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Topic 1 - Introduction to Auditing

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8 views

Topic 1 - Introduction to Auditing

Uploaded by

tadiwamaundukuse
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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INTRODUCTION

TO AUDITING
NATURE, PURPOSE AND SCOPE OF AUDITING
WHAT IS AUDITING?
Historically:
•The word audit is derived from Latin word
‘audire’ which means to hear.
•Can be traced back to feudalism, the role
of landlords and tenants
•Such audits were conducted by principals
themseleves
•Whenever principal entrusted the
collection of revenue or safeguarding of
assets to a servant, auditing plays role.
AUDITING DEFINED
1. Auditing is a systematic process of
objectively obtaining and evaluating evidence
regarding assertions about economic actions
and events to ascertain the degree of
correspondence between those assertions
and established criteria and communicating
the results to interested users
2. Auditing is a process of carrying out an
assurance engagement.
2a. An assurance engagement is defined as
one in which a practitioner expresses a
conclusion designed to enhance the degree of
confidence of the intended user about the
evaluation or measurement of the subject
FROM THE DEFINITION..
a) Auditing is a process that is
systematic in nature
b) Must be undertaken by a suitably
qualified person, not just any person.
c) Involves collection and evaluation of
evidence so as to report based on
established criteria
PRIMARY OBJECTIVE OF
AN AUDIT
The objective of an audit of the
financial statements is to enable an
auditor to express an opinion as to
whether or not the financial statements
truly and fairly present, in all material
respects, the financial position of the
entity at a specific date, and the results
of its operations and cash flow
information for the period ended on
that date, in accordance with an
identified financial reporting framework
SECONDARY
OBJECTIVES:
•To uncover material irregularities. to disclose
errors, defalcations and similar irregularities.
•To assist management in its responsibility to
establish and maintain an adequate system of
ICs by reporting deficiencies in controls noted
during the course of the audit.
•To make constructive suggestions to the
client regarding various aspects of the client’s
operations
EVOLUTION OF
AUDITING
1. Transactions Auditing - 1881
Involved vouching of entries, casting of ledgers and trial
balance and agreeing to the final accountsThere was
little concern on existence, valuation of assets, evidence
from 3rd parties & internal control
2. System Based Auditing – 1940
A much broader view of the entire business its underlying
assets as well as the system and procedures
forsafeguarding those assets and ensuring the
reliability of its accounts
3. Risk Based Auditing - currently
Requires auditor to use all available info to decide areas
which are likely to be subject to misstatement and focus
auditing efforts to these area
WHY IS THERE A NEED
FOR AUDITING?
The split between ownership and management.
Growth in business, e.g the Government passes
laws to protect the environment and citizens.
Confidence in financial statements – for those
who invest in business, the general public,
investment companies that the financial
information produced by business organisations
is reliable and credible.
Accountability – an independent assessment and
evaluation on whether directors, governments,
etc., are meeting their responsibilities.
TYPES OF AUDITORS

• They express an independent o


egistered external whether the AFS of a company
auditor the financial position and the re
• They perform independent assignme
company’s operations.
evaluation of the efficiency, economy

ernal auditors effectiveness of the company’s intern


systems and business activities and
evaluation of whether the company h
and is addressing the risks faced by t
vernment auditors
• They evaluate and investigate the financial affairs of government departm
meeting its responsibilities in running the financial affairs of the country
confidence which the government has in its departments .

rensic auditors •They concentrate on investigating and gathering


there has been alleged financial mismanagement

Special purpose •These are auditors who specialise in a particular field su


auditors who audit compliance with environmental regu
auditors
TYPES OF AUDITS
i) Financial Audits – audit of financial aspects of an
entity
ii) Operational Audits – audit of operational activities to
ensure performance is as per required standards
iii) Compliance Audits- Review of organisation’s
procedures to determine whether it is following specific
procedures, rules or regulations set out by some higher
authority. •Measures entity’s compliance with
established criteria.
Iii) Value for money Audits – auditing of the economy,
efficiency and effectiveness of organisations
TYPES OF AUDITS...CONT
Audits can be classified in different ways:
a) According to statutory requirementsa.
Statutory audit Non-statutory audit
b) Audit according to nature of work
Complete audit vs partial
Interim audit vs final
Vouching audit
Continuous audit
Management audit
Social audit
Systems based audit
Risk based audit
c) Audit according to responsibility
a) Internal b) external
FUNDAMENTAL
PRINCIPLES OF AUDITING
THEORY
No necessary conflict of interest exists between the
auditor and the management / employees of the
enterprise under audit (both the client and the auditor
have the same objective with regard to fair
presentation)
An auditor must act exclusively as auditor in order to
be able to offer an independent and objective opinion
on the fair presentation of financial information.
The professional status of the independent auditor
imposes commensurate professional obligations, i.e.
due care, service before interest, efficiency and
competence.
Financial data is verifiable, i.e. enough evidence to
support the transactions which have taken place.
FUNDAMENTAL PRINCIPLES
OF AUDITING THEORY
(CONT.)
Internal controls reduce the probability of
errors and irregularities.
Application of generally accepted accounting
practice results in fair presentation.
That which held true in the past will hold
true in the future (in the absence of any
contrary evidence).
The financial statements submitted to the
auditor for verification are free of collusive
and other unusual irregularities.
LIMITATIONS OF AUDIT
Why reasonable assurance and not absolute
assurance/Limitations of audit
•Auditors do not audit each and every
transaction.. Sample
•Use of professional judgments
•Reliance on management representations
•Time constraints
•Independence threat
THE CONCEPT OF ‘TRUE
AND FAIR’
True and fair can be attained when
i. Accounting concepts have been followed and they
are justified
ii. Accounting conventions have been followed and
they are clearly disclosed
iii. Accounting polices adopted are constantly applied
and are acceptable and appropriate
True and fair may be distorted when
i. Figures in the accounts are materially over or
understated
ii. Figures in the accounts do not disclose their true
nature (misleading/ambiguous)
iii. Inconsistent basis with prior period
iv. Some of relevant info not given
v. Obscure or complicated representation of figures in
the accounts
ADVANTAGES OF
AUDITING
•Enhances confidence to users of FS
•May help to detect fraud or errors
•It activates dormant business management
•May support raising of business funds
•Enhances participation of shareholders in
decision making
DISADVANTAGES OF
AUDITING
•Cost
•Time consuming
•Disruption of business operations
•Uncertainty of unveiling misstatement
THE END

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