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When you have studied this unit you should be able to:
describe what auditing is.
describe the nature of financial statement audits.
explain why audits are demanded by society.
describe the various types of audits and types of
auditors.
1.1 INTRODUCTION
Without question, the independent audit function plays an important role in both business and
society. Numerous third parties, including investors, creditors, and regulators, depend on the
competence and professional integrity of independent auditors.
Economic decisions are typically based upon the information available to the decision maker. To
obtain the most benefit, users should have economic information that is both relevant and
reliable.
This need for relevant and reliable financial information creates a demand for accounting and
auditing service.
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.
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.
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.
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.
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.
B. Types of Auditors
The most known types of auditors are
1. Independent auditors,
2. Internal auditors,
3. Government auditors.
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.
In Ethiopia audits seem to be done primary on account of government regulation. For example,
NGOS are audited because the assets of the NGO S are deemed a “national asset,” the use of
which is ultimately accountable to the government of Ethiopia.