auditor’s understanding of management’s intention or judgement (for example,
in respect of future plans for the business or a specific matter such as the net realizable value of
inventory), or
(ii)In respect of the completeness of a specific item (for example, that all liabilities have been
provided for).
However, although such written representations provide necessary audit evidence, they do not
provide sufficient appropriate evidence on their own.
If a representation by management is contradicted by other audit evidence, the auditor should.
Consider whether his risk assessment of that area is still appropriate
Consider whether additional audit procedures are needed
If he has concerns about the integrity of management, document those concerns and consider
withdrawing from the audit.
The auditor is also required by specific other ISAs to request certain other written
representations. These requirements are illustrated in the example letter set out below.
Written representations about management’s responsibilities
The auditor is also required by ISA 580 to obtain certain other specific written representations
from management. In these representations management acknowledges that:
(i)It has fulfilled its responsibility for the preparation and fair presentation of the financial
statements in accordance with the applicable financial reporting framework.
(ii)It has provided the auditor with all relevant information
(iii)its transaction have been recorded and are reflected in the financial statements.
Again, these points are illustrated in the example letter set out below.
Form and contents of the letter of representation
The letter of representation is:
Usually drafted by the auditor (since he knows the areas on which he requires written
representations)
Addressed to the auditor
Dated as near as practicable (but not after) the date of the audit report.
A written representation letter may include the following statements.
The written representation letter relates to the audit of the client company.

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The management of the entity have fulfilled their responsibilities for the preparation of the
financial statements, and the financial statements give a true and fair view and are free from
material misstatement.
The assumptions made by management to make accounting estimates and reach fair values are
reasonable.
Related party relationships and transactions have been disclosed.
All events after the reporting period have been either adjusted or disclosed.
The effect of any uncorrected misstatements (a list of which should be attached to the letter) is
immaterial.
The auditors have been provided with all relevant material, including the books of account, and
unrestricted access to individuals within the entity.
All transactions have been recorded and are included in the financial statements.
10.10 ISA 700: THE UNMODIFIED AUDIT REPORT:
10.10.1 Definition of an unmodified audit report
An unmodified audit report is an audit report containing an audit opinion not modified in any
way – either by changing the unmodified opinion (to a qualified opinion an adverse opinion or a
disclaimer of opinion) or by adding an extra paragraph such as an ‘emphasis of matter’ or ‘other
matters’ paragraph after the opinion paragraph.
ISA 700 requires the auditor to give an unmodified opinion when he concludes that the financial
statements have been prepared in all material respects in accordance with the applicable financial
reporting framework.
If that framework is a “fair presentation framework” then the report will give an opinion stating
whether or not the financial statements “give a true and fair view” or “present fair” the position
and results of the entity.
An unmodified opinion provides a high level of assurance that a professional, independent
examination of the financial statements has not revealed any material misstatements in those
financial statements.
Reaching the audit opinion
In reaching his audit opinion, the auditor is required to evaluate whether.
(i)He has obtained sufficient appropriate audit evidence as to whether the financial statements
are free from material misstatement
(ii)Uncorrected misstatements are material, individually or in aggregate

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(iii)The financial statements have been reared in accordance with the requirements of the
applicable financial reporting framework (which for a “fair presentation framework” will include
evaluating whether the financial statements give a true and fair view)
and, in particular, whether.
(iv)The financial statements adequately refer to or describe the applicable financial reporting
framework
(v)The financial statements adequately disclose the entity’s significant accounting policies.
(vi)The significant accounting policies are appropriate and consistent with the applicable
financial reporting framework
(vii)Accounting estimates are reasonable
(viii)The information in the financial statements is relevant, reliable, comparable and
understandable.
(ix)The financial statements provide adequate disclosures
(x)The terminology used in the financial statements is appropriate.
Core elements of the audit report
The basic elements of an unmodified audit report as given is ISA 700 are as follows:
Title
Addressee
Introductory paragraph
Statement of management’s responsibility for the financial statements
Auditor’s responsibility
Auditor’s opinion
Other reporting responsibilities (possibly)
Auditor’s signature
Date of the audit report
Auditor’s address
These elements are designed to achieve the objectives of ISA 700 which are for the auditor to:
(i)Form an opinion on the financial statements, based on the conclusions drawn from his
audit evidence, and
(ii)Express that opinion clearly through a written report that also describes the basis for that
opinion.

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Title
The auditor’s report should have a title that clearly indicates that it is the report of an
independent auditor. This is to distinguish this type of auditor’s report from other reports that
might be issued by other auditors (two may not have to abide by the same ethical requirements
and requirement for independence as the independent auditor - for example, internal auditors).
Address
The report should be appropriate addressed, as required by national law and the circumstances of
the engagement. The report is usually addressed to either:
(i)The shareholders of the entity whose financial statements are being audited, or
(ii)The board of directors of the entity.
Introductory paragraph
The introductory paragraph in the report should:
(i)Identify the entity whose financial statements have been audited
(ii)State that the financial statements have been audited
(iii)Identify the title of each of statement that makes up the complete set of ianncial statements
(statement of comprehensive income, statement o financial position, and so on)
(iv)Refer to the summary of significant accounting policies and other explanatory information.
(v)Specify the data or period covered by each statement.
Management’s responsibility for the financial statements
This section of the report should describe the responsibilities of those responsible for the
preparation and presentation of the financial statements. It should include ax explanation that
management is responsible for:
(i)The preparation of the financial statements in accordance with the applicable financial
reporting framework, and
(ii)For such internal controls as deemed necessary to enable the preparation o financial
statements which are free from material misstatement.
Auditor’s responsibility
This section of the report states that:
(i) The responsibility of the auditor is to express an opinion on the financial statements based on
his audit.
(ii)The audit was conducted in accordance with ISAs, explaining that those standards require the
auditor to:

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Comply with ethical requirements, and
Plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement.
The latter gives the reader of the report assurance that the audit has been carried out in
accordance with established standards and practices.
This section also describes the ‘scope’ of the audit it refers to the auditor’s ability to perform the
audit procedures which he deemed necessary in the circumstances. Any restriction on the scope
of the audit can lead to a ‘modified’ audit report (which is explained later).
This section also therefore describes an audit by stating that:
(i)An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements.
(ii)The procedures selected depend on the auditor’s judgement, including his assessment of the
risks of material misstatement of the financial statements. As part of this assessment, the auditor
consider relevant internal controls. He does not consider internal controls for the purpose of
expressing an opinion on their effectiveness
(iii)An audit also includes evaluating the appropriateness of the accounting policies used, the
reasonableness of accounting estimates made by managements, and the presentation of the
overall financial statements.
This part of the (unmodified) report should end with a statement that the auditor believes that the
audit evidence he has obtained is sufficient and appropriate to provide a basis for his opinion.
Auditor’s Opinion
When the financial statements have been prepared in accordance with a “fair presentation”
framework an unmodified opinion should be expressed when the auditor concludes that the
financial statements give a true and fair view or are presented fairly, in all material respects, in
accordance with the applicable financial reporting framework.
When the financial statements have been prepared in accordance with a “compliance” framework
an unmodified opinion should be expressed when the auditor concludes that the financial
statements have been prepared, in all material respects, in accordance with the applicable
financial reporting framework.

This can lead to a two-fold opinion. For example, in the UK, an opinion will be expressed on
whether the financial statements:
(i)Give a true and fair view (UK accounting standards) or present fairly (IFRSs), and
(ii)Have been properly prepared in accordance with the Companies Act 2006.

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Where IFRSs are not used as the financial reporting framework, the reference to the financial
reporting framework in the wording of the opinion should identify the jurisdiction of the
financial reporting framework.
Other reporting responsibilities
In some countries, the auditor may have additional reporting responsibilities. For example, he
may be required by local legislation to report certain matters if they come to his attention during
the course of the audit, or he may be required to report on specific matters such as the adequacy
of accounting records.
Such other reporting responsibilities should be addressed in a separate section of the report,
following the opinion paragraph, sub-titled “Report on Other Legal and Regulatory
Requirements.
Auditor’s signature
The report should be signed:
In the name of the audit firm, or
In the personal name of the auditor, or
Both.
The report is usually signed in the name of the firm because the firm assumes responsibilities for
the audit.
Date of the auditor’s report
The report should be dated on earlier than the date on which the auditor has obtained sufficient
appropriate evidence on which to base his opinion on the financial statements.
This will not be earlier than the date on which the financial statements are signed or approved by
the directors/management of the client company.
The date of the report informs the reader that the audit has considered the effect on the financial
statements (and on his audit report) of subsequent events which occurred after the reporting
period and up to the date.
In Text Question: State the core elements of audit report
In Text Answer:
Title
Addressee
Introductory paragraph
Statement of management’s responsibility for the financial statements

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Auditor’s responsibility
Auditor’s opinion
Other reporting responsibilities (possibly)
Auditor’s signature
Date of the audit report
Auditor’s address
SUMMARY OF STUDY SESSION 10
In this study session, you have learnt that:
1. the objective of auditing the financial statements as a whole is to ensure that its free from
material misstatement, whether due to fraud or error.
2. the auditor plans the audit work so that the audit will be performed in an effective manner.
3. the auditor will need to form an understanding of the entity and its environment.
4. information is material if its omission or misstatement could influence the economic decisions
of users taken on the basis of the financial statements
5 the auditor is to evaluate the effect of identified misstatements on the audit
6. the auditor must obtain sufficient and appropriate audit evidence
7. external confirmations received directly by the auditor are likely to be more reliable than
evidence generated within the client entity.
8. audit sampling is the application of audit procedures to less than100% of the items within the
account balance.
9.written representation is a written statement by management provided to confirm certain
matters or to support other audit evidence.
10.management has responsibilities for the preparation and presentation of financial statements
SELF ASSESSMENT QUESTION (SAQs) FOR STUDY SESSION 10
Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Write your answers in your study
notebooks; discuss them with course-mates and your Facilitator at the next contact session. You
can check your answers with the notes on the self-assessment questions at the end of this study
session .
SAQ 10.1 (Testing Learning Outcomes 10.1)
What is the primary objective of audit?

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SAQ 10.2 (Testing Learning Outcomes 10.2)
What is the justification for an auditor planning his audit work?
SAQ 10.3 (Testing Learning Outcomes 10.3)
State the factors that the auditor will need to consider in order to have a good understanding of
the entity and its environment.
SAQ 10.4 (Testing Learning Outcomes 10.4)
Explain materiality in the context of audit
SAQ 10.5 (Testing Learning Outcomes 10.5)
What is the justification for the evaluation of misstatement in the financial statement?
SAQ 10.6 (Testing Learning Outcomes 10.6)
According to ISA 500, state the identified seven main testing procedures for gathering audit
evidence
SAQ 10.7 (Testing Learning Outcomes 10.7)
According to ISA 505, enumerate those conditions that warrant the use of negative
circularisation
SAQ 10.8 (Testing Learning Outcomes 10.8)
Distinguish between statistics sampling and non-statistical sampling
SAQ 10.9 (Testing Learning Outcomes 10.9)
Why does an auditor obtain written representation from the management?
SAQ 10.10 (Testing Learning Outcomes 10.10)
Enumerate the core elements of audit report
REFERENCES
ICAN Study Text (2014).Audit and Assurance. Lagos: Emile Woolf International
.

ANSWERS TO SELF ASSESSMENT QUESTIONS (SAQs)

SELF ASSESSMENT ANSWERS

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 NOTES ON SAQs FOR STUDY SESSION 1
S As Q 1.1
Objectives of Auditing Planning
i)Assuring that appropriate attention is devoted to the different areas of the audit
ii)Assuring that potential problems are identified and resolved on a timely basis
iii)Facilitating review of work done
iv)To ensure proper assignment of work to members of the audit team and their briefing.
v)To assist in the coordination of work done by other auditors and experts so that the audit may
be performed in an efficient and timely manner.
S A Q 1.2
Issues for consideration in audit planningsss
a)Preliminary work to be done in addition to the real audit work
b)Changes in Legislation or any Auditing Standards or Guidelines
c)Analytical Review of Available Managements Accounts and Other Management Information
that relate to the Accounts
d) Changes in the Business or Management
e)Changes in the Accounting System
f)Deadlines Established for the submission of Audit Report
g)Use of Rotational Testing and Verification
S A Q 1.3
Audit strategy is directed to the gathering of relevant and reliable audit evidence in order to
support the expression of an opinion on the accounts.
S A Q 1.4
This is the relative significance of a particular amount, balance, or transaction in relation to the
financial statement as a whole.
S A Q 1.5
A client with multiple location can be described as organisation with many locations in form of
branches, depots, and shops either in the same city or across the nation.
S A Q 1.6

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A consolidated organization can be described as an organization that has a parent company,
subsidiaries, associated companies and affiliates .
NOTES ON SAQs FOR STUDY SESSION 2
SAQ 2.1
Audit risk is the risk that the auditors may give an inappropriate audit opinion on the financial
statements
SAQ 2.2
The components of audit risk are:
(a) Inherent risk
(b) Control risk; and
(c ) Detection risk
SAQ 2.3
The benefits of audit risk assessment are:
(a)It saves audit cost and fees;
(b)It ensures that the audit work is completed expeditiously and economically;
c)It removes all avoidable pitfalls in the audit procedure;
d)It reduces the possibility of under or over auditing;
e)It results in a more effective and efficient audit work;
f)It focuses the auditor’s attention on factors which are more likely to result in misstatements;
and
g)It facilitates the use of sampling and the attendant benefits derived therefrom.
SAQ 2.4
The limitations of audit risk assessment include the following:
a) Subjective values have to be placed on inherent and control risk
b) It may result in a mechanical approach which leads to a loss of auditor’s judgement.
c)The auditor may spend more time on the mechanic of the process and assignment at the
expense of time spent obtaining audit evidence; and
d)The assignments of risk levels are often not suitably specific which puts into question the
validity of any conclusions reached
SAQ 2.5

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Audit risk may be reduced if some of the following positive factors are identified:
a)The enterprise is financially stable without excessive debt ,and is likely to remain so in the
foreseeable future.
b)The enterprise is profitable, if its objective is to make profit.
c)The proprietor, in the case of a private company plays active role in the business.
d)The internal controls are strong and the company’s accounting personnel are competent.
e)The past audit experience has provided evidence of good accounting controls with no major
audit problems ; and
f) The enterprise’s relationship with the regulatory authorities has been good.
NOTES ON SAQs FOR STUDY SESSION 3
SAQ 3.1
Assurance engagement is defined as one in which a practitioner expresses a conclusion designed
to enhance the degree of confidence of the intended users, other than the responsible party, about
the outcome of the evaluation or measurement of a subject matter against criteria’’
SAQ 3.2
The need for assurance service has arisen for the following reasons:
i.Growth in international communication methods especially the proliferation of reporting on the
internet and the use of the worldwide web; and
ii.Additional areas for which information is required, that is corporate social responsibility,
environment reporting, corporate governance etc.
SAQ 3.3
The various elements which are peculiar to assurance engagement are:
(a)Existence of a three party relationship which involves:
(i) the practitioners
(ii) the responsible party: and
(iii) the intended users.
(b)Identification of the subject matter
(c)Existence of suitable criteria.
(d)Availability of sufficient appropriate evidence; and
(e)Written assurance report in appropriate form to include appropriate conclusions.

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S.A.Q 3.4
These are:
(i)Being identifiable
(ii)Being capable of consistent evaluation and measurement
(iii)Being subject to procedure and evidence gathering.
SAQ 3.5
There are basically two types of assurance engagement and they are:
a)An assertion-based engagement, where the accountant declares that a given assertion, that is,
claim or declaration is in his opinion true. A good example is the statutory audit ; and
b)A direct reporting engagement, where the accountant reports on issues that have come to his
attention during his evaluation. An example is a management performance report
SAQ 3.6
These are:
a)Those that vary according to the elements of the engagement. For instance, depending on the
engagement itself, the criteria and the subject matter the level of assurance that the practitioner
can give is either reasonable or limited.:and
b)Those that depend on the subject matter. The subject matter may fall into any of these three
categories
SAQ 3.7
Each audit firm should be conscious of the following implications:
a)Increase in potential liability of accountants resulting from a diversity of engagements
b)Need for accountants to acquire a broad skill base in order to meet the requirements of non-
audit assurance services
c)Possibility of declining audit requirement resulting in decrease in audit fee but compensated by
an increase in fee income from other assurance services
d)There is an increase in expectation gap and possibility of mistaking all other assurance services
as audit in a re-packaged form from the view point of the public

NOTES ON SAQs FOR STUDY SESSION 4

SAQ 4.1

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(i)Direction of the engagement team of their responsibilities, nature of the entity’s business, risk-
related issues, problems that may arise and detailed approach to performance of the assignment
(ii) Supervision by the engagement partner of the whole assignment but it is usual that within the
team, the senior members supervise the junior ones.
iii) Review of the work done is subjected to constant evaluation to ensure that the objectives of
the engagement procedures are met, and a thorough review must be conducted by the
engagement partner before issuing the audit report
(iv)Consultation on difficult and contentious matters are subjected to appropriate opinion and
must be well documented by the engagement partner
(v) Difference in opinions between the audit staff and their manager or between the entire audit
team and audit engagement partner should be resolved in accordance with the firm’s policy for
such matters
(vi)Quality control review requires the audit engagement partner to appoint a reviewer with
whom he discusses and finalizes all significant matters before issuing the audit report
SAQ 4.2
(a)Advertisement should be clearly distinguishable as advertisements.
(b)Advertisement should comply with the law and should be legal, decent, clear, honest and
truthful.
(c)Unsolicited promotional or technical material should not be sent to a non-client by facsimile
transmission or other electronic means.
(d)Unsolicited personal visit or telephone call (i.e. cold calling) to a person who is not a client
with a view to obtaining professional works from the non-client should not be made in relation to
audit or other financial reporting work.
(e)Professional material should not make disparaging references to or disparaging comparison
with the services of others. Reference to size on quality is subjective and should be avoided.
(f)A member is allowed to seek publicity for and advert his/her services achievements and
products in any way consistent with the dignity of the profession.
(g)A member should not project an image inconsistent with that of a professional person bound
to high ethical and technical standard.
(h)If reference is made in promotional materials to fees, member should not make comparison in
such material between their fees and the fees of other accounting practices whether members or
not.
SAQ 4.3

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Where there is no agreement on the basis of the fee, a member should charge a fee which is fair
and reasonable having regard to:
i)The seniority and professional expertise of the persons necessarily engaged on the work;
ii)The time expended by each of those persons;
iii)The degree of risk and responsibility which the work entails; and
iv)The priority and importance of the work to the client; and any expenses properly incurred.
SAQ 4.4
a)whether he or she wants to do the work , considering all the necessary ethical factors.
(b)Whether he/she is not disqualified by any statutory provision from carrying out the
assignment.
(c)Whether the firm has available the appropriate caliber of staff for the job, and if not what will
(be done to get the appropriate staff.
(d)What fees to quote for the work.
(e) Whether non- accounting specialist skills are necessary and if so which ones are required.
(f)Whether staff shall need further training for the work,and if so how much will such training
cost ;and
(g)Whether the proposed timetable for the work fits with the firm’s current work plan.
SAQ 4.5
a)Responsibilities and scope of the audit;
b) Refernces to special arrangements, for example, internal auditors, other auditors
c)Representation by Management, if requested before the completion of the audit.
d)Irregularities and fraud-the responsibilities of the management vis-a –vis the auditors on this
should be specified clearly;
e)Accounting and taxation services, if any;
f)Fees and the basis of calculation or estimation; and
g)Agreement of terms to be in written form
SAQ 4.6
(a)Appropriate consultation takes place on difficult or contentious matters.
(b)Adequate resources are available to accommodate the consultation.
(c)The nature and scope of such consultations are documented: and

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(d)Conclusions resulting from consultations are documented and implemented
It should be noted that consultation may involve seeking it externally, outside the shore of the
audit firm. It can be sourced from other firms or from the Institute.
SAQ 4.7
(a)Unqualified audit opinion – This implies that the accounts show a true and fair view.
(b)Modified audit reports- This implies that the ‘’accounts show a true and fair view except
for…… - when material item(s) in the accounts do not show a true and fair view.
(c)Adverse audit opinion: This implies that the auditor relates in his opinion the accounts do not
give a true and fair view.
(d)Disclaimer of opinion plus any implied opinion – This is issued when the author cannot
confirm whether a true and fair view is given at all, due to a limitation in scope.
(e)Modified audit report for example:- Accounts show a true and fair view expect for ……, plus
any implied opinion when the auditor cannot confirm whether a true and fair view is given in
respect of material item(s) due to limitations in scope.
SAQ 4.8
Expectation Gap is the difference between what people think auditors do and what auditors really
do in practice arising from the role of external auditors as defined by the auditing profession and
as determined by regulation and by statute.
SAQ 4.9
Fraud is an intentional misrepresentation of financial information by one or more individuals
among management, employees or third parties. Fraud is a special case of irregularity as it
involves the use of criminal’s deception to obtain an unjust or illegal advantages.
Error is an unintentional mistake in the financial statements. Examples are:
a. Mathematical error or clerical error
b. Genuine Oversight
NOTES ON SAQs FOR STUDY SESSION 5
SAQ 5.1
Government auditing can be divided into three major categories. These are:
i)Audit of Treasury Accounts
ii)Audit of Ministries/Departments and Agency Accounts;
iii)Audit of accounts of Parastatals.
SAQ 5.2

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a)Be approved by the Ministry of Finance to be a self-Accounting Unit
b)Write an Accounting Manual or Code which must be approved by the Accountant-General and
Auditor-General
c)Establish an Internal Audit Department;
d)Operate a Central Pay Office
e)Operate two current bank accounts with the Central Bank of Nigeria, one for Revenue account
and the other for Capital expenditure
NOTES ON SAQs FOR STUDY SESSION 6
SAQ 6.1
The objectives of Pension Audit is to ensure that payments of benefits such as gratuities and
pensions are carefully monitored and approved for payments by the office of the Auditor-
General for the Federation before such claims are paid.
SAQ 6.2
These are:
i)Regulatory Audit
ii)Financial Audit; and
iii)Value –for-Money -Audit
SAQ 6.3
(i)Economy Audit
(ii)Efficiency Audit
(iii Effective Audit
SAQ 6.4
This could be summarily referred to as all measures, efforts which are designed and put into
practice in the public service/sector with the aim of instilling orderliness, and various control
measures in the conduct of government activities
NOTES ON SAQs FOR STUDY SESSION 7
SAQ 7.1
The specific approach to the audit of any of these peculiar organisations could be as follows:
(a) Accounting policies:-Consideration should be given to problem of accounting
measurement which may affect the organisation revenue.

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(b) Assets and liabilities:- Consider the types of assets and liabilities which are likely to be
found and consider problems that may arise in verifying for them.
(c) Revenue and Expenses:- Consider the types of revenue and expenses which should be
expected and the particular problem which might arise in controlling and recording them.
(d) Internal control:- Consider any special problem which might arise in respect of any of the
transactions of the organisation
(e) Statutory requirement:- Consider CBN Act 1991, NDIC Act 1988 for Banks and Other
Financial Institutions.
(g) Audit Risk :- Consider matter which might give rise to greater than normal audit risk in
some organisation. E.g. valuation of stocks and Work – in – Progress.
(e) Auditor’s report :- Consider matters which might give rise to greater than normal audit
risk in some organisation. E.g. valuation of stock and Work – in Progress.
(h) Auditor’s report :- Consider the form of report.
SAQ 7.2
(i)Sub-Standard
(ii)Doubtful
(iii)Lost
SAQ 7.3
A joint audit is an audit assignment that is carried out by more than one audit firm at the same
time and for the same financial statements.
NOTES ON SAQs FOR STUDY SESSION 8
SAQ 8.1
Investigation is ‘’an act of examining, searching and inquiring into a matter with adequate care
and accuracy, usually undertaken to obtain information of a particular or special nature.
SAQ 8.2
(1)Auditing is statutory (i.e. conducted in line with CAMA 1990 and any other enabling Act as
appropriate to the organisation involved). For examples, BOFIA 1991, CBN Act 1991 and NDIC
Act 1988 as amended while investigation has different meanings.
(2)By definition – both auditing and investigation have different meanings.
(3)The auditors are appointed by, and responsible to the shareholders under audit but under
investigation they are appointed by and report to the management

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(4)The objectives and scope of the auditors are definitive while those of the accountant under
investigation are as directed by the management.
(5)In audit, provisions such as IAS, SAS, IAG are commonly observed while under
investigation, they may not be required.
(6)Details, the extent of audit is limited to account while that of investigation may be beyond
account.
(7)To be an auditor, a minimum professional qualification of ICAN is required with practicing
certificate whereas under investigation, the accountant may not be a member of ICAN with
practicing licence.
(8)Independence is fundamental to an audit whereas under investigation, independence of the
accountant may not be required.
SAQ 8.3
The following are some of the classes of investigations:
(a) Investigation for the proposed purchase of shares or for the purchase of business
(b)Investigation for a lending banker or financial institution for audit appraisal purpose
(c) Investigation for a prospective partnership participation
(d) Investigation for loan decision
(e)Investigation for the purpose of business re-organisation and reconstruction or for a merger
and acquisition scheme.
(f) Investigation for prospectus reporting
(g)Investigations under statute (ie CAMA) into the affairs of the company S 314 CAMA ’90 and
ownership of the company S 326 CAMA ‘90
(h) Investigation for special situations such as :
a)Fraud (Actual/Suspected) damage caused by fire
(b)Back duty investigation at the instance of Federal Inland Revenue Service or Board of Internal
Revenue.
(c)Loss/ Profit of a product line / segment.
SAQ 8.4
The adjustments necessary in the accountant’s report in a prospectus include:
(1)Accounting policies
(2)Change in group structure

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(3)Qualified audit report
(4)Reclassification for comparability
(5)Correction of fundamental errors
(6) Events after the reporting period
(7)Adjustments in source of material, revenue and expenses no longer required in the future.
NOTES ON SAQs FOR STUDY SESSION 9
SAQ 9.1
Insolvency is the inability of a particular person (either corporate or not) to pay debts when due.
SAQ 9.2
Corporate Distress is a situation when a company cannot meet its financial objectives as well as
its non-financial objectives
SAQ 9.3
Examples of events that may occur and cause a floating charge to crystallize are :
i) appointment of a receiver ;and
ii) Commencement of Liquidation.
SAQ 9.4
Acts of Bankruptcy : Before a bankruptcy petition can be presented , the court requires prima
facie evidence of the debtor’s insolvency. The evidence is furnished by proof that the debtor has
committed an act of bankruptcy. these are:
i)makes a conveyance or assignment of his property to a trustee for the benefit of the creditor
generally:
ii)makes a fraudulent conveyance, gift, delivery, or transfer of his property or any part thereof.
iii)makes any conveyance or transfer of his property or any part thereof or created any charge
thereof which would be void as a fraudulent if he were adjudged bankrupt.
iv)departs out or make himself absent from Nigeria, or departs from his dwelling house or place
of business or begins to keep house with intent to defeat or delay his creditor:
v)permits execution to been levied against him and allow the goods to be sold or held by the
court bailiff for more than 21 days.
vi)Files a declaration of his inability to pay his debts or files a bankruptcy petition against
himself:

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vii)Fails to comply with a bankruptcy notice served upon him and
viii)Gives notice to any of his creditors hat he has suspected or is about to suspend payment of
his debts.
SAQ 9.5
The winding up of a company under section 401 of CAMA may be effected by:
a) By the Court – Otherwise Known as compulsory winding up
b) Voluntarily
c) Subject to the supervision of the court.
NOTES ON SAQs FOR STUDY SESSION 10
SAQ 10.1
The objectives of the auditor are formally specified in ISA 200 as:
To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error.
This allows the auditor to give an opinion on whether the financial statements have been
prepared in accordance with the applicable financial reporting framework.
To report on the financial statements, and communicate as required by the ISAs, in accordance
with the auditor’s findings.
SAQ 10.2
Planning an audit of financial statements” is to plan the audit work so that the audit will be
performed in an effective manner.
Helping the auditor to devote appropriate attention to important areas of the audit
Helping the auditor to identify and resolve potential problems
Helping the auditor to identify organize and manage the audit engagement so that it is performed
in an effective and efficient manner.
Assisting in the selection of staff with appropriate experience and the proper assignment of work
to them.
Allowing for the direction and supervision of staff and review of their work.
SAQ 10.3
(i)The industry in which the entity operates
(ii)The nature and competence of its management
(iii)The entity’s internal control system

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(iv)Its current financial performance
(v)Reporting requirements and deadlines
(vi)Any recent developments
SAQ 10.4
Materiality refers to any information that its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements
SAQ 10.5
The objective of the auditor in this area, per ISA 450, is to evaluate the effect of:
(i)identified misstatements on the audit, and
(ii)Any uncorrected misstatements on the financial statements.
A misstatement could be in relation to the amount, classification, presentation or disclosure of an
item.
SAQ 10.6
ISA 500 identified seven main testing procedures for gathering audit evidence:
Inspection (of an item)
Observation (of a procedure)
Inquiry
External conformation
Recalculation
Reperformance
Analytical procedures.
SAQ 10.7
ISA 505 only permits the sole use of negative confirmation where all of the following conditions
are met:
The risk of material misstatement has been assessed as low and controls have been tested.
The population is comprised of a large number of small account balances or transactions
A very low exception rate is expected.
The auditor is not aware of circumstances which would case the respondent to ignore his request
for confirmation.
SAQ 10.8

119
Statistical sampling is any sampling approach that involves random selection and applies
probability theory to the evaluation of the sample results and the measurement of sampling risk.
Non-statistical sampling (also known as judgemental sampling) is any sampling technique not
based on probability theory. Instead, it is based on a judgemental opinion by the auditor about
the results of the sample.
SAQ 10.9
(i)To support the auditor’s understanding of management’s intention or judgement (for example,
in respect of future plans for the business or a specific matter such as the net realizable value of
inventory), or
(ii)In respect of the completeness of a specific item (for example, that all liabilities have been
provided for)
SAQ 10.10
The basic elements of an unmodified audit report as given is ISA 700 are as follows:
Title
Addressee
Introductory paragraph
Statement of management’s responsibility for the financial statements
Auditor’s responsibility
Auditor’s opinion
Other reporting responsibilities (possibly)
Auditor’s signature
Date of the audit report
Auditor’s address
ACC 415: GLOSSARY OF TERMS
A prospectus is any circular, advertisement, notices or other invitation offering any shares or
debenture of a company to the public for sales or subscription.
Audit risk is the term given to the risk that the auditor will reach an invalid opinion or
conclusion from his audit work on financial statements.
Assurance engagement is defined “as one in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users, other than the responsible
party, about the outcome of the evaluation or measurement of a subject matter against criteria’’.
Bankruptcy is a legal proceeding by which an insolvent debtor is declared bankrupt

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Inherent Risk is the risk that an account balance may be materially misstated either
individually or when aggregated with misstatement in other balances or classes, irrespective of
the related internal controls
Control Risk is the risk that a material misstatement could not be prevented or detected and
corrected on timely basis by the accounting and internal control systems.
Detection Risk is the risk that the audit procedures may not detect a misstatement that exists in
an account balance or class of transactions that could be material either individually or when
aggregated in misstatement or in other account balances or classes.
Expectation Gap is the difference between what people think auditors do and what auditors
really do in practice arising from the role of external auditors as defined by the auditing
profession and as determined by regulation and by statute.
Fraud is an intentional misrepresentation of financial information by one or more individuals
among management, employees or third parties. Fraud is a special case of irregularity as it
involves the use of criminal’s deception to obtain an unjust or illegal advantages.
Error is an unintentional mistake in the financial statements.
Insolvency is the inability of a particular person (either corporate or not) to pay debts when due.
Non-Self Accounting Units are ministries or extra –ministerial departments which are required
to maintain complete records of ‘Below-the-line’ payments and receipts (Salary Advance
Accounts) but incomplete records of the ‘Above-the-line’ (Budgetary Accounts) payments and
receipts.
Receivership is the process by which someone (referred to as a receiver of receiver manager) is
appointed in which is vested the legal right to ‘’receive’’ property belonging to the company.
Self-Accounting Units are ministries or extra-ministerial departments where the accounting
functions are delegated to the Accounting Officer.
Sub-Accounting Units are ministries or extra-ministerial departments where the accounting
functions are delegated to the Accounting Officer but the officer is required to render monthly
accounts to the Accountant-General not in details but in Sub-head aggregate form, accompanied
by the original vouchers.
Value for money audit is carried out with the view to ascertaining whether the establishment
pursues optimal value with adequate consideration for economy, efficiency and effectiveness in
its quest for resources management. Value for money audit is referred to as comprehensive audit
or efficiency audit. It is related to the extent to which funds are spent economically, efficiently
and effectively.

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