INSTITUTE OF ACCOUNTANCY ARUSHA

INTRODUCTION TO AUDITING

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introduction
The term audit is derived from the Latin term ‘audire,’ which
means to hear. In early days an auditor used to listen to the
accounts read over by an accountant in order to check them.
The original objective of auditing was to detect and prevent
errors and fraud.
Auditing evolved and grew rapidly after the industrial revolution
in the 18th century With the growth of the joint stock companies
the ownership and management became separate. The
shareholders who were the owners needed a report from an
independent expert on the accounts of the company managed by
the board of directors who were the employees.
The objective of audit shifted and audit was expected to ascertain
whether the accounts were true and fair rather than detection of
errors and frauds.

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Concepts of Audit
Definition: An audit is the independent examination and expression of an
opinion whether the financial statements give a true and fair view of the entity’s
affairs at the period, in order to give the users of those financial statements
confidence.

User of financial statements includes:

Owners or Shareholders
Lenders
Employees
Customers/Suppliers
Professionals
Competitors and potential investors
The Government authorities

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Note:
An audit gives the user reasonable assurance on the truth and farness
of the financial statement, which is a high but not absolute level of
assurance. The auditor’s report does not guarantee that the financial
statement are correct but that they are true and fair within a reasonable
margin of error.

True and fair concept

True: Information is truthful and conforms with reality. That is the
information conforms with required standards and law. The accounts
have been correctly extracted from the books and records

Fair: The information is free from discrimination and bias and

compliance with expected standards and rule.

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 OBJECTIVES OF AUDITING:
Primary objective
To enable an auditor to express his opinion of the truth and
fairness of financial statements so that any person reading or
using them can have belief in them

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 Secondary Objectives
To detect errors and fraud
To prevent errors and fraud by the deterrent and moral effect of
the audit
To provide follow-up effects. The auditor will be able to assist
his clients with accounting , systems, taxation , financial , and
other problems.

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 Types of Auditing
 Operational Audit
 Financial statement Audit
 Compliance Auditing
 Forensic Audit
 Value for Money Audit

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 Operational Auditing
Is the type of audit that the review is mainly focused on the
key processed, procedures, system as well as internal control
which the main objective is to improve productivity,
efficiency and effectiveness of the operations
 It is the part of internal audit and their aim is to add value
to the business by determining ways to improve them.
 It is a study of specific unit of organization for the purpose
of measuring its performance.
 It evaluates efficiency and effectiveness of either individual
unit.

Example IT unit, human resources unit, procurement unit ,

organization structure etc

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 Compliance Auditing

 Is a type of audit that checks against internal policies and

procedures of the entity as well as law and regulations where
the entity is operating in.

 Results of compliance audits are typically reported to

management as a primary group concerned rather than
outsider users.

 Is a part of the system used by management to enforce the

effectiveness of the implementation of the government’s law
and regulation, and the entity’s internal policies and
procedures

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 Forensic Audit
Forensic audit is normally performed by a forensic accountant
who has the skill in both accounting and investigation

Forensic accounting, it refers to the whole process of

investigating financial matters in response to a particular subject
matter, where the findings of the investigation normally are used
as evidence in court or conflict resolution among the
shareholders.

Investigation covers number of areas including fraud, crime as

well as dispute among shareholders.

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 Financial statement Auditing
 Is conducted to determine whether financial statements
are stated in accordance with GAAP (General Accepted
Accounting Principles)

 In determining whether financial statements are fairly

stated in accordance with GAAP, the auditor gathers
evidence to determine whether the statements contain
material errors or other misstatements.

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 Types of financial statement auditing

 Statutory Audit

Are audits which have to be undertaken following the requirement

of the law or existing legislations

for example The Companies Act,2002, The Cooperative Societies

Act No. 15 of 1991, The Public Finance Act 2001 and the related
regulations and others. These legislations set out the statutory
obligations for the accounts of every financial year of the entities
to be audited annually by a professionally qualified auditor.

 Non statutory Audit

Is where entities are not obliged to undergo audit. Is carried out at
the interested parties like owners, partners for different purpose.
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The differences between statutory audit and non statutory audit
Statutory Audit Non-Statutory Audit
i. Governed by a statute i. It is govern by specific
ii. Right and duties of the instructions to suit the client
auditors are specified by ii. Scope of the audit work can
the statute vary-either restricted or
iii.Audit report is written extended
basing on certain statutory iii.Report is made according to
requirement the terms of agreement
iv. Auditor has a statutory iv. Auditor is liable for
obligation which cannot be negligence but can avoid
contracted out claims
v. Audit is compulsory and v. Except for the requirement of
must be complete. taxation audit is not
compulsory.

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Activity
Differences between internal and external audit

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 Value for Money Audit
Value for Money audit examine the economy, effectiveness and
efficiency of activities

These are known as three Es of VFM audit

They are very important for assessing the performance of not for
profit organizations because their performance cannot be properly
assessed by accounting ratios.

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 The three Es can be defined as:
Economy: Attaining the appropriate quantity and quality physical,
human, financial resources (Input) at lowest cost (low cost at
acceptable quantity and quality)

Efficiency: Is the relationship between the goods/service produced

(output) and the resources used to produce them. Maximum output for
a given set of resource input

Effectiveness: Whether the entity using the resources to meet its

objective. (how well an activity is achieving its policy objectives and
other intended effects)

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 Limitations of Audit
1. Not all items in the Financial Statements are tested. That is
there is not specification on the kind of items which should
make a sample group(What to sample) which may lead to
sampling risk.
2. Limitation in accounting and control systems. That is human
error, possibility of collusion in fraud and possibility of control
override.
3. Audit report has inherent limitation, this is due to standard
format can be limiting and laymen may not understand audit
jargon.

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 Cont……………
4. Audit report is issued a long time after the balance sheet date,
where by the update position and historic position may be
different.
5. Auditing is not objective. Only judgments have to be made,
that is how much to test, what to test, risk assessment and audit
opinion.
Due to these limitations Auditors can never certify that the
accounts are correct, they can only ever express an opinion.

6. Time , resources and resources consuming

The audit involves the client’s staff and management in giving
time to providing information to the auditor. Also clearly the
services of an auditor must be paid for. It is for this reason that
few entities have their accounts audited

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 Cont……………

God gave us freedom of either to lead or being a follower….

Falling to any side still you’ll have to choose again

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