I)

The auditors interest in a clients accounting system The auditors interest in a clients accounting system comes from two sources: 1. Statement of Auditing System (SAS 300) re uires that auditors should o!tain an understanding of the accounting and internal control systems sufficient to "lan the audit and de#elo" an effecti#e audit a""roach. $urther SAS 300 re uires that auditors should% in "lanning the audit o!tain and document an understanding of the accounting system and control en#ironment sufficient to determine their audit a""roach. &. The 'om"anies Act 1()* Section &3+ states: A com"anys auditors shall% in "re"aring their re"ort% carry out such in#estigations as will ena!le them to form an o"inion as to: , -hether "ro"er accounting records ha#e !een .e"t !y the com"any and "ro"er returns ade uate for their audit ha#e !een recei#ed from !ranches not #isited !y them% , -hether the com"anys !alance sheet and (if not consolidated) its "rofit and loss account are in agreement with the accounting records and returns. If the auditors form a contrary o"inion% they must state the fact in their re"ort.

II)

The managements interest in an accounting system 1. The management of an enter"rise need com"lete and accurate accounting and other records !ecause: , , , , The !usiness cannot otherwise !e controlled. day to day records of de!tors and creditors are indis"ensa!le Assets can only !e safeguarded if a "ro"er record of them is made $inancial statements which are re uired for numerous "ur"oses can only !e "re"ared if ade uate "rimary records e/ist

Statutes often ha#e s"ecific re uirements on record .ee"ing for s"ecific ty"es of !usiness

0ecord .ee"ing for 1A23% 45I% 6AT and statutory sic. "ay an statutory maternity "ay is also a statutory re uirement.

&. -hat constitutes an ade uate system of accounting de"ends on the circumstances. A small sho".ee"er may find that a 7Sim"le/ !oo. and s"i.e for un"aid in#oices may suffice !ut an international com"any clearly needs rather more so"histicated records. The !asic needs of a system is that it "ro#ides for the orderly assem!ly of accounting information to ena!le the financial statements to !e "re"ared !ut all the other re uirements a!o#e must !e !orne in mind.

III)

The need for controls o#er the system A system of accounting and record .ee"ing will not succeed in com"letely and accurately "rocessing all transactions unless controls% .nown as internal controls% are !uilt into the system. The "ur"oses of such internal controls are: , To ensure transactions are e/ecuted in accordance with "ro"er general or s"ecific authori8ation. , To ensure all transactions are "rom"tly recorded at the correct amount% in the a""ro"riate accounts and in the "ro"er accounting "eriod so as to "ermit "re"aration of financial statements in accordance with rele#ant legislation and accounting standards. , To ensure access to assets are com"ared with the e/isting assets at reasona!le inter#als and a""ro"riate action is ta.en with regard to any differences , To ensure errors and irregularities are a#oided or made a""arent.

I6)

Auditors "rocedure The auditors "rocedures will de"end on the circumstances !ut may include:

9!taining an understanding of the enter"rise as a whole in order to see the accounting system in conte/t and thus !eing a!le to assess the systems effecti#eness and a""ro"riateness.

Ascertaining the com"lete system !y en uiry% use of an internal control uestionnaire or re uesting the client to su""ly full details.

0ecording the system in the form of flowcharts% narrati#e notes% and chec. lists or in the answer to the Internal 'ontrol :uestionnaire.

If the auditor intends to rely on the internal controls% he should record the system of controls in es"ecial detail.

If the system s"ecification was su""lied !y the client% then "erform wal., through chec.s to confirm the correctness of the descri"tion.

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1erform a "reliminary e#aluation of the system. If the system of controls seems ade uate and the auditor is a!le to and wishes to rely u"on the controls% then design and "erforms com"liance tests.

If the auditor does not feel a!le to rely on the controls then "erform su!stanti#e tests on the records. In any case% some su!stanti#e tests must !e "lanned and "erformed on all material items

3#aluate his e#idence and form an o"inion on whether "ro"er !oo.s of account ha#e !een .e"t and whether the records form a relia!le !asis for the "re"aration of financial statements.

SAS 300 re uires that auditors should o!tain and document an understanding of the accounting system and control en#ironment sufficient to determine their a""roach. This does not mean that a detailed .nowledge of the accounting system or internal controls is re uired. 5owe#er SAS 300 suggests that what is re uired is an understanding of the system sufficient to ena!le them to identify and understand:

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;a<or classes of transactions in the entitys o"erations. 5ow much transactions are initiated Significant accounting records% su""orting documents and accounts in the financial statements.

The accounting and financial "rocess% from the initiation of significant transactions and other e#ents to their conclusion in the financial statements.

This seems to !e #ery com"rehensi#e= 5owe#er note the words ma<or and significant. ;ore detailed .nowledge of internal controls may !e re uired if the auditor% after e#aluating ris.s matters% decides that her a""roach is to rely on some internal controls as audit e#idence. In "ractice an understanding of accounting records often goes hand in hand with an understanding of internal controls. In any e#ent the auditor needs to ha#e e#idence on The 'om"anies Act 1()* S &3+ re uirements