ACCT 304

AUDITING

Session 1 – Overview of Auditing

College of Education
School of Continuing and Distance Education
2016/2017
 Session Overview
• The objective of an audit is to add credibility to the
information contained in the financial statements. This
session seeks to introduce students to the nature and purpose
of auditing, classifications of audits and auditors and
strategies for auditing.

Mr. Donkor Slide 2

 Learning Objectives
• At the end of the session, the student will be able to
– Define and explain the meaning of auditing
– Understand the audit process
– Identify the various classifications of audit and auditors
– Identify and explain audit engagements (assurance and
non-assurance)
– Explain various audit strategies

Mr. Donkor Slide 3

 Session Outline
• This session covers the following topics
– Origin of Audit
– Nature and Scope of Auditing
– Features of Auditing
– Objectives of Auditing
– The Audit Process
– Audit Engagement
– Types of Audits
– Classification of Auditors
– Audit Strategies

Mr. Donkor Slide 4

 Reading List
• Read Chapter 1 of Bedi, I. (2009). Auditing & Assurance
Services in Ghana. Accra: Voyage Publishing Ltd., Accra

• Session Slides

• Other Auditing and Assurance text books available to students

Mr. Donkor Slide 5

 Origin of Audit
6

• Audit is derived from the Latin term “audire”, meaning to

hear
• In the olden days, people were often appointed to hear
verbal transactions prepared to help detect fraud to
safeguard the properties of owners
• Modern day auditing developed since the concept of
separate legal entity.
• To safeguard the interest of owners, who are not involved
in the day-to-day decisions made by management

Mr. Donkor
 Nature and Scope of Auditing
Definition
• Auditing and Assurance Standard (AAS) -
"Auditing is the independent examination of financial information of any
entity, whether profit oriented or not, and irrespective of its size or legal
form, when such an examination is conducted with a view to expressing an
opinion thereon.“

• Definition by the Committee on Basic Auditing Concepts of the American

Accounting Association (Accounting Review. Vol. 47) :
‘A systematic process of objectively 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’.

Mr. Donkor Slide 7

 Features of Auditing
• Audit is a systematic and scientific examination of the
books of accounts of a business;
• Audit is undertaken by an independent person or body of
persons who are duly qualified for the job.
• Audit is a critical review of the system of accounting and
internal control.
• Audit is done with the help of vouchers, documents,
information and explanations received from the authorities.
• The auditor has to satisfy himself with the authenticity of
the financial statements and report that they exhibit a true
and fair view of the state of affairs of the concern.
Mr. Donkor Slide 8
 Objectives of Auditing
• It increases the credibility of the information or matter being
reported.
• It reduces conflict between opposing factions.
• It safeguards the interest of shareholders.
• It reduces fraud and error.
• It facilitates the work of governmental and non-governmental
agencies particularly IRS, banks and donors.
• It helps in the liquidation of companies.
• It promotes accountability and good corporate governance.
• It ensures the efficient and effective functioning of systems of
control.
Mr. Donkor Slide 9
 The Audit Process
• Auditing goes through six(6) phases for completion and continuous auditing

Phase 1: Client & Engagement Acceptance

Phase 2: Planning
Phase 3: Gathering of Evidence
Phase 4: Review and Evaluation
Phase 5: Reporting
Phase 6: Continuing Issues

Mr. Donkor Slide 10

 Services Auditors Provide (Engagement)
• Assurance,
– Attestation, and
– Audit Services
• Non-Assurance

Note:
• Audit services are a subset of Attest services, which
are in turn a subset of Assurance services

Mr. Donkor Slide 11

 Services Auditors Provide (Engagement)
ASSURANCE services are independent professional services that improve the
quality of information, or its context, for decision makers.
There are five elements that must all be present in order to qualify the
engagement as an assurance engagement.
• A three-party relationship involving a practitioner, a responsible party, and
intended users;
• An appropriate subject matter;
• Sufficient appropriate evidence;
• Suitable Criteria;
• A written assurance report in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.
• Examples:
– Risk assessment
– Information system reliability
– Electronic commerce Slide 12
– Health care performance measurement
Mr. Donkor
 Services Auditors Provide (Engagement)
• ATTESTATION occurs when a practitioner is engaged to issue or
does issue a written communication that expresses a
conclusion about the reliability of a written assertion that is the
responsibility of another party.
• Example report on
– The effectiveness of internal control
– Financial information other than the financial statements
– Future-oriented financial information
– Compliance with statutory, regulatory, or contractual
obligations
– Management’s discussion and analysis

Mr. Donkor Slide 13

 Services Auditors Provide (Engagement)
• AUDITING is a written report on the examination of financial
statements for a client. Auditing is a specific type of
attestation.

Mr. Donkor Slide 14

 Non-Assurance Engagements
If an engagement lacks the five elements of assurance engagements, it is considered non-
assurance (residual definition). Examples of non-assurance engagement are the following:
• Agreed Upon Procedures Engagement
• Compilations engagements
• Preparation of Income tax returns where no conclusion conveying assurance is expressed
• Management advisory services and Consulting
• Engagement that includes rendering of professional opinions not intended to be an
assurance report
• Due Diligence
• Direct Reporting Engagements
• Engagement to Compile Financial Information
• Engagement to Review Financial Information
• Reports on Compliance with Contractual Agreements
• Examination of Prospective Financial Statement

Mr. Donkor Slide 15

 Types of Audits
• Financial statements audits – an audit whose objective is to
express an opinion on whether the financial statement present
fairly, in all respects, the financial position, results of operation.
(external audit)
• Compliance audits – an appraisal of the extent to which
organizational objectives are met
• Operational/ value for money audits
An audit that is concerned not only with accounting and financial
matters, but also with the overall goal achievement, effectiveness of
operating procedures and internal controls, performance of individual
managers and other non-financial aspects of the organization's
operations.
Mr. Donkor Slide 16
 Types of Audits Cont’d
• Forensic audits – a specialized area of auditing concerned with
solving commercial crimes, forensic auditors are often required to
testify in court regarding the evidence they have gathered
• Environmental audit – a process that assesses an organization's
compliance with environmental laws, policies and standards.
• Internal audits – a process that seeks to measure the effectiveness
and efficiency of an organization's controls over financial,
accounting and other operations. Internal audit is normally carried
out by internal auditors who are mostly employees of the
organization they audit.
• Public sector audit
• Social audit
• Tax audit, etc.
Mr. Donkor Slide 17
 Classification of Auditors
• Auditors in Business – they may be solely or jointly
responsible for the preparation and reporting of financial and
other information. They are often salaried employees,
directors, etc. working for one or more employing
organization.
• Auditors in Practice – they are the professional accountants
who undertake external audits and other services on behalf
of clients. They usually operate through accounting firms.
• Auditors in Academia – is a person lecturing and undertaking
research in auditing and assurance services in academia

Mr. Donkor Slide 18

 Audit Strategies
Strategies for performing audits
• Substantive Approach
• Systems Approach
• Audit Risk Approach
– Audit risk (AR) is a function of inherent risk (IR),
control risk (CR) and detection risk (DR).
Mathematically, AR= IR x CR x DR
• Balance Sheet Approach
• Business Risk Approach
• Directional Testing Approach
Mr. Donkor Slide 19
 Audit Strategies
• All audit strategies are geared towards ascertaining
the assertions being made by the financial statement

• Financial statements provide seven (7) main assertions;

– “C” represents Completeness
– “O” represents Occurrence
– “V” represents Valuation
– “E” represents Existence
– “R” represents Rights and Obligations
– “M” represents Measurement
– “P” represents Presentation and Disclosure
Mr. Donkor Slide 20