CHAPTER ONE

AN OVERVIEW OF AUDITING
1.1. Introduction

Reliable information is necessary if managers, investors, creditors, and regulatory agencies are to
make informed decisions about recourse allocation. Auditing plays an important role in this
process by providing objective and independent reports on the reliability of information.
Auditing is important to both private and public enterprise. By adding the audit function to each
situation, the users of the financial statements have reasonable assurance that the financial
statements do not contain material misstatements or omissions. In this chapter the general
overview of auditing principles such as meaning of auditing, distinction between accounting and
auditing, the demand for auditing, types of audits and auditors and others will be discussed.

1.2. Origin and Historical Development of Auditing

Auditing, like accounting, has a long history. Anthropologists have found records of auditing
activity dating back to early Babylonian times (around 3000 BC). There was also auditing
activity in ancient China, Greece and Rome. The term “Audit” is derived from the Latin word
“Audere” this means “to hear”. In the olden days, whenever the proprietors of a business concern
suspected a fraud, certain people were appointed to hear verbal explanations given by the
persons responsible for maintaining the books of accounts and to judge the facts. Such persons
were known as “Auditors”. Thus, the literal meaning of audit is to hear and the auditor is the
person who hears the explanations from the persons accountable for keeping accounts.

Scope of audit was quite limited as the auditors during those days were interested in ascertaining
whether the persons responsible for keeping accounts had properly accounted for all cash
receipts and payments to his principal and in locating errors and fraudulent transactions, if any.
In simple words, the aim of audit was to know whether cash had been embezzled and if so, who
embezzled it and what amount was involved. Thus, it was merely a cash audit. But, the scope of
modern audit cannot be confined to cash verifications as the principal object of modern audit is
to report on financial position of the undertaking as depicted by its financial statements, i.e.
Balance sheet and Profit and Loss account, and other financial and non-financial information that
are related to different aspects of organizations’ economic activities . Detection of errors and
fraud is an incidental object of modern audit.

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As far as the historical development of auditing is concerned, although the objectives and
concepts that guide present day audit were almost unknown until the early years of the 20 th
century, audits of one type or another have been performed throughout the recorded history of
commerce and government finance. From medieval times on through the time of industrial
revolution, audits were performed to determine whether persons in position of official
responsibility in government and commerce were acting and reporting in an honest manner.

During the industrial revolution, as manufacturing concerns grew in size, their owners began to
use the service of hired managers. With this separation of the ownership and management
groups, the absentee owners turned increasingly to auditors to protect themselves against the
danger of an intentional errors as well as fraud committed by managers and employees. Bankers
were the primary outside users of financial reports and were concerned whether the reports were
distorted by errors or fraud.

Generally, the practice of modern auditing dates back to the beginning of the modern
corporation, at the dawn of the Industrial Revolution. In other words, Modern auditing has
developed since the concept of a company as a separate legal entity came into existence. This led
to the separation of ownership from management and a consequent need to safeguard the
interests of the owners (the shareholders), who in all but the smallest of businesses (where
shareholders and directors were one and the same) were not involved in the day-to-day decisions
made by the management. Directors must therefore be accountable for their actions to the
shareholders on a regular basis. This accountability mainly occurs when the financial statements
are formerly presented to shareholders.

Some of the major auditing developments of the 20th century include:

1. A shift in emphasis to the determination of fairness in financial statements.
2. Increased responsibility of the auditor to third parties, such as governmental agencies,
stock exchanges, creditors, suppliers and other members of the society who depend on
the auditor’s report to make various economic decisions.

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 3. A change in auditing methods from detailed examination of individual transactions and
events to use of sampling techniques, including statistical sampling and non-statistical
samplings.
4. Recognition of the need to consider the effectiveness of internal control as a guide to the
direction and amount of testing and sampling to be performed.
5. Development of new auditing procedures applicable to electronic data processing
systems, and use of the computer as an auditing tool.
6. Recognition of the need for auditors to find means of protecting themselves from the
current wave of litigation.
7. An increased in demand for prompt disclosure of both favorable and unfavorable
information concerning any publicly owned company.
8. An increased responsibility to assess the risk of material fraud.
9. Increased demand for attestation by CPAs to managements assertion about compliance
with laws and regulations and the effectiveness of internal control.

1.3. Definition and Nature of Auditing

It is quite difficult to give a single and precise definition of the term “Audit”. The word “audit”
has been defined by many distinguished authors and other bodies, and every one of them has
attempted to highlight one aspect or the other, but the central idea is more or less the same.

1. American Accounting Associations Committee on Basic Auditing concepts developed a

definition of auditing as follows:
“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”.

2. International Federation of Accountants (IFAC) defines an audit as:

“An audit is a work performed by an auditor to enable him/her to express an opinion whether
the financial statements are prepared, in all material respects, in accordance with an identified
financial reporting framework”.

3. According to Montgomery, an American Accountant & author, auditing is a systematic

examination of the books and records of a business of other organizations in order to

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 ascertain or verify and to report upon the facts regarding the financial operations and the
results thereof.
4. Spicer and Pegler in Practical Auditing defines auditing as an examination of books,
accounts and vouchers of a business, as will enable the auditor to satisfy himself/herself
that, the balance sheet is properly drawn up so as to give a true and fair view of the state
of affairs of the business and whether profit and loss account gives a true and fair view of
the profit or loss for the financial period, according to the best of his information and the
explanations given to him and as shown by the books and if not in what respect he is not
satisfied.
5. A special committee of the American Institute of Accountants has defined the term
‘audit’ as follows:
“An audit is an attest function where by a Certified Public Accountant (CPA) independently
examine financial information of an entity and produce a report on the subject matter or an
assertion about the subject matter which is the responsibility of another party ( e.g.
Management).”

Some authors define auditing as an independent examination of and expression of opinion on,
the financial statements of a concern by an appointed auditor in pursuance of that appointment
and in compliance with any relevant statutory obligations.

Some scholars also define auditing as an independent examination of the books of account and
the related documentary evidence by a qualified person in order to ascertain the accuracy of
figures.

From the foregoing discussion and other definitions given by many scholars, auditing may be stated
as an independent, scientific, intelligent and critical examination of the books of accounts and records
of businesses. Such examination enables the auditors:

- To satisfy himself that the balance sheet and the profit and loss accounts are properly
prepared as per the requirement of GAAP.
- The above statements i.e. balance sheet and profit and loss account exhibit a true and fair
picture of the financial state of affairs of the business for the financial period.
- Detection of errors and frauds is also part of auditing.

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- The job of auditing is performed by an independent person or body of persons qualified for
the job.
- In order to report on the financial healthiness of a business, the auditor will have to go
through vouchers, documents, information, and related evidence (internal or external).
- The auditor may sufficiently satisfy himself about their correctness accuracy and authencity
and submit his report accordingly.
Demands for Audit

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. The major reasons
for increase in demand of auditing are:

A. Control Mechanism
Audits whether internally or externally performed are valued as important control mechanisms
for accountability the overall need for monitoring activities, especially financial activity includes
the need for auditing to provide credibility for reported and unreported information.
B. To resolve Conflict of Interest
The agency relationship that exists between an owner and manager produces a natural conflict of
interest because of the information asymmetry that exists between the manager and the absentee
owner. Information asymmetry means that the manager generally has more information about the
"true" financial position and results of operations of the entity than the absentee owner does. If
both parties seek to maximize their own self-interest, it is likely that the manager will not act in
the best interest of the owner.

Whenever there is a conflict of interest between parties, the need for an arbiter or a non-partisan
view is obvious. In financial affairs there are natural grounds for conflict of interest between
information preparer and user, which can result in the production of a biased information data.
Thus an audit is required for an objective review of the information.

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 A. To reduce damaging consequences
The ultimate objective and function of accounting is to provide information for economic
decision-making. Information is used for decisions that have serious and substantial economic
consequences. Thus the need for an audit for verifying the accuracy of information before they
are used in decisions that may bring damaging consequences.
B. To simplify complexity
In our age, financial information & translation has been come complex in preparation, content,
and format. Therefore it demands drippy specialized body of knowledge to prepare
(compilation), verify and interpret them.
C. Regulatory Requirements
Many business laws, memorandum of association and regulatory agencies acts make audits
annual requirements to be complied with for renewal of license or permit. For example the
security exchange commission (SEC) in the US; the Commercial Code of Ethiopia (1966), and
latter the Public Financial Regulation of Procl 163/1999 in Ethiopia make the filing of audited
financial statements annually. Disaster Prevention and Preparedness Commission (DPPC)
requires NGOs to prepare and submit their annual financial statements. Thus compliance
requirements create a very large demand for auditing services.

1.4. Objectives of Auditing

The primary objective of an auditing is to communicate the results to interested users. The audit
is conducted with the aim of expressing an informed and credible opinion in a written report. If
the item audited is the financial statements, the auditors must state that in their opinion the
statements ‘give a true and faire view’ or ‘present fairly, in all material respects’ the financial
position of the company. The purpose of the independent expert opinion is to lend credibility to
the financial statements. The communication of the auditor’s opinion is called attestation or attest
function. In audit this attestation is called audit report.

In addition, the following are the major specific objectives of an auditing:

a) Control Mechanism

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Audits whether internally or externally performed are valued as important control mechanisms
for accountability the overall need for monitoring activities, especially financial activity includes
the need for auditing to provide credibility for reported and unreported information.

b) Conflict of Interest
The agency relationship that exists between an owner and manager produces a natural conflict of
interest because of the information asymmetry that exists between the manager and the absentee
owner. Information asymmetry means that the manager generally has more information about the
"true" financial position and results of operations of the entity than the absentee owner does. If
both parties seek to maximize their own self-interest, it is likely that the manager will not act in
the best interest of the owner.

Whenever there is a conflict of interest between parties, the need for an arbiter or a non-partisan
view is obvious. In financial affairs there are natural grounds for conflict of interest between
information preparer and user, which can result in the production of a biased information data.
Thus an audit is required for an objective review of the information.

c) Consequences
The ultimate objective and function of accounting is to provide information for economic
decision-making. Information is used for decisions that have serious and substantial economic
consequences. Thus the need for an audit for verifying the accuracy of information before they
are used in decisions that may bring damaging consequences.

d) Remoteness
Because of the separateness of the management from the owners; information is prepared in a
place far from the user. The user is prevented from directly assessing the quality of information
he obtains. Thus the need for auditor services to assess the information on the users' behalf.

e) Regulatory Requirements
Many business laws, memorandum of association and regulatory agencies acts make audits
annual requirements to be complied with for renewal of license or permit. For example the
security exchange commission (SEC) in the US; the Commercial Code of Ethiopia (1966), and
latter the Public Financial Regulation of Procl 163/1999 in Ethiopia make the filing of audited
financial statements annually. Disaster Prevention and Preparedness Commission (DPPC)

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requires NGOs to prepare and submit their annual financial statements. Thus compliance
requirements create a very large demand for auditing services.

Accounting versus Auditing

Many financial statement users and members of the general public confuse auditing with
accounting. The confusion results because most auditing is concerned with accounting
information, and many auditors have considerable expertise in accounting matters. The
confusion is increased by the fact that auditing is performed by individuals described as public
accountants.

Accounting is the process of recording, classifying and summarizing economic events in a

logical manner for the purpose of providing financial information for decision-making
Accounting is constructive, It starts with the raw financial data to process and produce financial
summary through reports known as financial statements as the end product of its work. The
function of accounting, to an entity and to society as a whole, is to provide certain quantitative
information that management and others can use to make decisions. To provide relevant
information, accountants need to have a thorough understanding of the rules and principles and
provide the basis for preparing the accounting information.
Auditing on the other hand is analytical work that starts with the end product of accounting to
lend credibility and fairness of the measurements. In auditing, the concern is with determining
whether recorded information properly reflects the economic events that occurred during the
accounting period. Since the accounting rules and principles are the criteria for evaluating
whether the accounting information is properly recorded, any auditor involved with this data
must also thoroughly understand the accounting rules and principles. In the context of the audit
of financial statements these are generally accepted accounting principles (GAAP).

In addition to understanding accounting, the auditor must also possess expertise knowledge in
the accumulation and interpretation of audit evidence, determining the proper audit procedures,
sample size, particular items to examine, timing of the tests, and evaluating the results are unique
to the auditor. It is this expertise that distinguishes auditors from accountants.

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1.5. Types of Audits and Types of Auditors
1.5.1. Types of Auditors
The various types of audit that might be undertaken by the auditor can be categorized as:
i) Financial statement audit
ii) Compliance audits, and
iii) Operational audit

I) Financial Statement Audit

The audit of financial statements ordinarily covers the balance sheet and the related statements of
income, retained earnings, and cash flows. The goal is to determine whether these statements
have been prepared in conformity with specified criteria.

Normally, the criteria are generally accepted accounting principles (GAAP), although it is
possible to conduct audits of financial statements prepared using some other basis of accounting
appropriate for the organization, financial statement audits are normally performed by firms of
certified public accountants. Users of auditors' reports include management, investors, bankers,
creditors, financial analysts, and government agencies.

II) Compliance Audits

Compliance audit is the testing and reporting on whether an organization has complied with the
requirements of various laws, regulations, polices, procedures, and agreements. The purpose of
compliance audit is dependent upon the existence of verifiable data and of recognized criteria or
standards, such as established laws and regulations, and or an organization's policies and
procedures. For example, the audit of an income tax returns by an auditor of the Inland Revenue
service. Such audits seek to determine whether a tax return is in compliance with tax laws and
Inland Revenue regulations.

Like an independent financial statement audits, a compliance audit is designed to determine

whether an entity's financial statements are presented fairly in accordance with generally
accepted accounting principles. However, unlike a financial statement audit, a compliance audit
is also designed to determine whether the entity has complied with applicable laws and
regulations – hence the term "compliance" audits – that may have a material effect on financial

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statements. Compliance audits are conducted by either independent auditors or government
auditors.

III) Operational Audits

The term operational audit refers to a comprehensive examination of an operating unit or a
complete organization to evaluate its systems, controls, and performance, as measured by
management objectives. An operational audit focuses on the efficiency and effectiveness of
operations. Efficiency is success in using the available resources to the best advantage of the
organization. Effectiveness is success in meeting one’s stated goal and responsibility.
Operational audit is usually performed by internal auditors of the organizations.

An operational audit involves a systematic review of an organization's activities, or a part of

them, in relation to the efficient and effective use of resources. The operations of the receiving
department of a manufacturing company, for example, may be evaluated in terms of its
effectiveness, that is, its success in meeting its stated goals and responsibilities. Performance is
also judged in terms of efficiency, that is, success using to its best advantage the resources
available to the department.

The purpose of an operational audit is to assess performance, identify areas of improvement, and
develop recommendations. Sometimes this type of audit is referred to as a performance audit or
management audit. Because the criteria for effectiveness and efficiency are not as clearly
established as are generally accepted accounting principles and many laws and regulations, an
operational audit tends to require more subjective judgment than do audits of financial
statements or compliance audits. For example, quantifiable criteria often must be developed by
the auditors to be used to measure the effectiveness and efficiency of the department.

1.5.2. Types of Auditors

There are a number of different types of auditors; however, they can be classified under four
headings: Internal auditors, external auditors, Auditors of the general accounting office, and
internal revenue auditors (tax auditors). Each type of auditor will be discussed briefly. One
important requirement of each type of auditor is independence, in some manner form the entity
being audited.

a) Internal Auditors
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The principal goal of the internal auditors is to investigate and appraise the efficiency and
effectiveness with which the various organization units of the company are carrying out their
assigned functions. Even though internal auditors are not independent as in the same sense as the
independent public auditors, they should be independent of the department heads and other line
executives whose work they review.

Internal auditors report to the audit committee of the board of directors, to the president or to
other high executives. Internal auditors are employee of the organization in which they work and,
thus, subject to rules and regulations inherent in the employer- employee relationships. Large
part of the work of internal auditors consists of operational audit, they also conduct compliance
audit

Internal auditing is conducted by employees of the business engaged in work on behalf of the
organization. He/she is a salaried employee of the business. Internal audit has been defined as the
“ independent appraisal of activity within an organization for the view of accounting, financial
and other business practices as a protective end constructive arm of management” It is type of
control which functions by measuring and evaluating the effectiveness of other types of internal
control. Internal audit can be either pre-audit or post-audit. It deals primarily with accounting and
financial matters; it may also properly deal with matters of an operating nature. From the
definition, it is clear that internal audit not only includes the verification of accounting maters but
also financial & other matters.

The Internal auditor is responsible to:

a) Establish rules and procedures of the internal accounting system.
b) Review the day-to-day financial operating procedures, and to check of there is
adequate supervision with a clear and up to date supply of information to the
management.
c) Evaluate the system of internal control.
d) Give periodic report to the management about the financial condition of the
organization.
e) Give recommendations about the improvement of procedures.
f) Appraising the quality of performance in carrying out assigned responsibilities.

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 g) Ascertain whether assets of the businesses are accounted for & safeguarded form
losses of all kinds.

b) External Auditors
These are a group of auditors who examine the records supporting the financial reports of an
enterprise and give an opinion regarding their fairness and reliability. They are independent
professionals who perform or render professional service on a fee base, but not the employee of
the company being audited. They report their findings to stockholders.

External auditors are often referred to as independent auditors or certified public accountants.
Such auditors are called "external" because they are not employed by the organization being
audited. An external auditor conducts financial statement audits for publicly traded and private
companies, partnerships, municipalities, individuals and other types of entities. They may also
conduct compliance and operational audits for such entities. An external auditor may practice as
a sole proprietor or as a member of a CPA firm.

The CPA certificate is regulated by state law through licensing department in each country. The
requirements for becoming a certified public accountant vary among countries. In our country
the General Auditors grants the license to work as an independent auditor when someone has the
certificate of certified public accountant through passing the qualification exams given in US
(CPA) or UK (ACCA). In addition to these qualification exams the individual should possess at
least three-year experience in audit.

Professional standards require that external auditors maintain their objectivity and independence
when providing auditing or other attestation services for clients. Later in the text, independence
and objectivity will be discussed in depth.

C) Auditors of the general accounting office

Congress or federal government has long had its own auditing staff, headed by the controller
general and known as general accounting office, GAO auditor. The work of GAO auditors
includes audits of government agencies to determine the spending programs, evaluate the

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efficiency and effectiveness of selected government programs; audit of financial statements of a
number of federal agencies and others.

D) Internal revenue auditors (tax auditors)

The internal revenue service is responsible for enforcement of the federal tax laws. Thus,
internal revenue auditors conduct compliance audits of the income tax return of individual and
corporations to determine that income has been computed and taxes paid as required by the
federal law.

Government Auditors - The government auditor is paid a salary by the government. He/she is
responsible to the legislature or executive.
Government Auditors – are a nonpartisan agency in the legislative branch of the federal
government. They are responsible primarily to perform the audit functions for the congress.
Much of the financial statements prepared by government agencies are audited by government
auditors before submitted to congress. An increasing portion of the government auditors audit
efforts has been devoted to evaluate the operational efficiency and effectiveness of various
federal programs, these government auditors are also known as General accounting office
auditors (GAOs). Besides, Internal Revenue Agents (IRAs) who are tax auditors of the
government are responsible to audit the taxpayers’ returns to determine whether they have
complied with the tax laws. The audits performed by the IRAs are solely compliance audits. An
auditor involved in these areas must have considerable tax knowledge and auditing skills to
conduct an effective audit. For example, in 1977, the Federal Parliament made a revision to
existing legislation in passing the Auditor General Act which required the Auditor General to
report to the House of Commons on the efficiency and economy of expenditures or whether
value-for-money had been received.

The Nature of Auditing In Ethiopia

In Ethiopia audits seem to be done primary on account of government regulation. For example,
NGO 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.
Auditing in Ethiopia could be viewed in five main areas.
The office of the auditor general (OAG)
(OAG)
The powers and functions of the office of the OAG are given through the proclamations that
established it, its sphere of activity lies in government audit.
The audit service corporation The duty and functions of this entity involve mostly commercial
audits of commercial and productive enterprises wholly or partially owned by government.

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Private audit firms
Ministry of finance audit and inspection Auditing activity in this area includes audit of
ministries and government departments by MF auditors and inspectors, including tax audit by
Inland Revenue authorities.
‘Corporations’ and enterprises’ auditors.
auditors. These are audits performed by internal auditors
within enterprise.
Economic Demand for Auditing
In today’s business world information becomes the powerful weapon. Its consequence may be
incalculable reward if it is accurate and highly destructive if it is inaccurate. Thus, information is
considered as one form of risk.

Information risk reflects the possibility that the information upon which the business risk
decision was made inaccurate. A likely cause of information risk is the possibility of inaccurate
financial statements.

There are different causes of information risk.

1. Remoteness of information – the complexity of the business environment makes first

hand information scarce and thereby increases information risk. In the modern world, it I
virtually impossible for a decision maker to have first hand knowledge about the
organization with which he or she does business. Information provided by other s must be
relied upon. When information is obtained from others, the likelihood of it being
intentionally or unintentionally misstated increases.

Biases and motives of the provider – if information is provided by someone whose goals are
inconsistent with those of the decision maker; the information may be biased in favor of the
provider

Voluminous data – As organizations become larger, so does their exchange transactions. This
increases the likelihood that improperly recorded information will be included in the records.

Complex exchange transactions – This typically refers to the difficulty of correct accounting
treatments in some complex transactions. Such as the acquisition of one entity by another, proper
combining and disclosing the result of operations of subsidiaries in different industry. The more
exchange transactions among organizations become, the greater the risk of inaccuracy of
information.

Regulatory requirements - many business laws, memo random of association and government
regulation, make requirements’ annual audits. For Example –For renewal of license, or permit,

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(commercial code to Ethiopia), financial Administration regulation proclamation tax, requires
audited financial statements.

Reducing information Risk

To reduce information risk:

1. Users have to verify the information
2. User shares information risk with management through law suit against management
3. Audited financial statements. It is the most common way of obtaining reliable
information.
Importance of Audit

The decisions that are made depending on financial statements are usually critical to
stakeholders. Decisions that require the commitment of huge sum of money such as buying of
shares, diverting business, setting price of a share, granting bank loans etc hangs on financial
statements. Thus, any mistakes and errors in the reporting of financial statements may have
adverse consequences. However, statements are highly vulnerable to mistakes. The report may:

 Contain errors
 Not disclose frauds
 Be inadvertently misleading
 Be deliberately misleading
 Fail to disclose relevant information
 Fail to conform to regulation

Cognizant of this fact, stakeholders and accountants are worried about the credibility of reports.
Thus owners appoint, as a solution, independent person called Auditor to investigate the report
and report on his/her findings.
The other importance is that large organizations with complex operations summarize accounts of
subsidiaries with differing conventions, legal system and accounting control system. The
examination of such accounts by independent expert is of benefit to those who control and
operate such organizations as well as to owners and outsiders. The other notable importance of
auditing is that it checks the conformity of accounting practices and reports to various
requirements. To state few, the requirement of financial reporting standards (FRS) and the still
relevant statements of standard accounting practice (SSAPs) are the major ones.
Objectives of Auditing

The auditor should be an independent person who is appointed to investigate the organization, its
records and the financial statements prepared from them, and thus produce an opinion in the
accuracy and correctness of financial statements. Thus auditing objectives may be divided into
primary and subsidiary objectives.

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 Primary Objectives
To produce a report by the auditor of his opinion of the truth and fairness of financial statements
so that any person reading and using them can have a belief in them
 Secondary Objectives

 To detect errors and frauds

 To prevent errors and frauds by deterrent and moral effect of the audit
 To provide spin-off effects. The auditor will be able to assist his client with accounting,
systems, taxation, financial and other problems (Advisory service).

1.6. Generally Accepted Auditing Standards

Auditing standards are measures of the quality of the auditor's performance. There are ten major
generally accepted auditing standards (GAAS) issued by the American Institute of Certified
Public Accountants (AICPA) (see table 1.1). The GAAS are composed of three categories of
standards: general standards of qualification and conduct and standards of fieldwork and
standards of reporting.

Table 1.1 Generally Accepted Auditing Standards

1. General Standards of Qualification and Conduct

2. The audit is to be performed by a person or persons having adequate technical training

and proficiency as an auditor.
3. An auditor must maintain an independent physical and mental attitude.
4. An auditor must exercise due professional care in his work.
2. Standard of Fieldwork:

1. Auditor's work must be properly planned and supervised.

2. Auditor's must study and evaluate internal control.
3. Auditor must gather sufficient and competent evidence.
3. Standards of Reporting:

1. The audit report must state whether financial statements have been prepared in
accordance with Generally Accepted Accounting Principles (GAAP).
2. The audit report must state whether the GAAP has been consistently applied with that
of the preceding period.
3. The audit is to be presumed to have adequate information disclosure unless and
otherwise stated so.
4. The audit report must maintain an expression of opinion on the financial statements as
a whole or an explanation for not expressing an opinion.

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 1. General Standards of Qualification and Conduct
The three general standards are concerned with the auditor's qualification and the quality of his
or her work. The first general standard recognizes that an individual must have adequate training
and proficiency as an auditor. This is gained through formal education, continuing education
programs, and experience. It should be recognized that this training is on going with a
requirement on the part of the auditor to stay up to date with current accounting and auditing
pronouncements. Auditors should also be aware of developments in the business world that may
affect the auditing profession.

The second general standard requires that the auditor always maintain an attitude of
independence on an engagement. Independence precludes relationships that may impair the
auditor's objectivity. A distinction is often made between independence in fact and independence
in appearance. An auditor must not only be independent in fact but also avoid actions that may
appear to affect independence. If an auditor is perceived as not being independent, users may
lose confidence in the auditor's ability to report truthfully on financial statements. Public
confidence is impaired if an auditor is found to lack independence.

Due professional case is the focus of the third general standard. In simple terms, due care means
that the auditor performs his or her duties with a degree of skill commonly possessed by others in
the profession. The third general standard imposes an obligation on the members of the audit
team to observe the standards of field work and reporting, and to perform the work at the same
level as any other professional auditor who offers such services to clients.

2. Standards of Field Work

The standards of fieldwork relate to the actual conduct of the audit. These three standards
provide the conceptual background for the audit process. The first standard of fieldwork deals
with planning and supervision. Proper planning can lead to a more effective audit that is more
likely to detect material misstatements if they exist. Proper planning also assists in completing
the engagement in a reasonable amount of time. Additionally, the standard requires that
assistants on the engagement be properly supervised.

The second standard of fieldwork requires that the auditor gain sufficient understanding of the
auditee's internal control to plan an audit. Internal control is a process, affected by an entity's

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board of directors, management and other personnel that is designed to provide reasonable
assurance regarding the achievement of the following objectives: (1) reliability of financial
reporting, (2) compliance with applicable laws and regulations, and (3) effectiveness and
efficiency of operations. The degree to which the auditor relies on the auditee's internal control
directly affects the nature, timing, and extent of the work performed by the independent auditor.

Sufficient, competent evidence is the focus of the third fieldwork standard. Most of the auditor's
work involves the search for and evaluation of evidence to support management's assertions in
the financial statements. The auditor uses various audit procedures to gather this evidence.

3. Standards of Reporting
The four standards of reporting require that the auditor consider each of the following issues
before rendering an audit report: (1) the financial statement are presented in accordance with
generally accepted accounting principles, (2) those principles are consistently applied, (3) all
informative disclosures have been made and (4) what degree of responsibility the auditor is
taking and the character of the auditor's work.

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