Introduction to Auditing
(chap 1)
• Definitions and concepts:
Auditing is an independent examination of financial
statements to express an opinion on whether they give a
true and fair view of the state of affairs at a particular
date and comply with IFRS,ISAs and applicable laws at a
time.
Auditing 11 (P:17) focuses on the practical part of an
audit and to pass this paper the student must know how
to apply the knowledge acquired in Audit 1(P:12)
-Audit is divided into two ie Internal and external audits.
-Internal gives an assurance on the internal control
systems eg payment vouchers, Risk management, HR
issues, asset management and governance issues to
achieve company objectives and the auditor is stationed
at the entity’s premises but not part of management.
• External Auditor is an outside firm/auditor
who does an independent examination of
the financial statements in order to express
an opinion on whether the books give a true
and fair view of the state of affairs and
comply with applicable laws and IFRS as at
that date. This may not look at all areas the
internal auditor looks at.
• Financial statements include; SOCI, SOFP,
SOE,CFs, Notes and appendices.
• In doing the audit work, one is guided by the
IFRS and ISAs and for one to be an auditor,
you must be better than Accountant ie know
all the applicable standards.
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Other Assurance services:
• This is an independent opinion where a
professional Accountant evaluates the
responsibility of another and gives an opinion
or reasonable assurance to the user.
• Areas an auditor can give an assurance
service include;
-Business performance management.
-Forensic audit
-Value for money
-Risk management process.
-Internal audit
-Social and environmental audit
-Internal control systems.
• Financial Auditing:
-This is an independent, objective evaluation of
the company’s financial reports and financial
reporting process to give stake holders reasonable
assurance on the accuracy and completeness to
enable them make informed decisions.
-It may be conducted to check on disclosures,
compliance, taxation, legal and other purposes.
.Compliance Auditing:
This is a comprehensive review of organization’s
adherence to regulatory guidelines. E.g. security
policies, user access controls and risk management
procedures ie compliance to agreements by governing
body-ICPAU Vs. Firm.
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Concepts cont’d Discussion questions

• Operational Auditing: 1.Distinguish between operational

This is the systematic review of effectiveness, efficiency and
audit and Financial Audits.
economy of operation.
2.Explain the advantages and
-It is a future – oriented, systematic and independent
evaluation of organizational activities to identify likely risks, disadvantages of operational
and senior management position to avert them.
audits.
Governance Auditing: 3.Discuss the principles of good
Corporate governance involves a set of relationships that
exist between the B.o.D, management and other stake corporate governance.
holders
-This involves investigating the internal audit’s role in
improving organizational governance and assessing the
principles of good governance e.g openness and
transparency.

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Need for financial Audits
by external auditors:
1. The objectives of management may be
different from those of share holders hence
need to get an independent assurance.
2.Comply with statutory requirements-
registered, listed -a must.
3.Tax assessments are better done with audited
financial statements.
4.Help capital mobilization-Listed companies.
5.Corporate governance gesture-transparency
and accountability.
6.Assurance on investment and divestment-
right amount charged.
7.Detection of errors and fraud.
8.Increase reliability of F/S to decision makers
e.g banks.
Code of conduct of
professional Accountants
-The rules of professional conduct apply to accountancy
students, graduates and members of the profession and
their objective is to ensure that proper standards of the
profession are observed and thus give fundamental
principles and specific guidance statements.
Fundamental principles are:
1.Integrity-honest, fair dealing and straight forward.
2.Objectivity- mind free from bias-Independence from
external influence.
3.Professional competence and due care-KES- Don’t
accept work you are not competent- due care- don’t due
work for sake of finishing-due diligence.
4.Confidentiality-Don’t disclose clients information
unless otherwise or use it to your advantage.
5.Professional behavior- don’t do things that will
discredit the profession, your firm and your sel
f.
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Threats to compliance with
fundamental principles:
1.Self review threat-when auditor has to review
work done by him.
2.Self interest- when a friend or close family has
a financial or other interest in the client being
audited- employment, loans etc.
3.Advocacy threat- auditor is representing/
bargaining for a client eg in courts of law.
4.Familiarity threat- overstaying for more than
3-5 years.
5.Intimidation threat- to give un qualified
opinion ”will expose you”
6.Un necessary hospitality- special privilege eg
discounts, free goods/services.
7.Provision of other assurance services-
taxation HR, etc.
• Safe guards to threats:
-self review- Chinese walls on audit team-
segregation of duties.
-Self interest- Disclose and rotate auditors.
-Advocacy- Insist on professional behavior, turn
down the offer.
-Familiarity- Rotate staff, firm rotation after 3
years.
-Intimidation- maintain professionalism.
-Un necessary hospitality- Decline or disclose
the gifts
-other service- Rotate staff, segregation of
duties.
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Concept of independence
in relation to audits: FRAME WORK OF AUDITING IN UGANDA
• This is about objectivity, skepticism and
integrity of external auditors in carrying out
their audit work.
• Objectivity- mind free from bias
• Integrity- honest, fair dealing.
• Skepticism- be negative and doubt when
approaching audit.
• Independence- includes being free from
external influence ie an auditor must be and
be seen to be independent in professional
judgment.
• Threats to auditor independence refer to
above threats to fundamental principles.
THE LEGAL & REGULATORY OF
(chap 2)
Auditors in Uganda are regulated by the Accountants act
and no person shall practice accountancy unless he/she
possesses a practicing certificate or license issued under
this act and no member shall accept to be appointed as
Auditors unless they have this certificate issued by ICPAU.
• Eligibility Criteria: To be eligible for registration, one shall:
1.Be enrolled and registered as a member of ICPAU.
2.Possess 3 years of relevant and sufficient experience.
3.Have paid all subscribed fees.
4.Have obtained professional indemnity insurance.
5.Foreign nationals must possess valid work permit.
6.In case of partnership-valid partnership deed.
7.Have obtained 40 CPD hours in a year prior to application.
8. Have proper registered business practice.
9.Free from any significant disciplinary action
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Major categories of membership (sec 5 of the act)

1. Full membership: One must have • Roles & Responsibilities of ICPAU

passed all the ICPAU papers and or a
member of accountancy body 1.Organise,set and mark exams.
recognized by Council. 2.Establish guideline principles to
2. Associate Membership: For persons its members.
in audit practice on 7th Aug,1992
when the accountants act came into 3.Desciplinary action to its
force but were not qualified as members-questionable behaviors.
professional accountants at that time.
4.Arrange for CPDs for its members
3. Honorary membership: To any body
the council considers deserving. 5.Registration-mbrs,Firms
4. ACCA Members. Law and taxation.

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Rules governing registered and practicing
auditors( effective mar,2013)
-Firms/auditors are required to comply with
audit Regulations and guidance.
-The institute has rules and regulations on how
these firms must be run.
Examples are;
- A member must have appropriate qualification,
pay membership, attend CPD s, Not advertise,
Not discredit others, not to engage in illegal
activities etc.
- The regulations must be read in conjunction
with institute’s code of ethics.
-Examples; Integrity, Objectivity-Independence,
competence& due care, confidentiality,
Professional behavior.
• Reasons for regulating auditors:
1.To ensure registered auditors maintain
high standards of audit work.
2.To maintain the reputation of registered
auditors with the public.
3.To ensure the application of the
regulation is fair but firm.
4.To ensure regulations apply to all sizes
of firm.
5.To comply with International standards
on Audit.(ISAs).
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Qualification for appointment
as co auditors
-The appointment of an auditor will be done by the
BoD prior to the first annual general meeting of the
co and will hold office until the end of the first
annual meeting -cos act sec 159(5).
-Directors of the co can also fill the position on
casual basis.
- At each annual general meeting, members will
decide who the next auditor should be and
directors will approve the terms of the contract
for first auditor and subsequently, it will be the
members to approve.
- Registrar may also appoint where the above fail to
appoint one at an AGM.
- Auditors may be removed from office any time by
members of the the co. during his term in office.
• Duties of an auditor(external):
1.To express an independent opinion
on the truth and fairness of F/S.
2.Duty of due care to 3rd party who rely
on his opinion.
3.Confidentiality-Not disclose-unless
otherwise.
4.To deposit a statement of
circumstances up on resignation.
5. Not his duty to detect fraud or
control it.
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Rights of Auditors: Regulations governing the rights
and duties of auditors

1.Access any records of the co –minutes,
files.
2.Right to attend AGM.
3.Right to speak in an AGM.
4.Right to examine books of accounts.
5.Right to be paid his fees.
6.Right to resign.
7.Right to exercise a lien-if not paid can
confiscate a report.
8.Right to get a copy of any written resolution
proposed.
ISA 250 deals with the auditor’s responsibility to consider
laws and regulations in an audit of financial statements.
-It is the responsibility of management, with the
oversight of those charged with governance to ensure
the entity’s operations are conducted in accordance with
provisions of laws and regulations.
-The auditor is not responsible for preventing non-
compliance and can not be expected to detect non
compliance with the laws and regulations but rather
responsible for giving reasonable assurance that fin.
Statements are free from material misstatements.
• Rotation of auditors
Sec 139(2) of cos act ,2013,require auditors to be rotated
after a 2 5year term in office and 3 years for cos existing
before commencement of this act.

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Resignation & Dismissal
• Resignation of auditors ( procedure)
1.Must deposit a written notice together with
statement of circumstances to members.
2.Notice of resignation is sent to regulators by the co.
3.The auditor may require directors to call extra-
ordinary meeting to discuss reasons for resignation.
Removal of Auditors:
1.Notice to be given to the auditor.
2.Resolution from AGM.
3.Representation by auditor why he must stay in office.
4.Resolution to be deposited to registrar of companies.
• Reasons auditors may resign
1.Disagreement due to change of terms
of engagement.
2.Threat to independence that became
known after commencement.
3.Un able to obtain sufficient evidence on
material misstatement.
4.Not taking corrective actions on
recommendation by auditors.
5.Illegal activities-money laundering.
6.Failure to pay audit fees by the client.
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 Rights & Duties of Directors:
Liability:
1.Directors have a duty of running the company
through staff.
2.Reporting and accountability to the chair man BoD.
3.Ensure appropriate staff to implement day today
work.
4.Decision making and together with NEDS.they
formulate the strategy to achieve goals.
5.Implement policies laid down by NEDS.
6.Monitor performance in operations.
7.Build and maintain effective management team.
8.Represent the company to major suppliers,
customers and professionals.
Auditors
1. Negligence; If he fails to design procedures
that will detect and discover errors and fraud.
- Damages- his duty is to ensure that f/s give a
true and fair view position of the state of affairs
and if he fails to detect that, he is liable.
- Losses on contractual breach; If he fails to
examine books of accounts and detect
fraudulent entries e.g in the case of city fire
insurance co.(1924), the directors made frauds
on items of balance sheet for 3 years and
auditors failed to detect them and were sued.
- They were held liable for negligence because
the auditor relied on certificates and never
examined the books-KES
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2. Criminal liability: 3.Liability to 3rd party( Tort):
• Its an offence to accept an appointment when
not capable.
• Criminal liability can a rise under the following;
• Accepting an appointment when ineligible e.g
continuing in office after becoming ineligible.
• Instances of fraud e.g misappropriation of
assets, falsifying records etc.
• Insider dealing ie misuse of un published
information e.g pending change in price of
shares.
Penalty- Warning, fines, reprimand,
imprisonment or expulsion depending.
• 3rd party may sue the auditor for
damages but plaintiff must prove;
1) The defendant (auditor) owed a
duty of care.
2) The defendant breached the
appropriate standard of care.
3) The plaintiff suffered a loss as a
direct result of relying on it.
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4.Liability under private & 5. Liability under public interest
statutory audits:

• Auditor has a duty to report to members/
appointing authority on whether;
• F/S are free from material misstatements.
• Prepared in accordance to IFRS and
applicable laws.
• Directors report is consistent with F/S.
In case things go wrong, auditor will be
liable either under negligence or tortious
liability.
• A member of the public can sue the auditor in
public interest.
• Auditors are obliged to act in public interests
and should consider whether to report in the
interest of the public or not.
• Failure to do that may result in legal suit.

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Safeguards to reduce liability

• Proper client screening- understanding-KYC.

• Compulsory insurance for directors and staff
(professional indemnity).
• Financial cap on liability.
• Maintain independency-skepticism.
• Document your work properly.
• Deal with clients with no integrity issues-
fraud, illegal activities.
• Modification of the joint and several liability
principle.

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 AUDIT PLANNING (ISA 300)
Questions
• Assignment:
• Read about the following:
• Corporate governance
• Audit committee, its objectives and role.
• Role of Board, NEDS,CEO, Board
(chap 3)
• It is the formulation of a strategy that is used
to collect audit evidence on which the
opinion is based.
• The auditor should plan and perform the
audit with an attitude of professional
skepticism recognizing that circumstances
may exist which cause f/s to be material
misstated.
• Types of audit plans:
1. Flexible- for each audit irrespective of past
audit
2. Standard plans-prepared once and is used for
all audits.
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Rationale for Audit planning:
Activities:
1.To maximize the efficiency(resources) and
effectiveness(objectives) of audit.
2.To identify risky and problematic areas.
3.It is the requirement of the standard (ISA
300).
4.To establish a strategy/direction-when, where,
what, how and why.
5.To determine the appropriate fees-time,
scope, Risk, skills & seniority.
6.To minimize client disruption- auditors are
visitors.
7.Time saving.
Planning
1.Establish an overall audit strategy-scope,
applicable laws & IFRS, and timing-when is the
report needed.
2.Develop detailed audit plan-
3.Continous update of above 1 &2 -new things
come up.
4.Directing and supervision audit team and
reviewing work.
5.Documenting all above-minutes.
6.Communication-with management and those
charged with governance.
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 Details on planning activities:
client
business)
1. Overall audit strategy:
This includes the scope of the audit,
characteristics of engagement in relation to
applicable laws and GAAPS, ascertaining the
date, direction and resources needed to
complete the audit.
2.Developing a detailed Audit Plan:
This include the following:
-Understanding the business-what client does,
customers, directors.
-Understanding accounting and internal control
systems.
-Risk identification and assessment.
-Setting materiality levels.
-Design the audit methodology and time table.
Source of information on
(Understanding
• From the client-meeting.
• Review of the previous f/s-SOCI,SOFP,CFs etc.
• Website-company profile, products,
management caliber.
• Trade press.
• Previous auditors- management integrity,
strategy.
• Board minutes- authorization , Resolutions.
• Internal audit reports.
• Policies and procedure manuals
• Industry survey and experts
• Suppliers and customers.
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 Uses of information:
1)Staffing and expert team: • Qualitative must be disclosed however
• How many staff. small it is otherwise even if it is one shs, its
• Skills and experience.
material.
• Ethical issues- independency. • Fraud and errors.
• Firm with –KES. • Related party transactions.
11) Determination of the nature, purpose and scope- • Directors emoluments.
how long.
111) Materiality levels-(if it exceeds below, then its
material) 1v) Risk assessment- directly related to fees
-Quantitative- General errors-> 10% charge
-Turn over >0.5 – 1% AR= CR*IR*DR
- Net assets > 1%- 2%
- Net profit >5%-10%

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Risk Identification & assessment (ISA 315)

• This is done to determine whether • Audit Risk Modal

the risk is high, moderate or low.
AR=CR*IR*DR
• Risk is related to fees ie the higher
the risk, the higher the fees. Where;
• It also has implication on scope, AR= Audit Risk
staffing, materiality levels, strategy CR= Control Risk
to use and acceptance or rejection.
IR = Inherent Risk
DR = Detection Risk

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Materiality Levels (ISA 320)
Refers to the significance of an item to the f/s and
differs from business to business- use judgment.
-The higher the Risk, the lower the materiality levels.
- Materiality levels-(if it exceeds below, then its
material)
-Quantitative- General errors-> 10%
-Turn over >0.5 – 1%
- Net assets > 1%- 2%
- Net profit >5%-10%
• Qualitative: must be disclosed however small it is
otherwise even if it is one shs, its material.e.g.
• Fraud and errors.
• Related party transactions.
• Directors emoluments.
• Discussion questions:
1) Discuss reasons for the need to have an
independent examination of books of accounts.
2) ISA 300, gives guidelines on things an auditor must
perform at preliminary Review. Explain them.
3) What are the matters one should consider and
procedures to be done before accepting an
appointment of an audit assignment? Give reasons
not to commence an audit before the above
procedures are done.
4) Discuss the key stages in an audit (Audit process).
5) What is an engagement letter? What is its purpose
and state its contents.
6) With examples, explain the 3 categories of business
Risks.
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Materiality cont’d
7) Discuss indicators of going concern
problems.
8) Distinguish between ‘’opinion shopping’’
and ‘’low balling’’ and how can you deal
with opinion shopping?.
9) Discuss the preliminary activities you
would consider important for an audit
exercise.
10) What conditions and events may
indicate Risks of material misstatements.

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INTERNAL CONTROL SYSTEMS:
( chap 4)
Internal control systems refer to policies and
procedures in place to ensure the company’s
objectives are achieved.-aim at minimizing risks that
may stop achieving co objectives.
Types of Controls:
1) Detective controls: These monitor activity to
identify instances where practices or procedures
were not followed e.g. bank reconciliation to
detect fraudulent payments.
2) Preventive controls: These aim at preventing the
loss or harm from occurring e.g. segregation of
duties to minimize fraud.
3)Corrective controls: These aim at restoring the
system or process back to the state prior to harmful
event e.g. after evidence was discovered that there
was fraud.
4) Administrative controls: These are laws,
regulations, policies, practices and guidelines that
govern the overall requirements and controls for an
information security e.g. data security
5) Physical controls: These prevent access office or
storage room e.g. video surveillance systems, gates
and barricades, remote backup facilities and guards.
6) Logical controls: These are vital application and
technical controls (systems and software) e.g.
firewalls, anti virus software.
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Principal control objectives: Pros and cons of
Internal control systems
• Protect against financial loss. Pros:
• Prevent fraudulent acts by employees. • Limit access to un authorized personnel.
• Inventory control. • Optimal control.
• Product quality • Easy monitoring

• Safe guard company assets. • Inventory control.

• Product quality
• Comply with laws.
• Safe guard company assets.
• Public trust-secure finance.

Cons:
.Costs- Installation
.Passcodes, pins, password-threat.

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Role of control systems in Discussion questions
detecting errors and fraud

• Error: Refers to un intentional misapplication of

accounting policies, oversights or interpretations of
• Distinguish between fraud and
fact and clerical mistakes. error as used in Audit of
• Fraud: Refers to acts which may involve falsification financial statements.
of documents and records, misappropriation of
assets or misapplication of accounting policies to • State the factors and conditions
ones advantage.
that promote fraud in
• Strong internal controls are expected to result in
less fraud. organizations.
• Internal controls do not guarantee elimination of
the risk of errors and fraud.
• The main goal of internal control systems is to
reduce the risk to an acceptable levels ie
reasonable assurance

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Understanding the accounting and internal
control systems: ( chap 5)
• Internal control systems refer to policies and
procedures in place to ensure the company’s
objectives are achieved.-aim at minimizing
risks that may stop achieving co objectives.
• Components of good internal
control systems.
1.Control environment: This includes
communication and enforcement of
integrity and ethical values,
participation by those charged with
governance, organization structure, HR
policies and practices.
2. Entity’s Risk assessment: How management
identifies business risk, risk register and know
which controls to avert them.
-Risks can arise or change due to the following;
1) Changes in operating environment-
regulations.
2) New personnel- new ideas.
3) New or revamped information systems.
4) Rapid growth – breakdown
5) New technology
6) New products
7) Expanded foreign operations.
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Components cont’d
3. Control activities: This includes
performance reviews- actual vs budgets,
physical controls-security, access etc.

4. Monitoring controls: This includes

establishing whether staff are following.

5. Information systems: This includes

recording information from the start to
the end eg receivables, payables etc.

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Features of good internal controls
• O- Organization plan/ chart • S-Segregation of duties
• R- Recording and record keeping • O-Organizational chart
• D- Division or segregation of duties.
• A- Authorization
• A- Authorization and approval
• P-Physical controls
• S- Supervision
• S- Safeguarding assets
• S-Supervision
• I- Internal audit • P-Personnel
• C- Competence of staff • A-Arithmetic procedures
• A- Arithmetic and accounting controls • M-Management

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INTERNAL CONTROLS OVER
TRANSACTION CYCLES AND AUDIT
PROCEDURES
• Transactions • For each of the above, look at;
• The auditor needs to know the following
accounting information; 1) Transaction.
1) Sales and accounts receivable. 2) Control objective
2) Purchases and accounts payable. 3) Control procedure in place
3) Salaries and wages system-payroll.
4) Audit procedure.
4) Cash and bank system-reconciliation.
5) Inventory management system- IAS 2
6) Revenue and capital expenditure.
7) Tangible assets.
8) Non current liabilities

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Details
1. Sales and Accounts Receivables • Objectives:
1. That all sales are correctly recorded –Amt,
• The system assumes sales are made on credit with accuracy, occurrence etc.
the following steps;
1. Get an order from the customer.
2. That all payments received if not, there is
accounts receivable in place.
2. Check availability of the goods in stock and credit
limit. 3. To ensure procedure to collect receivables
are in place to avoid bad debts- time.
3. Approval of the sales order.
4. Dispatch of goods- customer must acknowledge 4. To know at what point is revenue
Dispatch Note. recognized.- comply with IFRS, IAS 18.
5. Invoice the customer- Revenue recogn-P &L 5. How to account /make a provision.
Receivable in Bal. sheet 6. Sales are made to valid customers.
6. Payment by the customer.

30
Details cont’d
• Control procedures over sales and
Receivables:
1. Orders: Be checked vs customers accounts,
credit limit given, pre-number sales,
authorization and use of dispatch Note.
2. Dispatch: Dispatch Note to be pre-
numbered, authorization of dispatch and
acknowledgment by buyer.
3. Invoicing & credit Notes: Be authorized by
responsible person, entered in sales book,
serial numbered and cancelled retained.
4. Returns:Be checked and credit Note issued.
5. Bad debts: Be authority to write off
• Audit procedures on Receivables:
1. Tests of control: Check authorization for
acceptance of orders, dispatch, serial
numbers, accuracy, etc.
2. Substantive procedures: Check records
additions, postings, sales day book, invoice
and credit notes, inventory records
3. Circularization- to third parties to confirm
existence and valuation.
4. Analytical procedures: cut offs, disclosures,
fluctuations in sales
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Details cont’d
2. Purchases & payable system • Purchase/ procurement procedures & their
(procurement): controls ( Test controls)
1. Requisition from the user department
Objectives:
2. Sourcing or call for quotations- competitive
1. To ensure purchases are made when there is bidding of atleast 3 suppliers.
need.
3. Evaluation of quotations to get best
2. Ensure VFM in procurement.
4. Issue of LPO or purchase invoice –Numbering
3. Goods/services delivered are what was
ordered. 5. Receipt of goods- GRN
4. Ensure quality of goods/services. 6. Returns out- ensure acknowledgment
5. To ensure all liabilities are recorded correctly. 7. Recognition of liability in ledgers- payable
6. That liabilities are paid in time to avoid risks. 8. Payment- ensure approval and obtain receipt

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Details cont’d
3. Inventory Management (IAS 2)
- Receipt of goods into the store is the starting point.
- For consultancy firm, don’t waste time because
these are done after understanding the business.
Objectives
1. To ensure accompany has adequate levels
2. To ensure what you received is what you ordered
for.
3. To ensure quality not dead stock receipts.
4. To ensure both receipts and returns are approved.
5. To ensure safety & proper valuation
• Control procedures over inventory
1. Approval & control of documents eg
issues.
2. Ensure there is a bin card and stock card
3. Arithmetic accuracy eg value of WIP
4. Comparison of assets and records- auditor
must attend the exercise.
5. Access to assets and records be restricted
to avoid theft and damage.
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Details cont’d
4. Salaries &wages system (payroll) • Control procedures on payroll:
Objectives: 1. Authorization and control of documents eg
over time.
5. To ensure right people are paid-not ghosts.
2. Time sheets
6. Ensure employees are paid at the correct
rate. 3. Segregation of duties preparation,
authorization and approval
7. To ensure employees are paid for work
done. 4. Ensure correct rates and benefits are
captured.
8. To ensure statutory deductions are made
and remitted. 5. Keep personal records- placement,
promotions etc
9. To ensure deductions are correct.
6. Cheque signatories checked.

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Details cont’d
• Tests of control on payroll: • Substantive procedures
1. Sample time sheets, clock cards 1. Select sample of time records eg
2. Observe wage distribution calculations
3. Test authority for payment of casual workers 2. Test rates of pay
4. Test control over payroll amendments 3. Details of leavers and joiners
5. Examine evidence of checking payroll 4. Test postings of payroll to generate ledger
calculations. accounts.
6. Inspect payroll reconciliations
7. Examine explanations for payroll deductions.
8. Test controls over un claimed wages.

35
Details cont’d
5. Cash and Bank system:
This includes cash at hand and cash at bank and
the auditor should ensure what is in the cash b) Controls over banking:
book tally with what is cash at bank.
- Receipts should be banked intact daily
It includes the following controls;
- Each day’s receipt be recorded promptly in
a) Controls over cash: Cash book.
- Recorded when a sale has taken place. - Sales ledger personnel should have no access
- Pre-number sales invoice & maintain a register to the cash or preparation of pay in slips
- Cash received should be reconciled daily with - Approval of withdrawals
invoice totals by independent person.
- Daily banking and reconciliation

36
Details con’t
c) Bank Reconciliation:
- Bank Reconciliations should be prepared at
least monthly.
- Person responsible for preparation should be
independent of receipts and payments.
- Statements should be obtained directly from
the bank and held until reconciliation is
complete.
d) Controls over petty cash:
- The level and location of cash floats be laid
down formally.
- Restricted access to the floats.
- Cash should be kept in a safe.
- Ensure approval of expenditures.
- Budget to be followed.
- Receipts for each payment to be made.
- Vouchers to be produced before cheque is
signed for reimbursement.
- Abrupt/surprise cash checks and counts.
37
Details cont’d
6: Revenue & Expenditure system 7: Tangible Assets (NCA)
- Ensure there is capital expenditure budgets-
refer to procurement process.
The audit of tangible assets should check;
- Ensure expenditure is on company’s
a) Existence- select a sample from asset
expenses.
register and physically inspect.
- Ensure expenses are recorded at correct
b) Completeness- check from books to ensure
amount each is included.
Key controls are: c) Valuation- correct amount- depreciation
- Requisition -Pre-number
d) Rights and obligation- ownership-title
- Approval - Cancel payments- PAID e) Disclosure- Face and notes
- Receipt

38
Details cont’d
8. Non current Liabilities:
- Loans payable- Agree loan balance to the loan
statement.
- Agree interest payments to the loan agreements.
- Recalculate interest accruals for accuracy.
- Analyze relevant disclosures of interest rates,
amounts due etc.
- Provisions and contingencies- Discuss the matter
giving rise to a provision with the client to
establish whether the obligation exist.
- Obtain confirmation from client’s lawyers-
probability of making payment.
9. Audit of payables and Accruals:
1. -Obtain a list of individual balances from
the payables ledgers, check the cost and
agree totals to trade payables figures in
the draft financial statements.
2. Ensure the balances have been correctly
extracted from the payables’ ledger.
3. Obtain a list of debt balances in the
payables ledger and obtain explanations
from management.
4. Agree brought forward figures from the
last year’s audit file.
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Details cont’d
• Note the following on payables
1. Presentations & disclosures:
Check that the figures disclosed in the F/S
agree to the audited figures.
2. Existence
Circularize a sample of trade payables to
confirm the balance at the end of the year.
3. Completeness.
- Investigate any supplier names that were
shown on last year’s payables listing but do
not have a balance showing in present year’s
list balances.
• Cont’d
- Review after date invoices and payments
and ensure they have been provided for at
the year end as appropriate.
- Analytical review
- Calculate the trade payables payment
period and compare to the last year’s to
assess reasonableness.
4. Cut offs:
- Select as ample of GRN’s immediately prior
to the year end and included in the year end
payables and ensure that the goods are
included in the year end inventories.
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Details cont’d
• Accruals
- Review relevant invoices when received
after the balance sheet date – if non are
received compere with the previous
period.
- Obtain a list of accruals from the client,
cast it to confirm arithmetic accuracy.
- Agree the figures per schedule to the
general ledger and Financial statements.
- Agree the calculation of accrual by
reference to the supporting documents
e.g previous period invoice.
• Questions
a) Identify the audit procedures on
Accounts payables, Accruals and
other provisions.
b) Give reasons why audit of trade
payables, accruals and provisions
is more demanding than audit of
trade receivables, prepayments
and other receivables
Ref bk
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AUDIT PROCEDURES(AUDIT RESPONSE TO RISKS)- ISA
330:
(EXECUTION) –chap 8
• This involves the audit strategy or
approaches/responses in response to assessed Risk
in execution of the audit assignment.
• There are basically 2 types of audit procedures ie
-Tests of controls.
-Substantive tests.
1. Tests of control:
-These are procedures performed to get evidence as to
whether internal controls is working or performing as
expected i.e. is it followed.
-It is the requirement of the standard that even if the
controls are good-do test of control + analytical
procedures e.g. bank reconciliation.
• Tests of control include the following;
1) Sequence test checks: This involves checking invoice,
credit Notes and orders to ensure that all items are
included and no duplications.
2) Checks on authorization for; acceptance of the orders,
dispatch ,pricing and discounts, write off bad debts and
signatures.
3) Arithmetic accuracy: invoices, credit Notes and sales
tax.
4) Checks on dispatch Notes and goods returned note,
credit note.
. Analytical procedures:
These are a must perform even if internal controls are good
and they include trend and Ratio analysis- used for
comparisons.
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Procedures cont’d: Substantive procedures to
get
evidence include:
2. Substantive Tests: • A- Analytical procedure-trend, Ratio
-These are procedures you perform to detect a • E – Enquiry from management- meeting.
misstatement in the f/s e.g. controls are weak and
you do such tests to check on accuracy. • I - Inspection- documents and tangible assets
-There are 2 types of substantive tests ie • O- Observation- e.g. stock.
-Analytical procedures. • U- RecompUte e.g. bank reconciliation, addns
- Tests of detail.
Analytical procedures:
- Include trend and Ratio Analysis
Tests of detail/ Detail testing:
Involves getting a sample, check on every supporting
documents from start to the end.

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Presentation of Financial Statements in view of IFRS:
(chap 9)

• Definitions: Components of Full set of F/S:

• General purpose F/S: These are F/S intended to meet • SOCI-( Income statement)
the needs of users who are not in a position to require
an entity to prepare reports tailored to their particular • SOFP-(Balance sheet)
information needs. • CFs –(IAS 7)
• IFRS: These are standards and interpretations adopted • SOE
by the IASB and they comprise of-IFRs,
IAS,IFRIC( International International Reporting • Notes and Appendices to F/S.
Interpretations Committee
• Objective of IAS 1: To prescribe the basis for
presentation of general purpose F/S to ensure
comparability of the entity with other entities and Scope of IAS 1:
entity's current and previous years. • It applies to general purpose F/S based on IFRS.
• IAS 1 sets guidelines for the structure and minimum
requirements for the contents of F/S.

44
Fair presentation and
compliance with IFRS:
• The F/S must ‘’present fairly’’ the financial position,
financial performance and cash flows of an entity.
• Fair presentation requires the faithful
representation of the effects of transactions, either
events and conditions in accordance with the
definitions and recognition criteria of assets,
liabilities, income and expenses with those setout
in the frame work.
• The application of IFRS with additional disclosures
when necessary, is presumed to result in F/S that
achieve a fair presentation.
Assumptions in presentation
of F/S:
• Going concern: An entity preparing IFRS F/S is
presumed to be a going concern about the entity’s
ability to continue as a going concern, the un
certainties must be disclosed and if so, F/S must be
prepared on a breakup.
• Accrual basis: IAS 1 requires that an entity
prepares its F/S except for cash flow information,
using accrual basis of accounting.
• Here, transactions and events are simply
recognized at the point when they occur and
matched to the period in the F/S to which they
relate.
• Offsetting: Assets and liabilities, and incomes and
expenses may not be offset unless required or
permitted by a standard or interpretation.
45
 Assumptions cont’d:
• Consistency of presentation: The presentation and
classification of items in the F/S shall be retained
from one period to the next unless changes/ a
change is justified either by a change in
circumstances or a requirement of a new IFRS.
• Materiality and aggregation: Each material class of
items must be presented separately in the F/S and
dissimilar items may be aggregated only if they are
individually immaterial.
• Comparative information: IAS 1 requires that
comparative information shall be disclosed in
respect of the previous period for all amounts
reported in the F/S and Notes unless another
standard requires otherwise -for comparison.
Structure of F/S in general
• The following must clearly be shown;
• Name of the entity.
• The Financial statements
• The date or period covered
• The presentation currency
• The level of precision e.g thousands, millions.
• Reporting period: There is a presumption that F/S
will be prepared at least annually, if there a change
and F/S are prepared for a different period, it must
be disclosed.
46
SOFP(Balance sheet): Minimum items on face of
SOFP
• An entity must normally present a classified • PPE(IAS 16).
balance sheet, separating NCA and current assets • Investment property(IAS 40)
and liabilities i.e. Financial position.
• Biological assets(IAS 41)
• IAS 1 does not prescribe the format of the
• Intangible assets
statement of Financial position to be used but a
net asset presentation is allowed i.e. Assets- • Financial assets
Liabilities. • Inventories(IAS 2)
• Trade & other Receivables
• Cash and cash equivalents
• Trade and other payables
• Provisions
• Capital and reserves
• Liabilities
• Drawings

47
SOCI (Income statement): Discussion
questions
• All items of income and expense recognized in a period 1) What steps would you follow to carry out
must be included in the profit or loss unless a standard analytical procedures?
or an interpretation requires otherwise. 2) Evaluate the factors and procedures to be
Minimum items on the face include; performed in deciding the extent of reliance on
the work of an internal auditor.
• Revenue
• C.O.S 3) What factors may signal to you that an
organization could be having high level of
• Finance costs inherent Risk.
• Share of profits/loss of associates/joint venture 4) Distinguish fraud from error. List the indicators
• Tax expense of fraud in an organization?
• Administrative expense 5) ISA 570 requires an auditor to consider going
• Interest expense concern of an entity. Discuss the financial and
• Profit or loss Formats for F/S – non financial indicators of going concern
problems.
Refer to your Financial Accounting Notes-formats

48
FINANCIAL STATEMENTS
ASSERTIONS:
• Definition. These are management’s
explanation(claims) about the recognition,
measurement, presentation and disclosure of
information in the F/S.
• Accountants evaluate records based on
assertions imbedded in the in the F/S.
• Example in preparation of F/S management
makes claims on buildings appearing in the
balance sheet valued at 100m. The auditor shall
assume that the building exists, is owned and
controlled by the company, accurately valued
etc.
• The auditor comes in to verify and see which
assertions and what F/S does it affect. These
assertions include - COVERMPC.
1) Completeness: Here, auditors ascertains
whether all Revenues, expenses, assets and
liabilities have been captured. These affects
the SOCI and SOFP.
2) Occurrence: Did all transactions in respect
of Revenue and Expenses take place and for
the entity. This affects the SOCI.
3) Valuation: Have all the assets and liabilities
been captured at the correct value e.g there
could be a risk that trade receivables are not
properly valued. This applies to SOFP.
4) Existence: Are all items in the balance sheet
there ie assets, liabilities, equity.
49
 Discuss the audit work/ tests you would
perform on accounts Receivable

5) Rights and obligations: Do assets and

liabilities in the balance sheet belong to
the entity.
6) Measurement: Revenue and expenditure
or transactions have been captured at the
right amount. They apply to income
statement.
7) Presentation and disclosure: Each has
been categorized appropriately ie
NCA,NCL CA, CL, Revenue and expenses.
8) Cut off: That transactions and events have
been recorded in the correct accounting
period ie accruals and prepayments.

50
AUDIT SAMPLING:
• Audit sampling means the
application of audit procedures to
less than 100% of the items within
an account balance or less
transactions in order to assist in
forming a conclusion concerning
the account balance or class of
transactions.
• Population- Is a set of data from
which the auditor wishes to sample
in order to reach a conclusion.
• Sampling Methods:
1) Random sampling-where each item in the
population has an equal chance of being
selected.
2) Systematic/ interval sampling –start with
random, then select nth item there after.
3) Stratified sampling –divide population into
subpopulations then samples selected
from them.
4) Monetary unit- every shilling has an equal
chance.
5) Attribute sampling- According to
characteristics e,g. sex, age.
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Sampling cont’d
• Where sampling is not
advisable:
1) Where population is too small.
2) Transactions are small in number.
3) Material fraud indication.
4) Director’s salary and taxation.
5) Where population has not been
maintained In a manner suitable for
audit sampling. E.g where sales are
maintained per customer and not
numerically.
• Factors that influence size of the sample:
• Auditor’s intended reliance on systems of
controls.
• Expected error- deviation is high, large
sample.
• Confidence level required by the auditor-
high, large sample.
• Number of sampling units in the
population.
• Nature of risk- Higher risk, large sample.
• Population size- large the population, the
larger the sample size.
52
AUDIT EVIDENCE (ISA 500):
• Audit evidence refers to all information
used by the auditor in arriving at the
conclusions on which the audit opinion
is based.
• ISA 500 requires that auditors should
obtain sufficient and appropriate audit
evidence to be able to draw reasonable
conclusions on which to base the audit
opinion.
• Sufficient- looks at quantity/volume
• Appropriate- Quality of audit evidence
ie reliability and relevancy.
• Factors that determine the reliability of
evidence.(DOIID)
1. Documentation: Documented evidence is
more reliable than verbal.
2. Original documentation: Original documents
more reliable than photocopies –never audit on
photocopies.
3. Independent source: More reliable if obtained
independently eg bank statement obtained from
the bank.
4. Internal control systems: More reliable where
internal controls are effective e.g segregation of
duties.
5. Direct source: More reliable e.g observation.
53
Evidence cont’d
• Concept of Relevancy • Assertions on PPE F/S
Audit evidence should be relevant procedure
to the applicable assertions e.g
having a car log book does not
confirm its existence.
- Have procedures on valuation,
existence, completeness e.g PTO

54
Evidence cont’d
• Procedures/Techniques to • NOTE
gather Evidence • Evidence is used to support the
A- Analytical procedures- trends, Ratio opinion
for comparison
E- Enquiry- from mgmt. and staff
I- Inspection- of records/documents
O- Observation
U- RecompUtation
C - Circularization- 3rd party

55
AUDIT DOCUMENTATION( ISA 230)
• The principle in audit evidence is that it must
be documented ie anything you do during the
audit must be documented as per ISA 230 in
audit working papers.
• Importance of documentation
1. It Is a proof that you performed your work-
ref.
2. It can save you in case they take you to court.
3. It increases audit efficiency and effectiveness.
4. It is the requirement of the standard
5. It helps in reviews- peer, cold and hot
reviews
• WORKING PAPERS
• These are documents which record all audit evidence
obtained during financial statements auditing, internal
management, systems auditing and investigations.
• Contents of working papers/Attributes
1. Name of the client you are auditing.
2. Period covered by the audit.
3. Subject matter eg PPE, Receivables
4. Person who prepared/reviewed them.
5. Objective to be achieved.
6. Procedures that were performed.
7. Results/findings, conclusion.
8. Headed paper, evidence, tests and sample size used.

56
Documentation cont’d
• Specimen of working paper • AUDIT FILE
Client …. Prepared by…. Date..
Year end: …. File is where audit working papers
Subject: PPE Reviewed by… are filed. They are of 2 types i.e
Date…..
Objective: To determine whether PPE exist.
-Permanent and
-Current files
Work done: Audit procedures performed-
sampling

Results/ Findings- some assets missing

Conclusion- PPE not properly recorded……

57
Documentation cont’d
• PERMANENT FILE
• These keep evidence that is of permanent
nature about the client e.g. understanding
business of your client, you come a cross the
following that have to be filed;
1. Memorandum and articles of association
2. Procedure manuals
3. Strategic plans.
4. Accounting policies and systems
5. Funding and loan agreements.
6. Titles of ownership
7. Previous year’s audit reports
8. Previous year’s financial statements.
• CURRENT FILE
• These keep evidence that keeps changing every
year and include the following;
1. Schedules of Revenues
2. Fixed asset register
3. Debtors aging schedule
4. Current year’s financial statements
5. Current year’s staffing strategies
6. Current year’s board work plans
7. New signed procurement deals
8. Financial reporting time table.
9. Others – ref Revenues, expenses, bal sheet
heads
58
COMPLETION AND REVIEW
• This is the overall stage at which the final
decisions are taken. The auditor should ask
him/herself the following questions;
1. Do the F/S comply with the relevant Reporting
frame work ie Laws and other regulations,
GAAPS,IFRS.
2. Does the audit evidence gathered in the course
of audit support the audit opinion ie
- Was the plan followed
- Sufficient and appropriate audit evidence
- What issues arose
- Has the file been adequately reviewed by
senior
• Audit reviews
3. Have the necessary completion procedures
been carried out ie
- Subsequent events review- ISA 560/ IAS 10
- Going concern review- ISA 570/ IAS 1
- Management representation obtained ISA
580
- Final analytical review – ISA 520
- Second partner review/ opinion
- Draft report(mgt letter & report)- ISA 700
- Contingencies
- Opening balances
59
1. Subsequent events review (ISA 560)
• The auditor should study the effect of events
after reporting date(ISA 560) on the F/S and
auditor’s report.
• IAS 10, deals with the treatment of F/S events
both favorable and un favorable that occur
between the date of F/S ie bal. sheet date and
when statements are authorized for issue.
• Events can either be adjusting or non adjusting
ie
• Adjusting events include- law suite where the
lawyer has assured you the client will win the
case, bad debts written off and debtor
reappears and pays.
• Non adjusting events
• For example Stock destroyed by fire after
balance sheet date.
Audit procedures on subsequent
events:
1. Be sensitive to dates of occurrence.
2. Confirm the event is directly or indirectly
related to F/S information.
3. Review Board minutes.
4. Always assess materiality of the event.
5. Review management F/S (Accounts).
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2. Going concern Review (ISA 570 /IAS 1):

61