1.

Introduction to Auditing
1.1 Definition
Auditing is a systematic and scientific examination of the books of account of a business
concerning the verification of the results shown by the profit and loss account and the
state of affairs as shown by the balance sheet.
Auditing is a systematic and scientific examination of the books of accounts and records
of business to enable the auditor to satisfy himself that the profit and loss account and
the balance sheet are properly drawn up so as to exhibit a true and fair view of the
financial state of affairs of the business and profit or loss for the financial period.
Auditing is done with the help of vouchers, documents, information and explanations
received from the authorities. It is undertaken by an independent person or body of
persons who are duly qualified for the job.
The term auditing has been distinguished from accounting and investigation. The main
point of distinction is that accountancy is concerned with the preparation of financial
statements whereas auditing is concerned with checking of these financial statements
and reporting on the financial position and result of operation of the organization.
Investigation is undertaken for some special purpose i.e. to determine the extent of fraud
or to determine the purchase price of the organization and the like.

1.2 Objective of Auditing

The objective of auditing is to report to the owners whether the balance sheet gives a true
and fair view of the company’s state of affairs and the profit and loss account gives a
correct figure of profit of loss for the financial year. The incidental objective of auditing will
be detection and prevention of Frauds and detection and prevention of Errors.

1.3 Main Classifications of Auditing

There are two main classifications of auditing mainly know as internal and external
auditing.
Internal auditing is a function that, although operating independently from other
departments and reports directly to the audit committee, resides within an organization
(i.e. they are company employees). It is responsible for performing audits (both financial
and non-financial) within a wide range of areas within a business, as directed by the
annual audit plan. Internal audit look at key risks facing the business and what is being
done to manage those risks effectively, to help the organization achieve its objectives.
For example, they may look at risks to the company’s reputation such as the use of cheap
labour in foreign countries, or strategic risks such as producing too many products in
comparison to resources available etc.

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External audit is an independent body which resides outside of the organization which it
is auditing. They are focused on the financial accounts or risks associated with finance
and are appointed by the company shareholders. The main responsibility of external audit
is to perform the annual statutory audit of the financial accounts, providing an opinion on
whether they are a true and fair reflection of the company’s financial position. As part of
this, external auditors often examine and evaluate internal controls put in place to manage
the risks which could affect the financial accounts, to determine if they are working as
intended.
Although the type of audits performed and the associated objectives may differ between
internal and external audit, the process followed by both parties is very similar. Whereas
the timing of an external audit of the financial statements is based upon a company’s
financial year-end, a programme of internal audits is planned over a longer term
dependent upon company activities (e.g. system implementations, mergers and
acquisitions etc.), and a view to rotating the focus on specific information systems based
upon criticality. Once the timing, scope and objectives of the audits have been planned,
all audits will undergo fieldwork activities (e.g. interviews, sample testing, system
interrogation etc.) to provide an assessment of the internal controls and processes in-
scope. The results of the audit will then typically be documented within an audit report,
with a ‘close out’ meeting held with all of the relevant stakeholders to discuss the findings
and agree on the details and timing of any required remediation activities.
The primary role of an internal and external auditor will vary due to the underlying
responsibilities of their respective functions. Despite these differences though, there is a
certain degree of commonality due to fundamental objectives, such as ensuring the
accuracy and integrity of information and business processes, being shared between
them. An internal auditor performs a variety of reviews and assessments, providing the
company board of directors with extremely important information about the operations of
the business. This provides a greater level of independent and objective insight to the
board, so they can see whether their directives are being achieved or not. An external
auditor is typically responsible for providing an independent opinion on the integrity of a
company’s financial statements, although they can be used to provide
additional audit services. This can be achieved by a variety of means, but the preferred
approach is to gain assurance over the company’s internal controls, rather than
performing significant amounts of substantive tests on the data itself.

2. How to Organize Audit Programme

2.1 Meaning of Audit Programme
It is desirable that in respect of each audit and more particularly for bigger audits an audit
programme should be drawn up. Audit programme is nothing but a list of examination and
verification steps to be applied set out in such a way that the inter-relationship of one step
to another is clearly shown and designed, keeping in view the assertions discernible in

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the statement of account produced for audit or on the basis of an appraisal of the
accounting records of the client. In other words, an audit programme is a detailed of the
accounting records of applying the audit procedures in the given circumstances with
instructions for the appropriate techniques to be adopted for accomplishing the audit
objectives.

Businesses vary in nature, size and composition; work which is suitable to one business
may not be suitable to be rendered by the auditor are the other factors that vary from
assignment to assignment. Because of such variations, evolving one audit programme
applicable to all business under all circumstances is not practicable. However it becomes
a necessity to specify in details in the audit programme the nature of work to be done so
that no time will be wasted on matters not pertinent to the engagement and any special
matter or any specific situation can be taken care of.

2.2 Organized Audit Programme

An audit programme consists of a series of verification procedures to be applied to the

financial statements and accounts of a given company for the purpose of obtaining
sufficient evidence to enable the auditor to express an informed opinion on such
statements. For the purpose of programme construction, the following points should be
kept in view:
1. Stay within the scope and limitation of the assignment.
2. Determining the evidence reasonable available and identify the best evidence for
deriving the necessary satisfaction.
3. Apply only these steps and procedures which are useful in accomplishing the
verification purpose. In the specific situation.
4. Consider all possibilities of error.
5. Co-ordinate the procedures to be applied to related items.

Amplification is not necessary of the above points except the one under evidence: that is
the very basis for formulation of opinion and an audit programme is designed to provide
for that by prescribing procedures and techniques. What is best evidence for testing the
accuracy of any assertion is a matter of expert’s knowledge and evidence. This is the
primary task before the auditor when he draws up the audit programme.

2.3 Audit Report and Audit Report Format

The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal
auditor or an independent external auditor as a result of an internal or external audit or
evaluation performed on a legal entity or subdivision thereof (called an "auditee").

The auditor gives his opinion on the financial information disclosed by the business. The
auditor’s report is an integral element of the business’s audited financial statement. At the
culmination of the audit engagement, the auditor expresses his opinion in the auditor’s
report, which can be qualified or unqualified.

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The auditor’s report begins with a brief introduction about the audit engagement.
Thereafter, the auditor’s report is divided in to three major sections. In the first section,
the auditor explains that preparing the financial statements and maintaining sound
internal controls is management’s responsibility. In the second section, the auditor
explains its own responsibilities, duties and rights regarding the engagement. Here, the
auditor emphasizes the nature of the audit and states that the auditor only examines
internal controls and accounting records on a sample basis. In the third section, the
auditor gives his opinion on the financial statements.

Unqualified Report

In an unqualified report, the auditors conclude that the financial statements of the
business present fairly its affairs in all material aspects. The opinion embodies the
assumptions that the business observed compliance with generally accepted accounting
principles and statutory requirements. Also known as a clean report, such a report implies
that any changes in the accounting policies, their application and effects, are adequately
determined and divulged. This opinion does not tell that your business is in good
economic health. It merely states that the financial report is transparent and thorough and
has not hidden important facts.

Audit reports include the auditors' opinion of audited financial statements.

In an audit engagement, the auditor gives his opinion on the financial information
disclosed by your business. The auditor’s report is an integral element of your business’s
audited financial statement. At the culmination of the audit engagement, the auditor
expresses his opinion in the auditor’s report, which can be qualified or unqualified.

Audit Report Layout

The auditor’s report begins with a brief introduction about the audit engagement.
Thereafter, the auditor’s report is divided in to three major sections. In the first section,
the auditor explains that preparing the financial statements and maintaining sound
internal controls is management’s responsibility. In the second section, the auditor
explains its own responsibilities, duties and rights regarding the engagement. Here, the
auditor emphasizes the nature of the audit and states that the auditor only examines
internal controls and accounting records on a sample basis. In the third section, the
auditor gives his opinion on the financial statements.

Unqualified Report

In an unqualified report, the auditors conclude that the financial statements of the
business present fairly its affairs in all material aspects. The opinion embodies the
assumptions that the business observed compliance with generally accepted accounting
principles and statutory requirements. Also known as a clean report, such a report implies
that any changes in the accounting policies, their application and effects, are adequately
determined and divulged. This opinion does not tell that the business is in good economic

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health. It merely states that the financial report is transparent and thorough and has not
hidden important facts.

Qualified Report

A qualified report is one in which the auditor concludes that most matters have been dealt
with adequately, except for a few issues. An auditor’s report is qualified when there is
either a limitation of scope in the auditor’s work, or when there is a disagreement with
management regarding application, acceptability or adequacy of accounting policies. For
auditors an issue must be material or financially worth consideration to qualify a report.
The issue should not be pervasive, that is, the issue should not misrepresent the factual
financial position. If issues are material and pervasive, the auditor issues a disclaimer or
adverse opinion. A qualified audit report does not mean that your business is suffering,
and it doesn't mean that your financial statement isn't transparent. It merely reflects the
auditor’s inability to give a clean report.

3. External Audit Practice in Ethiopia

An external audit is an independent examination of the financial statements prepared by
the organization. It is usually conducted for statutory purposes (because the law requires
it). An audit results in an audit opinion about whether the financial statements give a 'true
and fair' view of the:

Ethiopia’s corporate governance landscape in general and audit mechanisms in particular

are embedded in a setting that differs from a Western context in several ways. The legal
basis for external audit emanates from the Commercial Code of Ethiopia (1960) and that
for internal audit in state-owned companies emanates from directives issued by the Office
of the Auditor General of Ethiopia, whereas it is largely voluntary in the private sector.
Office of the Federal Auditor General (OFAG) issues practice licenses to auditors in public
practice. Having internationally recognized certified or chartered accountancy
qualification, membership to an internationally recognized accountancy body, and four
years of experience in external audit are the major requirements to obtain a license to
practice as an external auditor in Ethiopia. Ethiopian Professional Association of
Accountants and Auditors (EPAAA) is the first professional accountancy body in Ethiopia
that was established in 1973. However, this association does not have a legal backing to
monitor and regulate the profession. As a result, practitioners are affiliated to Western
professional accountancy associations—dominantly the Association of Chartered
Certified Accountants (ACCA).

The manner of appointment, the qualifications and the format of reporting by an external
auditor is defined by statute which varies according to jurisdiction of different countries.
External auditors must be a member of one of the recognized professional accountancy
bodies. External auditors normally address their reports to the shareholders of a
corporation. In Ethiopia, an international certified public accountants like ACCA, CPA or

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CIMA are the only authorized non-governmental type of external auditors who may can
open an auditing firm and attestations on an entity's financial statements and provide
reports on such audits for public review.

In Ethiopia, the external auditor also performs reviews of financial statements and
compilation. In review auditors are generally required to tick and tie numbers to general
ledger and make inquiries of management. In compilation auditors are required to take a
look at financial statement to make sure they are free of obvious misstatements and
errors. An external auditor may perform a full-scope financial statement audit, a balance-
sheet-only audit, an attestation of internal controls over financial reporting, or other
agreed-upon external audit procedures.
The External auditors are also responsible to undertake management consulting
assignments. Under statute, an external auditor can be prohibited from providing certain
services to the entity they audit. This is primarily to ensure that conflicts of interest do not
arise.
The independence of external auditors is crucial to a correct and thorough appraisal of
an entity's financial controls and statements. Any relationship between the external
auditors and the entity, other than retention for the audit itself, must be disclosed in the
external auditor's reports. These rules also prohibit the auditor from owning a stake in
public clients and severely limits the types of non-audit services they can provide.

4. External Audit Practice in Ethiopian Government Organization

4.1 Introduction

The main objectives of government auditing are to express opinion on financial

statements and related issues of legality, regularity and fraud as well as examining
whether government institutions are operating economically, efficiently and effectively. To
achieve these objectives every country establishes a supreme audit institution whose
independence is protected by law.
Features of independence includes, the legal terms and conditions for appointing and
removing the head of the supreme audit institution, reporting freedom, operational and
remuneration independence as well as unlimited access to relevant information.
The existence of independent supreme audit institution can enable informed policy
analysis, confident and credible decision making in the process of national economic
management. Quite apart from serving as the basis for policy analysis and decision

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making, audit also ensures proper accountability and enhances democracy in the
execution of responsibilities conferred at different levels of the decision making process.
Accountability is the obligation to answer for responsibility entrusted. It is also a
relationship based on the obligation to demonstrate and to be responsible for
performance in light of agreed expectations. To ensure accountability in government, the
relation among the three branches of a government (i.e. the legislative, the executive and
the judiciary) needs management in terms of control and power sharing.
The legislative approves various budgets. The approved plans and budget is
implemented by the executive body. In order to know whether the approved budget and
other planned issues are properly implemented or not, the legislative needs accurate
information. To obtain this information forming an independent external audit institution is
very important.
The main functions of the external auditor were:
 Verification of revenue collection through its inspectors.
 Ensuring appropriate implementations of laws regulations and guidance.
 Identification and detection of irregularities and fraud.
 Initiating legal proceedings against those who were involved in fraudulent
activities and irregularities.
 Submitting reports on its findings with recommendations.
Accountability is the obligation to answer for responsibility entrusted. It is also a
relationship based on the obligation to demonstrate and to be responsible for
performance in light of agreed expectations. To ensure accountability in government, the
relation among the three branches of a government (i.e. the legislative, the executive and
the judiciary) needs management in terms of control and power sharing.
2.3. Government auditing
Audit forms an indispensable part of the financial administration and is one of the
important organs necessary to ensure the sound functioning of a Parliamentary
Democracy. It is the main instrument to secure accountability of the Executive to the
Legislature. Audit assists Parliament/Legislature in exercising its financial control over the
Executive, to ensure that funds voted by the Parliament/Legislature have been utilized for
the purpose intended and the funds authorized to be raised through taxation and other
measures have been ssessed, collected and credited to the Government properly.
The primary function of audit is to verify the accuracy and completeness of accounts to
secure that all revenue and receipts collected are brought to account under the proper

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head, that all expenditure and disbursements are authorized, vouched and correctly
classified and the final account represents a complete and a true statement of the financial
transactions it purports to exhibit. It is the function of audit to verify that financial rules and
orders satisfy the provisions of Law and or otherwise free audit objections and the rules
& orders are properly applied.

4.2 Audit Working Paper Preparation in Ethiopian Context

Audit working papers are the documents which record all audit evidence obtained during
financial statements auditing, internal management auditing, information systems
auditing, and investigations. Audit working papers are used to support the audit work done
in order to provide assurance that the audit was performed in accordance with the relevant
auditing standards. They show the audit was properly planned, carried out, there was
adequate supervision, that the appropriate review was undertaken a finally and most
importantly and also that the evidence is sufficient and appropriate to support the audit
opinion.
The international audit report the purpose of the audit, source of information and
conclusions must be clearly evident.
In Ethiopian context the standard report format contains:-
 A descriptive heading: It should include the client’s name, the work paper’s
purpose, and the date under examination.
 Indexing: Like a book, every work paper has a unique page number showing its
place in the audit file.
 Cross-referencing: To improve the efficiency, they want to cross-reference their
work paper to related and supporting work papers. Doing so eliminates the
duplication of work.
 The source of the information: Be sure to include what documents you examined
or who you interviewed to gain evidence about the auditing matter at hand.
 A conclusion: Write a summary of the results of your analysis and your opinion
of the validity of the client assertion
The Management report/letter format includes:-
1. Introduction
2. Findings and
3. Recommendations

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4.3 Audit Sampling

As the purpose of this Auditing and Assurance Standard is to establish standards on the
design and selection of an audit sample and the evaluation of the sample results. This
applies equally to both statistical sampling methods. Either method, when properly
applied, can provide sufficient appropriate audit evidence.
When using either statistical or non-statistical sampling methods, the auditor should
design and select an audit sample, perform audit procedures thereon, and evaluate
sample results so as to provide sufficient appropriate audit evidence.
“Audit sampling” means the application of audit procedures to less than 100% of
the items within an account balance about some characteristic of the items
selected in order to form or assist in forming a conclusion concerning the
population.
While there are a number of selection methods commonly used by Ethiopian auditors are
Random selection (which ensures that all items in the population have an equal chance
of selection) and Systematic Selection (which involves selecting items using a constant
interval between selections, the selection can be based on certain number of items or on
monetary amounts).

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5. Summary

Auditing is a systematic and scientific examination of the books of account of a business

concerning the verification of the results shown by the profit and loss account and the
state of affairs as shown by the balance sheet.
The objective of auditing is to report to the owners whether the balance sheet gives a true
and fair view of the company’s state of affairs.
There are two main classifications of auditing mainly know as internal and external
auditing. External audit is an independent body which resides outside of the organization
which it is auditing.
An audit program is a set of policies and procedures that dictate how an evaluation of a
business is done. This generally involves specific instructions as to what, and how much,
evidence must be collected and evaluated, as well as who will collect and analyze the
data and when this should be done. These types of programs are used to check up on
things like a business' performance, finances, economy, and efficiency, and are generally
tailored to a specific business or purpose.
The auditor gives his opinion on the financial information disclosed by the business. The
auditor’s report is an integral element of the business’s audited financial statement. At the
culmination of the audit engagement, the auditor expresses his opinion in the auditor’s
report, which can be qualified or unqualified.

The process of accounting professionalization in Ethiopia appears to exhibit distinct

patterns during the three epochs when the state followed capitalist-oriented (pre 1974),

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communist (1974 through to 1991), and then capitalist-oriented (1991 onwards)
ideologies.

There has been ongoing public sector financial reform in Ethiopia since the early-1990s
that has been undertaken with the support of Western consultants and Western funding
agencies. Particularly concerning the accountancy profession, among others
recommendations, establishing a National Board of Accountants and Auditors, under
which professional associations would be established.

There was a Ministry of Trade and Industry initiative which led to a road map for the
development of accounting standards in Ethiopia. This was done by the ACCA as a
consultant and with the involvement of other stakeholders in the Country.
In Ethiopia, the external auditor also performs reviews of financial statements and
compilation. In review auditors are generally required to tick and tie numbers to general
ledger and make inquiries of management. In compilation auditors are required to take a
look at financial statement to make sure they are free of obvious misstatements and
errors. An external auditor may perform a full-scope financial statement audit, a balance-
sheet-only audit, an attestation of internal controls over financial reporting, or other
agreed-upon external audit procedures.
The external auditor report has two forms called standard report (which include a
heading, indexing, cross referencing, source of the information and a conclusion) and
Management report (includes introduction, findings and recommendations)

The use of sampling is widely adopted in auditing because it offers the opportunity for the
auditor to obtain the minimum amount of audit evidence, which is both sufficient and
appropriate, in order to form valid conclusions on the population. Audit sampling is also
widely known to reduce the risk of ‘over-auditing’ in certain areas, and enables a much
more efficient review of the working papers at the review stage of the audit.
While there are a number of selection methods commonly used by Ethiopian auditors are
Random selection (which ensures that all items in the population have an equal chance
of selection) and Systematic Selection (which involves selecting items using a constant
interval between selections, the selection can be based on certain number of items or on
monetary amounts).
Auditor independence can be defined as a reference to the independence of internal or
external auditors from parties that might have a financial interest in the business being
audited.

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 6. Referance
 Tesfaye Teferi & Co, Chartered Certified Accountants
 Lisane Auditor Magazine by office of the federal auditor
 Introduction to Auditor
A.A. Bromhead and Co.
A.H Associate Audit
Audit Firm: A.A. Bromhead and Co.
Auditor: Mr. A.A. Bromhead Audit Firm: A.H Associate Audit
Auditor: Ato Hassen Abate

A.W. Thomas and Co. Abebe Kifle Authorized Auditor

Audit Firm: A.W. Thomas and Co. Audit Firm: Abebe Kifle Authorized Auditor
Auditor: Mr. A.W. Thomas, Ato Melaku Abeje Auditor: Ato Abebe Kifle
Abraham Berhanu and Co. Abraham Teshome and Co.

Audit Firm: Abraham Berhanu and Co. Audit Firm: Abraham Teshome and Co.
Auditor: Ato Abraham Berhanu Auditor: Ato Abraham Teshome
Adane Batiso & Co. Adanech Feyisa & Co.

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Audit Firm: Adane Batiso & Co. Audit Firm: Adanech Feyisa & Co.
Auditor: Ato Adane Batiso Auditor: W/ro Adanech Feyisa
ALETA & Co.
Akalu Nuriye & Co.

Audit Firm: ALETA & Co.

Audit Firm: Akalu Nuriye & Co.
Auditor: Ato Tesfaye Alemu, Ato Alemgena
Auditor: Ato Akalu Nuriye
Adugna
(Argaw, 1997; Government of Ethiopia, 1987)

Table of Content
1. Introduction to Auditing
1.1 Definition …………………………………………………………………..1
1.2 Objective of Auditing ……………………………………………………..1
1.3 Main Classifications of Auditing ……………………………………….. 1
2. How to Organize Audit Programme
2.1 Meaning of Audit Programme ……………………………………………2
2.2 Organized Audit Programme …………………………………………….3
2.3 Audit Report and Audit Report Format ………………………………….3
3. External Audit Practice in Ethiopia ………………………………………………5
4. External Audit Practice in Ethiopian Government Organization

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 4.1 Introduction ………………………………………………………………...6
4.2 Audit Working Paper Preparation in Ethiopian Context ……………….7
4.3 Audit Sampling …………………………………………………………….8
5. Summary …………………………………………………………………………..10
6. Reference ………………………………………………………………………….12
7. Sample Audit Report Format

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