TUTORIAL 2

Introduction to Audit and

Controls in Accounting
System
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 Auditing is more conceptual in nature

compared to other accounting courses.

Rather than focusing on the rules,

techniques and computations to prepare the

FS, auditing emphasizes on analytical and
logical skills to evaluate the relevance and
reliability of the systems and processes as a
responsible for financial information.
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 To be successful, the framework must be

learnt and then learn to use logic and

common sense in applying auditing concepts
to various circumstances and situations.

Understanding auditing can improve the

decision making ability of consultants,

business, managers by providing a
framework for evaluating the usefulness and
reliability of information.
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 Shareholders/owners are PARENT, while managers

are AGENT.

Agency relationship (between shareholders/owners

and managers) may produces a natural conflict of
interest due to the info asymmetry that exists
between them.

As a result, the agent agrees to be monitored and

auditing appears to be a cost-effective form of
monitoring.

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Assurance services are to enhance the degree of

confidence that intended users can have about the
subject matter information.

Thus, assurance engagements could improve the

quality of information or its context for decision
makers.

In an audit engagement, the subject matter is the

financial statements of the company and the auditors
conclusion in the form of an opinion enhances the
credibility of the financial statements which are the
responsibility of the management or directors of the
company.

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 Materiality is an omission or misstatement

of accounting information that makes it

probable that the judgment of a reasonable
person relying on the information would have
been changed or influenced by the omission
or misstatement.

Audit risk is the risk that the auditor may

unknowingly issue an inappropriate opinion on

financial statements that are materially
misstated.
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Materiality is reflected in the wording of the auditors

standard audit report through the phrase the financial
statements present give a true and fair view.

This is the manner in which the auditor communicates the

notion of materiality to the users.

The auditors standard report states that the audit provides

only reasonable assurance that financial statements do not
contain material misstatement.

The term reasonable assurance implies that there is

some risk that a material misstatement could be present in
the financial statements and the auditor will fail to detect it.
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On most audits, it is not feasible or cost-effective to audit

all transactions.

For example: Small company: The auditor might be able to examine all transactions
occurred. However, it is unlikely that the owner of the business could
afford to pay for such an extensive audit.
Large company: The sheer volume of transactions prevents the
auditor from examining every transaction. There is a trade-off
between the exactness or precision of the audit and its cost.

It is not necessary to examine every item in a population to

draw conclusion about the true characteristics of the
population.
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The major phases of audit are:

Preliminary engagement activities including client

acceptance/continuance and establishing
engagement terms
Obtain an understanding of the entity
Establish materiality and assess risks
Set overall audit strategy and develop audit plan
Perform tests of control and audit business
processes and related accounts
Complete the audit
Evaluate results and issue audit report
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 Unqualified report is one where the financial

reports follow stringent requirements such as:

Being properly drawn up in accordance with the
provision of the Act.
Being properly drawn up according to
applicable approved accounting standards.
Giving a true and fair view of the co.s state of
affairs and result of operations.
The auditor must state in his opinion that the
accounting records has been properly kept.

Unqualified reports assert that the financial

statements are prepared in accordance with

approved accounting standards.
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 Qualified reports are departs from

unqualified reports in terms of
limitation of scope and other
disagreements.

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 (a) Qualified report: Report that states

scope limitation or disagreement with

material consequences, but the overall
financial statements present a true and
fair view. The opinion paragraph is modified
by the words except for.

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 (b) Disclaimer: The auditor cannot give an

opinion on the financial statements. This

occurs when the possible effect of a scope
limitation is so material and pervasive that
the auditor has not been able to obtain
sufficient appropriate evidence to form an
opinion on the overall financial statements.

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 (c) Adverse opinion: Expressed when the

effect of a disagreement is so material and

pervasive to the financial statements that in
the auditors opinion, the financial
statements do not give a true and fair
view in accordance with approved
accounting standards.

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 Relevance refers to whether the evidence relates

to the specific audit objective being tested. If the
auditor relies on evidence that relates to a
different audit objective from the one being
tested, an incorrect conclusion may be reached
about a management assertion.

Reliability refers to the truthfulness of the

evidence. That is, the type of evidence usually

signals the true state of the assertion or audit
objective tested.
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 An auditor may resign from office at an

annual general meeting of a company if he

is not the sole auditor of the company.
Others, he has to hold office until the next
AGM of the company.

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The factors of inherent limitations of

auditing are:

Use of test
Inherent limitations
Audit evidence
Use of judgment
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