PERFORM AUDITING AND

REPORTING
DEFINITION AND BASIC FEATURES OF AUDITING
•Auditing is the accumulation and evaluation of evidence about information to
determine and report on the degree of correspondence between the information and
established criteria.
•Auditing should be done by a competent and independent person.
•Auditing enable the auditor to express opinion whether the financial statements are
prepared, in all material respects, in accordance with an identified financial
reporting framework.
•This framework (criterion) might be generally accepted accounting principles
(GAAP), or the national standard of a particular country.
Cont.
•Financial statements include balance sheet, income statement,
statement of cash flow, notes and explanatory material that are identified
as being part of financial statements.
•The phrases used to express the auditor’s opinion are that the financial
statements ‘give a trued and fair view’ or ‘present fairly in all material
respective’.
• Note that the auditor does not certify the financial statements or
guarantee that the financial statements are correct, he reports that in
his opinion they give a ‘true and fair view’, or present fairly’ the
financial position
DEMAND FOR AUDIT

• There is a need for auditing when ownership is separated from

control.
• At a practical level, it helps prevent or detect misstatements-errors or
fraud.
• It may prevent or detect misstatements on the part of (1) the
employees who actually handle the money, or (2) management.
• Auditing is needed to enhance the credibility of financial information
prepared by an entity.
• The independent audit requirement fulfils the need to ensure that
those financial statements are objective, free from bias and
manipulation and relevant to the needs of users.
ACCOUNTING VS AUDITING

•Accounting is the collecting (recording, classifying), summarizing, reporting and

interpreting of financial data.
•Auditing is the testing of those accounting records for fairness, appropriateness. An
accountant only needs to know generally accepted accounting principles (GAAP). The
auditor needs to know GAAP, plus how to select and evaluate evidence related to the
assertions of financial statements.
•Accounting is constructive. It starts with the raw financial data to process and produce
financial statements.
•Auditing on the other hand is analytical work that starts with financial statement to lend
credibility and fairness of the measurements.
TYPES OF AUDITS AND AUDITORS

A. Types of Audits
•Audits are often viewed as falling into three major types:
(1)Audits of financial statements,
(2)Operational audits, and
(3)Compliance audits.
Cont.
1. Audits of financial statements: - The goal is to determine whether the financial
statements have been prepared in conformity with generally accepted accounting
principles.
2. Operational audits: - An operational audit is study of some specific unit of an
organization for the purpose of measuring its performance. The operation of a
unit can be evaluated for its effectiveness and efficiency.
3. Compliance audits: - Compliance audit determines whether the specified rules,
regulations, or procedures are being carried out or followed.
B. Types of Auditors

•The most known types of auditors are

• Independent auditors,
• Internal auditors,
• Government auditors.
Cont.
1. Independent (external auditors): - Independent auditors have no connection to the
firm as an owner or employee/manager. The basic task of independent auditor is to
confirm to the owners that the employees are correctly reporting on their financial
position and performance.
2. Internal auditor: - An internal auditor is paid salary as employee on the organization
that is being audits. He/she is responsible to appraise and investigation the performance
of unit and/or units within the organization and give recommendation to top management.
3. Government audit: - The government auditor is paid a salary by the government.
He/she is responsible to the legislature or executive.
THE NATURE OF EXTERNAL AUDITING IN ETHIOPIA

• In Ethiopia audits seem to be done primary on account of government

regulation. For example, NGOS are audited because the assets of the
NGOS are deemed a “national asset,” the use of which is ultimately
accountable to the government of Ethiopia.
• Auditing in Ethiopia could be viewed in five main areas.
1. The office of the auditor general (OAG)
• The powers and functions of the office of the OG are circumscribed
through the proclamations that established it, its sphere of activity
lies in government audit.
Cont.
2. The audit service corporation. The duty and functions of this entity involve
mostly commercial audits of commercial and productive enterprises wholly or
partially owned by government.
3. Private audit firms.
4. Ministry of finance audit and inspection.
• Auditing activity in this area includes audit of ministries and government
departments by MF auditors and inspectors, including tax audit by Inland Revenue
authorities.
5. State corporations’ and enterprises’ auditors.
•These are audits performed by internal auditors within enterprise
THE AUDITING PROFESSION
INDEPENDENCE
•The AICPA code of professional conduct requires a member in public practice to be
independent in the performance of professional services as required by standards
promulgated by bodies designated by council.
•The requirement is stated in terms of “standards promulgated by bodies designated by
council” to conveniently permit inclusion or exclusion of independence requirements for
certain types of services provided by CPA firms. For example, independence is required for
audits of annual financial statement but a CPA firm can do tax return and provide
management services without being independent. Independence in auditing means an
unbiased viewpoint in the performance of audit test, the evaluation of results, and the
issuance of the audit report.
Cont.
•Independence has two distinct aspects. First, the public accountants must in fact be
independent toward any enterprise they audit. Second, the relationships of public
accountants with audit clients must be such that they will appear independent to third
parties.
•Independences in fact refers to the auditor’s ability to maintain unbiased and impartial
mental attitude or state of mind in all aspects of work. As such independence in fact is
not subject to objective measurement and therefore can be judged only by the auditor.
•Independence in appearance refers to the auditor’s freedom from conflict of interest,
which third parties may infer from circumstantial evidence.
Cont.
The following paragraphs illustrate some of the common situations, which may impair independence.
• Investment interest in audit client: - An auditor’s investment in shares, bonds, mortgage, and
notes of an audit client or its associates, either direct or indirect, may impair independence. In
this situation, an auditor may be in a position to issue an opinion or to influence the client’s
financial statements for personal financial gains at the expense of his/her capacity as auditor.
Such an investment is not limited to the auditor but also applies to his or her immediately family
and to partners and their immediate families.
• Non audit functions and services: - Certain functions are incompatible with the auditing
function. These include functioning as a director, officers or employee of an audit client. The
auditor’s involvement in these functions and services creates a conflict of interest
Cont.
• Litigation between CPA firm and client: When there is a lawsuit or intent to
start a lawsuit between a CPA firm and its client, the ability of the CPA firm
and client to remain objective is questionable.
• Hospitality or goods and services: - This will affect independence unless it is
modest.
• Undue dependence on income: - If the amount of income from a client is very
large as compared to the total annual income of the audit firm, independence
will be impaired since the auditors want to maintain this financial interest.
PROFESSIONAL ETHICS

•All recognized professions have developed codes of professional ethics. Professional

ethics refer to the basic principles of right action for the member of a profession.
•Professional ethics may be regarded as a mixture of moral and practical concepts.
Thus the professional ethics of an accountant would signify his behavior towards his
fellows in the profession and other professions and towards members of the public.
•The fundamental purpose of such codes is to provide members with guidelines for
maintaining a professional attitude and conducting themselves in a manner that will
enhance the professional stature of their discipline.
Cont.
•The AICPA code of professional conduct considers the following to be followed by auditors (accountants) in the
conduct of professional relations with others.
•

- Integrity: - An accountant should be straightforward, honest and sincere in his approach to his professional
work.
- Objectivity: - An accountant should be fair and should not allow bias to override his objectivity. When
reporting on financial statements, which come his review, he should maintain an impartial attitude.
- Independence: - When in public practice, an accountant should both be and appear to be free of any interest
which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity.
- Confidentiality: - A professional accountant should respect the confidentiality of information acquired in the
course of his work and should not disclose any such information to a third party without specific authority or
unless there is a legal or professional duty to disclose.
Cont.
- Technical standards: - An accountant should carry out his professional work in accordance with the technical and
professional standards relevant to that work.
- Professional competence: - An accountant has a duty to maintain his level of competence throughout his professional
career. He should only undertake works, which he or his firm can expect to complete with professional competence.
- Ethical behavior: - An accountant should conduct himself with a good reputation of the profession and refrain from
any conduct, which might bring discredit to the profession.
- Contingent fess: - The AICPA code of professional conduct prohibits a CPA firm from rendering any professional
services on a contingent fee basis.
- Responsibilities to colleagues: - The auditor should promote cooperation and good relations with other members of the
profession.
- Advertising: - The advertising should not be false or misleading,” should not contravene “professional good taste,”
should not make “unfavorable reflection on the competence or integrity of the profession,” and should not” involve a
statement the contents of which” cannot be substantiated.
LEGAL RESPONSIBILITY AND LIABILITY OF AUDITORS

•The auditor is responsible for his report. The auditor then has certain duties to fulfill to the users of
the financial statements that he reports on.
•Responsibilities impose liabilities if things go wrong.
•Liable for what?
•The CPA can be sued under the following legal concepts.
(i) Prudent man concept: - The auditor is responsible for exercising due professional care, and he
is subject to lawsuit if he fails to do so.
(ii) Liable for acts of others: - The partners are jointly liable for civil actions against a partner.
(iii)Lack of privileged communication: - CPAS do not have the right under common law to
withhold information from the courts on the grounds that the information is privileged.
Cont.
A. Auditors’ liability to their clients
•When CPAS take on any type of engagement, they are obliged to render due
professional care. This obligation exists whether or not it is specifically set forth in
the written contract with the client.
•Thus, CPAS are liable to their clients for any losses proximately caused by the CPA’ S
failure to exercise due professional care.
•That is to recover its losses, an injured client need only prove that the auditors were
guilty of negligence and that the auditors’ negligence was the proximate cause of the
client’s losses.
Cont.
B. Auditors’ liability to third parties
•Bankers and other creditors or investors who utilize financial statements covered by an audit
report can recover damages from the auditors if it can be shown that the auditors were guilty
of fraud or gross negligence in the performance of their professional duties.
•Moreover, the auditors can be held liable for negligence to a limited class of third parties if
the auditors have actual knowledge of such third parties or if there exists a special
relationship between the auditors and the third parties.
•The clients (plaintiffs) must prove that they sustained losses, that they relied on the audited
financial statements, which were misleading, that this reliance was the primate cause of their
losses, and that the auditors were negligent.
Cont.
C. Auditors’ responsibility for the detection of fraud and error
•The detection and prevention of error and fraud is the management’s responsibility
by designing and implementing appropriate internal control systems.
•The auditor is not responsible for the prevention and detection of error and fraud.
The auditor is responsible to design audit procedures to reduce the risk of not
detecting a material error or fraud, to an appropriate level to provide reasonable
assurance.
•Accordingly, the auditor must exercise due care in planning, performing, and
evaluating the results of audit procedures.
AUDIT OBJECTIVES

• The objective of the ordinary examination of financial statements

by the auditor is expression of an opinion on the fairness of the
financial statements.
• It is customary in the audit to identify audit objectives for the
audit in general and for each account reported in the financial
statements.
• These objectives are derived from management’s assertions.
• Audit objectives are intended to provide a framework to help the
auditor accumulate sufficient and competent evidence required by
the third standard of fieldwork and decide the proper evidence to
accumulate given the circumstances of the engagement.
Cont.
• A distinction must be made between general audit objectives
and specific audit objectives for each account balance.
• The general audit objectives discussed here are applicable to
every account balance but stated in broad terms.
• Specific audit objectives are applied to each account balance
on the financial statement.
• To achieve this objective the auditor needs to support the
following financial statement assertions (i.e. assertions by
management embodied in the financial statements).
Cont.
• Existence: - an asset or liability exists at a given date. Auditors spend a
great deal of time on this assertion confirming the existence of assets such
as inventories, plant assets, receivable, and cash. Clearly this is a
fundamental assertion; no other assertion is relevant if the asset or liability
does not exist.
• Completeness: - there are no unrecorded assets or liabilities, transaction or
events.
• Occurrence: - a transaction or event occurred during the relevant
accounting period (i.e. has correct cut-off been applied?).
Cont.
• Measurement: - a transaction or event is recorded at the proper
amount and in the correct period.
• Ownership: - an asset pertains (i.e. belongs) to the entity.
• Valuation: - the asset or liability is recorded at an appropriate
carrying value.
• Presentation and disclosure: - must be in accordance with the
relevant legislation and accounting standards (i.e. the applicable
financial reporting framework).
AUDITING PRINCIPLES
• Auditing principles are generally, guidelines that help direct or chart goals and aims.
Principles are based on concepts or assumptions, and/or developed from particular
observations. The following are the basic principles:
(a)Integrity, objectivity and independence. The auditor should be straightforward,
honest, and sincere in his approach to his professional work.
(b)Confidentiality: - the audit should respect the confidentiality of information acquired
in the course of his work and should not disclose any such information to a third party
without specific authority unless there is legal or professional duty to disclose.
(c) Skills and competence: - the audit should be performed and the reports prepared with
due professional care by persons who have adequate training, experience and
competence in auditing.
Cont.
(d) Documentation: - the auditor should document matters which are important in
providing evidence that the auditor was carried out with the basic principles.
(e) Planning: - the auditor should plan his work to enable him to conduct an
effective audit in efficient and timely manner.
(f) Audit evidence: - the auditor should obtain sufficient appropriate audit evidence
through the performance of compliance and substantive procedures to enable him to
draw conclusion there from and give opinion on the financial statements.
(g) Accounting system and internal control: The auditor should gain or
understanding of the accounting system and related internal controls to determine
the nature, extent, and timing of audit procedures
AUDIT STANDARDS

•Standards are authoritative rules for measuring the quality of

performance.
•The existence of generally accepted auditing standards is
evidence that auditors are very concerned with the maintenance
of a uniformly high quality of audit work by all independent
public accountants.
•The 10 GAAS are stated in their entirety as follows:
General standards

1. The examination is to be performed by a person or persons

having adequate technical training and proficiency as auditor.
2. In all matters relating to the assignment, an independence in
mental attitude is to be maintained by the auditor or auditors.
3. Due professional care is to be exercised in the performance of
the examination and the preparation of the report.
Standards of fieldwork

1. The work is to be adequately planned and assistants, if any, are to be

properly supervised.
2. The auditor should obtain a sufficient understanding of the internal
control structure to plan the audit and to determine the nature, extent and
timing of tests to be performed.
3. Sufficient competent evidential matter is to be obtained through
inspection, observation, inquiries, and confirmation to afford a reasonable
basis for an opinion regarding the financial statements under examination.
Standards of reporting

1. The report shall state whether the financial statements are presented in accordance
with GAAP or IFRS.
2. The report shall identify those circumstances in which such principles have not
been consistently observed in the current period in relation to the preceding period.
3. Informative disclosures in the financial statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
4. The report shall either contain an expression of opinion regarding the financial
statements, taken as a whole, or an assertion to the effect than an opinion cannot
be expressed.
THE AUDITORS’ STANDARD REPORT(ELEMENTS)

- Title: Auditing standards require that the report be titled and include the word
independent.
- Address: The audit report is addressed to the individual or group that engaged the
auditors.
- Introductory paragraph: - The first paragraph of the report does three things:
 Specifies the financial statements to which the report relates,
 Specifies the respective responsibilities of directors and auditors, and;
 It makes the simple statement that the auditor has done an audit.
Cont.
- Scope paragraph: -The scope paragraph describes the nature of an audit. The scope paragraph states the
following:
 The auditors followed GAAS,
 The audit is designed to obtain a reasonable assurance about whether the financial statements
are free of material misstatements.
 The audit evidence accumulated and the auditor believes the evidence accumulated was
appropriate for the circumstances to express the opinion presented.
- Opinion paragraph: The final paragraph in the standard report states the auditors’ conclusion based on
the results the audit examination.
- Name of the audit firm.
- Audit report date. The appropriate data for the audit report is the one on which the auditor has completed
the most important auditing procedures in the field.
EXPRESSION OF AN OPINION

•The auditors’ opinions when expressing an opinion on financial

statements may be summarized as follows:
1. An unqualified opinion – standard report.
2. A qualified opinion.
3. An adverse opinion.
4. A denial opinion.
•All significant reasons for the issuance of a qualified, adverse, or
denial of opinion should be set forth in a reservation paragraph
between the scope and opinion paragraph.
•Auditors must qualify their report whenever there are material
deficiencies in the client’s financial statements.
THE UNQUALIFIED REPORT

•The unqualified report is used when the following conditions are met:
1. All statements - balance sheet, income statement, statements of retained earnings,
and statement of cash flows are included in the financial statement.
2. The three general standards have been followed in all respects on the engagements.
3. Sufficient evidence has been accumulated.
4. The financial statements are presented in accordance with generally accepted
accounting principles.
5. There are no circumstances requiring the addition of an explanatory paragraph or
modification of the wording of the report.
• In general, auditors express an unqualified opinion on the client’s financial
statements when there has been no material departure from GAAP and there have
been no material unresolved restrictions on the scope of their audit.
QUALIFIED OPINIONS

• Auditors may issue opinions other than unqualified

opinion when (1) they do not agree with the
accounting principles used in preparing financial
statements or when they believe disclosures in the
statement are inadequate; (2) a change in accounting
principle is not applied properly a as per GAAP, and is
not adequately disclosed in the financial statements;
(3) there are limitations on scope of examination;
and /or (4) there is major uncertainty affecting a
client’s business’
Cont.
A. Qualified opinion -except for: This is issued when there is a limitation
of Scope; or the auditor disagrees with an accounting treatment or
disclosure.
• The opinion states that except for the effects of some material
departure from GAAP, or some material limitation in the scope of the
auditors’ examination, the financial statements are presented fairly.
• The auditors’ reports should have a separate reservation paragraph
disclosing the reasons for the qualification.
Cont.
B. Adverse opinion: This is a stronger form of ‘except for’ opinion – the
disagreement is so material that the financial statements as a whole are
misreading. When the auditors express an adverse opinion, they must have
accumulated sufficient appropriate evidence to support their unfavourable
opinion.
• Whenever the auditors issue an adverse opinion, they should disclose in a
separate paragraph of their report the reasons for the adverse opinion and the
principal effects of the adverse opinion on the client company’s financial
position and operating results.
Cont.
C. Denial of opinion. A denial (disclaimer) of opinion is no opinion. In
an audit engagement, a denial is required when very significant
restrictions on the scope of the audit preclude compliance with generally
accepted auditing standards.
• A very significant scope limitation may be caused by the client or by
the timing of the auditors’ appointment and their audit work or by
factors beyond the control of the client or the auditors, rather than by
restrictions imposed by the client.
Materiality of Type of report
the issue
Not material
Unqualified
Departure from
GAAP scope limitation
Material Qualified ‘except for’ qualified ‘except for’

Very material
adverse denial
Perform auditing and reporting(elements)

• Participate in planning an audit

• Participate in conducting an audit
• Report and follow up audit outcomes
Participate in planning an audit
• Roles and responsibilities for participating in the
audit are Identified based on work requirements.
• Purpose and scope of audit is identified
according to plan.
• Information and resources required to conduct
audit are identified and located based on work
requirements.
Participate in conducting an audit
• Information is collected that is adequate, representative and
meets audit requirements based on audit plan
• Information is analyzed to assess adequacy of performance
against program based on principles.
• Records are reviewed to confirm compliance with program
according to work procedure.
• Compliance with the program is observed within workplace.
• Areas requiring corrective action are identified based on
work requirements.
Report and follow up audit outcomes
• Situations presenting an imminent and serious risk to
program objectives are identified and reported in
accordance with reporting requirements.
• Audit reports are prepared to address audit scope
requirements based on results.
• Results of audit are communicated according to audit
purpose and requirements
• A corrective action plan is developed based on work
requirements.
Thanks