Professional Documents
Culture Documents
INSTRUCTOR’S NAME
MR. BWAMBALE SALVERI
DIM, DAF, BAF
CONTACT
+256 771471627
muzanasalveri@gmail.com
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PREFACE
Course description;
1) This course provides an introduction to the auditing practices performed by public accountants. The
topics covered include the theory and philosophy of auditing, prescribed auditing standards,
operational and compliance audits, attestation engagements, the design and evaluation of
accounting systems and controls, relationship of public accountants to management, professional
ethics, legal obligations of reporting companies and auditors, sampling techniques, and other
auditing procedures and considerations.
Course Objectives;
On completion of this course the student will be able to:
Define auditing
Explain various auditing standards
Design and evaluation of accounting systems and controls
Prepare an audit program
Apply sampling techniques in collecting audit evidence
Write audit reports
COURSE OUTLINE;
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Instructional materials
White boards and markers
Lecture notes
Assessments
Attendance 10%
Assignments 20%
Tests 30%
Final exam 40%
TOTAL 100%
References
Manasseh.P.N (1999) a text book of principles of auditing, McMore Accounting book
Woolf, E (1997) Auditing today, 6th edition, prentice hall
IFAC (2009) Handbook of International auditing, Assurance and ethics pronouncements,
International federation of Accountants
ICPAU (1997) code of ethics, Institute of Certified Public Accountants of Uganda
Boynton W.C. Johnson R.N. and Kell W.G (2001) Modern Auditing
TOPIC I
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Shareholders
Employees
Directors
Stakeholders
Tax
Creditors authorities
The public
All these ‘stakeholders’ base their financial decision on “financial reports” prepared by management of
the company.
An audit therefore is intended to give all the stakeholders (shareholders inclusive) level of assurance
about the financial statements. It provides knowledgeable review of the reports (financial reports)
produced by management for use by the stakeholders. An audit also provides an impartial view of the
state of financial affairs of a company (an entity).
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What is an audit? (ISA 200: Objective and General Principles governing an audit of financial
statements). Audits are carried out in accordance with international standards on auditing (ISAS). The
standards outline basic principles and essential procedures to be followed when conducting an audit.
Any departure from auditing standards must be disclosed in the audit report.
An audit is an exercise whose main objective is to enable auditors express an opinion (to the
shareholders / any other appointing authority) whether the financial statements (balance sheet, income
statement, statement of chances in equity, cash flow statement, notes to the accounts) give a true and
fair view of the entry's affairs at the period and,
Whether those financial statements have been prepared, in all material respects, in accordance with an
identified' financial reporting. framework international. Accounting standards (or other standards as the
case may be for example UK FRS, USA GAAP, etc) - and do comply with the requirements of the
Company's Act (any other legislation).
AB: Auditors do not bear any responsibility for the preparation and presentation of the financial
statements, which is the responsibility of the directors.
Auditing therefore is a systematic process of objectivity obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence between those
assertions and established criteria and communicating the results to interested users.
Completeness - all transactions, balances, etc, which ought to be included in the financial information
are so included and that there are no unrecorded assets, liabilities or transaction for example the balance
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of accounts payable stated in the balance sheet implies an assertion by management that all obligations
of the entity regarding accounts payable have been included.
Occurrence - this assertion implies that transaction or events took places, which pertain to the entity
during the relevant period. For example purchases shown n the financial statements imply an assertion
by the management that they pertain to the entity and were made during the period covered by the
financial information.
Existence - asset or liability included in .the financial exists at a given data for example cash balance
included in the balance sheet represents an assertion by management that the entity actually held the
cash balance to that extent on the balance sheet date.
Rights and obligations - this implies that the entity has a legal title or similar rights of ownership in
relation to its assets. Similarly, it is asserted that the liabilities included in the balance sheet represent
obligations of the entity at a given date.
Measurement - transactions or events are recorded at the proper amounts and revenues and expenses
are allocated to the proper period.
Presentation and disc1osure - transactions and balances are properly disclosed, classified and described
in accordance with recognized accounting policies and practices and relevant statutory requirements.
Reporting - the results made must be communicated to some interested parties - the appointing
authority, other users of the financial statements, etc.
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True: That the information is factual and conforms with reality, not false. In addition it conforms to be
required standards and law. The accounts have been correctly extracted from the accounting records.
Fair: Information is free from discrimination and bias and is in compliance with expected standards I
rules. The accounts reflect the commercial substance. Fair, covers three concepts; propriety, adequate
disclosure and audit obligation.
In the case of accounting statements, propriety implies that statements are drawn up in conformity
with accepted accounting principles so as to portray the realities of operation and financial- conditions
of an enterprise.
The concept of adequate disclosure can similarly be sense with reference to the needs of the investors
and other readers of financial statements.
Audit obligation implies that an 3uditor has an obligation towards the readers of this report to indicate
the extent of examination conducted or the nature of opinion expressed
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That a clean audit report means that the entity will continue to exist.
This type of audit involves obtaining and evaluating evidence about an entity's financial report for the
purpose of expressing an opinion on whether the financial information is presented fairly in accordance
with established criteria for example applicable accounting standards and the law. Usually, external
auditors, appointed by shareholders / other relevant authority, undertake this audit. The scope of the
statutory audit is unlimited.
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Audit adds credibility to the financial statements. Managers / directors are accountable to the
shareholders and they give their accountability in the forms of financial statements, if an auditor
expresses an opinion on those FSs then their credibility (credibility of the FSs) is improved.
An audit helps to settle disputes between managers and shareholders.
Audited accounts are used by tax authorities to determine the true tax position of the enterprise.
Auditors in the course of their work will give advise to management about the improvements of the
internal control system.
Audits are important when valuing shares and bonds.
Audited financial statements ease comparability between 2 firms or within the financial periods.
Disadvantages / limitations
Not purely objective - there is some subjective judgment left to the auditor to draw conclusions.
Not all items in the financial statements are checked.
There are inherent limitations of internal control systems (collusion, potential human error, by pass of
controls, etc).
Time lag (period - reporting).
The audit report is criticized for not being "clear" on the position of the auditor with regards to fraud.
It disrupts the clients work especially if the exercise is done more often. It requires the attention of staff
and management, taking their time! An audit should therefore plan well in advance so that he
minimizes the disturbances of the client work.
Voluntary / non-statutory audit: These audits are performed on various clubs, schools, sole traders and
partnerships because the owners want them, not because it is legally needed. They are carried out
according to agreement between the client and the auditor. They are not compulsory and their scope is
limited. Tax audit, cost audits, project audit, performance audit, etc are also explained of voluntary
audit.
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Accounting and internal control systems are ascertained and recorded, evaluated and tested – Interim
Audit and gather evidence to be used in forming an opinion.
Test of control / compliance tests – to find out any weaknesses and report them to management in a
management letter – gather evidence to be used in forming an opinion. (Vouching – checking vouchers
from books of original entry to final accounts, verification, and direction of testing – final accounts).
Carry out substantive tests (detailed tests) of account balances to confirm the assertions. Completeness
all transactions have been recorded, ownership, valuation, existence, presentation / disclosure, etc,
gather evidence to be used in forming an opinion.
Finalizing the audit and review of the financial statements – use of ratios to see trends, opining balances
and closing balances – gather evidence to be used in forming an opinion.
Audit report: Form an opinion and communicate the opinion in a report to the shareholders / appointing
authority – qualified, unqualified, adverse opinion.
QUALITIES OF AN AUDITOR
1. Integrity: This is an essential quality of an auditor. He should be honest with his profession and
must abstain from reporting as per the wish of management simply due to fear (for example he
may not be appointed as auditor next year) or favour (auditor should be financially embarrassed,
need to be financially OK, in order to impair independence).
2. Independence: It means that the auditor should not subordinate his judgment to that of the
client. It is important that the auditor should not only appear to be independent but should be in
reality.
3. Objectivity: The auditor's view point must be complete objectivity that is detached, fair,
impersonal and unbiased. An independent state of mind and an unbiased and objective judgment
'are the cornerstones of the profession of auditors.
4. Logical abilities: The auditors have to analyze logically, to interpret problems and facts and to
draw a logical conclusion.
5. Communication ability: The auditor must have proficient written and oral communication
ability.
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6. Technical competence: The enterprise always expects that professional accountant engage as
auditor command full technical competence. Therefore, the auditor must have full knowledge of
technicalities of accounts, audit, taxation, financial management, economics, other laws,
mathematics, etc.
7. Continuing awareness of latest developments: The auditor should keep himself aware of
continuing developments in business as well as his profession. The introduction of E-commerce
or E-business and fast developing information technology has changed the business mode
globally. Therefore, the auditor must keep his knowledge level intact through continued
professional education.
TOPIC 2:
THE FRAMEWORK OF AUDITING
THE AUDIT REPORT
The audit report as a medium of communication
a) The external auditor's report provides information to shareholders and in order to communicate
effectively; the format and phrases have been standardized.
b) i) The auditor issues an unqualified report if he is satisfied with the FS in all aspects.
ii) A qualified report will be issued when he is not.
iii) There may be need to include additional details emphasizing particular matter of the
accounts even in an unqualified report.
c) The ISA 700 "Auditor's Reports on Financial Statements" requires the audit report
to contain the following:
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BASIS OF OPINION
We conducted our audit in accordance with International Standards on Auditing. Those standards
require that we plan and perform our audit to obtain reasonable assurance that the accounts are free
from material misstatement. An audit includes an examination, on a test basis, of evidence supporting
the amounts and disclosure in the accounts. It also includes the assessment of the accounting policies
used and significant estimates made by the directors, as well as an evaluation of the overall presentation
of the accounts.
OPINION
In our opinion the accounts give a true and fair view of the state of affairs of the company …… and its
profit and cash flows for the year then ended and comply with the Companies Act.
NB: The duties of the directors are put in the separate note in the financial report. If not, the auditor
puts them in the audit report.
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A Qualified Report
It is issued when the above are not compiled with or there is disagreement between the Auditor and the
client on some treatment of some issues or disclosure. It can also be due to limitation in scope or
insufficient audit evidence is got.
ELIGIBILITY AS AUDITOR
Every partner in an audit firm must be a member of the professional bodies.
This ensures
Proper people are appointed as auditors
That audit work is conducted properly and with professional integrity.
That eligible people maintain appropriate levels of competence.
d) That people who are not members do not exert influence over an audit and members have
appropriate qualifications.
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4. DISQUALIFICATION
The following people are not allowed to be appointed as auditors of a company
An officer or servant of the company e.g. directors.
A person who is a partner of or an employee of an officer or servant of a public company. Private
companies are exempted.
c) A body corporate - limited liability of a company would expose clients to risk. - Limited companies
cannot express a personal opinion.
The act does not disqualify the following from being an auditor of a company; a shareholder, a debtor
or creditor of the company and a close relative of an officer or employee of the company.
Accountability bodies prohibit these, however.
5. APPOINTMENT
The general rule is that auditors are appointed by shareholders at the annual general meeting and once
appointed holds office till the next annual general meeting.
A retiring auditor is deemed re-appointed without any resolution being passed unless:
(i) He is not qualified for reappointment ego Breach of the code of ethics.
(ii) Through a resolution, another one is appointed or it is clearly stated that he shall not, be
reappointed.
(iii) He has given notice in writing that he is willing to be reappointed. A simple majority is needed.
Reappointment of the continuing auditor is automatic. A simple majority is required to appoint
auditors.
6. REMUNERATION
a. Remuneration is fixed by
(i) Whoever makes the appointment
(ii) The company in the general meeting or in such a manner determined by the GM,
b. In practice, shareholders usually delegate to directors to fix remuneration in case (a) above. Their
remuneration must be disclosed in the financial statements separately.
7. REMOVAL
Special notice is needed for a resolution at the GM appointing another auditor or expressly stating that
the retiring one shall not be reappointed.
A copy of the notice must be sent to the retiring auditor.
Where a retiring auditor makes written representations regarding the resolution, the shareholders should
be sent copies of representations, if they are not received late or are of reasonable length.
If the representations are not sent, they should be read out in the meeting unless secure needless
publicity for defamatory matter.
The auditor may defend himself at the meeting. ,
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Removal procedures allow members to appoint auditors of their choice and safeguards the auditor's
independence by not allowing directors to remove auditors, These procedures ensure that the auditor is
not removed for improper reasons without the knowledge of the shareholders.
d) Resignation
The Act has no provision for this. The auditor cannot resign before the tenure of office. He can only
give notice that he is unwilling to be reappointed.
8. DUTIES
a) To report on the F/S. To form an opinion as to:
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Whether they have obtained all the information and explanations ecessary for the audit.
Whether in their opinion, proper books and returns have been kept.
Whether the balance sheet and profit and loss account are in agreement with the constitution.
Whether the directors' report is consistent with the accounts.
Whether the financial statements show a true and fair view.
To qualify the report if the above in (a) is not satisfied.
c) To consider whether the information in the management report is consistent with the FS
d) The auditor should include additional information in the report connected with the director's
remuneration and loans to officer's in case it is not provided in the accounts. An auditor is liable
in case of negligence, default, breach of duty or trust.
Auditors should plan and perform their audit procedures and report the results thereof,
recognizing that fraud or error· materially affects the FS. The auditors are only concerned with
fraud as it affects the truth and fairness of FS.
The Act does not give the auditor any legal power.
RIGHT
1. Access to record books, documents and accounts at all times. Never use force or seek
court redress when refused access. Simply resign or qualify the report.
2. To get information and explanations from officers necessary for that audit. It extends to
subsidiary companies and their auditors when carrying out holding company audit.
3. To attend or get notices of meetings like any shareholder
4. To speak at the general meeting as auditor.
5. Get information from subsidiaries or branches.
6. Get written resolutions proposed.
7. Right to remuneration if he has completed his work.
8. Right to sign the Audit Report.
9. Rights during removal.
NB.
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The auditor should have a right to require the holding of a general meeting for the purpose of
laying the accounts and reports.
An officer willfully making a false statement to an auditor, commits an offence.
In order to safeguard their objectivity, members should consider the following before they /
decide to accept any appointment.
a) Relationships that may threaten objectivity. These should be disclosed before work
commences, there the threat is great, a member may not accept appointment.
b) The public interest in the work to be done.
c) Threats to objectivity - these may include
(i) The self-interest threat-member may have interest in a client or may fear losing the same and
lose the fees being earned.
(ii) The self-review threat - a member may not be objective when reviewing a report that he has
issued- in order to make fresh conclusions.
(iii) The advocacy threat- member may not be objective when advocating for or against a client.
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(iv) The familiarity/trust threat - a member may sympathize with the clients staff known to
him/her.
The intimidation threat - a member may be intimidated by threat, dominating personality or
pressure.
Fees
Family and personal relationships
Holding shares in audit clients
Owning shares in client where the audit firm reports other than auditor.
Voting on audit appointments
Practice loans
Individual loans
Goods and services
Commission
Provision of other services to audit clients. There are
Employment in an audit client
An audit firm should not report on a company if its partner or employee is an officer or employee
o the company.
An auditor should not be on the audit team handling his former employees unless two years have
elapsed.
STATEMENT 3
CONFIDENTIALITY
Information confidential to a client or employer acquired in the course of professional work
should not be disclosed except where consent has been obtained from the client, employer or
other proper sources, or where there is a legal right or duty to disclose.
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STATEMENT 5
PROFESSINOAL COMPETENCE
An auditor should not undertake or continue professional work which he is not himself
competent to perform unless he obtains such advice and assistance as will enable him
competently to carry out his task.
STATEMENT 6
ADVERTISING AND PUBLICITY
No accountant shall advertise professional services.
STATEMENT 7
CHANGES IN A PROFESSIONAL APPOINTMENT
No accountant shall accept any professional engagement as an auditor, which was previously
held by another accountant without first communicating with that accountant in writing.
STATEMENT 8
8. FEES
a) An accountant shall not charge fees which are based on percentages of profits or which are
based on results except for profession employment in insolvency or receivership. The fees should
be appropriate remuneration for the auditor.
c) Your audit client who deals in Toyota vehicles has promised to sell to you a Prado on hire
purchase and to pay you RF.20 million as audit fees in the previous year. React to this proposal.
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of the client's business in order to identify and understand the events, transitions and practices
that may have a significant effect on the FS, or on the examination or the audit report.
Before and after acceptance of the engagement, the auditor should get knowledge about the
client in the following areas.
General economic factors
Industry conditions affecting the clients business (iii) The entity itself –
The entity's products, market, suppliers, expenses and operations.
The entity's financial performance and condition.
The report environment
Legislation
a) The auditors and the client should agree on the terms of engagement, which should be
recorded in writing.
A separate letter is needed for non-audit work.
c) Auditors should regularly review the terms of engagement and if appropriate agree any
updating in writing.
d) Auditors who, before the completion of the audit, are requested to change the engagement one
which provides a different Level of assurance, should consider the appropriateness of so doing. If
auditor considers that it is appropriate to change the terms of engagement, they should obtain
written agreement to the revised terms. Where the new level of assurance is lower, this should be
justified by the client and agreed by the auditor, or else the auditor. Withdraws from the
engagement.
2. Points to Note
The Contents should be discussed with management before it is sent by the auditor.
It is effective for one appointment only.
It 'needs annual review to reflect changes terms, if any.
Each subsidiary company should have its own letter if terms are different,
It is addressed to the board of directors or audit committee.
Contents
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APPENDIX I
Illustration of a letter of engagement
The following letter is for use as a guide in conjunct\on with the considerations outlined in ISA
210 and will need to be varied according to individual requirements and circumstances.
To the Board of Direct or the appropriate representative of senior management. You have
requested that we audit the balance sheet of As of and the related statements of income and cash
flows for the year then ending. We are pleased to confirm our acceptance and our understanding
of this engagement by means of this letter. Our audit will be made with the objective of our
expressing an opinion on the financial statements.
We will conduct our audit in accordance with International Standards on Auditing (or relevant
national standards or practices). Those ISPs require that we plan and perform the audit to obtain
reasonable assurance about whether financial statements are free of material misstatements. An
audit includes examining on test basis evidence supporting the amounts non disclosure in the
financial statements. An audit also includes assessing the accounting principles used and
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significant estimates made b management as well as evaluating the overall financial statement
presentation.
Because of the test nature and other inherent limitations of an audit, together with the inherit
limitations of any accounting and internal control system, there is an unavoidable risk that even
some material misstatements remain undiscovered.
In addition to our report on the financial statement we expect to provide you with a separate
letter concerning any material weakness in accounting and internal control systems which come
to our notice
We remind you that the responsibility for the preparation of financial statements including
adequate disclosure is that of the management of the company. This includes the maintenance of,
adequate accounting records and internal control, the selection and application of accounting
policies, and the safeguarding of the assets of the company. As part of our audit process, we will
request from management written confirmation concerning representations made to us in
connection with the audit.
We look forward to full cooperation with your staff and we trust that they will make available to
us whatever records; documentation and other information are requested in connection with our
audit. Our fees, which will be billed as work in progresses, are based on the time required by the
individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly rates vary
according to the degree of responsibility involved and the experienced and skill required.
This letter will be effective for future years unless it is terminated, amended or superseded.
Please sign and return the attached copy of this letter to indicate that it is in accordance with your
understanding of the arrangements for our audit of the financial statements.
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