Elementary Auditing

Lecture 9

Prepared by: CPA Mulogo, Eric [MFA-OG, B.Com Acc Hons., CPA(T)]

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Learning outcome:
• Nature and Purpose of auditing
• Scope of auditing
• Qualities of an auditor
• Professional ethics of an auditor
• Internal control system
• Legal liability
• Audit report

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Nature: Introduction
The word 'Audit' is originated from the Latin word 'audire'
which means 'to hear'.
In the earlier days, whenever there is suspected fraud in a
business organization, the owner of the business would appoint
a person to check the accounts and hear the explanations given
by the person responsible for keeping the account and funds.
In those days, the audit is done to find out whether the
payments and receipt are properly accounted or not.

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Nature: Definitions
Auditing: is the accumulation and evaluation of evidence about
information to determine and report on the degree of
correspondence between the information and established
criteria. Auditing should be done by a competent, independent
person.
ISA (International Standard of Auditing) “ An Audit is the
independent examination of financial statement or related
information of an entity, whether profit oriented or not, and
irrespective of its size, or legal form, when such an examination
is conducted with a view to expressing an opinion thereon”

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Scope of Audit
Objectives of audit:
The objective of the external audit of the financial statements
of a limited liability company is to enable the auditors to
express an opinion as to whether the financial statements are
prepared in all material respects, in accordance with an
identified reporting framework.
This means that the external auditor expresses a written
opinion on the truth and fairness of the financial statements.

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Scope of Audit…

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Scope of Audit…
Types of Auditing:
❑Internal vs External Auditing
❑Statutory vs Non-statutory Auditing
❑Operating vs Auditing of Financial Statements

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Scope of Audit…
❑Internal vs External Auditing
• Internal Auditing:
An internal audit is an audit on behalf of management to ensure
that the existing internal controls are adequate and effective
and each unit of the organisation follows the policies and
procedures as laid down by top management.
An internal audit is conducted by internal auditors, who are
integral to the organisation and provide ongoing assessment of
all activities.

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Scope of Audit…
• External Auditing:
An external audit is performed by external auditors, who
are independent of the organisation and provide an
independent opinion on the organisation’s financial
statements.
It is a review and assessment of the financial records to
form an overall conclusion

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Scope of Audit…

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Scope of Audit…
❑Statutory vs Non-statutory Auditing
• Statutory Audit
Statutory audit refers to external audit. As already discussed earlier, the
objective of an external audit engagement is to enable the auditor to
express an opinion on whether all the financial statements have been
prepared in all material respects, in accordance with the applicable
financial reporting framework.
The basic aim is to express an opinion on the truth and fairness of the
financial statements

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Scope of Audit…
• Non-statutory Audit
Non-statutory audits refer to audits which are not statutory audits.
They could be of the following types:
➢Review engagement
➢Negative assurance engagements
➢Agreed upon procedures
➢Compilations

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Scope of Audit…
❑Operating vs Auditing of Financial Statements
• Operating Audit:
An operational audit is an audit of the major operational
processes of an organisation.
The operations include procurement, marketing, treasury and
human resources management.
In operational internal audit assignments, the auditor measures
the performance of the various procedures in terms of
efficiency, effectiveness and economy.

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Scope of Audit…
• Audit of financial statements:
This is the same as external audit (refer to external
audit; slide no. 09)

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Scope of Audit…
Important terminologies:
❖Engagement Letter: Is an official document of all the terms and
conditions of the audit and is signed by the auditor / accountant and
the entity which is being audited.
The content of an audit engagement letter is basically all the issues that
have been discussed and agreed upon by the accountant and the
organisation.
It contains:
oConfirmation that the auditor has accepted the appointment. The
engagement letter creates a contract between the auditor and the client.

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Scope of Audit…
oa summary of the responsibilities of client’s management (e.g.
directors in the case of a company) and auditors;
odetails on:
✓the objective of the audit
✓the responsibilities of the directors
✓ the responsibilities of auditors and the scope of the audit
✓the form of report that will be issued after the audit
✓any other services that would be provided by the auditor
✓the method through which the audit fees would be calculated and
billing arrangements made the various applicable legislations

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Scope of Audit…
❖Audit working papers: these are audit documentations
‘Audit documentation’ means the record of audit procedures
performed, relevant audit evidence obtained and the
conclusions the auditor reached.
Objectives of audit working papers / audit documentation:
✓ Facilitates adequate planning
✓Facilitates supervision and review of the audit work
✓ Provide the basis of audit report

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Scope of Audit…
✓Allows discussion of audit findings with management
✓Provide defence against negligence charges
✓Serves as guide for succeeding auditors
✓Serves as a data bank

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Reading Assignment

❖Advantages of auditing

❖Limitations of Auditing
❖Difference between Accounting and Auditing

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Quality of an Auditor
1. Competent
Auditors must be competent to carry out audits. This requires the
auditor to be:
✓thoroughly conversant with accountancy principles as well as auditing
standards and their practical application.
✓aware of business laws and taxation laws
✓aware of their duties
✓aware of their rights
✓professionally competent

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Quality of an Auditor
2. Independent
An external auditor is an independent person i.e. not related to the entity
in any capacity other than as an auditor. Therefore, a person cannot be
appointed as an auditor if he is:
(i) an officer or employee of the company
(ii) an officer or employee of an associated company, parent company
or subsidiary company
(iii) a partner or an employee of an officer or employee of the company,
or;
(iv) a partnership of which such a person is a partner
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 Reading Assignment

❖Threats to independence of an Auditor/Accountant

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Professional ethics of an auditor
1. Integrity
This principle requires members to be “straightforward and honest in
all professional and business relationships”. In addition members
must also not be associated with or “sign off” on any fraudulent or
inaccurate financial reports and / or statements.
In short, integrity means acting with honesty and being fair and truthful
at all times. Integrity also means not accepting positions or situations
where your integrity may be in doubt due to the behaviour of others.

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Professional ethics of an auditor….
2. Objectivity
A professional accountant should be objective or unbiased. For all
professional decisions which are to be taken, accountants must ensure
that there is no conflict of interest.
Therefore, all of their findings and judgments should be based solely
upon sound rationale and research

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Professional ethics of an auditor….
3. Professional Competence and Due Care
Professional accountants must ensure they have the necessary
professional skill and knowledge to handle the tasks that are assigned
to them by their client. They must continuously update themselves
with the latest developments with respect to knowledge and practices in
the profession.
Accountant must work meticulously and ensure that the services they
provide are in accordance with the professional standards set by the
relevant professional body.

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Professional ethics of an auditor….
4. Confidentiality
This principle requires that accountants never disclose any confidential
information of their clients or organisations to any other third party
unless there is a legal duty to do so or a legal right to do so. It is
important to note here that an accountant is still bound by this same
confidentiality principle even after they have left the employ of an
organisation or are longer engaged by a client.

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Professional ethics of an auditor….
5. Professional behavior
The IFAC requires that its members “should comply with relevant
laws and regulations and should avoid any action that discredits the
profession.” This organisation also requires that their members act
ethically when marketing and promoting their services. Members should
not engage in any false advertising and should not slander the work of
any other accountant.

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Professional ethics of an auditor….

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 Internal control system
An internal control system is the name given to the process that
organisations use to help ensure that:
otheir financial reporting is timely, reliable and accurate
otheir operations are conducted effectively and efficiently and
othey are in compliance with all applicable laws and regulations.

Internal control systems are designed and implemented in

response to any risks that may prevent an organisation from
achieving the above three stated objectives.
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Internal control system…
Internal controls can be divided into three main types:
1. Preventive controls: are designed to discourage errors or
irregularities from occurring. E.g. processing travel vouchers
only after signatures have been obtained from appropriate
personnel.
2. Detective controls: are designed to find errors or irregularities
after they have occurred. E.g. to review monthly departmental
account reports for inappropriate charges.
3. Corrective controls: are designed to fix errors or irregularities
after they are detected. E.g. budget variance reports.
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 Audit report
ISA 700 states that the auditor’s report should contain a clear
expression of the auditor’s opinion on the financial statements.
ISA 700 sets out the requirements for the content of the audit
report.
Format and content of the audit report:
1. Title 6. Auditor’s opinion
2. Addressee 7. Other Reporting Responsibilities
3. Opening or introductory paragraph 8. Auditor’s signature
4. Management’s responsibility for the financial 9. Date of the report
statements
5. Auditor’s responsibility 10. Auditor’s address

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 Merci, The End!!!!

All the best in your UE

Be always blessed!!!

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