(a). The nature of auditing and accounting has changed dramatically over recent years as a result of environmental changes. However, these disciplines are still defined by the
Auditing is the process of providing assurance about the reliability of the information contained in a financial statement prepared in accordance with generally accepted accounting principles or other rules. The financial statements are first and foremost the
responsibility of the management of the reporting entity. But the independent auditor plays a crucial role in financial reporting. Users of financial statements expect external auditors to bring to the reporting process technical competence, integrity, independence and objectivity The main objective of an audit of financial statement is to enable the auditor to express an opinion on whether the overall financial statements (the information being verified) are prepared, in all material respects, in accordance with an identified financial reporting framework The financial statements most often included are the statement of financial position, income statement and statement of cash flows, including accompanying footnotes. Assurance services will be an advantage to all business reporting. That includes all information flows to parties whose decisions affect an entity – including investors, creditors, management, employees, customers, and governmental bodies. Managers in charge of business decisions seek assurance services to help improve the reliability and relevance of the information used as the basis for their decisions. Assurance services are valued because the assurance provider is independent and perceived as being unbiased with respect to the information examined.
(b)Code of Ethics
The Code of Ethics states the principles and expectations governing the behavior of individuals and organizations in the conduct of internal auditing. It describes the minimum requirements for conduct, and behavioral expectations rather than specific activities A code of ethics is necessary and appropriate for the profession of auditing, founded as it is on the trust placed in its objective assurance about governance, risk management, and control. Code of Ethics — Principles
Auditors are expected to apply and uphold the following principles:
A professional accountant should be straightforward and honest in all professional and
A professional accountant should not allow bias, conflict of interest or undue influence of
others to override professional or business judgments.
(c) Professional Competence and Due Care
A professional accountant has a continuing duty to maintain professional knowledge and
skill at the level required to ensure that a client or employer receives competent
professional service based on current developments in practice, legislation and
A professional accountant should respect the confidentiality of information acquired as a
result of professional and business relationships and should not disclose any such
information to third parties without proper and specific authority unless there is a legal or
professional right or duty to disclose.
(e) Professional Behaviour
A professional accountant should comply with relevant laws and regulations and should
avoid any action that discredits the profession.
Other fundamental principles applied by professional
accountants in public practice (auditors) are’;
Conflicts of Interest-An auditor should be alert to any circumstances that could pose a conflict of interest
Fees and Other Types of Remuneration
Objectivity – All Services
An auditor should consider whether there are interests in, or relationships with, a client
or directors, officers or employees.
Examples of potential threats include:
- A close family friend is an employee of the client
- The auditor went to school with the client managing director
Independence – Assurance Engagements
On assurance engagements, the intended users of the financial statements require the
Auditor to be independent from the assurance client. The auditor must be both
Independent in mind and independent in appearance
(a) During the planning stage, an auditor will gain an understanding of their client, their client’s internal controls, their client’s information technology (IT) environment, their client’s corporate governance environment, and their client’s closing procedures. An auditor will identify any related parties, factors that may affect their client’s going concern status, and significant accounts and classes of transactions that will require close audit attention to gauge the risk of material misstatement.
The audit process is generally a ten-step procedure as outlined below. Please click through the steps in order to better understand the process:
1. NotificationFirst, you will receive a letter to inform you of an upcoming audit. The auditor will send you a preliminary checklist. This is a list of documents (e.g. organization charts, financial statements) that will help the auditor learn about your unit before planning the audit.
2. PlanningAfter reviewing the information, the auditor will plan the review, conduct a risk workshop primarily to identify key risks and raise risk awareness, draft an audit plan, and schedule an opening meeting.
3.Opening MeetingThe opening meeting should include senior management and any administrative staff that may be involved in the audit. During this meeting, the scope of the audit will be discussed. You should feel free to ask the auditors to review areas that you are concerned about. The time frame of the audit will be determined, and you should discuss any potential timing issues (e.g. vacations, deadlines) that could impact the audit. It doesn't take as much of your time as you might expect!
4.CommunicationThroughout the process, the auditor will keep you informed, and you will have an opportunity to discuss issues noted and the possible solutions.
5.Report DraftingAfter the fieldwork is completed, the auditor will draft a report. The report consists of several sections and includes: the distribution list, the follow-up date, a general overview of your unit, the scope of the audit, any major audit concerns, the overall conclusion, and detailed commentary describing the findings and recommended solutions. You should read the draft report carefully to make sure there are no errors. If you find a mistake, inform the auditor right away so that it can be corrected before the final report is issued.
6.Management ResponseOnce the report is finalized, we will request your management responses. The response consists of 3 components: whether you agree or disagree with the problem, your action plan to correct the problem, and the expected completion date.
7.Closing MeetingA closing meeting will be held so that everyone can discuss the audit report and review your management responses. This is an opportunity to discuss how the audit went and any remaining issues.
8.Report DistributionThe report is then distributed to you, your manager(s), senior university administrators, internal audit, and the university's external auditors. We also distribute an audit survey to the audited unit to solicit feedback about the audit. Feedback is important to us, since it can help us improve the audit process.
9.Follow-UpFollow-up reviews are performed on an issue-by-issue basis and typically occur shortly after the expected completion date, so that agreed-upon corrective actions can be implemented. The purpose of the follow-up is to verify that you have implemented the agreed-upon corrective actions. The auditor will interview staff, perform tests, or review new procedures to perform the verification. You will then receive a letter from the auditor indicating whether you have satisfactorily corrected all problems or whether further actions are necessary. If further corrective action is required, you will need to write a management response. Otherwise, the issue will be reported as resolved.
(b) Materiality and Audit Risk
Materiality refers to quantative and qualitative omissions or misstatements that make it probable the judgment of a reasonable person would have been changed or influenced. The auditors' responsibility when conducting an audit is to provide reasonable assurance that the financial statements are fairly presented in all material respects. Financial statements are materially misstated when they contain misstatements whose effect, individually or in the aggregate, results in financial statements that are not fairly presented. The auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of users of financial statements.
Tolerable misstatement is the maximum error in a population (for example,
the class of transactions or account balance) that the auditor is willing
to accept. This term may be referred to as tolerable error in other standards.
Auditors may consider the following factors to allocate planning materiality:
- The cost of collecting evidence for a particular account,
- The competency of evidence available for a particular account,
- Expected misstatement,
- Size of account balances, and
- Relevance of the account balances to user decisions.
The auditor should determine a materiality level for the financial statements
taken as a whole when establishing the overall audit strategy for the
Audit risk is the risk that an auditor will fail to modify his or her opinion when the financial statements contain a material misstatement. For each line in the financial statements, auditors want audit risk to be low for each assertion. The auditor should assess the risk of material misstatement at the relevant assertion level as a basis for further audit procedures. Examples of audit risk include:
1.Detection risk is the risk that the auditor will not detect a misstatement
that exists in a relevant assertion that could be material, either individually or when aggregated with other misstatements.
2.Control risk is the risk that a misstatement that could occur in
a relevant assertion and that could be material, either individually or
when aggregated with other misstatements, will not be prevented or
detected on a timely basis by the entity's internal control
3. Inherent risk is the susceptibility of a relevant assertion to a misstatement
that could be material, either individually or when aggregated
with other misstatements, assuming that there are no related
(Q 3) audit evidence
Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based and includes the information contained in the accounting records underlying the financial statements and other information. Auditors are not expected to examine all information that may exist. Audit evidence, which is cumulative in nature, includes audit evidence obtained from audit procedures performed during the course of the audit and may include audit evidence obtained from other sources, such as previous audits and a firm's quality control procedures for client acceptance and continuance. Management is responsible for the preparation of the financial statements based on the accounting records of the entity. The auditor should obtain audit evidence by testing the accounting records, for example, through analysis and review, re-performing procedures followed in the financial reporting process, and reconciling related types and applications of the same information. Through the performance of such audit procedures, the auditor may determine that the accounting records are internally consistent and agree to the financial statements, however, because accounting records alone do not provide sufficient appropriate audit evidence on which to base an audit opinion on the financial statements, the auditor should obtain other audit evidence.
Other information that the auditor may use as audit evidence includes
minutes of meetings; confirmations from third parties; industry analysts' reports;
comparable data about competitors (benchmarking); controls manuals;
information obtained by the auditor from such audit procedures as inquiry, observation,
and inspection; and other information developed by or available tothe auditor that permits the auditor to reach conclusions through valid reasoning. Methods of obtaining Audit Evidence
Audit evidence is one of the basic principles that govern an audit. There are various methods that can be adopted to obtain audit evidence. The most common ones include:
- Inspection This is the most efficient method of obtaining audit evidence. Inspection refers to checking all the documents, records, and physical assets. The reliability of these documents and records depends upon the nature and effectiveness of internal control.
- Observation Another important method of obtaining audit evidence is observation. This method involves the auditor to look at a process of procedure being executed by others. This method can be exemplified by the auditors’ presence at the clients’ physical stock count.
- Inquiry and confirmation The two aspects of this method include searching about the info from a knowledgeable person inside or outside the company, and responding to any inquiry to substantiate information in the accounting records. These responses might provide the auditor with info which is not previously possessed by him or even with corroborative evidence.
- Computation This method of obtaining evidence involves the examination of arithmetical accuracy of source documents and accounting records. The method might also involve performing individual calculations.
- Analytical review This method involves conducting a study of important ratios and trends and examining unusual fluctuations and items.
Sufficiency is the measure of the quantity of audit evidence. Appropriateness is the measure of the quality of audit evidence, that is, its relevance and its reliability in providing support for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related assertions. The auditor should consider the sufficiency and appropriateness of audit evidence to be obtained when assessing risks and designing further audit procedures.
The quantity of audit evidence needed is affected by the risk of misstatement
(the greater the risk, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less the audit evidence that may be required). Accordingly, the sufficiency and appropriateness of audit evidence are interrelated.
The reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained. Generalizations about the reliability of various kinds of audit evidence can be made; however, such generalizations are subject to important exceptions
Unqualified OpinionAn opinion is said to be unqualified when the Auditor concludes that the Financial Statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the Financial Statements. An Auditor gives a Clean opinion or Unqualified Opinion when he or she does not have any significant reservation in respect of matters contained in the Financial Statements. The most frequent type of report is referred to as the "Unqualified Opinion", and is regarded by many as the equivalent of a "clean bill of health" to a patient, which has led many to call it the "Clean Opinion", but in reality it is not a clean bill of health, because the Auditor can only provide reasonable assurance that there are no material misstatements within the Financial Statements. This type of report is issued by an auditor when the financial statements presented are free of material misstatements and are represented fairly in accordance with the Generally Accepted Accounting Principles (GAAP), which in other words means that the company's financial condition, position, and operations are fairly presented in the financial statements. It is the best type of report an auditee may receive from an external auditor.Mr. JJ westwards should not worry because:
An Unqualified Opinion indicates the following –
(1) The Financial Statements have been prepared using the Generally Accepted Accounting Principles which have been consistently applied;
(2) The Financial Statements comply with relevant statutory requirements and regulations;
(3) There is adequate disclosure of all material matters relevant to the proper presentation of the financial information subject to statutory requirements, where applicable;
(4) Any changes in the accounting principles or in the method of their application and the effects thereof have been properly determined and disclosed in the Financial Statements.