CPA NOTES..

TOPIC ONE; INTRODUCTION: NATURE, PURPOSE AND SCOPE OF AUDIT

Audit :

An examination and expression of opinion on the financial statements of an enterprise by an appointed auditor.

Auditing:
Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions

about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

Objectives of an audit
1. The statutory objective

Which is to produce a report which should contain matters of the seventh schedule the companies act Cap486 which include the following:
That the auditor has obtained all info and explanations necessary for the purposes of the audit. That proper books of a/c have been kept by the company being audited. That proper returns have been received from the branches of the company not visited by the auditor That the financial statements are in agreement with the books of a/cs maintained by the company That in the auditors opinion the financial statements comply in all material respect to the provision of

the companies act

2.

Professional objective
This is according to ISA 200 objective of an audit is to enable the auditor express an opinion as to whether the financial statements have been prepared in all material respects in accordance with an identified financial reporting framework. The other objective is for the auditor to highlight all problems encountered during the audit function.

3. i. ii.

Incidental objective The incidental objectives of an audit include To detect errors and fraud To prevent errors and irregularities through deterrent and moral effect of the auditors presence. To report on any omissions or inconsistencies of reports produces by the directors

iii. To provide spin off effects e.g. advising the mgt to improve on thea systems thru a mgt letter iv.

Scope of audits Refers to the procedure required to conduct an audit in a particular environment and therefore may depend on the nature of the entity being audited. It maybe conducted in accordance with the following

The requirements of international standards of audit or national auditing standards. The ethical requirements of the relevant professional bodies. The relevant legislation affecting the entity i.e. companys act The relevant legislation affecting the entity e.g. memorandum and articles of association of a company The engagement terms as per the engagement letter The relevant reporting requirements

Audit as an assurance function The term assurance serves to satisfy the purposes namely:

Increase user confidence on information Reduce information risk

There are various types of assurance services performed by practicing accountants, such services include;

Bookkeeping, Accounting services, Audit services, Tax consultancy services, Financial management services, Human resource consultancy services, Reviewing of perspective financial information, Risk management services, Customer satisfaction survey services, Bench marking practices, Value for money audit

The above info can be classified into three Assurance engagement Attestation engagement Audit engagement

Attestation Services Primarily Financial Information

1.

Assurance engagement Its a professional service where the practioner is engaged is engaged in the review of any type of info with a view to giving a certain level of assurance depending on the nature of work

Attestation engagement The review of financial info with a view to giving a certain level of assurance. Such services are referred to as non financial services.
2.

Audit engagement This is a detailed examination of the clients financial statements with a view to expressing an opinion through a fair and true view.
3.

N/B : an audit may not be 100% accurate because

Judgment involved Estimation involved Time constraints Lack of cooperation from the client Weak sys The fact that auditor relies on persuasive evidence rather than conclusive evidence

LEVELS OF ASSURANCE
1.

Highest level (reasonable) Given when the auditor has performed a full audit of the clients fin stmnts involving carrying out a standard audit procedure and performance requirement. Level of certainty is high and auditor gets reasonable assurance that the financial stmnts rep a true and fair view.

2.

Middle/moderate level Its given wea a review has been performed on financial info for the purpose of giving a limited level of assurance . Used wea an auditors work has been confined Lowest level Its a disclaimer normally given by the auditor in the situation where he has carried out work on behalf of the client e.g.. Completion of accounts

3.

CLASSIFICATION OF AUDITS

Audits can be classified into various broad groups or types depending on:
i. ii.

Nature of work

- private, statutory, internal, external

Timing of audit work - interim, final/completed, continuous - procedural, balance sheet, management, compliance, operational - vouching/ substantive, risk based, systems

iii. Method/ approach taken iv. Strategies v.

Organizational structures joint,, group, branch - social, environment, forensic

vi. Respect of society

Types of audits
1.

Private audit/ non statutory

its not required by the law. Its common to sole traders, partnerships, welfare societies clubs Carried out at owners convenience. Auditors liability is limited to a contractual arrangement with the client nd therefore can only be liable in negligence to the extent of contractual obligation

1.

Statutory audit Its performed as per legal requirement nd is dependant on the relevant statutes (an act of parliament) R compulsory and carried out annually In such an audit the duties, rights, scope of procedures for appointment nd removal of an auditor r also specified by law In such audits the auditors report is required to comply with statutory objectives Auditors liability extend to third party who may an interest in the clients activity Auditors have a wider responsibility to stake holders in the context of stewardship accounting concept

3.

Internal audit Its an internal function involving an review and appraisal of an entitys internal control system by an employee of the org who works under the employer. Its usually for the purposes of improvement

4.

Duty nd scope responsibility n procedures are there fore prescribed by the appointing availability Internal auditors therefore perform private nd partial audits e.g. procedural, operation and compliance audits External audit

An audit function performed by an independent external auditor on behalf of the owners off the entity. Duty nd scope, responsibility n procedures are there fore prescribed by the client External auditors may perform statutory , private, internal, partial audits etc

5.

Interim audit An audit carried out in the early part or middle part of the financial period of the client either to lay out ground work for the final audit or to achieve some predetermined

Suitable for medium sized entity

Functions of interim audits

i. ii.

Reviewing previous working papers Understanding the nature of client sys

iii. Following up of the matters raised in the previous final audit

Advantages of interim audits

its useful where the client is about to pay interim dividends Enables the auditor plan for the final audit Errors and frauds maybe discovered early and corrected Enables auditors to clearly understand the nature of their clients systems May facilitate arrangements e.g. mergers, acquisition and take over May act as a preventive measure against irregularities due to the auditors presence May facilitate publication of interim financial statements

Disadvantages of interim audits

Such audits may entail a lot of note taking and therefore may be time consuming Such audits may create familiarity threat to the independence of auditors Interim performance may be subject to changes which may distort the auditors judgments and decisions at a later date

Such audits are only confined to medium and large entities

6.

Continuous audits

Its a n audit carried throughout the year without stopping This is the type of audit requires the auditors to be stationed permanently

Advantages of continuous audit

1.

Mistakes and frauds are discovered easily and quickly as the auditor checks the accounts at regular intervals and in details.

2.

Guidance to Client - The auditor remains in touch with the business details, so he also indicates about the mistakes and gives valuable suggestions to the client to keep the accounts in proper manner.

3.

Another audit benefit is the early completion of the accounts checking. The results of audit can be found out just at the end of the accounting period.

4.

Moral Check - In the continuous audit the auditor make the surprise visit in the business. The clerks are not aware about the visit. So they are alert and efficient in their work. There is less chances of frauds in this type of business

5.

Auditor Advice - In the continuous audit the auditor can find the weakness of the business during the year and he can make the suggestion for the improvement of the business.

Disadvantages of continuous audits

1.

Expensive - Continuous audit is more expensive as compared to other kinds of audit, because the auditor has to devote more time to this audit.

2.

Inconvenience - In this audit, the auditor visits the clients office at regular intervals to check the accounts and records these frequent visits made by the auditor may dislocate the work of his client and cause convenient to him.

3. 4. 5.

Familiarity threat due to permanent interactions town the auditor and audit staff Becomes boring working in same environment Mechanical Work - The work of audit becomes too mechanical because it remains continue throughout the year.

7.

Final audit (audits small clients)

Takes place towards the end of the clients financial period up to the finalization of the audit process Advantages
1. 2. 3. 4. 5.

Eliminates note taking which is common in interim and conti audits Helps in avoidance of clients operations since it commences after accounts have been finalized Its easy to plan and execute because it takes place in one session It may not b subject to manipulation by client staff since the auditors will have taken charge of the fin stmnts Less expensive compared to interim and conti audits

Disadvantages
1. 2. 3. 4.

Confusion where The auditor has many clients and their financial year ends on the same date. In this type of audit, the management has a whole year to think and decide how to make the frauds In the final audit there may not be thorough checking. In this way the errors and frauds are not located. The auditor cannot pay the proper attention towards the audit because he is bound by the fixed time.

Factors affecting timing of audit work

1. 2. 3. 4. 5.

Nature of clients entity in terms of size Deadlines fixed by the clients to be met during the function Nature of clients systems in terms of strengths and weakness Whether auditors are dealing with new or old clients Whether client sys are computerized or manual

8.

Procedural audit

Evaluation of internal controls, accounting policies, and other procedures of a business entity by an auditor. Advantages
1. 2. 3.

Auditors may provide expert advice regarding appropriate procedures to be followed Such audits may result to overall improvement of the entity's systems Such audits may result into a facilitation of an external audit process.

Disadvantages
1. 2. 3. 4. 5.

External auditors may lack sufficient knowledge of the clients procedures The client may not cooperate with the auditor in providing sufficient information Such audits may result into self review threats on the independence of the auditor Such audits may be expensive to conduct Such audits would result in to duplication of auditors with external and internal audits

9.

Management audit (partial audit)

Conducted to investigate the managerial aspect of an entity in terms of managerial making process Advantages
1. 2. 3. 4. 5.

Help improve quality of management decisions thus enhance profitability May also reveal the strength and weakness of the top mgt of an entity They dont in tempt other functions since they are only confined to managerial aspects Management a/cs mayb improved and also irregularities and fraud may be reveled Inefficiencies of a budgetary sys mal also be reveled

Disadvantages of management audit

1. 2. 3. 4.

time consuming and expensive May result into biased reports esp. if influenced by directors and managers They may not be relied upon to highlight inefficiency caused by factors beyond the management They could result into disagreements to owners of an entityand the mgt leading to a possible takeover

10. Balance sheet audit (partial audit)

An audit where the auditor commences his examine frm the balance sheet nd moves backwards to the bks of org entry Occurs where: - (1) client is a well established large entity (2) auditor has associated with the client for may years (3) the client has a strong a/cting and internal control system (3) the interim audit has already been performed (4) thea is a highly computerized sys with appropriate controls for prevention of errors and fraud

Advantages
1. 2. 3. 4.

Assists auditors in detecting misstatements affecting assets and liabilities Much faster Work well wea auditor has sufficient knowledge of the client Less costly in terms of resources

Disadvantages
1. 2. 3.

Errors and irregularities in other fin stmnts may not be detected It assumes the effectiveness of the clients system which may not be true Concentrates only on the balance sheet

11. Operational audit (partial audit)

Its a sys review of an entitys op and activities to assess its performance n to identify opportunities for improvement It establishes whether there is economic and efficient use of resources and whether the company is operating effectively to be able to me its goals and objectives

Advantages
1. 2. 3.

Result into improvement in utilization of resources May also highlight areas that nid urgent attention by the manage Also reveal errors and fraud affecting the operations of the entity

Disadvantages
1. 2. 3. 4.

Auditors may lack proper understanding of the nature of clients operations Lack of co-operation from the clients staff in providing sufficient and relevant information This is a partial audit and may result into insufficient info for the user needs Such audits may not be useful to entities operating in dynamic environments

12. Compliance audit (partial audit)

Its carried out to determine whether the company is complying with the laws and regulations affecting it

Advantages
1. 2. 3. 4. 5.

Ensures transparency May reveal situations where there are conflicting regulations May also help to detect irregularities and fraud Helps to ensure that funds are properly utilized for the right project Helps to ensure the budgets aint exceeded

Disadvantages
1. 2. 3.

May be based on outdated laws and regulations Some auditors may lack understands on the nature of the laws and regulations affecting the entity Existence of corruption and impurity may frustrate the efforts of such audits

13. Joint audit

This where 2 or audit farms carry out joint audit work for the same work concurrently with a view the issuance of an audit report

Advantages
1. 2. 3. 4. 5.

There is an opportunity for training and exposure of the audit staff due to consultations Combined efforts ma produc5 synergistic effect during joint efforts Such audits may be performed much faster auditors are much better placed to meet the relevant deadlines required by clients Local auditors tend to understand the nature of their environment and may therefore carry out an effective audit

Disadvantages
1. 2. 3. 4. 5.

There may be lack of uniformity of procedures by the different auditor. Difficulty in coordination of work There is a possibility of conflicting decisions by different auditors There is a problem of sharing or extended liabilities by the joint auditors during such functions Such audits tend to be costly and expensive

AUDITING AND ACCOUNTING DISTINGUISHED ACCOUNTING Involves prep of financial statements AUDITING Involves detailed review and examination of financial statements Carried out to facilitate decision making internally in an entity or externally by user Formed in accordance with accounting standards May involve preparation of diff types of accounts Can be carried out by a competent accountant Is a continuous process carried out internally by an employer of an entity Carried out to provide credibility and to give highest level assurance Performed with the relevant auditing standards Performed with the relevant auditing standards Should be performed by a qualified competent auditor Maybe performed as an independent function only on specific occasions

International standards on auditing Authoritative statements formulated by the accounting profession to be applied during the audit of financial stmnts. Advantages of ISA
1. 2. 3. 4.

Provides a framework for all audits around which an audit can be developed Help to standardize the audit report to a common objective of producing a report They assist the audits in the interpretation of important audit concepts They increase public awareness of what an audit comprises and nature of work behind the production of the auditors report

5.

May provide support to the auditors actions esp. where disputes arise btwn auditor and client

Disadvantages of ISA
1. 2. 3.

They are a rigid set of rules which may not allow flexibility They create additional work esp. when auditors are dealing wid small clients May be followed mechanically by the audit assistant despite any changing circumstances

Users of audited reports

a.

Existing share holders

R interested in audited accounts to be able to make decisions on wealth maximization

a. b. c. d. e. f. g. h. i.

potential investors Lenders Trade creditors and suppliers Customers Directors Employees The government and its agencies Other consultants and experts General public

Advantages of audits
1.

Sole proprietorship business Minimization of errors and fraud Facilitation of decision making by the business owner due to accurate info Facilitation of the filling of tax returns Useful for the administration of deceased persons estate Provides credibility to lenders

2.

Partnerships settlement of disputes among partners Useful to a dormant or sleeping partner in evaluating partnership affairs Useful during change in the partnership e.g. admission of a new partner Availability of expert advice in improving the accounting and internal control system Minimization of errors and fraud Facilitates filling of tax returns forms

3.

Company Credibility to the shareholders Assurance to the directors dat they have complied with statutory responsibility Improvement of accounting and internal control systems Minimization of fraud and errors Facilitates settlement of insurance claims

Disadvantages of audits Inherent limitations ; these are unique xteristcs which may affect auditors liability to give a good report

1. 2. 3. 4. 5.

An audit isn't purely an obi function and may involve judgments sm of which may b subjective to nature audits may also involve risk assessment and evaluation of accounting estimates resulting in inaccurate judgments Auditors may also be dealing wid weak sys raising the possibility of high audit risk Possibility of collusion among the client staff , raising the possibility of the auditors not getting accurate info Auditors rely on rather conclusive evidence rather then conclusive to be able to express their opinion and not certify the financial position

6.

Audit function may involve the technique such as sampling and test checking which could in turn result into less accurate results

Changes in audit objective

1. 2.

Accounting systems have become more sophisticated requiring auditors to use different approaches Concepts such as stewardship and corporate governance have also come in to existence there by laying emphasis on separation of business management from control

3. 4.

Auditors now report to the public instead of the traditional reporting to the owners of the entity In the past manual audits were common but currently auditors are required a detailed understanding of computers and computerized system

5.

In the past main auditors duty was detecting errors and fraud but currently that has become an incidental objective

6.

Previously auditors used to certify financal statements through issuance of a certificate, however this changed to giving assurance by expressing there opinion