TUTORIAL 2Introduction 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 auditor’s 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 auditor’s 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 auditor’s 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 auditor’s 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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