AUDITING

An audit is the independent examination of, and expression of opinion

on , the financial statements of an entity by a duly appointed auditor

In pursuit of that appointment.

It is important to realize that auditor is not certifying the accuracy

Of the financial statements.

 Corporate Governance
- the purpose of an external audit
 Corporate governance- the system by which companies are directed
and governed.

PRINCIPLES OF CORPORATE GOVERNANCE

The rights of shareholders-

Corporate governance framework should protect the right of the shareholders.

The equitable treatment of shareholders

CGF should ensure the equitable treatment of all the shareholders including
Minority and foreign shareholders

All the shareholders should have the opportunity to obtain effective redress

For any violation of their rights

The role of stakeholders

CGF should recognize the rights of the stakeholders and encourage the active

cooperation between the entities and stakeholders in creating wealth, jobs and

sustainability of financially sound entities.

Disclosure and Transparency

CGF should ensure that timely and accurate disclosure is made on all the

Material matters regarding the entity, including the financial situation,

Performance, ownership and governance of the entity.

Responsibility of the Board

CGF should ensure the strategic guidance of the entity, the effective

Monitoring of the management by the board and the board’s accountability

to the entity and its shareholders.

Auditors Code of Conduct

Integrity- Straightforward and Honest

Objectivity- Free from Bias

Professional competence- current development, legislations

Confidentiality

Professional behavior
Self Interest

• Financial

•Close business relationships

•Past Employment

•Family relationships

•Loans and Guarantees

•Overdue Fees

•Contingent Fees

•High percentage fees

Low Balling

Recruitment for the client

SELF REVIEW

Problem of criticizing your own work

ADVOCACY

Where the assurance firm promotes a point of view or opinion

That subsequent objectivity is compromised

INTIMIDATION

Black mailing and physical threats

AUDITORS REPORT

• Unmodified

• Modified

MODIFIED

Matters that do not Matters that do affect the

Affect the auditors opinion Auditors opinion

Qualified opinion:
Emphasis of matter
Limitation on scope or
Disagreement
A paragraph in an auditors report used when the auditor specially wishes to
draw the readers attention to some matter already properly and clearly disclosed
Within the FS

Such a paragraph does not constitute a qualification of the auditors opinion

Without qualifying our opinion above, we draw attention to NOTE 10 of the FS. 5
days before the directors formally approved the FS, the company received
notification that they are to be named as defendants in a proposed legal action…
At this early stage it is not possible to estimate the ultimate outcome of this matter.,
and no provision has been included within the FS.
Going Concern
Should assess going concern over the 12 months from the balance sheet
date

• Negative operating cash flows

• Inability to pay suppliers in time
• Operating losses
• Borrowing facilities not agreed
• Loss of key staff members
• Loss of key customers
• Technology change
• Legislative changes
• Non compliance with regulations
Case Study
 
You are in charge of the audit firm. The audit manager has completed the audit for
the financial year and has given you the draft financial statements for the period 1
Jan 2209 to 31st Dec 2009 and audit fie containing all the working papers. You are
conducting your final review prior to signing the audit report and have identified
that company has borrowings of Rs 10 million which are due for the repayment on
25th Jan 2010 but it is trying to currently extend the due date; in addition it also has
an overdraft of Rs 250,000 which is 50,000 over the authorized limit; this was not
identified as the cause of concern by the audit manager.
 
Required:
Discuss ten issues that you think the audit manager should have considered whether
or not a company is a going concern.
Going Concern
Effect on audit report when going concern is in doubt

If disclosed---------Emphasis of matter

If not disclosed---------Disclaimer, adverse, limitation in scope

Audit Planning

•Plan audit work……so as to do the work in an effective manner

•General strategy and detailed approach

• Planning objectives are

1.Appropriate attention to important areas

2.Identify potential problems
3.Work completed expeditiously
4.Proper staffing and work assignment
5.Coordination with other parties
6.Facilitate review
Gaining an understanding of the Entity

• Nature of the entity

• Industry, regulator
• Accounting policies
• Objectives and strategies
• Internal controls
• Control environment
• How entity identifies business risks
• Measurement of financial performance
 The concepts of risk

What is “reasonable assurance”

• Managers need to put in place control strategies which will offer the best
chances of identifying and correcting errors at a
reasonable cost.

• To do this, they need to understand risk

 The different types of risk

• Inherent risk (the risk linked to the activity itself)

• Control risk (the risk that controls will not prevent, detect and correct errors)
• Residual risk (the product of inherent risk and control risk)

RR=IRXCR
Put another way
Inherent risk x control risk = residual risk

OR

The risk linked to the activity, less the amount of error detected by
controls = The amount of error likely to remain undetected
What is inherent risk?

Definition: Inherent risk is the risk related to the nature of the activities
• Relevant factors (complex rules, ambiguous claim forms, lack of
Guidance, new staff, recently shifted to computerised systems.…)

In simple terms it is risk that company's financial statements will contain an error

What is control risk?

Definition: Control risk is the threat that errors or irregularities in the

underlying transactions will not be prevented, detected and corrected
by the internal control systems at the spot.
What is residual risk?
The risk remaining after the controls put in place to mitigate the inherent risk.

Remember the formula:

Inherent risk x control risk = residual risk

Conclusion
→zero risk in any activity is not achievable; therefore

→the residual risk, after controls, has to be defined by management;

→management may decide or not to reduce residual risk further

→the additional benefit of extra controls must be weighed against its cost
Sources of Evidence

Analytical Procedures

Enquiry and Confirmation

Inspection

Observation

Recalculation and Re performance

How Much Evidence

Sufficient appropriate audit evidence to be able to draw reasonable

conclusion on which to base an audit opinion.

Sufficient= Quantity
Appropriate= Relevant and Reliability

• External better than entity's records

• Direct evidence is better than indirect evidence
• Written is better than oral
• Original better than photocopies
The Use of Assertions
Accurate

Complete

Cutoff

Allocation

Classification and Understandability

Occurrence

Valuation

Existence

Rights and Obligations

Types of Sampling
Random selection

Systematic selection

Haphazard selection

Stratification

Monetary Unit Sampling

Hasnain constructions are a construction company employing a large number of
workers on various construction sites. The internal audit department is reviewing
cash wages systems in the company.
The following information is available.
Hours worked are recorded using a clocking in/out system. On arriving for work
and at the end of each days work each workers enters their unique employee’s
number on a key pad.
Workers on each site are controlled by a foreman. The foreman has record of all the
employees’ numbers and can issue temporary numbers for new employees.
Any overtime is calculated by the computerized wage system and added to the
standard pay.
The two staff in the wages department makes amendments to the computerized
wages system in respect of employee holidays, illness as well as setting up and
maintaining all employees’ records.
The computerized wage system calculates deductions from the gross pay, such as
employee’s taxes and net pay. Finally the list of net cash payments for each
employee is produced.
Cash is delivered to the wage office by secure courier.
The two staff place cash into wages packets for each employee along with a hand
written note of gross pay, deductions and net pay. The packets are given to the
foreman for distribution to the individual employees.
 RECEIVABLES
Write to selected debtors and ask for the confirmation of
Amounts owing

Two types
•Positive: want a reply everyone written to
•Negative: want a reply only if balance out of agreement

Reply should go directly to auditor’s office

Can stratify as samples so that large percentage is covered
Ask about old debts
Balances haven't moved for sometimes
Other work regarding receivables
Reconcile ledger to control accounts
Aged listings
Correspondence
Board minutes
Collection period
Receipts after year end
Payables
Reconcile ledger to control accounts
Correspondence ( Contingent Liability)
Board minutes
Payable period
Statement reconciliation
Payments after year end
 Contingent Liability

Contingent liability: Possible liability arising from pat events….existence

Confirmed by future events

•Present obligation probably requiring outflow of resources:

Provision recognized and disclosure required

• Possible obligation, or present obligation that will Probably not

Require outflow of resources: No provision but disclosure

• Possible obligation , or present obligation where likelihood of an outflow

Is remote: No provision, no disclosure
 Contingent Assets

Contingent asset: possible asset arising from past events….existence confirmed

By future events

• Inflow of economic benefits is certain: asset is not contingent

•Inflow of benefits is probable but not certain: No asset is recognized but disclosure
Is made

•Inflow is not certain: No asset recognized and no disclosure

Inventory counts
Inventory is difficult to audit: Quantity, description, ownership,
Condition, value

1. Plan in advance
2. Identify damaged and third party inventories
3. Pre number the locations
4. Issue pre numbered sheets
5. Sign off the location counted
6. Check Inventory Sheets
7. Account for all inventory sheets
8. Check price: Re perform the calculations