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Auditing
The objective of an audit of financial statements is to enable the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework.

Purpose of an external audit engagement is to‘enhance the degree of confidence of

intended users in financial statements.’

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Appointment of auditors
Members appoints the auditors usually in a general meeting.
Directors may appoint only the first ever auditors and the auditors to fill a casual vacancy.

Incase if members and directors fail to appoint auditors then the Secretary of State shall
appoint the auditors.

The remuneration of the auditors, which will include auditors' expenses, will be fixed by
whoever made the appointment.

Objectives of an audit
The objectives of an auditor are to:

• Obtain reasonable assurance about whether the financial statements as a

whole are free from material misstatement, whether due to fraud or error.

• Express an opinion on whether the financial statements are prepared, in all

material respects, in accordance with an applicable financial reporting
framework.

• Report on the financial statements, and communicate as required by ISAs, in

accordance with the auditor's findings.

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Professional Judgement
Professional judgement is the application of relevant training, Knowledge and experience in
making informed decision about the appropriate course of action in the circumstance of the
audit engagement.

Professional Scepticism
Professional Scepticism is an attitude that includes having a questioning mind,

being alert to the conditions that may indicate possible misstatements due to fraud or error

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and

subjecting the audit evidence to a critical assessment rather than taking it at its face value.

Communication with those charged with

governance
'Those charged with governance' is defined by ISA 260 as:

The person(s) or organisation(s) with responsibility for overseeing the strategic direction of
the entity and obligations related to the accountability of the entity.

Management' is defined by ISA 260 as:

The person(s) with executive responsibility for the conduct of the entity's operations.

Matters to be communicated by auditors to those

charged with governance

(a) The auditor's responsibilities in relation to the financial statement audit

(b) Auditor independence

(c) Planned scope and timing of the audit

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(d) Significant findings from the audit

(e) Audit Conclusion

Agreeing the terms of audit engagements

The objective of the auditor is to accept or continue an audit engagement only when the
basis on which it is to be performed has been agreed, through:

• Establishing whether the preconditions for an audit are present, and

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• Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the terms of
the audit engagement.

Preconditions for an audit

- For the preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant their fair presentation;

-  For such internal control as management determines is necessary to enable the

preparation of financial statements that are free from material misstatement, whether due
to fraud or error;

-  To provide the auditor with:

• Access to all information of which management is aware that is

relevant to the preparation of the financial statements;

• Additional information that the auditor may request from

management for the purpose of the audit; and

• Unrestricted access to persons within the entity from whom

the auditor determines it necessary to obtain audit evidence.

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Materiality
A item is material if its omission or misstatement would reasonably influence the economic
decisions by a user of financial statements.

It is affected by the size and nature of the misstatement.

Planning Materiality/Overall materiality

Planning Materiality is the Materiality that have been decided for the financial statements as
a whole.

Performance materiality

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The amount or amounts set by the auditor at less than the materiality level or levels for
particular classes of transactions, account balances or disclosures’.

The calculation or estimation of materiality should be based on professional

judgement .

Materiality for the financial statements as a whole must be reviewed throughout the audit
and revised if necessary.

Assertions
Audit Assertions are the implicit or explicit claims and representations made by the
management responsible for the preparation of financial statements regarding the
appropriateness of the various elements of financial statements and disclosures.

Assertions about classes of transactions and events and

related disclosures for the period under audit
Occurrence: Transactions and events that have been recorded or disclosed have occurred,
and such transactions and events pertain to the entity.
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Completeness: All transactions and events that should have been recorded have been
recorded, and all related disclosures that should have been included in the financial
statements have been included.

Accuracy: Amounts and other data relating to recorded transactions and events have been
recorded appropriately, and related disclosures have been appropriately measured and
described.

Cut-off: Transactions and events have been recorded in the correct reporting period.

Classification: Transactions and events have been recorded in the proper accounts.

Presentation: Transactions and events are appropriately aggregated or disaggregated and

are clearly described, and related disclosures are relevant and understandable in the context
of the requirements of the applicable financial reporting framework.

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Assertions about account balances and related
disclosures at the period end
Existence: Assets, liabilities and equity interests exist.

Rights and obligations: The entity holds or controls the rights to assets, and liabilities are
the obligations of the entity.

Completeness: All assets, liabilities and equity interests that should have been
recorded have been recorded, and all related disclosures that should have been included in
the financial statements have been included.

Accuracy, valuation and allocation: Assets, liabilities and equity interests have been
included in the financial statements at appropriate amounts and any resulting valuation or
allocation adjustments have been appropriately recorded, and related disclosures have been
appropriately measured and described.

Classification: Assets, liabilities and equity interests have been recorded in the proper
accounts.

Presentation: Assets, liabilities and equity interests are appropriately aggregated or

disaggregated and clearly described, and related disclosures are relevant and understandable
in the context of the requirements of the applicable financial reporting framework.
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Audit evidence
The auditor need to obtain sufficient appropriate evidence to be able to draw reasonable
conclusions. (ISA 500,4)

The sufficiency means the quantity of the evidence and the appropriateness means the
quality of the evidence

Audit Procedures
The auditor obtains audit evidence by undertaking audit procedures to do the following:

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Risk assessment procedures Obtain an understanding of the entity and its environment
to assess the risks of material misstatement at the financial statement and assertion levels

Tests of controls are designed to check that the audit client's internal control systems
operate effectively.

Substantive procedures are designed to detect material misstatement at the assertion level
in the financial statements

• Substantive analytical procedures test the balances as a whole to identify

any unusual relationship

• Substantive tests of detail looks at the supporting evidence for individual

transactions and traces them through to the financial statements to ensure they
are dealt with appropriately.

Audit procedures for obtaining evidence

• Analytical procedures
• Enquiry
• Inspection
• Observation
• Recalculation and reperformance
• External confirmations
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Using the work of others

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The auditor's responsibilities relating to

fraud in an audit of financial statements

Types of fraud:
• Fraudulent Financial reporting

• Misappropriation of Assets

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The objectives of the auditor are:
• (a) To identify and assess the risks of material misstatement of the financial
statements due to fraud;

• (b) To obtain sufficient appropriate audit evidence regarding the assessed risks of
material misstatement due to fraud, through designing and implementing appropriate
responses; and

• (c) To respond appropriately to fraud or suspected fraud identified during the audit.

Fraud risk factors:

Those events or conditions that influences or pressurises or given an opportunity to commit
fraud.

• Dishonesty

• Need/Motivation

• Opportunity
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Audit documentation
Audit documentation is the record of audit procedures performed, audit evidences obtained
and audit conclusions reached. These are also known as audit working papers.

Purpose of audit documentation

• To show that the audit work has been done properly.

• To enable senior staff to review the work of junior staff. obtained.

• To help the audit team in future years.

• To encourage a methodical, high-quality approach.

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External confirmations
External confirmations are audit evidence obtained as a direct written response to the
auditor from a third party (the confirming party), in paper form, or by electronic or other
medium.

Types of confirmation request

• Positive confirmation request

• Negative confirmation request

Audit sampling
The application of audit procedures to less than 100% of items within a population of audit
relevance such that all sampling units have a chance of selection in order to provide the
auditor with a reasonable basis on which to draw conclusions about the entire population.’ [I

Types of sample selection

• Random Sampling

• Systematic sampling

• Haphazard sampling

• Cluster sampling

• Monetary unit sampling

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Written representations
Written representations are written statements by management provided to the auditor to
confirm certain matters or to support other audit evidence.

• Must be in clients letter head

• The date of the written representation must be as near as practicable to, but not after,
the date of the auditor's report on the financial statements and must be for all the financial
statements and period(s) referred to in the auditor's report

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Communicating deficiencies in internal control
to those charged with governance and
management
A deficiency in internal control 'exists when:

• A control is designed, implemented or operated in such a way that it is unable to

prevent, or detect and correct, misstatements in the financial statements on a timely
basis; or

• A control necessary to prevent, or detect and correct, misstatements in the financial

statements on a timely basis is missing' (ISA 265: para. 6(a)).

A significant deficiency in internal control is a deficiency or combination of deficiencies in

internal control that, in the auditor's professional judgment, is of sufficient importance to
merit the attention of those charged with governance (ISA 265: para. 6(b)).

Management letter or report(Covering letter)

The auditor shall include the following in the written communication:

• Deficiency in the ICS

• Implication in the FS
• Recommendations
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Initial Engagements - Opening Balances

ISA 510 Initial Engagements Opening Balances requires that when auditors take on a new
client, they must ensure that:
• Opening balances do not contain material misstatements
• Appropriate accounting policies have been consistently applied, or changes adequately
disclosed.

Audit risk
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the

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financial statements are materially misstated.

Audit risk is a function of the risk of material misstatement and detection risk.

Audit risk = Inherent risk × Control risk × Detection risk

Risk of material misstatement = Inherent risk × Control risk

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Reporting

Pervasiveness
Pervasiveness is a term used to describe the effects or possible effects on the financial
statements of misstatements or undetected misstatements (due to an inability to obtain
sufficient appropriate audit evidence). There are three types of pervasive effect:

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• Those that are not confined to specific elements, accounts or items in the financial
statements

• Those that are confined to specific elements, accounts or items in the financial
statements and represent or could represent a substantial portion of the financial
statements

• Those that relate to disclosures which are fundamental to users' understanding of the
financial statements (ISA 705: para. 5(a)) 


Opinions
An unmodified opinion is the opinion expressed by the auditor when the auditor
concludes that the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework (ISA 700: para. 16).

Modified opinions:

Qualified opinion
• The auditor concludes that misstatements are material, but not pervasive, to the
financial statements (ISA 705: para. 7(a)).

• The auditor cannot obtain sufficient appropriate audit evidence on which to base the
opinion but concludes that the possible effects of undetected misstatements, if any,
could be material but not pervasive (ISA 705: para. 7(b)). 

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Adverse opinions 

An adverse opinion is expressed when the auditor, having obtained sufficient appropriate
audit evidence, concludes that misstatements are both material and pervasive to the
financial statements (ISA 705: para. 8. 


Disclaimers of opinion
An opinion must be disclaimed when the auditor cannot obtain sufficient appropriate audit
evidence on which to base the opinion and concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be both material and
pervasive (ISA 705: para.10).

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Paragraphs
• An emphasis of matter paragraph is a paragraph included in the auditor's report
that refers to a matter appropriately presented or disclosed in the financial statements
that, in the auditor's judgement, is of such importance that it is fundamental to users'
understanding of the financial statements (ISA 700: para. 7(a))

• An other matter paragraph is a paragraph included in the auditor's report that refers
to a matter other than those presented or disclosed in the financial statements that, in
the auditor's judgement, is relevant to users' understanding of the audit, the auditor's
responsibilities or the auditor's report (ISA 706: para. 7(b)).

• Key audit matters. 'Those matters that, in the auditor's professional judgment, were
of most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with
governance' (ISA 701: para. 8).

• Other Information paragraph. The auditor's report will always include a separate
Other Information section when the auditor has obtained some or all of the other
information as of the date of the auditor's report

If the auditor concludes that there is a material misstatement of the other

information, the 'Other Information' section is placed immediately after the
basis of opinion section.

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Stages in an audit
Appointment

Plan the audit

Understand the entity

Assess the risk

Respond to risk

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Check the effectiveness of Internal Control System

Select an Audit approach

Overall review of Financial Statements

Auditors Report

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