Over the years, business organizations have grown from owner operated entities, which

employed a handful of family members, to a vast multinational companies staffed by thousands

of employees. Such growth has been made possible by channeling financial resources from many
thousands of small investors, through the financial markets and credit granting institutions, to the
growing companies. As companies have grown in size their management has passed from
owners to small group of professional managers. Thus, company growth has been accompanied
by the increasing separation of ownership interests and management functions. As a
consequence, a need has arisen for company managers to report to the organization owners and
other providers of funds such as banks and other lenders, on the financial aspects of their
activities. Those receiving these reports need assurance that they are reliable. They, therefore,
wish to have the information in the reports checked out or audited. Three questions arise in
relation to the audit of management’s reports:
 Why might the information in the reports not be reliable?
 Why is it so important to receivers of the reports that the information is reliable?
 Why do the receivers of reports not audit the information for themselves?
The answers to these questions may be found in four main factors, namely: conflicts of interest,
consequences of error, remoteness and complexity.
Conflicts of Interests
A company’s financial statements are prepared by its directors and these directors are essentially
reporting on their own performance. Users of financial statements want the statements to portray
the company’s financial performance, position and cash flows as accurately as possible.
However, they perceive that the directors may bias their report so that it reflects favorably on
their management of the company’s affairs. Thus it can be seen that there is a potential conflict
of interest between the preparers and users of the financial statements. The audit plays a vital
role in helping to ensure that directors provide, and users are confident in receiving information
which is a fair representation of the company’s financial affairs.

Consequence of Error

If users of a company’s external financial statements base their decisions on unreliable

information, they may suffer serious financial loss as a result. Therefore, before basing decisions
on financial statements information, they wish to be assured that the information is reliable and
safe to act upon.

Remoteness

In general ,as a consequence of legal ,physical and economic factors , users of a company’s
external financial statements are not able to verify for themselves the reliability of the
information contained in the financial statements . Even if, for example, they are major
shareholders in a company, they have no legal right of access to the company’s books and
records. Further, they may be many miles distant from the company which prevents easy access
to it , and /or they may not be able to afford the time and expenses which should be involved in
checking the information personally ,should they have the legal right to do so . As a result of
legal, physical and economic factors preventing users of external financial statements from
examining personally the information provided by a company’s directors, an independent party
is needed to assess the reliability of the information on their behalf.

Complexity
As companies have grown in size, the volume of their transactions has been increased. Further,
especially in recent years, economic transactions and the accounting systems which capture and
process them, have been very complex. As a result of these changes, errors are more likely to
creep into the accounting data and the resulting financial statements. Additionally, with
increasing complexity of transactions, accounting systems and financial statements, users of
external financial statements are less able to evaluate the quality of the information for them.
Therefore, there is a growing need for the financial statements to be examined by independent
qualified auditors, who has the necessary competence and expertise to understand the entity’s
business, its transactions and its accounting system. We noted above that external financial
statement audits are necessary because the ownership and management functions of companies
have become increasingly separated and because of factors such as a potential conflict of interest
between preparers and users of financial statements ,and the inability of financial statement users
to verify the information for themselves . In this section we consider the benefits derived from
external financial statements audits by financial statement users, auditees and society as whole.
These benefits are reflected in the fundamental principles of external auditing – providing value:
Auditors add to the reliability and quality of financial reporting (provided for external parties );
they also provide to directors and officers (auditee) constructive observations arising from the
audit process and thereby contribute to the effective operations of business , capital markets and
the public sector (APB,1996 ).

The value of an external audit for financial statement users is the credibility it gives to the
financial information provided by the management of corporate entities. This credibility arises
from three forms of control which an audit provides:
i. Preventive control : Employees involved in the capture and processing of accounting data
and /or the preparation of the entity’s financial statements ,who know their work will be
subject to the scrutiny of an auditor ,are likely to work more carefully than they would in
the absence of an audit . It is probable that the extra care taken by employees prevent at
least some errors form occurring.
ii. Detective control: Even if employees in the auditee entity process the accounting data
and prepare the financial statements carefully errors may still occur. The auditors may
detect these errors during the audit and draw them to the management’s attention. They
may then be corrected prior to publication of the financial statements.
iii. Reporting control: If the auditor detects material errors in the financial statements and
refers them to management, but management refuses to correct them, the auditor draws
attention to the errors by qualifying the audit report (i.e. the auditor states that all is not
well, giving reasons for this conclusion). In this way, users of financial statements are
made aware that, in the auditor’s opinion, the information provided is not reliable. It is
interesting to note that legislation is silent on the qualifications of those who may prepare
company financial statements ,if it specifies that the auditors of these statements, must
hold that the auditors of these statements must hold an appropriate qualification and be
registered . This implies that, although the preparer of the financial statements need not
 be qualified accountant, the auditor must be a well-qualified, competent and experienced
professional. It, therefore, seems that auditors are deemed to protect the interests of
financial statements users by giving assurance that the financial statements are reliable or
providing a warning that they are not auditees.

During the course of an external financial statements audit, the auditor becomes very familiar
with the organization, its business, its accounting system and all aspects of its financial affairs.
Added to this, the auditor is a qualified and experienced individual, who comes to the auditee as
an independent objective outsider, divorced from the day to day running of the entity. These
factors place the auditor in an ideal position to observe where improvements can be made. (S)he
is able to advise the auditee on matters such as strengthening internal control ; the development
of accounting or other management information system ;tax ,investment , and financial planning.
In addition (in cases where the issue arises for the auditee ) , the auditor is able to provide advice
on matters such as how to proceed with business acquisitions ,divestment or liquidation. The
provision of these additional services by the auditor is very valuable for the auditee . Indeed, as
Anderson (1977) pointed out: In many cases, it is the presence of these collateral services which
makes the audit an economical package from management’s point of view. The professional
auditor must always be alert for the opportunities to be of service to his or her client while at the
same time discharging conscientiously her or his responsibilities to the users of the audited
financial statements. Notwithstanding the value of these services for the auditee, there is a
potential danger which auditors need to bear in mind. In recent years, the fees paid by audit
clients to their auditors for non-audit services have grown to such an extent that in many
instances, they exceed the audit fee. This has led to the concerns that auditors may not be
sufficiently critical in their auditing duties for fear of upsetting the entity’s management and
consequently losing lucrative non-audit contracts.
The benefits flowing from audits for society as a whole are to smoothen the functioning of
financial markets and secure the accountability of corporate management. Continued investment
in the capital markets rests on investors having confidence in the financial information on which
they base their investment decisions. This confidence, in turn, is derived from the audit function.
Therefore, most members of society –directly or indirectly –benefit from external financial
statements audit. On the other hand, large national and multinational companies dominate the
lives and control the well-being, of whole communities and have a major impact on society in
general. However, in a democratic society, power is not absolute. Mindful of Lord Action’s
dictum that “power corrupts and absolute power corrupts absolutely”. The Society has set in
place checks and balances designed to prevent possible abuse of power. As one of the checks
designed to ensure that company managements do not abuse power bestowed upon them through
the provision of resources, they are held accountable for the responsible use of resources
entrusted to them. This accountability is secured primarily by:

 Requiring company directors to provide publicly available annual financial

statements which report on their use of resources ;
 To submit these financial statements to a critical examination by an
independent expert (that is an audit )

Thus, auditors may be seen as an integral part of the process of securing the accountability of
company management whose control and use of the resources of various groups in society such
as shareholders, debt-holders, creditors, employees, suppliers, customers and the general public.
In reality, however, all stakeholders who provide resources to company managements have an
interest in the accountability process of which auditing is a part. Therefore, in addition to
protecting the interests of financial statement users by giving credibility to the financial
statements and providing ancillary services to auditee entities, the external audit, by helping to
ensure the smooth functioning of financial markets and by functioning as an element of social
control within the corporate accountability process, is also of value to society as a whole.

To put another way, the main rationale for auditing is reduction of information risk not, in fact
business risk. Business risk is a risk because of economic or business conditions such as a
recession, poor management decisions or unexpected competition in the industry. Auditing has
no effect on business risk and the auditor is not held responsible for the same. Information risk
refers to the possibility that the information upon which the business risk decision was made was
inaccurate. A likely cause of information risk is the possibility of inaccurate financial statements.
Causes of information risk are remoteness of information, bias and motive of the information
provider, voluminous data and Complex Exchange transactions. Information risk may be
reduced when user verifies information, user shares information risk with management and gets
audited financial statements (the most common way)

1.3 Objectives of Auditing

An audit objective is the object of the auditor’s investigation. It is what the auditor is trying to
find out and the purpose for which audit procedures are performed. It is often helpful to express
an audit objective in the form of a question. We use the single term ‘audit objective’ even if three
separate levels of objectives exist: Overall audit objective, General audit objective and specific
audit objective. The highest level is the overall objective. This is reflected in a question: Do
financial statements give a true and fair view of the entity state of affairs and its profit and loss
(financial position and results of operation and cash flows). In order to answer this question, and
thus accomplish the overall audit objective, further, more detailed, questions need to be asked.
For example, do the financial statements comply with the generally accepted accounting
standards? Have the entity’s internal controls operated effectively through out the reporting
period? Is the amount shown in the financial statements for, say, sales or trade debtors fairly
stated? Questions of this general nature reflect general audit objectives. To accomplish these
general objectives, even more specific questions need to be asked. These are expressions of the
specific audit objectives. For example, to accomplish the general objective of ascertaining
whether sales are fairly stated in the financial statements, the auditor needs to determine, among
others, whether:
 Sales transactions have been properly authorized;
 Recorded sales transactions are valid;
 All valid sales transactions have been recorded;
 Sales transactions have been properly classified;
 Sales transactions have been recorded at their proper amount;
 Sales transactions have been recorded in their proper accounting period and
 Each of these factors constitutes a specific audit objective.
The main objective of an audit of financial statement is to enable the auditor to express an
opinion on whether the overall financial statements (the information being verified) are prepared,
in all material respects, in accordance with an identified financial reporting framework.
Normally, this framework can be defined as the generally accepted accounting principles
(GAAP) such as the US GAAP or the equivalents in other countries. The International Financial
Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB)
can also be considered for this purpose. The financial statements most often included are the
statement of financial position, income statement and statement of cash flows, including
accompanying footnotes.

1.4 Distinction between Accounting and Auditing

This course is primarily concerned with the external financial statement audits of companies and
unless indicated otherwise, when we refer to audit or auditor , these terms should be understood
in that context. However, before focusing attention on these audits, we need to distinguish
between accounting and auditing. Accounting data and the accounting system which capture and
process this data, provide the raw materials with in which auditors work. In order to understand
these systems and the data they process an auditor must first be a qualified accountant. However,
the process involved in auditing and accounting is different. Accounting is essentially a creative
process which involves identifying, organizing, summarizing and communicating information
about economic events. Auditing, on the other hand, is essentially a critical (evaluative) process.
It involves gathering and evaluating audit evidence and communicating conclusions based on
this evidence about the fairness with which the communication resulting from the accounting
process (i.e. financial statements) reflects the underlying economic events.
Accounting is the collecting [recording, classifying], summarizing, reporting and interpreting of
financial data. It is constructive. It starts with raw financial data and ends with the preparation of
financial summary known as financial statements.

Auditing is the testing of the accounting records for fairness, appropriateness. It is analytical
work that starts with the end product of accounting to lend credibility and test the fairness of the
measurements. Have they been prepared according to GAAP? An accountant only needs to know
GAAP. The auditor needs to know GAAP, plus how to select and evaluate items related to the
assertion of financial statements. More specifically:
i. Auditing starts when accounting ends
ii. Auditing is done by professionals who know at least accounting and auditing but
accounting may be undertaken by some one who knows only accounting
iii. Auditing calls for independence but accounting does not. Accountant should be
advocate to the entity in question so far as the activity is legal and ethical but auditor
is independent
iv. Auditing is verification ( attestation ) but accounting is concerned mainly with
production of financial statements
v. Accounting is creation of new information but auditing is adding credibility to the
already created information

1.5 Types of Audits and Auditors

Types of Audits
Audits may be classified in various ways. They may be, for instance, categorized according to
the primary objective of audit; or the primary beneficiaries of audit:
Classification by Primary Audit Objective
Based on primary audit objective, three main categories of audit may be recognized, namely;
i. Financial statements audit ;
ii. Compliance audit ; and
iii. Performance audit

Financial Statements Audit

A financial statements audit is an examination of an entity’s financial statements, which have

been prepared by the entity’s management for owners and interested parties outside the entity
and of evidence supporting the information contained in those financial statements. It is
conducted by a qualified, experienced professional, who is independent of the entity, for the
purpose of expressing an opinion on whether or not the financial statements provide a true and
fair view of the entity’s financial position and performance, and comply with relevant statutory
and /or regulatory requirements. Financial statements include balance sheet, income statement
(profit and loss account) and cash flows statement, among others. Financial statement Audit –is
conducted to determine whether the overall financial statements are stated in accordance with the
established criteria. Normally the established criteria are GAAP.

Compliance Audit
The purpose of compliance audit is to determine whether an individual or entity (auditee) has
acted or is acting in accordance with procedures or regulations established by an authority such
as the entity’s management or a regulatory body. The audits are conducted by competent,
experienced professional, internal or external to the auditee, who are appointed by, and report to
the authority which set the procedures or regulations in place. Examples of compliance audits
include audits conducted by the Inland Revenue which are designed to ascertain whether
individuals or organizations have complied with tax regulations or legislations governing imports
and exports, as applicable. They also include audits conducted within companies or other entity’s
employees are with the system of internal controls established by management.
Compliance audits-determine whether specified rules, regulations, or procedures are being
carried out or followed. An example of this is : Is a grant recipient adhering to the rules for
administrating the grant? Results of compliance audit are typically reported to some one within
the organizational unit being audited rather than to a broad spectrum of users .Note that there is
no pure financial, compliance or performance audit. They go in combination a. What determines
this or that is the majority, i.e. if the majority of the engagement is related to checking
compliance with the applicable rules and regulations s, it is compliance audit even if it involves
some sort of audit of financial statements. Unless stated otherwise, financial statements audit is
taken up throughout. On the other hand, audit may be classified into governmental and non
governmental, external and internal or some other.
Operational Audit
An operational audit involves a systematic examination and evaluation of an entity’s operations
which is conducted with a view to improving the efficiency and /or effectiveness of the entity
.Such audits are audits are usually conducted by competent ,experience professional , internal or
external to the auditee, who report their findings to management . An operational audit may
apply to the organization as a whole or to an identified segment thereof, such as a subsidiary,
division or department. The objective the audit may be broad, for example, to improve the
overall efficiency of the entity, or narrow and designed, for example, to solve a specific problem
such as excessive staff turnover. Operational audit (performance audit) – determines the
effectiveness (success in achieving goals) or efficiency (production with least amount of effort or
waste). For example: is the post office meeting its goal of delivering domestic packages
undamaged, and within five days? Sources of criteria include historical information,
benchmarking, and engineered standards (time and motion studies). The criteria are extremely
subjective.

Comparison among the three types of audit classified by primary objectives

Established Available
Type of audit Example Information criteria evidence
Financial Annual audit of Airlines financial Documents,
statements audit Airlines financial statements records,
statements GAAPs confirmations
Performance Evaluate whether the Payroll register Company Payroll records,
audit Airlines payroll standards for attendance sheet
processing is efficiency and , time cards
operating efficiently effectiveness
and effectively
Compliance Determine whether Company Loan agreement Financial
audit bank requirements records provisions statements , ratio
for loan continuation calculated by the
have been met auditor
Classification by Primary Audit Beneficiaries
Based on primary beneficiaries, that are those for whom the audit is conducted, the audits may be
classified as:
i. External audit ; or
ii. Internal audit

External Audit
An external audit is an audit performed for parties external to the auditee. Experts, independent
of the auditee and its personnel, conduct these audits in accordance with requirements, which ate
defined by or on behalf of the parties for whose benefit the audit is conducted. Probably the best
known and most frequently performed, external audits are the statutory audits of companies and
public sector entities’ financial statements (i.e. financial statements audit). However, Compliance
audits conducted, for instance, by the Inland Revenue is an example of external audit

Internal Audit

In contrast to external audits, internal audits are performed for parties, usually management,
internal the entity. They may be performed by the employees of the entity itself or by personnel
form an outside source (such as accounting firm). However, in either case, the audit is conducted
in accordance with management’s requirements. These may be wide-ranging or narrowly
focused, and continuous (on-going) or one-off in nature. They may, for example, be as broad as
investigating the appropriateness and level of compliance with the organization’s system of
internal controls or as narrow as examining the entity policies and procedures for ensuring
compliance with health and safety regulations.

Other Types of Audit

Environmental Audit
Environmental audit is a critical analysis of policies, principles, practices and performances of
the aspect which relates to the environment. . They can be performed by internal or external
experts at the discretion of entity’s management. Often the work is performed by a multi-
disciplinary team. The objective of environmental audit is to evaluate the efficacy of the
utilization of resources of man, machine and materials and to identify the areas of environmental
risks and liabilities and weaknesses of management systems and problems in compliance of the
directives of the regulatory agencies and control the generation of pollutants and/or wastes.

Forensic Audit
A forensic audit is an examination of organizations’ or individuals’ economic affairs, resulting in
a report designed especially for use in a court of law. A forensic audit is similar to the tax audit
in that both strive to establish a comprehensive picture of an entity’s finances (assets, liabilities,
total income, cash flows). However, while a tax audit is intended to determine the true size of
one’s tax liability, a forensic audit can have several goals, including cash flows /cash
transactions, identifying accounting errors and enumerating total assets. Forensic audits are used
whenever lawyers or law enforcement officials need reliable data on a party’s financial status or
activities. For example, while reaching a divorce settlement, a law may require the presiding
judge to permit a forensic audit to uncover assets that one spouse is trying to hide. If you want to
sue an auditor for negligence, you would request a separate forensic audit to determine how
much the botched job cost you in business. If an elected official is accused of accepting bribes,
the FBI would set up a forensic audit team. Forensic audits are sought by CEOs, chief financial
officers or board members who suspect embezzlement with the company.
Forensic audits are performed by special class of financial experts known as forensic
accountants. This class includes fraud examiners, people with bachelor’s degrees or equal
professional experience who have a background in accounting, prosecuting fraud, loss
prevention or criminology/sociology. Forensic audits begin by taking all the accounts, asets,
capital and other economic elements and determining how they should work together. To use a
hypothetical example, if a suitor sees that a business grosses Birr 10 million a year,s/he assumes
that the profits, cash flows, new capital, inventories, taxes, payroll, rent and other costs add up
Birr 10 million. He then looks at the profits, cash etc, and checks how they ought to interact.
Once he has collected the reported values as well as caveats, he would establish an ideal model
for how the each side of the balance sheet should read. Then the report is sent to the appropriate
authorities it is recorded as evidence. While its completeness and objectivity are certainly
important, a forensic audit report’s most useful attributes is the summary of results. Finance is a
highly technical discipline to accommodate this complexity. In so doing accountants have
adopted a forensic lexicon. As such, an unscrupulous defense attorney could exploit the average
juror’s experience ignorance of such terminology to discount audit results that are actually
compelling. Luckily, chartered accountants specializing in forensics understand finance as well
as criminal law. This allows them to translate audit results into language useful to prosecutors
trying to build a case.
Common Characteristics of Audit
It should be noted that, although different categories and types of audit may be recognized,
all audits possess the same general characteristics whether they are financial, compliance, or
performance, and whether they are conducted for parties external or internal to the entity ,
they all involve :
 The systematic examination and evaluation of evidence which is undertaken to
ascertain whether statements or actions by individuals or organizations comply with
established criteria; and
 Communication of results of the examination, usually in a written report to the
party by whom, or on whose behalf, the auditor was appointed.

Services given by auditors may be broadly divided into assurance and non-assurance services.

Assurance Services

Assurance services: are independent professional services that improve the quality of
information for decision makers. Attestation service is a type of assurance service in which the
CPA (certified auditors) firm issues a written communication that expresses a conclusion about
the reliability of a written assertion of another party.

There are three categories of attestation services:

i. Audit of historical financial statements- is a form of attestation service in which the
auditors issue a written report expressing an opinion about whether the financial
statements are in material conformity with generally accepted accounting principles.
It is this service that the course mainly sticks to.
ii. Review of historical financial statements- is another type of attestation service
performed by CPAs. Many nonpublic (private) companies want to provide assurance
on their financial statements, with out incurring cost of an audit
iii. Other attest services- CPAs provide much other type of attestation services related to
historical financial statements to meet the specific needs of financial statement users.
Examples are reports on forecasted financial statements and reports on internal
control over financial reporting

Non-Assurance Services
CPAs perform numerous non-assurance services including
i. On information technology
ii. Business performance measurement services(comprehensive performance measures)
iii. Accounting and bookkeeping services
iv. Tax services
v. Management consulting services

Types of Auditors:
There are four types of Auditors
i. Independent (external) Auditor - CPAs in USA, Chartered certified
Accountants in Ethiopia. They are certified to give public accounting services such
 as auditing , management advisory services , income tax consultations , compilation ,
bookkeeping ,etc

To get a public accountant certification, uniform exam has to be passed, experience is required
and a first degree qualification is required. Locally, there are neither professional accountancy
qualifications nor training available for professional accountancy. All professional accountants
hold foreign professional qualifications. The leading professional qualification is Association of
Chartered Certified Accountants (ACCA). The ACCA has 192 members (including associates),
and 1,300 students in Ethiopia. It is estimated that about 95 percent of the professional
accountants in the country hold the ACCA qualification. The ACCA has a branch in Addis
Ababa. As for training, there is no institution that provides professional accountancy training.
Professional accountants get their qualification through distance learning. However, the ACCA
fees are considered too expensive by the majority of Ethiopians.

ii. General accounting office Auditors (office of Audit general in Ethiopia)

 The auditor is paid a salary by the government (taxpayers)
 Responsible to the legislature, or executive, but ultimately to the tax payer
 Performs mostly compliance audit

The Office of the Federal Auditor General and the Ethiopian Civil Service College have been
given some legislative authority for regulating the accountancy profession. There are efforts by
the Ethiopian Civil Service College (through its Institute for Certifying Accountants and
Auditors - ICAA) to certify accountants and auditors, focusing initially in the public sector.

iii. Internal Revenue Agents (Income tax auditors) - audits the taxpayers’ returns whether
they have compiled with the tax laws. It performs compliance audit. In Ethiopia
accountants or auditors who work in Federal Inland Revenue Authority (FIRA)
iv. Internal Auditors - are employees by individual companies
 Are responsible to top management or the board of directors
 Perform compliance and operational audit
Internal auditing is a profession which has always prided itself on being a service to
management. That service was founded on the ability of internal auditors to influence the way in
which managers controlled their organization’s operations in order to achieve objectives. Internal
auditors have never attempted to take over the management task—rather they have tried to
support the manager’s endeavors by reviewing and advising in order to give an assurance that
control is as effective as it can be.
The function of internal auditing can be undertaken in a variety of ways and it is for each
Organization to discover the best way for itself. In-house teams know the business; outsource
providers and partnerships bring other strengths. Boards of directors must decide from all the
options open to them which type of service is most likely to work for them, is the most cost-
effective and adds the most value.
It is clear, however, that at the start of the third millennium, internal auditing has a significant
role to play in every type of organization and in every economic centre. The late twentieth
century saw virtually every type of organization suffer to some extent from poor management
decisions, unethical corporate behavior, fraud and other unacceptable business practices. Thus,
corporate governance—the way in which organizations are directed and controlled—and a
worldwide interest in the wider stakeholder community has been meant that boards of directors
have come under more scrutiny than ever before.
Accountability, transparency of operations and the integrity of boards and their individual
members have resulted in global pressure on organizations to fully understand their corporate
objectives and the impact, both socially and environmentally, which these objectives may have.
Additionally, organizations must assess and manage the risks which may prevent attainment of
objectives and convince their stakeholders that outputs of product or service have been achieved
as economically, efficiently and effectively as is practicable.
All of these allow the internal auditor to move to centre-stage. The skills in which internal
auditors have always excelled—understanding strategic planning and objective setting; assessing
and prioritizing risks; recommending control and mitigation strategies; communication ability—
mean that more than ever before boards and senior managers are seeking the help of well-
qualified, professional internal auditors to assist them in this increasingly complex technological
world. Internal auditors have not been slow to take up the challenge
There is an unstated assumption that the auditor has the right attributes to perform to the requisite
standards. This can only arise where audit management has defined these attributes so that
recruitment and development programmes can be directed towards them. If this definition has
not been carried out then it becomes guesswork. At worst, auditors may guess wrongly and
behave in an inappropriate way because this is what they assume is required.

1.6 Generally Accepted Auditing Standards (GAAS)

The past decade has been one of unprecedented change in the global economy and capital
markets. Key aspects of the current business environment include a globalized, highly
competitive, expanding economy; explosive growth in the development and use of technology;
dramatic increases in new economic service- and technology-based businesses with
predominantly intangible assets; unparalleled expansion in the number of public entities; large
increases in the number of individuals who directly or indirectly own equity securities; and
unprecedented growth in the market value of those securities.

The expanded use of technology in both the operating and financial systems of companies also
has significantly affected the audit environment, forcing audit firms to recruit, train and deploy a
large number of information technology specialists to support their audit efforts. It also has
caused firms to reconsider their audit methods and techniques in an effort to harness technology
to improve audit efficiency and effectiveness. In the changing environment, it is obvious that a
professional accountant should adhere to standards and procedures laid down by the professional
accountancy bodies of which he is a member while discharging his duties in a responsible
manner. In this direction, the role of a professional accounting body is to lay down such
standards and procedures with the aim of providing guidance to members.
There are 10 generally accepted auditing standards, divided into three categories. They emanate
from AICPA procedure no. 23 of 1949 G.C.
i. General Standards
1. The audit is to be performed by a person or persons having adequate technical training
and proficiency as an auditor.
2. In all matters relating to the assignments, independence in mental attitude is to be
maintained by the auditor or auditors.
 3. Due professional care is to be exercised in the planning and performance of the audit
and the preparation of the report.
ii. Standards of Field Work
1. The work is to be adequately planned and assistants, if any, are to be properly
supervised.
2. A sufficient understanding of internal control is to be obtained to plan the audit and to
determine the nature, timing and extent of tests to be performed.
3. Sufficient competent evidential matters is to be obtained through inspection,
observation, inquires, and confirmations to afford a reasonable basis for an opinion
regarding the financial statements under audit.

iii. Standards of Reporting

1. The report shall state whether the financial statements are presented in accordance
with generally accepted accounting principles.
2. The report shall identify those circumstances in which such principles have not been
consistently observed in the current period in relation to the preceding period.
3. Informative disclosures in the financial statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
4. The report shall either contain an express of opinion regarding the financial
statements, taken as whole, or an assertion to the effect that an opinion cannot be
expressed. When an overall opinion cannot be expressed, the reasons therefore should
be stated. In all cases where an auditor’s name is associated with financial statement,
the report should contain a clear-cut indication of the character of the auditor’s work, if
any, and the degree of responsibility the auditor is taking.

Where: The ten standards set forth by the American Institute of Certified public Accountants
include such intangible and subjective terms of measurement as “adequate planning,” “sufficient
understanding of the internal control structure,” sufficient competent evidential matter,” and
“adequate disclosure.”To decide under the circumstances of each audit engagement what is
adequate, sufficient, and competent requires the exercise of professional judgment. Auditing
cannot be reduced to rote; the exercise of judgment by the auditor is vital at numerous points in
every examination. However, the formulation and publication of carefully worded auditing
standards are of immense aid in raising the quality of audit work, even though these standards
require professional judgment in their application.

General Standards
The general standards stress the importance of personal qualities that the auditor should possess.
Training and Proficiency
How does the independent auditor achieve the “adequate technical training and proficiently”
required by the first general standard? This requirement is usually interpreted to mean college or
university education in accounting and auditing, substantial public accounting experience, ability
to use procedures suitable for computer-based systems, and participation in continuing education
programs. A technical knowledge of the industry in which the client operates is also part of the
personal qualifications of the auditor. It follows that an audit firm must not accept an audit
engagement without first determining that members of its staff have the technical training and
proficiency needed to function effectively in the particular industry. The auditor should have
formal education in auditing and accounting, practical experience for the work being performed,
and continuing professional education

Independence
An opinion by an independent public accountant as to the fairness of a company’s financial
statement is of no value unless the accountant is truly independent. Consequently, the auditing
standard that “in all matters relating to the assignment independence in mental attitude is to be
maintained by the auditor” is perhaps the most essential factor in the existence of a public
accounting profession.
If auditors owned shares of stock in a company that they audited, or if they served as members of
the board of directors, they might subconsciously be biased in the performance of auditing
duties. An auditor should therefore avoid any relationship with a client that would cause an
outsider who had knowledge of all the facts to doubt the auditor’s independence. It is not enough
that auditors be independent; they must conduct themselves in such a manner that informed
members of the public will have no reason to doubt their independence.

Due Professional Care

The third general standard requires due professional care in the conduct of the audit and in the
preparation of the audit report. This standard requires the auditors to carry out every step of the
audit engagement in an alert and diligent manner. Full compliance with this standard would rule
out any negligent acts or material omissions by the auditors. Of course, auditors, as well as
members of other professions, inevitably make occasional errors in judgment, but this human
element does not justify indifference or inattention to professional responsibilities. Due
professional care (conscientiousness) includes completeness of the working paper, sufficiency of
the audit evidence and appropriateness of the audit report

Standards of Field Work

The three standards of field work relate to accumulating and evaluating evidence sufficient for
the auditors to express an opinion on the financial statements. One major type of evidence is the
client’s internal control. By obtaining an understanding of the internal control structure, the
auditors can assess whether the structure offers assurance that the financial statements will be
free from material errors and irregularities. A second major type of evidence consists of
information that substantiates the amounts on the financial statements being audited. Examples
of such evidence include written confirmations from outsiders and firsthand observation of assets
by the auditors. The gathering and evaluating of evidence lies at the very heart of the audit
process and is a continuing theme throughout this course

Adequate Planning and Supervision

Adequate planning is essential to a satisfactory audit. Some portions of the examination can be
performed prior to the end of the year under audit; some information may be compiled by the
client’s staff and made available for the auditors’ review. The appropriate number of audit staff
of various levels of skill and the time required of each need to be determined in advance of field
work. These are but a few of the elements of planning the audit.
Most of the field work of an audit is carried out by staff members with limited experience. The
key to successful use of relatively new staff members is close supervision at every level. This
concept extends from providing specific written instructions to staff members all the way to an
overall review by the partner in charge of the engagement.
Sufficient Understanding of Internal Control
An excellent internal control structure provides strong assurance that the client’s records are
dependable and that its assets are protected. When the auditors find this type of strong internal
control, the quantity of other evidence required is much less that if controls were weak. Thus, the
auditors’ assessment of internal control has great impact on the length and nature of the audit
process.

Sufficient Competent Evidential Matter

The third standard of field work requires that the auditors gather sufficient competent evidence to
have a basis for expressing an opinion on the financial statements. The term competent refers to
the quality of the evidence; some forms of evidence are stronger and more convincing than
others. On the other hand, the term sufficient refers to the quantity of evidence. So that the audit
evidence may be persuasive, it has to be competent and sufficient simultaneously. What should
be the basis of any type of audit opinion is persuasive evidence with out which no opinion shall
be rendered.

The Reporting Standards

The four reporting standards establish some specific directives for preparation of the auditors’
report. The report must specifically state whether the financial statements are in conformity with
generally accepted accounting principles. The report must contain an opinion on the financial
statements as a whole, or must disclaim an opinion. Consistency in the application of generally
accepted accounting principles and adequate informative disclosure in the financial statements is
to be assumed unless the audit report states otherwise.

The main responsibility of the auditor in the financial statements audit is expression of opinion
on the financial statements conducting an audit in accordance with GAAS as to whether they
fairly represent the financial condition and position of the business. Fair presentation entails
being free from material error, material fraud, material direct effect illegal acts, among others.
On the other hand, the responsibilities of management in relation to financial statements audit
are;
 Establishing and maintaining effective internal controls over financial reporting
 Identifying and insuring that the entity complies with laws and regulations
 Making financial records and related information available to the auditor
 Providing a representation letter
 Adjusting financial statements to correct material misstatements
 Affirming in representation letter that effect of uncorrected misstatements aggregated
by auditor is immaterial

The auditor may, nonetheless, assist in the preparation of financial statements ,for example, he or
she may counsel management as to the applicability of a new accounting standard ,or propose
adjustments to the client’s statements based on audit findings . However, management’s
acceptance of this advice and the inclusion of the suggested adjustments in the financial
statements do not alter the basic separation of responsibilities .Ultimately, management is
responsible for all decisions concerning the form and content of the statements.

Summary
An audit may be defined as a systematic process of objectively obtaining and evaluating
evidence regarding information about economic events to ascertain the degree of correspondence
between this information and established criteria and communicating the results to interested
users. Auditors today are responsible for adding credibility to the financial statements. Whereas
accounting is concerned with production of financial information, auditing is concerned with
verifying this information fairness in light of generally accepted accounting principles. Audits
are classified into three: financial statements audit, operational audit and compliance audit. There
are four types of auditors: independent auditor, general accounts office auditor, income tax
auditor and internal auditor.

The ten generally accepted auditing standards are measure of performance quality upon auditing.
Included are general standards, field work standards and reporting standards. General standards
are mainly geared towards quality of the auditor, field work standards consist of evidence
accumulation, plan and supervision and reporting standards guide the way audit report is
prepared.