International Audit & Assurance

Lecture 1

Topic: The nature and issues of audit

 Auditing 1
Lecture 1
The nature and issues of audit
History of audit
THE ANCIENT AUDITOR
Independent arbitrator appointed by interested
parties for accounts to be heard by him and he in turn
gives an opinion by oral report.
Audire ( Latin word) – meaning to hear
Agency theory
Shareholders (Principals) as owners invest in
companies and appoint Directors (primary agents).
Shareholders appoint auditors (secondary agents) who
provide report about directors’ stewardship to them.
Audit in perspective
What? – independent examination of F/S
Why? – to give/express objective opinion as to the true
and fairness of the F/S in conformity with GAAP.
When? – after the mgmt has prepared the F/S.
Who? – independent and expert external auditor
Where? – report audit findings in audit report.
How? – by performing audit as per GAAS
Note:
Mgt is to F/S per GAAP
Auditor is to audit report per GAAS
Definition of audit
Definition by the “Auditing standards and Guidelines”
of the Auditing Practices Committee (now Board)
Definition;
“An independent examination of, and expression of
opinion on the financial statements of an enterprise by
an appointed auditor in pursuance of that
appointment and in compliance with the relevant
statutory obligation”.
Definition of audit
An Audit is an exercise which objective is
to enable auditors to express an opinion
whether the financial statements give a true
and fair view of the entity’s affairs at the
period end and of its profit and loss for the
period then ended, and have been properly
prepared in accordance with the applicable
reporting framework.
Definition of audit
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 judgment including the
assessment of the risk of material misstatements of
the financial statement whether due to fraud or error.
An audit also includes evaluating the appropriateness
of accounting estimates made by management, as well
as evaluating the overall presentation of the financial
statement.
Objectives of an audit
IAASB issue in Jan 2007 has no definition audit in
glossary but states objectives as;
“Audit of FS is to enable the auditor to express an
opinion whether the FS as prepared show true and fair
view in all material respects and in accordance with
applicable financial reporting framework.
An audit of FS is an assurance engagement
IAASB develops International Standard on Auditing
(ISA’s)
Objectives of an audit
Primary Objective
The primary objective of an audit is to enable the
auditor to form and express an independent opinion
on the financial statements.
Objectives of an audit
Subsidiary/Secondary Objectives
To detect errors and fraud.
To prevent errors and fraud by the deterrent and
moral effect of the audit and also by assisting
clients to institute improved financial control
system.
To assist client with accounting systems,
taxation, financial and other problems.
Independent Examination
Auditor should be independent in mind and
appearance ( fact or mental attitude)
Professional code of ethics discusses this
Expression of opinion
Auditors opinion enhances the credibility of FS by
providing high, but not absolute level of assurance
(guarantee)
Absolute opinion is not attainable because
need for judgment (bias)
Lack of precision
Use of testing which may not be 100% tested
Inherent limitations and internal control systems
Evidence is persuasive but not conclusive
Financial statement
The main 5 FS
Other documents;
Director’s Report
Corporate Governance statements
Operating and financial reviews
Five-year trend information
Chairman’s statement
Value added statement
Corporate Social responsibility statement
The appointed auditor
The auditor should have authority vested in him or her
to be able to perform his duties.
Such authority is gained by being appointed under a
contract to be able to enjoy the rights and powers
bestowed under the Companies Act.
To be eligible for appointment in Ghana, one must be
a member of ICA (Gh)
Compliance with relevant statutory
obligations
Auditors duty is governed by statute (GAAS).
Companies Act in Ghana and other
international/relevant standards and guidelines.
Evidence
Evidence should be both Sufficient and appropriate to
draw conclusions.
Question
Discuss how the sufficiency and appropriateness of
the audit evidence can be mutually reconciled to be
able to draw relevant conclusions.
Detection of fraud and error
This is the Primary responsibility of the management
Auditor should however consider likelihood of fraud
in the conduct of an audit
Audit – related services
To provide reasonable and limited levels of assurance
True and Fair view
Auditor is required to report whether the F/S show a
true and fair view or otherwise
True information is not false but factual and conform
with reality. Practically the information conforms with
required standards and law.
Fair information is free from discrimination and bias
and is in compliance with acceptable standards and
rules. Practically the accounts should reflect the
commercial substance of the company’s underlying
transactions.
Responsibilities of auditor
Primary responsibilities of Auditing.
That accounts have been prepared in accordance with
regulation
Accounts are in agreement with accounting records
Proper records have been kept
Balance Sheet and Income Statement show a true and
fair view show state of affairs and results for the period
(True and Fair view / or present fairly in all material
respects)
Responsibilities of auditor
Secondary responsibilities of the auditor
Preventing of errors and fraud
Exercise reasonable care and skill ( there should be no
preconceived idea that accounts contain frauds and
errors
Adhere to objective and general principles of audit.
Education/training & proficiency
To belong to a Professional accountancy body
Obtain years of practical experience
Become a member under strict supervision
Continuing Professional Development
Code of ethics for professional accountancy – IFACs
Advantages of an audit
The sale of business as a going concern is facilitated.
It enables the auditor to give constructive advice to
management on improving the efficiency of the business.
Give assurance that statutory responsibilities concerning the
accounts have been carried out e.g. assurance that all
directors’ emoluments have been disclosed.
The auditor may detect errors and fraud during his audit.
Settlement of accounts on the death or retirement of a
partner is facilitated when audited accounts forms the basis.
Advantages of an audit
It enhances application for fund from third parties.
Gives assurance that the directors have fulfilled their
statutory obligation in keeping proper books of accounts
and safeguarding the assets of the enterprise.
Disputes between management may be easily settled.
Give assurance that the accounts show a true and fair
view or otherwise and that it complies with statutory
requirements.
Sleeping partners and shareholders who have little or no
means of checking the books obtain a fair idea of the
performance of the directors and of the business.
Advantages of an Audit (Specific)
As far as the company’s directors are concerned, the
audit gives:
Assurance that statutory responsibilities concerning
financial statements have been carried out.
Assistance with statutory responsibilities concerning the
accounts.
Availability of expert professional advice – that is, the
suggestions which the Auditor is sometimes able to
make with regard to the improvement of the accounting
system is of great importance to the directors and the
company as a whole.
Advantages of an Audit (Specific)
As far as the company’s shareholders are concerned
it gives:
Assurance that the financial statements show a true and
fair view and complied with statutory requirement.
Assurance that the directors have fulfilled their statutory
responsibilities for the books and accounts and the
safeguarding of assets.
Assurance that all directors’ remuneration has been
disclosed.
Advantages of an Audit (Specific)
Audited accounts is also important to partnership
firm in that:
It affords a convenient means of settling accounts
between the partners themselves and so avoiding the
possibility of future dispute.
The Auditor can give advice to the management on how
to improve the efficiency of the business.
Limitations of an audit
 In spite of the numerous merits of an audit, its limitations
cannot be overlooked.
 It requires client’s staff and management time in providing
information to the auditor.
 If not properly carried out, it will lead to wrong decisions
made by management and shareholders.
 Fraud committed by combined effort of management and staff
may not be detected.
 Information given by management to the auditor may not be
complete or misleading and this may cause the audit report to
be misleading.
 The auditor’s opinion is not a guarantee of future viability of
the entity.
Limitations of an audit
The auditor does not certify that the accounts is
correct or is not correct. This comes from the fact that:
The audit work involves the exercise of judgments
Information given to an auditor by management may be
misleading
Inherent limitation of the audit such as:
 The impracticality of examining all items within

account balance or class of transaction.

 The possibility of collusion or misrepresentation for

fraudulent purposes.
Types of audit
STATUTORY AUDIT
These are audits carried out because the law requires them.
Such audits are governed by the Companies’ Code 1963, Act
179. The auditor must carry out his work in whatever
manner he considers necessary in order to achieve his
statutory duties. The client has no right to restrict enquiries
necessary for the auditor to perform his audit.
It is the audit for an incorporated company having limited
liability status. The auditor has a statutory obligation to
report to members of the company or the appointing
authorities under the statute.
Types of audit
NON STATUTORY (PRIVATE) AUDIT
These are those audits carried out at the request of
interested parties. They are not specifically required by
law. It includes audit of sole proprietor, partnership,
joint ventures. The scope of the audit is underlined in
the engagement letter.
It is the type of audit contracted by businesses not
incorporated under the Companies Act hence have no
legal obligation as regards the auditing of their
accounts.
Complete audit
This is an audit where the auditor is given
unrestricted scope as to the work which he is to
perform and in which he uses his own discretion as to
the extent of the detailed work he is to perform.
It must be noted that a complete audit does not
mean thorough examination and checking of every
document within an undertaking. Modern auditing is
concerned with assessing internal controls and
evaluating these controls to determine the extent of
reliance to be placed on them.
Partial audit
Is one in which the auditor is restricted to carry out
particular work only or is restricted in a way as to his
power of enquiry or examination.
System based audit
This type of audit applies modern auditing techniques
in a scientific and statistical form to investigate the
system of internal control and its operations backed by
test to substantiate the accuracy and reliability of the
records.
It was considered necessary, formerly, to check a great
number of transactions and vouch many documents as
it was as though the greater the amount of work
undertaken the more efficient will be the audit and the
more reliable will the auditor’s report.
Risk based audit
Risk-based auditing refers to the development of
auditing techniques which are responsive to risk
factors in an audit.
The auditor applies judgment to determine what level
of risk pertains to different areas of a client’s system and
devises appropriate audit tests.
This approach should ensure that the greater audit
effort is directed at the areas the auditor considers
critical, so that the chance of detecting errors is
improved and time is not spent on unnecessary testing
of ‘safe areas’.
The increasing use of risk based audit
The increasing use of risk based auditing reflects two
factors:
1. The growing complexity of the business
environment increases the danger of fraud or
misstatement; factors such as the developing use of
computerized systems and the growing
internationalization of businesses are relevant.
Pressures by audit clients for the auditor to keep fee
levels down while providing an improved level of
service.
Management audit
It is concerned with the examination of
procedures laid down by management and of the
efficiency of management itself.
Its objective is to form and express opinion on
the efficiency of management rather than on
the financial statements.
Such audit may be carried out by the internal
auditors of the company.
Areas of Management audit
 The suitability, practicality and present compliance or otherwise
of the organization with its designated objects and aims.
 The relationship of business with its own shareholders and the
investing public in general.
 The current standing of the organization in relation to the
general public and within its own particular industrial or
commercial field.
 The relationship between management and staff of the business
 Financial policies and controls.
 The ratio of operating returns on sales as compared with the
particular industry and the rate of return on capital.
Types of auditors
External auditors
They are independent auditors appointed under either
the private or statutory audit arrangements with no
connection with the company.
Internal auditors
They are auditors who are employed by an enterprise
and who use the same techniques employed by the
external auditors.
Methods of audit
Interim audit

Continuous audit

Final or completed audit

Interim audit
Interim audit is one that is conducted to cover a
certain time or up to a certain date within a financial
period. It is carried out at specific time intervals.
This approach is more often carried out in the case of
large clients so as to cut down on the immense volume
of work.
Interim audit
Advantages;
Dividend payment
Application for extra finance
All advantages of continuous audit

Disadvantages
Alteration of figures after the audit work by the client
Continuous audit
This audit is carried out throughout the financial year.
It starts from the beginning of the accounting period
to the end. It is appropriate for big companies where
volume of transactions are high and also where
internal controls are weak.
In this case, the auditor’s staff will either make several
visits to the client throughout the year or as in the case
of very large companies, some of the audit staff will be
present at the client’s premises virtually all the time.
Continuous audit
Advantages
Extensive and detailed audit work can be carried out.
Errors and fraud and other weaknesses are likely to be
revealed promptly
Moral check/deterrent on clients staff due to
continuous/regular attendance
Audit can be completed more speedily after year end of
client. This allows for early presentation of financial
statements.
The auditor’s work is more evenly spread over the year
which helps relieve pressures on staff .
Continuous audit
Disadvantages
Deliberate alteration of figures by clients staff
Continuous attendance as a nuisance to clients staff
Familiarity may reduce independence
Audit staff expected to solve clients problems
The auditor’s staff may fail to follow up transaction and
answers to queries not be completed at the previous visit.
Strict control is needed to ensure that this does not happen
particularly where the audit staff assigned to the audit has
changed.
More time is taken over the audit.
Measures to minimise the disadvantages of
continuous audit
All necessary corrections to be made to figures audited
must be by way of journal.
Totals at the end of a period should be recorded in the
audit note book and be verified at the next audit.
Errors and queries should be cleared or dealt with as
soon as necessary.
The audit of impersonal and private ledgers should be
left until the final audit.
Final or completed audit
Final audit is one in which the work is undertaken in a
single period following the end of the company’s
financial year.
The auditor starts the audit after the end of the
accounting period of his client and undertakes the
audit through to completion.
Final or completed audit
Advantages
Efficient planning of the audit and proper arrangement of
timetable.
Work is done at one stretch hence no need to return to
uncompleted work.
Alteration of figures is avoided
No interruption of client’s accounting staff (as compared to
continuous audit)
Disadvantages
Difficulty in allocating audit staff
Delays in submitting annual accounts to shareholders
Interim Audit and Final Audit Compared
The difference between interim audit and final audit is
essentially one of timing. The interim Audit will
normally take place approximately three quarters of the
way through the financial year. During interim audit,
the focus is mainly on systems work while the final
audit concentrates on balance sheet work. However,
it will be necessary to complete some systems work
during the final audit so that transactions between the
time of the interim and final audit do not escape the
auditor’s attention. Similarly, some substantive testing
is very likely to be carried out during the interim audit.
The concept of expectation gap
There is a perception of the public of the role of the auditor
although this has been defined by the auditing profession and
regulated by statute.
There are some common misconceptions in relation to the role
of the auditor even among ‘financially aware’ people.
 Many people think that the auditor reports to the Directors of a
company rather than to members.
 Some think that a qualified audit report is more favorable than an

unqualified audit report whereas the converse is true.

 There is a perception that it is the auditor’s duty to detect fraud, when in

fact the detection of fraud is the responsibility of the directors.

These findings highlight the ‘expectation gap’ between what
auditors do and what people in general think that they do.
Value for money audit
Economy
Effectiveness
Efficiency
Regulatory framework
ISA’s by IFAC
Companies Act
ACCA Rules of Professional Conduct
IFACs Professional Bodies;
IAASB
ISAs
ISAE
ISRE
ISQC
QUIZ
Attempt all questions;
1. All accountants are auditors. True or False
2. All auditors are accountants. True or False
3. State in full the following abbreviations;
 GAAP
GAAS.
4. Construct a definition of an audit based on the
answers to the basic questions of audit as in; what,
why, when, who, where and how.
Exercise
Read the text below and fill in the missing words,
making your choice from the words given. You will not
need to use all the words.
WORDS AS OPTIONS
Internal, threat, profession, revision, demands,
sensitive, future, power, interest, promise, reject,
accountability, dynamic, mend, mechanism,
competence, changing, mobile, needs, role,
expectation, groups, social and society.
Text/Passage
The audit is a …(a).. control…(b)..for securing the …(c)..of
the company and its directors. The audit function is a
product of the …(d)..of …(e)..and as such it is a …(f )..not a
static one. The profession must continue to be …(g)..to the
…(h)..needs of the various…(i)..groups. The emergence of
the kind of …(j)..gap to which reference has already been
made, represents a potential …(k)..to the future of the …(l)..
As auditors and the apparent users of audited financial
statement change, society may …(m)..roles formerly
considered acceptable. Professional groups, such as
auditors, must continually be alert to the desirability of …
(n)..modification and …(o)….
Review Questions
1. Define auditing
2. State the prime objective of an audit
3. Discuss the advantages and limitations of an audit
4. Explain the concept of expectation gap
5. Distinguish between the following;
 Statutory audit and non statutory audit
 Interim and final audit
 Partial and complete audit
6. Write briefly on the following:
 Management audit
 System based audit