ARBA MINCH UNIVERSITY, SAWLA CAMPUS,

COLLEGE OF COMMERCE AND BUSINESS ADMINSTRATION

TARGET GROUP: 4TH YEAR ACCOUNTING AND FINANCE

COURSE: AUDITING PRINCIPLES AND PRACTICE-I

GROUP ASSIGNMENT FOR YEAR IV SEMISTER III

GROUP MEMBERS

S/ NAME OF STUDENT ID NO

1 ZEMED MELESE TADESSE EVBE/365/13

2 MEKIDES AYALEW SELEMON EVBE/410/13

3 TIGIST DAGENE DANGESO EVBE/385/13

4 MIHIRETU TILAHUN MEKONIN EVBE/386/13

5 MESAY FEREDE ALTO EVBE/406/13

SEPTEMBER-2024

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 SAWLA, ETHIOPIA

Table of Contents
Questions.............................................................................................................................ii

1. Explain the difference between accounting and auditing?............................................1

2. Define Audit Program...................................................................................................2

3. Explain the difference between internal auditing and external auditing?.....................3

4. List down the four options of auditor report and why the auditor gives such different
options? Reason out?...........................................................................................................3

5. Explain materiality in relation to audit risks?...............................................................5

Reference.............................................................................................................................6

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Questions
1. Explain the difference between accounting and auditing? (3 points)
2. Define audit programs? (2 points)
3. Explain the difference between internal auditing and external auditing? (3 points)
4. List down the four options of auditor report and why the auditor gives such different
options? Reason out? (2 points)
5. Explain materiality in relation to audit risks? (2 points)

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1. Explain the difference between accounting and auditing?

Accounting vs. Auditing: A Key Difference

Accounting and auditing are both vital functions in the financial world, but they serve distinct
purposes.

Accounting

Purpose: To record, analyze, and interpret financial information.

Process: Involves the daily recording of financial transactions, preparing financial statements
(like income statements and balance sheets), and providing insights to management for decision-
making.

Role: Accountants are responsible for ensuring accurate financial records and providing
financial analysis to support business operations.

Auditing

Purpose: To verify the accuracy and completeness of financial statements.

Process: Auditors examine financial records, internal controls, and accounting practices to
ensure compliance with accounting standards and regulations.

Role: Auditors provide an independent assessment of a company's financial health, helping

Accounting is like keeping a daily diary of financial activities. Auditing is like reviewing that
diary to ensure accurate and complete.

Key differences

Focus: Accounting focuses on recording and analyzing financial data, while auditing focuses on
verifying its accuracy.

Independence: Auditors are typically independent of the company they're auditing, ensuring
objectivity.

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Scope: Accounting covers a broader range of financial activities, while auditing is more focused
on specific financial statements.

While both accounting and auditing are essential for financial transparency and accountability,
they play distinct roles in ensuring the integrity of financial information.

2. Define Audit Program

Audit programs are detailed plans that outline the specific procedures and tasks auditors will
perform during a financial audit. These programs serve as a roadmap, guiding auditors through
the examination of a company's financial records and internal controls.
Key Components of an Audit Program
Objectives: Clearly defined goals of the audit, such as assessing the fairness of financial
statements or evaluating internal controls.
Procedures: Specific steps or techniques auditors will use to gather evidence, including:
 Testing transactions: Examining individual transactions to verify accuracy and
completeness.
 Analytical procedures: Using financial ratios and trends to identify unusual or unexpected
patterns.
 Confirmations: Verifying information directly with third parties.
 Physical examination: Inspecting tangible assets to ensure they exist and are properly
valued.
Timing: A schedule indicating when specific procedures will be performed.
Staffing: Assignment of audit team members to various tasks
Risk Assessment: Identification of potential risks and areas of focus
Documentation: A system for recording the evidence gathered and conclusions reached.
Purpose of Audit Programs
Efficiency: Provides a structured approach, preventing unnecessary work or omissions.
Consistency: Ensures that audits are conducted in a consistent manner, and enhancing quality
Evidence: Documents the audit procedures performed and the evidence collected, supporting the
auditor's opinion.
Communication: Serves as a reference for the audit team and can be shared with management
to explain the audit scope and findings.

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3. Explain the difference between internal auditing and external auditing?

Internal auditing and external auditing are both essential functions that contribute to the financial
health and integrity of an organization. However, they differ in their scope, purpose, and the
entities performing them.

Internal Auditing

Purpose: To evaluate the organization's risk management, control processes, and governance. It
helps to identify areas for improvement, prevent fraud, and ensure compliance with relevant
regulations.

Scope: Typically covers the entire organization, including its subsidiaries and affiliates.

Performer: Internal auditors are employed by the organization itself. They are typically
independent of the departments they audit, but they are still part of the company's structure.

External Auditing

Purpose: To provide an independent opinion on the fairness and reliability of the organization's
financial statements. This is crucial for investors, creditors, and other stakeholders who rely on
these statements to make informed decisions.

Scope: Primarily focuses on the financial statements, but may also involve other aspects of the
organization's operations if necessary.

Performer: External auditors are independent professionals, usually from accounting firms.
They are not employed by the organization they audit.

4. List down the four options of auditor report and why the auditor gives such
different options? Reason out?

Auditors typically provide one of four types of opinions in their reports:

Unqualified Opinion: This is the most favorable opinion and indicates that the financial
statements present fairly, in all material respects, the financial position, results of operations, and
cash flows of the entity in accordance with the applicable financial reporting framework.

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Qualified Opinion: This opinion is issued when the auditor identifies a material misstatement
that is not pervasive. The auditor qualifies the opinion to highlight the specific issue and its
impact on the financial statements.

Adverse Opinion: This opinion is issued when the auditor concludes that the financial
statements are not presented fairly, in all material respects, and the misstatements are pervasive.
This is the most severe type of opinion and indicates significant issues with the financial
reporting.

Disclaimer of Opinion: This opinion is issued when the auditor is unable to obtain sufficient
appropriate evidence to form an opinion on the financial statements. 1 This can occur due to
significant limitations in the scope of the audit or other factors that prevent the auditor from
gathering necessary information.

Reasoning for Different Opinions

The choice of opinion depends on the auditor's assessment of the financial statements and the
evidence gathered during the audit. Here's a breakdown of the reasons for each opinion:
Unqualified Opinion: This opinion is issued when the financial statements are presented fairly
and in accordance with applicable accounting standards. The auditor has obtained sufficient
appropriate evidence to support this conclusion.

Qualified Opinion: A qualified opinion is issued when there is a material misstatement that is
not pervasive. This means the misstatement is significant but does not affect the overall fairness
of the financial statements. The auditor qualifies the opinion to highlight the specific issue and its
impact.

Adverse Opinion: An adverse opinion is issued when the financial statements are materially
misstated and the misstatements are pervasive. This indicates that the financial statements do not
present a fair picture of the entity's financial position, results of operations, or cash flows.

Disclaimer of Opinion: A disclaimer of opinion is issued when the auditor is unable to obtain
sufficient appropriate evidence to form an opinion. This can occur due to factors such as
significant limitations in the scope of the audit, or when the entity's management refuses to
provide necessary information.

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In essence, the auditor's choice of opinion reflects their assessment of the quality of the financial
reporting and their ability to provide a reliable opinion on its fairness and reliability.

5. Explain materiality in relation to audit risks?

Materiality is a fundamental concept in auditing that refers to the significance of an error or

Audit risk is the risk that the auditor will express an inappropriate opinion on the financial
statements. It is composed of three components:

Inherent risk: The risk of material misstatement occurring in the financial statements before
considering any internal controls.

Control risk: The risk that the entity's internal controls will fail to prevent or detect material
misstatements.

Detection risk: The risk that the auditor's procedures will fail to detect a material misstatement.

How Materiality Relates to Audit Risks:

Materiality plays a crucial role in determining the overall audit risk and the nature, timing, and
extent of audit procedures. Here's how:

Inherent risk assessment: The auditor assesses the inherent risk of material misstatement based
on factors such as the nature of the entity's business, industry conditions, and the complexity of
its financial transactions. Materiality is a key factor in this assessment, as the auditor will focus
on areas where the potential for material misstatements is higher.

Materiality threshold: The auditor establishes a materiality threshold, which is the maximum
amount of misstatement that could reasonably be expected to influence the decisions of users of
the financial statements. This threshold is used to determine the scope and nature of audit
procedures.

Detection risk: The auditor sets the detection risk, which is the risk that the auditor's procedures
will fail to detect a material misstatement. The auditor adjusts the detection risk based on the
assessed inherent and control risks. If the inherent risk or control risk is high, the auditor will set
a lower detection risk to compensate and vice versa.

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 Audit procedures: The auditor designs audit procedures to address the assessed audit risks.
These procedures are tailored to the specific circumstances of the audit, considering the
materiality threshold and the assessed inherent and control risks. The auditor will focus on areas
where the potential for material misstatements is higher and where the internal controls are
weaker.

In summary, materiality is a critical factor in determining audit risk and the scope and nature of
audit procedures. By understanding the concept of materiality, auditors can allocate their
resources effectively and ensure that their audits provide a reasonable level of assurance
regarding the fairness of the financial statements.

Reference
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and internal control system." Managerial auditing journal 20, no. 8 (2005): 844-866.
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Patil, and Jasdeep Singh. "Cloud Based DDOS Attack Detection Using Machine Learning
Architectures: Understanding the Potential for Scientific Applications." International Journal
of Intelligent Systems and Applications in Engineering 10, no. 2s (2022): 268-271.
3. Ramamoorti, Sridhar. "Internal auditing: history, evolution, and prospects." (2003).
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