Financial audit

COURSE OUTLINECOURSE OUTLINE
FINANCIAL AUDIT
DAY 1 AND 2
TECHNICAL AUDIT
DAY 3
ENTERPRISE RISK MANAGEMENT
DAY 4 AND 5

FINANCIAL AUDITFINANCIAL AUDIT
AUDIT OF FINANCIAL STATEMENTS AND
RELATED INFORMATION
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WHAT DO YOU EXPECT WHAT DO YOU EXPECT
FROM THIS TRAINING?FROM THIS TRAINING?
•List of expectations………
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OUTLINEOUTLINE
–Understand the meaning and reason for
auditing
–Understand relationship between
auditing, attestation and assurance
services
–Know the different types of auditors
–Understand the auditor’s role
–Understand the basis for auditing
–Understand the audit process
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OUTLINEOUTLINE
•Understand the importance of ethics and
independence of audit function
•Know the basic elements of audit reporting
•Know the auditor’s responsibility for errors,
fraud and illegal acts
•Understanding the practical audit process
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What is an audit? Auditing?What is an audit? Auditing?
Put your own definition…..
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Historical Background of auditHistorical Background of audit
•The role of auditor goes back many
hundreds of years. There are
records from ancient Egypt and
Rome, showing that people were
employed to review work done by
tax collector and estate managers
•The emphasis was very much on the
detection of fraud and other
irregularities

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Historical Background of auditHistorical Background of audit
•Emphasis has changed and the role of
the auditor becomes much more
sophisticated
•Stewardship requires an outsider with
sufficient independence and objectively
to review the accounts of stewardship
and to express an opinion as to their
honesty or otherwise.

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DEVELOPMENT OF MODERN AUDITINGDEVELOPMENT OF MODERN AUDITING
•Concept of a company as a separate legal
entity came into existence in the late
ninetieth century.
•This led to the separation of ownership
(shareholders) from control (directors) and
consequent need to safeguard the
interests of the owners, who in all but the
smallest of business where shareholders
and directors were on and the same) were
not involved in the day to day decisions
made by the management

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DEVELOPMENT OF MODERN AUDITINGDEVELOPMENT OF MODERN AUDITING
•Before 19
th
Century
–the appointed auditor duties to discover fraudulent
misrepresentations, the detection of fraud and error become
the major objective of company audits.
•After ( late 19
th
Century)
–However in later part of nineteenth century, there
was a growing school of thought that the prevention
of fraud and error (as opposed to its detection)
should be the major objective of the auditor (both
external and internal) and that the management of a
company should play a greater part and accept a
larger degree of responsibility in this respect

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DEVELOPMENT OF MODERN AUDITINGDEVELOPMENT OF MODERN AUDITING
•The Kingston Cotton Mill case of 1896,
established the fact that the auditor should
not be responsible for finding every fraud
and error. Here, the judgment pronounced
that the auditor’s role should be likened to
that of a watchdog rather than
bloodhound, and that what was required
of auditors was that they should act with
such reasonable care and skill as was
appropriate circumstances

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DISADVANTAGES OF AUDITDISADVANTAGES OF AUDIT
•The audit involves the client’s staff and
management in giving time to providing
information to the auditor. Professional auditors
should therefore plan their audit carefully to
minimize the disruption, which their work will
cause.
•The audit fee, clearly the services of an auditor
must be paid for. It is for this reason that few
partnership and even fewer sole trader are likely
to have their accounts audited. The accountant’s
role as the preparer of financial statements, as
tax adviser and general financial adviser,
becomes much more important to such
concerns.

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ADVANTAGES OF AUDITADVANTAGES OF AUDIT
•Companies
–Directors
•Assurance that statutory
responsibilities concerning accounts
have been carried out
•Assistance with statutory
responsibilities concerning accounts
•Availability of expert professional
advice
•The letter of weakness

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ADVANTAGES OF AUDITADVANTAGES OF AUDIT
–To shareholders
–Assurance that accounts show a true and
fair view and comply with statutory
requirements
–Assurance that directors have fulfilled their
statutory responsibilities for books and
accounts, and the safeguarding of assets
–Assurance that directors have fulfilled their
statutory responsibilities for books of
accounts and the safeguarding of assets
–Assurance that all directors remuneration
has been disclosed

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ADVANTAGES OF AUDITADVANTAGES OF AUDIT
–Other organization with published accounts
•Assurance to all users of accounts , that the
accounts show a true and fair view and
comply with statute
•Assurance that ‘stewards’ have fulfilled their
accounting and financial responsibilities
–Private organizations such as partnerships
•Assurance that accounts are reliable
•Reasonable assurance that all fraud of
consequence has been disclosed.
–In addition they provide reliable accounts to
regulatory bodies such as the Companies
Registry, the stock exchange etc.

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DEVELOPMENT OF MODERN AUDITINGDEVELOPMENT OF MODERN AUDITING
•In previous years it was part of the appointed
auditor duties to discover fraudulent
misrepresentations, the detection of fraud and
error become the major objective of company
audits. However in later part of nineteenth
century, there was a growing school of thought
that the prevention of fraud and error (as
opposed to its detection) should be the major
objective of the auditor (both external and
internal) and that the management of a company
should play a greater part and accept a larger
degree of responsibility in this respect

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DEVELOPMENT OF MODERN AUDITINGDEVELOPMENT OF MODERN AUDITING
•The Kingston Cotton Mill case of 1896,
established the fact that the auditor should
not be responsible for finding every fraud
and error. Here, the judgment pronounced
that the auditor’s role should be likened to
that of a watchdog rather than
bloodhound, and that what was required
of auditors was that they should act with
such reasonable care and skill as was
appropriate circumstances

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DUTIES OF AUDITORSDUTIES OF AUDITORS
•Carry out procedures designed to obtain
sufficient appropriate audit evidence, in
accordance with International Standards of
Auditing, to determine with reasonable
confidence whether the financial statements
are free from materials misstatement
•Evaluate the overall presentation of the
financial statements, in order to ascertain
whether they have been prepared in
accordance with relevant legislation and
IFRS/IAS
•Issue a report containing a clear expression
of their opinion on the financial statements.

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AUDIT AND AUDITINGAUDIT AND AUDITING
AUDITING) is 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 parties.

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AUDIT AND AUDITINGAUDIT AND AUDITING
Audit refersAudit refers
– to an independent examination
of the financial statements of an
enterprise,
–conducted with a view to
expressing an opinion
–as to whether those statements
give a true and fair view

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What is true and fair What is true and fair
view?view?
•We say financial
statements shows true and
fair view….. What is it?

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What is true and fair view?What is true and fair view?
•True
–information is factual and
conforms with reality, not false.
–In addition the information
conforms with required
standards and law.
–The accounts have been
correctly extracted from the
books and records

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What is true and fair view?What is true and fair view?
•Fair
–information is free from
discrimination and bias and
–in compliance with expected
standards and rules.
–The accounts should reflect the
commercial substance of the
company’s underlying
transactions.

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Objectives of AuditingObjectives of Auditing
•Primary Objective (main objective)
–To produce a report by the
auditor of 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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Objectives of AuditingObjectives of Auditing
•Secondary
–To detect errors and fraud ( Consider
materiality)
–To prevent errors and fraud by the
deterrent and moral effect of the audit
–To provide spin- off effects. The auditor
will be able to assist his clients with
accounting , systems, taxation , financial ,
and other problems.

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AUDIT OBJECTIVESAUDIT OBJECTIVES
•Validity
•Completeness
•Cutoff
•Ownership
•Accuracy
•Valuation
•Classification
•Disclosure

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LIMITATION OF AUDITLIMITATION OF AUDIT
•The responsibility for preparation and presentation of
the financial statements is that of directors of the
entity. The audit does not relieve the directors of any
of their responsibilities.
–Auditors opinion is not a guarantee of the future viability of
the entity
–Auditors opinion is not an assurance of management’s
effectiveness and efficient
•Causes of limitations
–The impracticality of examining all items within an account
balance or class of transactions
–The inherent limitation of any accounting and control
system
–The possibility of collusion or misrepresentation for
fraudulent purposes
–Most audit evidence is being persuasive rather than
conclusive

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PROFESSIONAL SCEPTICISMPROFESSIONAL SCEPTICISM
•Material misstatement may exist in financial
statement and auditors should plan their
work on this basis, i.e. professional
skepticism, ISA, makes it clear that, even
where auditors assess that the risk of
litigation or adverse publicity as very low ,
they must still perform sufficient procedures
according to auditing standards, ie there
can never be a reason for carrying out an
audit of a lower quality than that demanded
by the ISA’s

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PROFESSIONAL SCEPTICISMPROFESSIONAL SCEPTICISM
•In carrying out his work the auditor should
adopt an attitude of professional
skepticism, recognizing that
circumstances may exist which cause the
financial statements to be materially
misstated.
•The purpose of the independent audit is to
ensure that the financial statements are
OBJECTIVE, FREE from BIAS and
MANIPULATION and RELEVANT to the
need of users.

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LEGAL FRAMEWORK OF AUDITINGLEGAL FRAMEWORK OF AUDITING
•The work of an auditor is regulated by two sources
–Statues, the Companies Act No.12 of 2002
•The Act also requires auditors to have a recognized professional
qualification, as well as laying down minimum disclosure levels
as per accountants and auditors Act (Registration) of 1973 as
amended
–Professional pronouncements on Auditing ( issued by
NBAA and IFAC)
–Professional pronouncements include the rules of
professional conduct issued by NBAA and IFAC,
–The ethical principles that govern auditors’
responsibilities are
•Integrity Objectivity
•Independence Professional competence an due care
•Professional behavior confidentiality

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TYPES OF AUDITTYPES OF AUDIT
•Statutory Audit, carried because the law requires
them. Statutes include Companies Act, Parastatal
organization Act
•Private audits, because of auditor’s desire and not
because of law e.g. sole trader and partnership
•Internal audits, is the one conducted by an
employee of a business into any aspect of its
affairs.
•Management audit, an inquiry into efficiency and
effectiveness of management
•Public sector audit, contract audit , computer audit
etc

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TYPES OF AUDITSTYPES OF AUDITS
-Financial statements audit -Compliance audits-Financial statements audit -Compliance audits
-Operational audits -Comprehensive audits-Operational audits -Comprehensive audits
-Forensic audits-Forensic audits
TYPES OF AUDITORSTYPES OF AUDITORS
-External auditors -External auditors -Internal auditors -Internal auditors
-Government auditors-Government auditors -Forensic auditors-Forensic auditors
ISSUES AFFECTING THE PROFESSIONISSUES AFFECTING THE PROFESSION
-Expanded services-Expanded services -Globalization -Globalization
-Litigation-Litigation -Independence issues -Independence issues

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Presentation of the systems audit

Determine the audit approach
Ascertain relevant systems and controls
Document relevant systems and controls
Confirm operation of systems and controls
Evaluate operation of systems and controls
Submit Interim mgt and letter Select and perform test
of controls
Carry out final review
Report to members
Select and perform
substantive procedures
Select and perform
restricted substantive
procedures
Submit final management
letter

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Planning of the audit
Assessment of the accounting and internal
control systems and audit risk assessments
Consideration of the ways in which
audit evidence can be sought
Testing of Internal Controls ‘test of
control’
Extensive testing of transactions
and balances ‘substantive
procedures’

Reduced testing of
transactions and
balances “substantive
procedures’
Review of financial statements
Audit Report

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Management
Assertions
THE RELATIONSHIP OF EVIDENTIAL MATTER
TO THE AUDIT REPORT
Financial
Statements
Audit
Objectives
Audit
Procedures
Audit
Report
Evidence

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MANAGEMENT ASSERTIONS
•Existence or occurrence
•Completeness
•Rights and obligations
•Valuation and allocation
•Presentation and disclosure
•Existence or occurrence
•Completeness
•Rights and obligations
•Valuation and allocation
•Presentation and disclosure

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KEY STAGES OF AUDITKEY STAGES OF AUDIT
•Determine audit approach
•Ascertain in the accounting system and internal
controls
•Assess the accounting system and internal
controls
•Test the accounting system and internal controls
•Test the financial statements ( substantive
testing)
•Review the financial statements
•Express an opinion
OR

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KEY STAGES OF AUDITKEY STAGES OF AUDIT
•Client acceptance and continuance
•Establish the terms of the engagement
•Plan the audit
•Consider internal control
•Conduct substantive audit procedures
•Complete the audit
•Issue audit report

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•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.
•Examples:
–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
AUDITING, ATTESTATION, AND ASSURANCE SERVICESAUDITING, ATTESTATION, AND ASSURANCE SERVICES

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ASSURANCE ENGAGEMENTASSURANCE ENGAGEMENT
•According to ISA, Audit client is an entity in respect of which a
firm conducts an audit engagement. When the audit client is a
listed entity, audit client will always include its related entities.
Audit engagement (An assurance engagement) to provide a
high level of assurance that financial statements are free of
material misstatement, such as an engagement in
accordance with International Standards on Auditing. This
includes a statutory audit which is an audit required by
national legislation or other regulation.
•ISA 100 Assurance Engagements, an assignment whereby a
professional accountant is required to evaluate or measure a
subject matter that is the responsibility of another party
against identified suitable criteria, and to express a
conclusion that provides the intended user with a level of
assurance about the subject matter. It is important to
distinguish between the levels of assurance given by an audit
( which gives a high level of assurance) to that given by other
assurance engagements which , depending on the nature of
the engagement, may give a lower level of assurance.

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ASSURANCE ENGAGEMENTASSURANCE ENGAGEMENT
•There is a broad range of assurance engagements ,
including any combination of the following :
–Engagements to report on a broad range of subject matters covering
financial and non-financial information.
–Engagements intended to provide high or moderate levels of
assurance
–Attest and direct reporting engagements
–Engagements to report internally or externally
–Engagement in the private or public sector.
•ISA 910 states that the objective of a review of financial
statements is to enable an auditor to state whether, on the
basis of procedures which do not provide all the evidence
that would be required in an audit, any thing has come to
the auditor’s attention that causes the auditor to believe that
the financial statements are not prepared, in all material
respects, in accordance with an identified financial reporting
frame work (negative assurance)

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AUDITING, ATTESTATION, AND ASSURANCE SERVICES
ASSURANCE services are independent
professional services that improve the
quality of information, or its context, for
decision makers.
Examples:
Risk assessment
Information system reliability
Electronic commerce
Health care performance measurement

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THE RELATIONSHIP THE RELATIONSHIP
BETWEEN AUDITING, BETWEEN AUDITING,
ATTESTATION, AND ATTESTATION, AND
ASSURANCE SERVICESASSURANCE SERVICES
AttestationAuditing Assurance

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-Materiality-Materiality
-Audit risk-Audit risk
-Evidence-Evidence
THREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDITTHREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDIT

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THREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDITTHREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDIT
•Materiality A misstatement or the aggregate of all
misstatements in financial statements is considered
to be material if, in light of surrounding
circumstances, it is probable that the decision of a
person who is relying on the financial statements,
and who has a reasonable knowledge of business
and economic activities ( the user), would be
changed or influenced by such misstatement or the
aggregate of all misstatements.
•Audit risk is the risk that the auditor will fail to
express a reservation in his or her opinion on
financial statements that are materiality
misstated

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THREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDITTHREE FUNDAMENTAL CONCEPTS IN CONDUCTING AN AUDIT
•Evidence
Evidential matter supporting the financial
statements consists of the underlying accounting
records and all corroborating information
available to the auditor.
Relevance refers to whether the evidence
relates to the specific audit objective being
tested.
Reliability refers to the whether or not a
particular type of evidence can be relied upon to
signal the true state of the assertion or audit
objective.

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INTERNAL AUDITINGINTERNAL AUDITING
•An internal audit is an independent
activity established by management
to examine and evaluate the
organization’s risk management
process and systems of control,
and to make recommendations for
the achievement of company
objectives.

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INTERNAL AUDITINGINTERNAL AUDITING
•The internal audit staffs may also engage in
number of other activities :
–Examination and evaluation of financial and
operating information within the organization- in
certain organization this can form a type of
continuous auditing and may involve
sophisticated information systems that capture
monitoring of risk and evidencing of controls
–Review of economy, efficiency and effectiveness
of operations
–Review of compliance with external laws and
regulations and internal policy and procedures
–Review and advice on the development of key
organizational systems and on the
implementation of major change.

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INTERNAL AUDITING CONT…INTERNAL AUDITING CONT…
•The current focus of internal audit is on adding
value to an organization through risk control and
reviewing all types of risk and recommending
relevant controls. The institute of internal Auditors
definition has changed the focus of internal audit
toward a more risk-based, consultancy type
activity. The internal audit can be referred as
–An independent, objective assurance and consulting
activity
–Designed to add value and improve an organization’s
operations
–Helps the organization accomplish its objectives
–Bring systematic, disciplined approach to evaluate and
improve the effectiveness of risk management, control
and governance processes.

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INTERNAL AUDITING cont…INTERNAL AUDITING cont…
•There are four major areas of
importance for internal audit that are
addressed
–Corporate governance
–Risk management
–Organizational control
–Corporate objectives

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INTERNAL AND EXTERNAL AUDITINGINTERNAL AND EXTERNAL AUDITING
It is important to understand and recognize It is important to understand and recognize
the differences and commonalities between the differences and commonalities between
internal and external audit. Internal and internal and external audit. Internal and
external auditor should work closely external auditor should work closely
together, in particular to coordinate activity together, in particular to coordinate activity
and maximize effectiveness and where and maximize effectiveness and where
appropriate external audit may rely on the appropriate external audit may rely on the
work of internal audit. However, there are work of internal audit. However, there are
number of fundamental differences in their number of fundamental differences in their
objectives, scope and responsibility.objectives, scope and responsibility.

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Internal auditing External auditing
Objectives To advise management on whether
the organization has sound
systems of internal controls to
protect the organization against
loss
To provide an opinion on whether
the financial statements provide
a true and fair view
Legal basisAll areas of the organization,
operational as well as financial
Financial focus
Scope All areas of the organization,
operational as well as financial
Financial focus
Approach Increasingly risk base
Assess risks
Evaluate system of controls
Test operation of system
Make recommendation for
improvements
Increasingly risk based
Test underlying transactions that
form the basis of the financial
statements
ResponsibilityTo advice and make
recommendations on the internal
control and corporate
governance
To form opinion on whether the
financial statements provide a
true and fair view.

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ISA 610, “CONSIDERING THE WORK OF INTERNAL AUDITING”ISA 610, “CONSIDERING THE WORK OF INTERNAL AUDITING”
•ISA 610 requires external auditors to consider the
activities of internal auditors and their effect, if
any, on the nature, timing, and extent of the
external auditor’s procedures. The external
auditor considers the organizational status of the
internal audit function, the scope of its function,
the technical competence of its members and the
professional care they exercise when assessing
the work of the department.
•The auditing process is very similar between the
external and internal auditors however; the audit
objectives are often very different.

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ISA 610, “CONSIDERING THE WORK OF INTERNAL AUDITING”ISA 610, “CONSIDERING THE WORK OF INTERNAL AUDITING”
There are number of factors to consider for an auditor to rely on the
work of internal auditor:
•(a) Organizational status: Specific status of internal auditing in the entity
and the effect this has on its ability to be objective. In the ideal situation,
internal auditing will report to the highest level of management and be free
of any other operating responsibility. Any constraints or restrictions placed
on internal auditing by management would need to be carefully considered.
In particular, the internal auditors will need to be free to communicate fully
with the external auditor.
•(b) Scope of function: The nature and extent of internal auditing
assignments performed. The external auditor would also need to consider
whether management acts on internal audit recommendations and how
this is evidenced.
•(c) Technical competence: Whether internal auditing is performed by
persons having adequate technical training and proficiency as internal
auditors. The external auditor may, for example, review the policies for
hiring and training the internal auditing staff and their experience and
professional qualifications.
•(d) Due professional care: Whether internal auditing is properly planned,
supervised, reviewed and documented. The existence of adequate audit
manuals, work programs and working papers would be considered.

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OUTSOURCING OF IA FUNCTIONOUTSOURCING OF IA FUNCTION
•The National Board of Accountants and Auditors’ Governing Board at its
132nd meeting held on 11th April 2005, among other issues, deliberated on
the above professional issue and resolved that the outsourcing of the
Internal Audit function in the country is a relatively new phenomenon, which
needs some guidance. In view of this, it was agreed that institutions wanting
to outsource the Internal Audit function may only do so under the following
conditions:
•(1)That the service be provided in the form of a consultancy by
competent, qualified accountants registered with the Board in the
registration category of CPA-PP.
•(2)That the outsourced Internal Auditor be distinct from the External
Auditor of the entity.
•(3)That the institution seeking such professional services should have in
place an Audit Charter.
•(4)That such professional services be guided by very clearly worked out
“Terms of Reference” showing:
• – the scope of the audit
• – the number of man-days to be used
• – the reporting requirement including the types and frequencies
of reports to be prepared
• – the price of the consultancy

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OUTSOURCING OF IA FUNCTIONOUTSOURCING OF IA FUNCTION
•(5)That the consultancy be for a specified time frame after
which there should be need to change the internal auditor.
•(6)That the client (procuring entity) shall have the powers to
pre-maturely terminate the consultancy contract on
unsatisfactory performance of the outsourced Internal Auditor
(Consultant).
•(7)That the Internal Audit process should be guided by
programmes and detailed working papers which should be
available for AQR purposes, should need arise.
•(8)That the outsourcing of the Internal Audit function should
avoid any kind of conflict of interest among the parties.
•(9)That the Internal Auditor should exercise the pre-requisite
independence when rendering such professional services.
•(10)That such professional services should be procured based
on competitive bidding processes.
•All organizations / entities operating in Tanzania and the
general public are required to note this development and
observe the above guidelines.

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SHIFT OF EMPHASIS OF AUDITSHIFT OF EMPHASIS OF AUDIT
•The emphasis in approaching an audit has shifted
from detailed checking of individual items towards
an overall review of the systems in operation;
followed by an examination of the records and the
financial statements prepared from them. Amongst
the reason for this major shift of emphasis are:
–The increasing size and complexity of modern
enterprises
–The development of more accurate and sophisticated
computerized systems
–The requirement that the auditor should also report on
the profit and loss account, which entails a review of all
transactions during the period, not simply of year-end
balances as before.

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INTERNAL AUDITING WORKED EXAMPLEINTERNAL AUDITING WORKED EXAMPLE
•TPDC, parastatal organization dealing with industrial
research development has recently decided to appoint a
small internal audit team. The Chief Accountant has sent to
you as statutory auditor for a number of years for your
comment on the following job specification for the team
Job specification- internal audit
Your role is to
–Review accounting systems and related internal controls
–Examine financial and operating information for management,
including detailed testing of transactions and balances
–Review the economy , efficiency and effectiveness of operations and
of non financial controls
–Review the implementation of corporate policies, plans and
procedures.
TPDC also state that the new internal audit team should
enable the statutory auditors to reduce the amount of testing
they undertake and thus, to increase overall efficiency and
reduce the cost of the statutory audit.

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INTERNAL AUDITING WORKED EXAMPLEINTERNAL AUDITING WORKED EXAMPLE
1.Describe the objectives and scope of internal audit
function according to ISA 610
2.Comment briefly on the four items in the internal audit job
specification indicating with examples the extent, which
they might impinge upon the work of the statutory auditor.
3.List and explain five criteria which you would have to
consider accordance to ISA 610, before deciding how
much reliance you could place on the work done by the
internal auditor
4.Outline the response, which you would make to TPDC
regarding a possible reduction in the cost of the statutory
audit.
5.If the management of TPDC decided to outsource the
internal audit services. Comment briefly on possible
advantages and disadvantages of the procedure.
6.Describe major ethical matters in accordance to ISA
which external auditors to TPDC should consider in case
they decide to undertake the external audit assignment

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AUDIT AS A COMMUNICATION MEDIUMAUDIT AS A COMMUNICATION MEDIUM
•According to ISA 700, the objective of any audit is for
the auditor to obtain sufficient appropriate audit
evidence to be able to express an opinion on the
financial statements.
•ISA 700, provides authoritative guidance on audit
reporting.
•Audit report is the primary means of communication
between the auditor and the shareholders of the
company.
•In order to convey information of a succinct form, the
audit report has become an extremely formalized group
of phrases, each of which has special significance.
These are similar to legal phrases know as “terms of
art’. Such phrases do not mean merely what they
appear to mean on the face of it , and have significance
much greater that they first appear to. Any deviation
from the standard format is regarded by accountants as
being significant and may provide more important extra
information.

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THE AUDITOR'S STANDARD UNQUALIFIED AUDIT REPORTTHE AUDITOR'S STANDARD UNQUALIFIED AUDIT REPORT
•This is the most common type of audit report.
•The standard unqualified audit report contains
seven important elements:
–Title
–Addressee
–Introductory paragraph
–Scope paragraph
–Opinion paragraph
–Name of auditor
–Date of report

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Example of unqualified reportExample of unqualified report
•AUDITOR’S REPORT TO .....
•We have audited the financial statements of ABC Company for
the year ended December 31, 19X0, from which the
summarized financial statements were derived, in accordance
with International Standards on Auditing (or refer to relevant
national standards or practices). In our report dated March 10,
19X1 we expressed an unqualified opinion on the financial
statements from which the summarized financial statements
were derived.
•In our opinion, the accompanying summarized financial
statements are consistent, in all material respects, with the
financial statements from which they were derived.
•For a better understanding of the Company’s financial position and
the results of its operations for the period and of the scope of our
audit, the summarized financial statements should be read in
conjunction with the financial statements from which the summarized
financial statements were derived and our audit report thereon.
•AUDITOR
•Date
•Address

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QUALIFIED REPORTQUALIFIED REPORT
•A qualified report is less common and
is where an auditor disagrees with the
view presented in the accounts, or if he
has not been able to form an opinion
because of inadequate evidence.A sample
of it can be obtained on ISA 800 appendix
643 as an appendix 4.
•Reasons for qualification
–A departure from IFRS
–Scope limitation
–The auditor is not independent

@Sako Mayrick 2006@Sako Mayrick 2006
Example of qualified reportExample of qualified report
•AUDITOR’S REPORT TO .....
•We have audited the financial statements of ABC Company for
the year ended December 31, 19X0, from which the
summarized financial statements were derived, in accordance
with International Standards on Auditing (or refer to relevant
national standards or practices). In our report dated March 10,
19X1 we expressed an opinion that the financial statements
from which the summarized financial statements were derived
gave a true and fair view of (or presented fairly, in all material
respects) ...except that inventory had been overstated by ....
•In our opinion, the accompanying summarized financial statements are
consistent, in all material respects, with the financial statements from which
they were derived and on which we expressed a qualified opinion.
•For a better understanding of the Company’s financial position and the
results of its operations for the period and of the scope of our audit, the
summarized financial statements should be read in conjunction with the
financial statements from which the summarized financial statements were
derived and our audit report thereon.
•AUDITOR
•Date
•Address

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Other reportsOther reports
•In summary the audit report must contain; the
heading which shows the independence of
the auditor, the fact that the report is
addressed to the shareholders and the name
of the company; Respective responsibilities
of directors and auditors; the basis of opinion
and the opinion. (Please visit google search
on the Internet for various samples of audit
report).
•Other forms
–Qualified
–Denial/Disclaimer
–Adverse

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AUDIT QUALIFICATION MATRIXAUDIT QUALIFICATION MATRIX
Nature of
Circumstance
Material but not
fundamental
Fundamental
Limitation of
Scope
Except for
..might
Disclaimer
DisagreementExcept for Adverse opinion

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AUDIT QUALIFICATION MATRIX… cont.AUDIT QUALIFICATION MATRIX… cont.
•Except for ..might auditors disclaim an
opinion on a particular aspects of the
accounts which is not considered
fundamental
•Disclaimer of Opinion- Auditor state they
are unable to form an opinion in the truth
and fairness
•Except for , auditor expresses adverse
opinion on particular aspects of accounts
which is not considered fundamental
•Adverse opinion, auditors state that
accounts do not give a true and fair view.

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AUDIT QUALIFICATION MATRIXAUDIT QUALIFICATION MATRIX … cont … cont
•Limitation of Scope,
–Absence of accounting records
–Ownership of material assets
•Disagreement
–Inappropriate accounting policies
–Facts /amount
–Manner or extent of disclosure
–Failure to comply with legislation

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REPORTING UNCERTAINITYREPORTING UNCERTAINITY
•Inherent uncertainty, an uncertainty whose
resolution is dependent upon uncertain future
event outside the control of the reporting entity’s
directors at the date financial statement are
approved.
• Fundamental Uncertainty, is an inherent where
the magnitude of its potential impact is so great
that, without a clear disclosure of nature and
implication of uncertainty the view given by the f/
s would be seriously misleading.
•E.g. Going concern
•Major litigation

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Worked ExampleWorked Example
•During the course of your audit of the fixed assets of NEDCO
LTD at 31 March 2004 two problems have arisen.
•The calculations of the cost of direct labour incurred on assets
in course of construction by the company’s employees have
been accidentally destroyed for the early part of the year. The
direct labour cost involved is Tshs. 10,000,000/=
•The company has received a government grant of Tshs25,
000,000/= towards the cost of plant and equipment acquired
during the year and expected to last for ten years. The grant
has been credited in full to the profit and loss account as
exceptional income.
•Other relevant financial information is as follows.
Tshs.
•Profit before tax 100,000,000/=
•Fixed asset additions 133,000,000/=
•Assets constructed by company 34,000,000/=
•Fixed asset at net book value 666,667,000/=

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Worked ExampleWorked Example
•Required:
•List the general forms of qualification available to
auditors in drafting their report and state the
circumstance in which each is appropriate.
•State whether you feel that a qualified audit report would
be necessary with respect to the treatment of the
government grant, draft the section of the report
describing the matter (the whole report is not required).
•On the assumption that you decide that a qualified audit
report is necessary with respect to the treatment of the
government grant, draft the section of the report
describing the matter (the whole report is not required).
•Outline the auditor’ general responsibility with regard to
the statement in the directors’ report concerning the
valuation of land and buildings.

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MISCELLANEOUS MATTERSMISCELLANEOUS MATTERS
Timing of Audit work
–At or after year end- suitable for small business
–Interim and final audit-
•Interim – test of controls, planning
•Final- Substantive balance sheet audit
–Continuous audit – the auditor is present throughout the year , suitable
for the large client
•Responsibilities of directors
–Safeguard assets
–Prevent fraud and errors
–Ensure proper accounting records as per Companies act
–Prepare financial statements
–Prepare company’s return to registrar of companies
–Set up system of IC
–Directors are responsible to adopt consistent and appropriate
accounting policies for f/s, they must comply with Companies act and
comply with accounting standards

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Miscellaneous Issues cont…Miscellaneous Issues cont…
•Responsibilities of Auditors
–End result work for f/s on their true and fairness
•The auditor’s should have
–Deep understanding and knowledge of accounting
•Directors will consult auditors of accounting policies to adopt
•Ultimately auditors must stand back from accounting function
•Social Audit
–In Narrow sense it is a financial audit
•It adds value
•Efficiency of markets and investment funds
–Measuring social, ethical and Environmental conduct
to ensure
•CSR, accountability and transparency
–Ensures that in an ever competitive corporate
environment management do not sacrifice their social
value in quest for higher profitability

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AGENCY THEORY
•Principal- Agent to perform task on his
behalf
•Agent will not act against the interest of
the principal
•Directors are like agents to shareholders

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LETTER OF ENGAGEMENTLETTER OF ENGAGEMENT
•It is a letter send by an auditor before commencing
any professional work, it show an agreement in
writing, the precise scope and nature of the work to
be undertaken
•Purpose
–To define clearly the extent of the auditor’s
responsibilities
–To minimize misunderstandings between auditor firm and
client
–To confirm in writing the verbal agreement
–To confirm acceptance by the auditor of his engagement
–To inform and educate the client
–Avoidance of implied contracts arising out of the articles
of Association or previous conduct of the auditor

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LETTER OF ENGAGEMENTLETTER OF ENGAGEMENT
•Timing
–To all new clients before any professional
work has been started
–To all existing clients who have not previously
had such a letter
–Whenever there is significance changes of
circumstances ( e.g. new ISA’s , major
change in management.
–The letter should be reviewed every year to
see if there is a need for revised letter
–To each member of the company of the group
( if it is a group)

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Procedures and ContentProcedures and Content
•Before acceptance discuss the precise
terms with the management( board for a
company)
•Draft and sign the letter before
commencing any part of an assignment
•Receive the client’s written acceptance
•Every year review the letter and
consider if revision is necessary

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CONTENTS OF LETTER OF ENGAGEMENTCONTENTS OF LETTER OF ENGAGEMENT
•The Board’s responsibilities according to company Act
•The auditor’s responsibilities to report on f/s and consistency
of view of directors report
•The scope of auditor’s work
–Auditing standards
–Accounting systems review
–Collection of audit evidence
–Tests and reliance on internal controls
•Sending of letter of weakness to the management
•Any special factors
–Relation with internal audit
–Audit of division and branches
–Any overseas location problems
–Other auditors if any
–Significance reliance on supervision of the directors in small proprietary
companies

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CONTENTS OF LETTER OF ENGAGEMENTCONTENTS OF LETTER OF ENGAGEMENT
•Any special factors
–Relation with internal audit
–Audit of division and branches
–Any overseas location problems
–Other auditors if any
–Significance reliance on supervision of the directors in small
proprietary companies
•The need for a letter of representation from the
management
•Irregularities and fraud – the directors’ primary responsibility
–The auditor’s planning of his audit to have a reasonable expectation
of discovering material misstatement in accounts- non reliance on
the auditor to uncover irregularities and frauds
•Any agreement for the auditors to carry out work of a
bookkeeping or accounting nature- this could be covered on
separate letter

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CONTENTS OF LETTER OF ENGAGEMENT CONT….CONTENTS OF LETTER OF ENGAGEMENT CONT….
•Any agreement to provide taxation services – this
could be a separate letter
•The CHINNESE WALL IDEA; where accounting and
tax services are carried out the staff may be different
from those engaged on audit work and so information
given to tax or accounting staff is not thereby given to
audit staff.
•The fees and the basis on which they are charged
•A request for written acknowledgement of the letter
and that it creates a contractual obligations. In the
case of a company the letter of acknowledgement
should be signed on behalf of the board

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CONCEPT OF MATERIALITYCONCEPT OF MATERIALITY
•According to ISA 320, the auditor should consider
materiality and its relationship with audit risk
when conducting an audit. Also glossary number
139 defines materiality as Materiality—Information
is material if its omission or misstatement could
influence the economic decisions of users taken
on the basis of the financial statements. Materiality
depends on the size of the item or error judged in
the particular circumstances of its omission or
misstatement. Thus, materiality provides a
threshold or cutoff point rather than being a
primary qualitative characteristic which information
must have if it is to be useful.

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CONCEPT OF MATERIALITYCONCEPT OF MATERIALITY
•Auditors hope that their audit procedures will
uncover any large errors in the financial
statements they are auditing. Materiality should be
considered by the auditor when:
–Determining the nature, timing and extent of audit
procedures;
–Evaluating the effect of misstatements.
•Materiality is defined as the expression for the
relative significance or importance of a particular
matter in the context of financial statements as a
whole. A matter is material if its omission or
misstatement would reasonably influence the
decisions of an addressee of the auditor’s report.
Materiality is not capable of the general
mathematical definition as it has both qualitative
and quantitative aspects.

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CONCEPT OF MATERIALITY CONT…CONCEPT OF MATERIALITY CONT…
•Auditors’ responsibility is to plan and perform their
audit to provide reasonable assurance that the
financial statements are free of material
misstatement and give a true and fair view. From
audit point of view anything that would distort the
view given by accounts must lead to qualification
but only if it is material.
•Example things that will fit the above definition
include
–Inclusion of deferred revenue expenditure, such
as advertising costs, in debtors and
prepayments
–A loan which could not quickly be recalled
shown under money at call at short notice
–Omission of an item of stock

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CONCEPT OF MATERIALITY CONT…CONCEPT OF MATERIALITY CONT…
•The key problem in practice is that of how
‘large’ an item has to be for it to be
considered as material.
•An initial assessment of materiality during
audit planning assists in the determination
of an efficient and effective audit
approach. The preliminary materiality
assessment helps auditor to decide such
factors as what items to examine and
whether to use sampling techniques and
which ones. This enables them to select
audit procedures that will reduce audit risk
to an acceptable level.

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MATERIALITY CONCEPT CONT….MATERIALITY CONCEPT CONT….
•Auditors must use their professional judgment in coming to
a decision as to whether an item is, or is not, material.
Important points to take into consideration are as follows:
–What qualitative aspects are involved, such as the
inaccurate or inadequate description of an accounting
policy?
–Relatively small amounts, such as a small error in a
month end procedure, can cumulatively have a material
effect, if repeated.
–Materiality is relative factor and should be considered in
relative terms. Shs.1,000,000 may be absolutely
immaterial in the accounts of a larger company , whereas
in a small organization the reverse would probably be
true. Further, under this heading and amount must
considered in relation to:-

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MATERIALITY CONCEPT CONT….MATERIALITY CONCEPT CONT….
•Items in the overall financial statement level
•Items at individual account balance or
transaction level
•Statutory and other disclosure requirements
which may require disclosure regardless of value
, such as those relating to directors’ emoluments.
•The corresponding amount in previous years
–What degree of latitude is allowable in deciding on
the amount attributable to a particular item? Some
items, such as directors’ fees, are capable of exact
definition; other, such as depreciation and
provisions for obsolete or damaged stock, are at
best an intelligent estimate. The overriding
consideration must be whether the accounts
disclose a true and fair view. It is also clearly
important that such items are consistently treated
from year to year.

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Materiality Cont…..Materiality Cont…..
•Auditors must use their professional judgment in
deciding whether or not an item is material.
They must consider:
•Qualitative aspects
•The cumulative effect of small amounts
•The relative nature of materiality
•The degree of latitude that is allowable.
•According to ISA 320:400, in evaluating whether
the financial statements give a true and fair
view, auditors should assess the materiality of
the aggregate of uncorrected misstatements.
This indicates that the overall effect of
misstatements should be evaluated.

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Materiality Cont…..Materiality Cont…..
•If the auditor believes that the aggregate of
uncorrected misstatement may be material, they
may wish to extend their audit testing to obtain
more audit evidence in the relevant area, or
request the directors to adjust the financial
statements according to ISA 260
“Communication of audit matters to those who
are charged with Governance”. In practice, once
the directors have been informed of the
misstatements in the draft accounts, they are
likely to be happy for accounts to be adjusted. If
the directors refuse any adjustments, the auditor
should consider the implications for the audit
report.

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Materiality Cont…..Materiality Cont…..
•The following are some of audit tests to
determine whether an item is material.
–Who are the relevant users?
–What are their decision making needs?
–For a given item, what is the
appropriate context for assessing its
materiality?
–In what range of values do items
become critical in terms of materiality

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Materiality Cont…..Materiality Cont…..
•The following are some of audit tests to determine
whether an item is material…
–For a given item, what is the appropriate context
for assessing its materiality?
–Securities and Exchange Commission in US
(main regulator of US securities Laws) takes the
following rule of thumb for materiality.
–Errors over 10% - material
–Errors between 5% and 10% may be
material
–Errors less than 5% - not material. But note
that these are figures as guidelines only,
judgment is required.

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General Principles of an AuditGeneral Principles of an Audit
•The auditor should comply with the Code of
Ethics for Professional Accountants issued
by the International Federation of
Accountants. Ethical principles governing the
auditor’s professional responsibilities are:
–Independence; Integrity;
–Objectivity;
–Professional competence and due care;
–Confidentiality; Professional behavior; and
–Technical standards.

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•• Integrity
–A professional accountant should be straightforward and honest in
performing professional services.*
•• Objectivity
–A professional accountant should be fair and should not allow prejudice
orbias, conflict of interest or influence of others to override objectivity.
•• Professional Competence and Due Care
A professional accountant should perform professional services
with due care, competence and diligence and has a continuing
duty to maintain professional knowledge and skill at a level
required to ensure that a client or employer receives the
advantage of competent professional service based on up-to-
date developments in practice, legislation and techniques.
•• Confidentiality
A professional accountant should respect the confidentiality of
information acquired during the course of performing
professional services and should not use or disclose any such
information without proper and specific authority or unless there
is a legal or professional right or duty to disclose.
General Principles of an AuditGeneral Principles of an Audit

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• Professional Behavior
A professional accountant should act in a manner consistent with the good
reputation of the profession and refrain from any conduct which might bring
discredit to the profession. The obligation to refrain from any conduct which
might bring discredit to the profession requires IFAC member bodies to
consider, when developing ethical requirements, the responsibilities of a
professional accountant to clients, third parties, other members of the
accountancy profession, staff, employers, and the general public.
•• Technical Standards
A professional accountant should carry out professional services in
accordance with the relevant technical and professional standards.
•Professional accountants have a duty to carry out with care and skill, the
instructions of the client or employer insofar as they are compatible with the
requirements of integrity, objectivity and, in the case of professional
accountants in public practice. In addition, they should conform with the
technical and professional standards promulgated by:
–. IFAC (e.g., International Standards on Auditing);
–. International Accounting Standards Board;
–. The member’s professional body or other regulatory body; and
–. Relevant legislation.
General Principles of an AuditGeneral Principles of an Audit

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PROFESSIONAL SCEPTICISMPROFESSIONAL SCEPTICISM
•The auditor should plan and perform an audit with
an attitude of professional skepticism recognizing
that circumstances may exist that cause the
financial statements to be materially misstated
•An attitude of professional skepticism means the
auditor makes a critical assessment, with a questioning
mind, of the validity of audit evidence obtained and is
alert to audit evidence that contradicts or brings into
question the reliability of documents or management
representations
•In planning and performing an audit, the auditor neither
assumes that management is dishonest nor assumes
unquestioned honesty. (Remember Mautz and Sharaf
audit postulates).
•Accordingly, representations from management are not a
substitute for obtaining sufficient appropriate audit
evidence to be able to draw reasonable conclusions on
which to base the audit opinion.

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SCOPE OF AUDITSCOPE OF AUDIT
•The term “scope of an audit” refers to the audit procedures
deemed necessary in the circumstances to achieve the
objective of the audit. The procedures required to Conduct an
audit in accordance with ISAs should be determined by the
auditor having regard to the requirements of ISAs, relevant
professional bodies, legislation, regulations and, where
appropriate, the terms of the audit engagement and reporting
requirements.
•An audit in accordance with ISAs is designed to provide
reasonable assurance that the financial statements taken as
a whole are free from material misstatement. Reasonable
assurance is a concept relating to the accumulation of the
audit evidence necessary for the auditor to conclude that there
are no material misstatements in the financial statements
taken as a whole. Reasonable assurance relates to the whole
audit process.

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SCOPE OF AUDITSCOPE OF AUDIT
REASONABLE ASSURANCE Vs ABSOLUTE
ASSURANCE
•An auditor cannot obtain absolute assurance
because there are inherent limitations in an
audit that affect the auditor’s ability to detect
material misstatements. These limitations
result from factors such as:
– The use of testing.
– The inherent limitations of internal control (for
example, the possibility of management override
or collusion).
– The fact that most audit evidence is persuasive
rather than conclusive.

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REASONABLE Vs ABSOLUTE ASSURANCE…..REASONABLE Vs ABSOLUTE ASSURANCE…..
•Also, the work undertaken by the auditor
to form an audit opinion is permeated by
judgment, in particular regarding:
•The gathering of audit evidence, for
example, in deciding the nature, timing,
• and extent of audit procedures; and
•The drawing of conclusions based on the
audit evidence gathered, for
• example, assessing the
reasonableness of the estimates made by
management
• in preparing the financial statements.

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QUALITY CONTROLQUALITY CONTROL
•According to ISA 220, the audit firm should
implement quality control policies and
procedures designed to ensure that all audits
are conducted in accordance with ISAs or
relevant national standards or practices. The
nature, timing and extent of an audit firm’s
quality control policies and procedures
depend on a number of factors such as the
–size and nature of its practice,
–its geographic dispersion,
– its organization and
– appropriate cost/benefit considerations.

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QUALITY CONTROLQUALITY CONTROL
•The firm’s general quality control policies and
procedures should be communicated to its
personnel in a manner that provides
reasonable assurance that the policies and
procedures are understood and implemented.
Further, The auditor should implement those
quality control procedures, which are, in the
context of the policies and procedures of the
firm, appropriate to the individual audit.

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OBJECTIVES OF QCOBJECTIVES OF QC
•(a) Professional requirements:
Personnel in the firm are to adhere to the principles of
independence, integrity, objectivity, confidentiality and
professional behavior.
•(b) Skills and competence:
The firm is to be staffed by personnel who have attained and
maintain the technical standards and professional competence
required to enable them to fulfill their responsibilities with due
care.
•(c) Assignment:
Audit work is to be assigned to personnel who have the
degree of technical training and proficiency required in the
circumstances.
•(d) Delegation:
There is to be sufficient direction, supervision and review of
work at all levels to provide reasonable assurance that the
work performed meets appropriate standards of quality.

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OBJECTIVES OF QCOBJECTIVES OF QC
•(e) Consultation:
Whenever necessary, consultation within or outside
the firm is to occur with those who have appropriate
expertise.
•(f) Acceptance and retention of clients:
An evaluation of prospective clients and a review, on
an ongoing basis, of existing clients is to be
conducted. In making a decision to accept or retain a
client, the firm’s independence and ability to serve
the client properly and the integrity of the client’s
management are to be considered.
•(g) Monitoring:
The continued adequacy and operational
effectiveness of quality control policies and
procedures is to be monitored.

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PRINCIPLES OF DELEGATION IN QC….PRINCIPLES OF DELEGATION IN QC….
•Any delegation of work to assistants
would be in a manner that provides
reasonable assurance that such work will
be performed with due care by persons
having the degree of professional
competence required in the
circumstances. In due course the
following matters will be considered:
•Direction
•Supervision
•Review

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Principles of Delegation in QCPrinciples of Delegation in QC
–Direction
•Assistants to whom work is delegated need appropriate
direction. Direction involves informing assistants of their
responsibilities and the objectives of the procedures they
are to perform. It also involves informing them of matters,
such as the nature of the entity’s business and possible
accounting or auditing problems that may affect the
nature, timing and extent of audit procedures with which
they are involved. The audit program is an important tool
for the communication of audit directions. Time budgets
and the overall audit plan are also helpful in
communicating audit directions.

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PRINCIPLES OF DELEGATION IN QC…..PRINCIPLES OF DELEGATION IN QC…..
•Supervision
Supervision is closely related to both direction and
review and may involve elements of both. Personnel
carrying out supervisory responsibilities perform the
following functions during the audit:
–Monitor the progress of the audit to consider whether:
•Assistants have the necessary skills and competence to carry out
their assigned tasks;
• Assistants understand the audit directions; and
•The work is being carried out in accordance with the overall audit
plan and the audit program;
–Become informed of and address significant accounting
and auditing questions raised during the audit, by
assessing their significance and modifying the overall audit
plan and the audit program as appropriate; and
–Resolve any differences of professional judgment between
personnel and consider the level of consultation that is
appropriate.

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PRINCIPLES OF DELEGATION IN QC….PRINCIPLES OF DELEGATION IN QC….
•Review
The work performed by each assistant needs to be
reviewed by personnel of at least equal
competence to consider whether:
–The work has been performed in accordance with the
audit program;
–The work performed and the results obtained have
been adequately documented;
– All significant audit matters have been resolved or
are reflected in audit conclusions;
–The objectives of the audit procedures have been
achieved; and
–The conclusions expressed are consistent with the
results of the work performed and support the audit
opinion.

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THINGS TO BE REVIEWED ON TIMELY BASISTHINGS TO BE REVIEWED ON TIMELY BASIS
•The overall audit plan and the audit program;
•The assessments of inherent and control risks, including the
results of tests of control and the modifications, if any, made to
the overall audit plan and the audit program as a result thereof;
•The documentation of the audit evidence obtained from
substantive procedures and the conclusions drawn there from,
including the results of consultations; and
•The financial statements, proposed audit adjustments and the
proposed auditor’s report.
The process of reviewing an audit may include, particularly in the
case of large complex audits, requesting personnel not
otherwise involved in the audit to perform certain additional
procedures before issuing the auditor’s report.

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CONTEMPORARY AUDIT ISSUES AS PART OF AQRCONTEMPORARY AUDIT ISSUES AS PART OF AQR
•Adhering generally to auditing standards and
Guidelines
•Obtaining confirmation direct from the
company’s bankers of bank balances and
other important matters known to the bankers.
•Obtaining direct confirmation of balances
owed by debtors
•Attendance at stocktaking.

@Sako Mayrick 2006@Sako Mayrick 2006
REGULATORY FRAMEWORK OF AUDITING IN TANZANIAREGULATORY FRAMEWORK OF AUDITING IN TANZANIA
•The work of auditor today is regulated by mainly three
sources:
–Statutes, Companies Act is the most important and
– Professional pronouncements on auditing which are issued by the
NBAA.
–For public accounts, legal framework is in the Public Finance Act
No. 6 of 2001 and Public Procurement Act No.21 of 2004.
Sections 26 reads “there shall continue in existence of public
national audit office which shall be headed by the Controller and
Auditor –General appointed by the president. The Controller and
Auditor General shall , in addition to terms and conditions
specified in the Constitution , hold the office on such terms and
conditions as may be provided in any written law or as may be
determined by the President and set out in instrument of his
appointment. Section 30 of the Public finance Act has set out the
functions of the CAG.( this shall be discussed in Public Sector
Audit topic)
–The constitution of the United Republic of Tanzania Section 143
(1) through (6)
–Income Tax Act, 2004
– Auditors and Accountants (Registrations) Act.; Act No. 33 of 1972
( as amended)
–The Cooperatives Societies Act No.15 of 1991 ( as amended)
–Local Government Finance Act No.9 of 1982 ( as amended)

@Sako Mayrick 2006@Sako Mayrick 2006
LEGAL FRAMEWORK OF AUDITINGLEGAL FRAMEWORK OF AUDITING
COMPANIES ACT NO.12 OF 2002COMPANIES ACT NO.12 OF 2002
•Requirement of the company to prepare
accounts( Directors’ Responsibility)- Section 151
-160
•Sect.151
–Books of accounts in Swahili or English to show and
explaining the company’s transactions
•Timely and accurate transactions
•The Financial statements complies with requirements of the Act
–Books of accounts to be kept in a registered office
available for inspection by directors
–The books of accounts to be preserved for six years

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Sect.151Sect.151
… cont… cont
–Failure to comply with the section on conviction liable to
imprisonment or fine or both
•Sect.152Sect.152
–Accounting period to be more than six months but not
more than 18 months from the date of incorporation
–On subsequent periods should be 12 month
•Sect.153Sect.153
–Accounts should be prepared and indicates
•A profit and loss account or, in the case of a company not trading
for profit , an income and expenditure account;
•A balance sheet as at the last day of the accounting period
•A cash flow statement

@Sako Mayrick 2006@Sako Mayrick 2006
Companies Act…. Cont….Companies Act…. Cont….
•Sect.154
–The financial statement shall give a true and fair view of the
state of affairs of the company as at the end of its
accounting period.
–The financial statement shall comply with requirement
specified in regulations prescribed by the Minister, or the
NBAA or such other body as the Minister may decide, having
regard in either case to generally accepted principles of
accounting, and the regulations in this section.
–If special circumstances compliance with any requirements
above is inconsistent with the requirement of true and fair
view, the directors shall depart from such requirements to
the extent necessary to give a true and fair view. Particulars
of any such departure, the reasons for it and its effect shall
be given in the not to accounts.
–Failure to comply with requirements of this section by
directors , they are liable for fine or imprisonment

@Sako Mayrick 2006@Sako Mayrick 2006
Companies Act…. Cont….Companies Act…. Cont….
•Sect.155
–Duty to prepare group accounts
•Consolidated financial statements
•Financial statements must give a true and fair view
•Sect.156
–Exemption for preparation of group accounts
•If it is a subsidiary of another company that prepares group account
•Sect. 157
–Registrar may allow the company to extend its accounting period
to match with that of holding company including submission of
relevant returns.
•Sect. 158
–Company annual accounts to be approved by the BoD and
signed on behalf by the director
–Every copy of Balancer sheet shall be laid before the general
meeting or circulated or issued and state the name of a person
who signed the balance sheet
–A copy of Balance Sheet to be delivered to Registrar
–Failure to comply with requirement is liable to fine.
–Defined “annual accounts”
•Sect.159
–Directors of a company should prepare Directors’ report giving a
a fair review of the development of the business of the company
and its subsidiaries during the accounting period and their
position at the end of it and the amount if any that should be paid
by the way of dividend
–Failure to comply results into fine or imprisonment.

@Sako Mayrick 2006@Sako Mayrick 2006
Companies Act… cont..Companies Act… cont..
•Sect.159
–Directors of a company should prepare Directors’ report giving a
a fair review of the development of the business of the company
and its subsidiaries during the accounting period and their
position at the end of it and the amount if any that should be paid
by the way of dividend
–Failure to comply results into fine or imprisonment.
•Sect.160
–Directors report laid before the company meeting
shall state the name of the person who signed it on
behalf of the Board
–The report must be signed by the director and
secretary of the company.
–Failure to comply or false information is guilty of an
offence and liable to a fine.

@Sako Mayrick 2006@Sako Mayrick 2006
Auditor’s Report as per CAAuditor’s Report as per CA
•Sect. 161
–The auditor shall make a report to the company’s members
on all annual accounts of which copies are laid bere the
company in the general meeting during their tenure in the
offiece
–The report shall state
•Whether in Auditor’s opinion the annual accounts have been
properly prepared in accordance with the Act.
•Whether a true and fair view is given
–Balance sheet – state of affairs of the the company at the end of the
accounting period
–Profit and Loss Account
–Cash flow statement
–Group accounts – consolidation as a whole
•Information in the Directors Report for the accounting period for
which the annual accounts are prepared and are consistent with
those accounts ; and if they ar of opinion that it is not , they shall
state the fact in their report

@Sako Mayrick 2006@Sako Mayrick 2006
Auditor’s Report as per CAAuditor’s Report as per CA
•Sect.162
–The Auditor’s Report shall state the names of auditors
and be signed by them
–Every copy of the auditors’ Report shall state names
of the Auditors
–If no name of the auditor is give the company and
every officer who is default shall be liable to a fine
–Signature by the auditors are where the office of
auditor is held by a body corporate or partnership to
signature in the name of the body corporate or
partnership by a parson authorized to sign on its
behalf

@Sako Mayrick 2006@Sako Mayrick 2006
Auditor’s Report as per CAAuditor’s Report as per CA
•Section 163
–In preparing company’s report the auditors shall carry out
such investigations as will enable them to form opinion as to
•Whether proper accounting records have been kept by the company
and proper return adequate for their audit have been received from
branches not visited by them
•Whether the company’s individual accounts are in agreement with
the accounting records and returns.
–Any departure must be stated in fact in the auditors report
–Any failure to obtain information necessary for purpose of
audit must be stated
–If the requirements of section 206 relating to disclosure of
information on emoluments and other benefits of directors
and others are not complied with in the annual accounts, the
auditors shall include in their report , so far as they are
reasonably able to do so , a statement giving required
particulars.

@Sako Mayrick 2006@Sako Mayrick 2006
Auditor’s Report as per CAAuditor’s Report as per CA
•Sect.164
–A copy of annual accounts, directors report and
auditors report shall not less than 21 days before the
date general meeting be sent to every member of the
company , every holder of debenture of the company
and all persons other then members or holders of
debenture of the company being a person so entitled.
–Failure to comply results into fine
•Sect. 165
–Every other member of the company whether or not is
entitled, shall be furnished on demand without charge
a copy of last annual accounts of the company,
together with a copy of Director’s Report and the
Auditor’s Report , within 7 days.

@Sako Mayrick 2006@Sako Mayrick 2006
Auditor’s Report as per CAAuditor’s Report as per CA
•Sect.166
–The directors, in respect of each accounting period
must lay before the company in the general meeting
eh annual accounts, the directors report and Auditors
report on those accounts within seven months for a
public company and ten months for the private from
the completion of accounting period
–Failure to the above is guilty of offence by every
officer or director and liable to a fine and for continued
contravention, to daily fine.
–It is a defence to prove that a person took reasonable
steps to comply before the end of the period BUT it is
not a defence to prove that the documents in question
were not in fact prepared as required by this part.

@Sako Mayrick 2006@Sako Mayrick 2006
Auditor’s Report as per CAAuditor’s Report as per CA
•Sect. 167
–Directors should deliver to Registrar within each accounting
period a copy of annual accounts, auditors reports and
directors reports
–Exemption for private company according to section 171
–Failure to which every person who immediately before the
end of that period was a director of the company is guilty of
an offence and liable to fine and continued contravention , to
a daily default fine
–If the directors fails to make good the default within 14 days
after service of the note of compliance, the court may on the
application of any member of creditors of the company or of
the Registrar , make an order directing the directors to make
good the default within such time as may be specified in the
order.. And the court may provide that all costs of and
incidental to the application shall be born by the directors.

@Sako Mayrick 2006@Sako Mayrick 2006
Auditor’s Report as per CAAuditor’s Report as per CA
•Sect.168
–Any problems on non-compliance with the act on
submitted returns the Minister may give notice to the
Directors on the same.
–The notice shall specify the period of not less than
one month for the directors to give him an explanation
of the accounts or prepare revised accounts. The
minister may apply to the court for the company to
prepare and have audited the revised accounts
•Section 169
–Set out conditions for unlimited company not to
submit the required reprots

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•Section 170
–The company shall at each general meeting appoint
an auditor or auditors
–Hold office from the conclusion of annual meeting to
the conclusion of the next
–The retired auditor shall deem to be re-appointed
( however appointed) without any resolution being
being passed unless
•He is not qualified for re-appointment
•A resolution is passed at the meeting appointing somebody
instead of him or providing expressly that he shall not be re-
appointed
•He has given the company notice in writing of his
unwillingness to be re-appointed

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•Where at the general meeting at which accounts are laid no auditors
are appointed or re-appointed , the Registrar may appoint a person to
fill the vacancy.
•The first auditors of the company may be appointed by the directors
at any time before the firs annual general meeting, and the auditors
so appointed shall hold office until the conclusion of the meeting;
provided that the company at a general meeting remove any such
auditor and appoint in their place any other persons who have been
nominated for appointment by any member of the company and
whose nomination notice has been given to the members of the
company not less than fourteen days before the date of the meeting
•If the directors fail to exercise their powers under this subsection, the
company in general meeting may appoint the firs auditors, and
thereupon the said powers of the directors shall cease.
•The directors may fill any casual vacancy in the office of auditor,but
while any such vacancy continues, the surviving or continuing Auditor
may act.

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•Sect. 170(7)
–The company may by ordinary resolution at any time
remove an auditor from office,notwithstanding
anything in any agreement between him and it.
–HOWEVER, where such a resolution is passed, the
company shall within fourteen days give notice of that
fact in the prescribed form to the Registrar, failing with
the company and every officer of it who is n default
shall be guilty of an offence and liable to a fine and
default fine.

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•The remuneration of the the auditor may be
fixed by the directors or the Registrar
•Subject to foregoing paragraph
•Sect.171
–A private company shall be exempt form the
requirement to appoint auditor under section 170
under the following conditions
•In the case of the company first accounting period , in that
period
•In case of any subsequent accounting period, in that period
or preceding period
–The qualifying conditions shall be met in the
accounting period which the following requirement are
satisfied
•Turnover and gross assets as specified in either case in
regulations prescribed by the Minister having regard to
GAAS

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•The conditions above does not apply for banks or
insurance company or dealer or investment adviser
–The company is , or was at any time during the period , a
member of an ineligible group
•Sect.172
–The company is not entitle to the exemption above unless its
balance sheet contains a statement by the Directors
•That for the accounting period in question , the company satisfied the
qualifying conditions specified above
•That no notice has been deposited in relation to accounts for the
accounting period
•The directors acknowledges their responsibilities for
–Ensuring that the company keeps books so account which comply with
section 151
–Preparing accounts which gives a true and fair view of the state of affairs
of the company in accordance with section 153 and 154

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•A company satisfying the qualifying conditions
set out in section above shall annex the
appropriate certificate to its annual returns as
provided for in section 132
–The directors’ statement and certificate under this
section shall be submitted for verification by the
auditors appointed by the company for that purpose
no less than once in every five consecutive
accounting periods
–False certificate or statement in material way is liable
to imprisonment , fine or both

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•Sect.173
•Any member o the company holding the
aggregate than 10% in nominal value of the
issued share capital or any class or 10% of
members, may by notice in writing deposit at the
registered office of the company during an
accounting period by not later than one month
before the end of that accounting period, require
the company to obtain an audit of its accounts
for that accounting period.
•If the notice have been deposited , the company
shall be obliged to appoint an auditor in respect
of the accounting period to which the notice
relates

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•Sect.174
–Special notice for resolution shall be required for a resolution
at general meeting at which accounts are laid
•Appointing as auditor a person other than a retiring auditor;
•Providing expressly that a retiring auditor shall not be re-appointed
•Filling the casual vacancy in the office of the auditor
•Removing an auditor before the expiration of his term of office
–On receipt of notice of such an intended resolution as
above , the company shall immediately send a copy the
thereof to the retiring auditor ( if any) or , as the case may be
, the auditor to be removed
–The copy of representation by the auditor will sent to every
member of the company, if too late shall be read out in a
meeting
–An auditor is liable for the cost for any defamatory
statements causing injury to the company

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•Section 175
–A person or firm shall not be qualified for appointment
as auditor of a company unless he, or in the case of a
firm , every partner is a CPA- defined by NBAA
–Unqualified persons include
•The officer or employee of the company
•A person who is a partner of or in the employment of an
officer or employee of the company
•This is not a reference for an auditor
•If any unqualified person is appointed the company and
every officer is default and the person acting as an auditor
shall be liable to a fine

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•Sect.176- rights to information
–Auditor shall have rights to access o books of
accounts and vouchers of the company and entitled
to require form the officers of the company such
information and explanations as he thinks necessary
for the performance of the duties of the auditors
–Any misleading information by the officer of the
company is an offence and liable to imprisonment or
fine or bothe
–The auditor of a company shall be entitled to attend
any gneral meetint of the company and to receive all
notices of and other communication relating to any
general meeting which they attend on part of the
business of the meeting which concerns them as
auditors.

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•Sect.177
–The auditor of the company may resign his office by
depositing a notice in writing to that effect a the
company’s registered office
–The notice is not effective unless accompanied by the
statement by section 179
–The company within 14 days must sent to the
registrar of companies the notice , contravention
results into a fine and default fine
•Sect.178
– applicable where the notice of resignation is
accompanied by a statement of circumstances which
he considers should be brought to the attention of
members or creditors
•It can call an extraordinary meeting for explanation of the
circumstances.

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•The directors must act within 21 days otherwise
will be liable for a fine.
•The copies of statement need not be sent out an
the statement need not be read out at the
meeting if , on application of the company or of
any other person who claims to be aggrieved,
the court is satisfied that the rights conferred by
this section are being abused to secure
needless publicity for defamatory matter; and
the court may order the company’s costs on
such an application to be paid in whole or in part
by the auditor, notwithstanding that he is not a
party to that application

@Sako Mayrick 2006@Sako Mayrick 2006
Auditors as per CAAuditors as per CA
•Sect.179
–Where an auditor ceases for any reason, to hold
office , he shall deposit at the company’s registered
office a statement of any circumstances connected
with his ceasing to hold office which he considers
should be brought the the attention of the members or
creditors of the company or , if he considers that there
are no such circumstances, a statement that there are
none.
–In case of resignation , the statement shall be
deposited along with the notice of resignation; in the
case of failure to seek re-appointment , the statement
shall be deposited not less than 14 days before the
end of the time allowed for next appointing auditors;
not later than the end of the period of 14 days
beginning the date he ceases to hold office

@Sako Mayrick 2006@Sako Mayrick 2006
NATURE AND SOURCE OF AUDIT EVIDENCENATURE AND SOURCE OF AUDIT EVIDENCE
•ISA defines audit evidence as all of the information used by
the auditor in arriving at the conclusions on which the audit
opinion is based. Audit evidence includes the information
contained in the accounting records underlying the financial
statements and other information. Auditors are not expected
to address all information that may exist. Audit evidence,
which is cumulative in nature, includes
–audit evidence obtained from audit procedures performed during the
course of the audit and
–may include audit evidence obtained from other sources such as
• previous audits and
•a firm’s quality control procedures for client acceptance and
continuance.
•The auditor seeks to obtain sufficient appropriate audit
evidence at the class of transactions, account balance, and
disclosure level in such a way that enables the auditor, at
the completion of the audit, to express an opinion on the
financial statements taken as a whole at an acceptably low
level of audit risk. Auditors use various approaches to
accomplish that objective.

@Sako Mayrick 2006@Sako Mayrick 2006
AUDIT EVIDENCE CON..AUDIT EVIDENCE CON..
• Accounting records generally include the records of initial entries and supporting
records, such as checks and records of electronic fund transfers; invoices;
contracts; the general and subsidiary ledgers, journal entries and other
adjustments to the financial statements that are not reflected in formal journal
entries; and records such as work sheets and spreadsheets supporting cost
allocations, computations, reconciliations and disclosures. The entries in the
accounting records are often initiated, recorded, processed and reported in
electronic form. In addition, the accounting records may be part of integrated
systems that share data and support all aspects of the entity’s financial
reporting, operations and compliance objectives.
• Management is responsible for the preparation of the financial statements based
upon the accounting records of the entity.
• The auditor obtains some audit evidence by testing the accounting records, for
example, through analysis and review, reperforming procedures followed in the
financial reporting process, and reconciling related types and
applications of the same information. Through the performance of such audit
procedures, the auditor may determine that the accounting records are
internally consistent and agree to the financial statements.
• However, because accounting records alone do not provide sufficient audit
evidence on which to base an audit opinion on the financial statements, the
auditor obtains other audit evidence.
• Other information that the auditor may use as audit evidence includes minutes
of meetings; confirmations from third parties; analysts’ reports; comparable data
about competitors (benchmarking); controls manuals; information obtained by
the auditor from such audit procedures as inquiry, observation, and inspection;
and other information developed by, or available to, the auditor that permits the
auditor to reach conclusions through valid reasoning

@Sako Mayrick 2006@Sako Mayrick 2006
SUFFICIENCY,APPROPRIATENESS AND RELIABILITY OF EVIDENCESUFFICIENCY,APPROPRIATENESS AND RELIABILITY OF EVIDENCE
•An auditor has to obtain sufficient, appropriate and reliable audit evidence
as to a material financial statement assertion.
–Sufficiency is the measure of the quantity of audit evidence.
– Appropriateness is the measure of the quality of audit evidence; that is, its
relevance and its reliability in providing support for, or detecting misstatements
in, the classes of transactions, account balances, and disclosures and related
assertions.
–The quantity of audit evidence needed is affected by the risk of misstatement
(the greater the risk, the more audit evidence is likely to be required) and also
by the quality of such audit evidence (the higher the quality, the less may be
required). Accordingly, the sufficiency and appropriateness of audit evidence
are interrelated. However, merely obtaining more audit evidence may not
compensate for its poor quality.
–For example, inspection of records and documents related to the collection of
receivables after the period end may provide audit evidence regarding both
existence and valuation, although not necessarily the appropriateness of
period-end cutoffs.
–On the other hand, the auditor often obtains audit evidence from different
sources or of a different nature that is relevant to the same assertion. For
example, the auditor may analyze the aging of accounts receivable and the
subsequent collection of receivables to obtain audit evidence relating to the
valuation of the allowance for doubtful accounts.
–Furthermore, obtaining audit evidence relating to a particular assertion, for
example, the physical existence of inventory, is not a substitute for obtaining
audit evidence regarding another assertion, for example, the valuation of
inventory.

@Sako Mayrick 2006@Sako Mayrick 2006
FACTORS INFLUENCING RELIABILITY OF AUDIT EVIDENCEFACTORS INFLUENCING RELIABILITY OF AUDIT EVIDENCE
•The reliability of audit evidence is influenced by its source and by its
nature and is dependent on the individual circumstances under which it is
obtained. While recognizing that exceptions may exist, the following
generalizations about the reliability of audit evidence may be useful
• Audit evidence is more reliable when it is obtained from independent
sources outside the entity.
• Audit evidence that is generated internally is more reliable when the
related controls imposed by the entity are effective.
• Audit evidence obtained directly by the auditor (for example, observation
of the application of a control) is more reliable than audit evidence
obtained indirectly or by inference (for example, inquiry about the
application of a control).
• Audit evidence is more reliable when it exists in documentary form,
whether paper, electronic, or other medium (for example, a
contemporaneously written record of a meeting is more reliable than a
subsequent oral representation of the matters discussed).
• Audit evidence provided by original documents is more reliable than
audit evidence provided by photocopies or facsimiles.
When information produced by the entity is used by the auditor to perform audit
procedures, the auditor should obtain audit evidence about the accuracy and
completeness of the information.

@Sako Mayrick 2006@Sako Mayrick 2006
FACTORS INFLUENCING RELIABILITY OF AUDIT EVIDENCE..FACTORS INFLUENCING RELIABILITY OF AUDIT EVIDENCE..
•The auditor ordinarily finds it necessary to rely
on audit evidence that is persuasive rather
than conclusive; however, to obtain reasonable
assurance, the auditor is not satisfied with
audit evidence that is less than persuasive.
The auditor uses professional judgment and
exercises professional skepticism in evaluating
the quantity and quality of audit evidence, and
thus its sufficiency and appropriateness, to
support the audit opinion.

@Sako Mayrick 2006@Sako Mayrick 2006
USE OF ASSERTIONS FOR AUDIT EVIDENCEUSE OF ASSERTIONS FOR AUDIT EVIDENCE
•The auditor should use assertions for classes of transactions, account
balances, and presentation and disclosures in sufficient detail to form a
basis for the assessment of risks of material misstatement and the design
and performance of further audit procedures. The auditor uses assertions
in assessing risks by considering the different types of potential
misstatements that may occur, and thereby designing audit procedures
that are responsive to the assessed risks. Other ISAs discuss specific
situations where the auditor is required to obtain audit evidence at the
assertion level.
Assertions used by the auditor fall into the following categories:
•Assertions about classes of transactions and events for the period under
audit:
–Occurrence—transactions and events that have been recorded have
occurred and pertain to the entity.
–(ii) Completeness—all transactions and events that should have been
recorded have been recorded.
–Accuracy—amounts and other data relating to recorded transactions and
events have been recorded appropriately.
–Cutoff—transactions and events have been recorded in the correct accounting
period.
–Classification—transactions and events have been recorded in the proper
accounts.

@Sako Mayrick 2006@Sako Mayrick 2006
ASSERTIONS CONT….ASSERTIONS CONT….
Assertions about account balances at the period end:
–Existence—assets, liabilities, and equity interests exist.
–Rights and obligations—the entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.
–Completeness—all assets, liabilities and equity interests that should have
been recorded have been recorded.
–Valuation and allocation—assets, liabilities, and equity interests are included
in the financial statements at appropriate amounts and any resulting valuation
or allocation adjustments are appropriately recorded.
Assertions about presentation and disclosure:
–Occurrence and rights and obligations—disclosed events, transactions, and
other matters have occurred and pertain to the entity.
–Completeness—all disclosures that should have been included in the
financial statements have been included.
–Classification and understandability—financial information is appropriately
presented and described, and disclosures are clearly expressed.
–Accuracy and valuation—financial and other information are disclosed fairly
and at appropriate amounts.

@Sako Mayrick 2006@Sako Mayrick 2006
AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCEAUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE
•Obtain an understanding of the entity and its environment,
including its internal control, to assess the risks of material
misstatement at the financial statement and assertion levels
(audit procedures performed for this purpose are referred to in
the ISAs as “risk assessment procedures”);
•When necessary or when the auditor has determined to do
so, test the operating effectiveness of controls in preventing,
or detecting and correcting, material misstatements at the
assertion level (audit procedures performed for this purpose
are referred to in the ISAs as “tests of controls”); and
•Detect material misstatements at the assertion level (audit
procedures performed for this purpose are referred to in the
ISAs as “substantive procedures” and include tests of
details of classes of transactions, account balances, and
disclosures and substantive analytical procedures).

@Sako Mayrick 2006@Sako Mayrick 2006
TEST OF CONTROLSTEST OF CONTROLS
•Tests of controls are necessary in two circumstances.
When the auditor’s risk assessment includes an
expectation of the operating effectiveness of controls, the
auditor is required to test those controls to support the
risk assessment. In addition, when substantive
procedures alone do not provide sufficient appropriate
audit evidence, the auditor is required to perform tests of
controls to obtain audit evidence about their operating
effectiveness.
•Examples of tests
–Walkthrough tests – this includes taking a few transactions and
following them through every stage of the system, from material
requisition to settlement of supplier’s invoice.
–Test of controls- Taking a representative sample of
transactions, and testing certain significant controls. For
purchases, test control over payments by checking purchases
invoices have been authorized before payments
–Substantive procedures – Taking a larger sample of balances,
and testing for completeness and accuracy. For creditors,
compare suppliers statements with purchases ledger to ensure
creditors are stated at their correct amount.

@Sako Mayrick 2006@Sako Mayrick 2006
EVIDENCE IN E-COMMERCEEVIDENCE IN E-COMMERCE
•The nature and timing of the audit procedures to be used may be
affected by the fact that some of the accounting data and other
information may be available only in electronic form or only at
certain points or periods in time. Source documents, such as
purchase orders, bills of lading, invoices, and checks, may be
replaced with electronic messages. For example, entities may use
electronic commerce or image processing systems. In electronic
commerce, the entity and its customers or suppliers use connected
computers over a public network, such as the Internet, to transact
business electronically. Purchase, shipping, billing, cash receipt,
and cash disbursement transactions are often consummated
entirely by the exchange of electronic messages between the
parties. In image processing systems, documents are scanned and
converted into electronic images to facilitate storage and reference,
and the source documents may not be retained after conversion.
Certain electronic information may exist at a certain point in time.
However, such information may not be retrievable after a specified
period of time if files are changed and if backup files do not exist. An
entity’s data retention policies may require the auditor to request
retention of some information for the auditor’s review or to perform
audit procedures at a time when the information is available.

@Sako Mayrick 2006@Sako Mayrick 2006
USE OF CAAT TO OBTAIN ELECTRONIC EVIDENCEUSE OF CAAT TO OBTAIN ELECTRONIC EVIDENCE
•When the information is in electronic form, the auditor
may carry out certain of the audit procedures
described below through CAATs
–Inspection of Records or Documents
–Inspection of Tangible Assets
–Observation -consider ISA 501, “Audit Evidence—
Additional Considerations for Specific Items”
–Inquiry- consider ISA 580, “Management
Representations” for further guidance on written
representations.
–Confirmation- consider ISA 505, “External Confirmations”
for further guidance on confirmations.
–Recalculation
–Reperformance
–Analytical Procedures – consider ISA 520,“Analytical
Procedures” for further guidance on analytical
procedures.

@Sako Mayrick 2006@Sako Mayrick 2006
MANAGEMENT ASSERTIONSMANAGEMENT ASSERTIONS
•Example inventory
–Existence- inventory in the balance sheet physically exists.
Inventory is held for sale or use in the ordinary course of
business
–Completeness
•Inventory quantities include all items on hand, in transit and stored at
outside locations. Inventory listings are accurately included in the
inventory accounts.
–Rights and Obligations – the company has legal title or
similar rights of ownership to the inventory. Inventory
excludes items billed to customers or owned by others..
–Valuation – inventory is properly stated at cost. Valuation is
reduced , where appropriate, to the market lower than cost
–Presentation and Disclosure – inventory is properly
classified as a current asset. Major inventory categories and
their valuation bases are adequately disclosed in notes.
Pledge or assignment of inventory as collateral is
appropriately disclosed in notes

@Sako Mayrick 2006@Sako Mayrick 2006
EXISTENCE TESTS CUT OFF PROCEDURESEXISTENCE TESTS CUT OFF PROCEDURES
Cutoff refers to recognizing assets and liabilities as of a proper Cutoff refers to recognizing assets and liabilities as of a proper
date and accounting for revenue, expense and other transactions date and accounting for revenue, expense and other transactions
in the proper period.in the proper period.
•Simple cut off errors can occur Simple cut off errors can occur
–When last December sales invoices are record for goods not
actually shipped until January or when cash receipts are
recorded through the end of the week ( e.g.., Friday, January
4) and the last batch for the year should have been processed
on December 31
–In Auditor’s jargon, the cutoff date refers to the client's year
end balance sheet date. Proper cutoff means accounting for all
transactions that occurred during the period and neither
postponing some recordings to the next period nor
accelerating next-period transactions into the current- year
accounts.

@Sako Mayrick 2006@Sako Mayrick 2006
•The auditors use seven basic types of evidence
an seven general procedures to gather it. One
or more of these procedures may be sued no
matter what account balance , control
procedures, class of transactions or other other
information is under audit. The auditor arrange
the procedures in an AUDIT PROGRAM
Management
Assertions
and Audit
Objectives
Sufficient
appropriate
Evidence
General
Audit
procedures
Audit
Working papers
GENERAL AUDIT PROCEDURES

@Sako Mayrick 2006@Sako Mayrick 2006
TYPES OF EVIDENCE AND RELATED AUDIT PROCEDURESTYPES OF EVIDENCE AND RELATED AUDIT PROCEDURES
TYPES OF EVIDENCE EVIDENCE GATHERING PROCEDURES
Physical observation, inspection Observation and Examination by the
Auditor
Auditor’s calculations Recalculation by the auditor
Statement by independent parties Confirmation letter
Statement by client personnel Verbal inquiry and written representations
Documents prepared by independent
parties
Examination of documents ( vouching or
tracing)
Documents prepared by the client Examination of documents ( vouching or
tracing)
Data interrelationship Scanning and Analytical procedures

@Sako Mayrick 2006@Sako Mayrick 2006
INTERNAL CONTROLSINTERNAL CONTROLS
•Internal control system is the whole system of
controls, financial and otherwise, established by the
management in order to carry on the business of
enterprise in an orderly and efficient manner ensure
adherence to management policies, safeguard the
assets and secure as far as possible the
completeness and accuracy of the records.
•Types of internal control
–Organizational
•Plan of an organization
•Define and allocate responsibilities
•Identify lines of reporting
–Authority to purchase items of plant may be vested in BoD
–Segregation of Duties
•No one person should be responsible for the recording and
processing of the entire transaction.
•Several people reduces the risk of intentional or accidental
manipulation or error
•Authorization, execution and custody , recording

@Sako Mayrick 2006@Sako Mayrick 2006
INTERNAL CONTROLS….INTERNAL CONTROLS….
–Physical
•Limit access to authorized personnel only
•Documentation of access
•Controls for valuables , portable , exchangeable or desirable assset e.g .locking of securities,in
safe with procedures for the custody and use of keys
–Authorization and approval
•Approval by authorized person, limits of authorization should be specified e.g credit sale must be
approved by the credit control dept.
–Arithmetical and accounting
•Controls in the recording function which check that the transactions have been authorized, they
are all included and that they are correctly recorded and accurately processed.
•Checking the arithmetical accuracy of the records the maintenance and checking of total,
reconciliations
–Previews, bank reconciliation
–Personnel
•Procedures to ensure that personnel operating a system are competent and motivated to carry out
the task to them as the proper functioning of a system depends upon the competence and integrity
of operating personnel
•Appropriate remuneration and promotion and career development prospects, selection of people
with appropriate personal characteristics and training , and , assignment to the task of the right
level
–Supervision
•All actions by all levels of staff should be supervised. Responsibility for supervision should be
clearly laid down and communicated to the persons being supervised.
–Management
•Controls exercised by mgt which are outside and over and above the day to day routine of the
system
•Overall supervision controls, reviews of mgt controls, comparisons with budgets , internal audits

@Sako Mayrick 2006@Sako Mayrick 2006
INTERANL CONTROLS…..INTERANL CONTROLS…..
Other controls
•Acknowledgement of Performance
–A person performing data processing
operations should acknowledge their
activities by means of signatures, initials ,
rubber stamps.
•Budgeting
–Is a quantitative plan of action
–Budgets can be compared with actual turn
and differences investigated

@Sako Mayrick 2006@Sako Mayrick 2006
AUDIT TESTINGAUDIT TESTING
•WALK THROUGH TESTS
–An auditor must record the accounting system and its associated internal
controls
–When the record has been prepared in the previous year or earlier or when it
has been prepared by the staff of the client, it is necessary for the auditor to be
sure that the record correctly describes the system as it exists and is operated.
To test the correctness of the description, the auditor takes a few transactions
of each type. This means tracing the transaction from its initiation to the entry
in the books of account, looking at all documents and records produced, the
manner of preparation and the internal controls applied. The objective is not to
test the effectiveness of the system but that the auditor has a correct
description and understanding of the system.
•The walk through test should also be applied
–In situation where the auditor has not obtained his description of the system
from a personal investigation of the system by the questioning operating staff
and examining documents and records
–At the final audit when he needs to review the system form the date of the
interim completion of the year end . She must determine if the system has
changed and walk through checks will achieve this.
•COMPLIANCE TESTS
–Those tests which seek to provide audit evidence that provides audit evidence
that internal control procedures are being applied as prescribed.

@Sako Mayrick 2006@Sako Mayrick 2006
COMPLIANCE TESTSCOMPLIANCE TESTS
•The first stage is preliminary review of the effectiveness of the
system by using an internal control evaluation questionnaires which
contains key questions.
•E.g. can wage be paid to piecework personnel for work not done?
–The system would then be inspected o see if it included procedures to
ensure that this could not happen.
–If the system appears to be defective or weak then the auditor may
need to abandon the system approach and apply substantive test. If the
system is effective, then the next stage is for the auditor to obtain
evidence that the system is effective , then the next stage is for the
auditor to obtain evidence that the system is applied as his description
at all times. This evidence is obtained by examining a sample of the
transactions to determine if each has been treated as required by the
system.
•NOTE:
•Compliance tests is the application of the system that is being
tested not the transactions although the testing is through the
medium of the transactions
•If the discovery is made that the system was not complied with in
any particular, then;
–She may need to revise his system description and re-appraise its
effectiveness
–She will need to determine if the failure of compliance was an isolated
instance or was symptomatic.

@Sako Mayrick 2006@Sako Mayrick 2006
SUBSTANTIVE TESTSSUBSTANTIVE TESTS
•Are those tests (other than compliance tests) of transactions and
balances and other procedures such as analytical review, which
seek to provide evidence as to the completeness , accuracy and
validity of the information contained in the accounting records or the
financial statements.
•Substantive test is any test which seeks direct evidence of the
correct treatment of a transaction, a balance , an asset , a liability,
or any item in the books or accounts.
•Examples
–Transactions
–A balance e.g. deposit account
–Analytical review
–Completeness of information
–Accuracy of information
–Validity of information

@Sako Mayrick 2006@Sako Mayrick 2006
TECHNIQUES OF AUDIT TESTINGTECHNIQUES OF AUDIT TESTING
–Inspection
–Observation
–Inquiry
–Computation
•ROTATIONAL TESTS
–Rotation of audit emphasis – the auditor performs a
systems audit on all areas of the client’s business
every year but each year he select one are ( wages,
sales, stock control, purchasing) for special in-depth
testing
–Visit rotation – where the client has numerous
branches , factories, locations, etc, it may be
impractical to visit them all each year.

@Sako Mayrick 2006@Sako Mayrick 2006
AUDIT WORKING PAPERSAUDIT WORKING PAPERS
•The audit work must be adequately planned, controlled and recorded.
•The purpose of working papers
–To control current year’s work, the record of work done is essential for the
audit clerk, supervisor, manager and partner and other person who will
review the work done.
–To form the basis for the plan of the audit of the following year
–Evidence of the work carried out.
•The working papers should contain
–Information and documents which are continuing importance to each annual
audit
–Audit planning and control information
–Details of the client’s system and records with the auditor’s evaluation of
them
–Schedules in support of the accounts additional to, or summarizing the detail
in the client’s Books.
–Details of the audit work carried out, notes of queries raised with action taken
thereon and the conclusion drawn by the audit staff concerned
–Evidence that the wok of the audit staff has been properly reviewed by more
senior people
–A summary of significant points affecting the financial statements and the
audit report ( e.g. the guarantee above), showing how these points were dealt
with

@Sako Mayrick 2006@Sako Mayrick 2006
FORMS OF WORKING PAPERSFORMS OF WORKING PAPERS
•The Permanent file
–The permanent file usually contains documents and matters continuing
importance which will be required for more than one audit
•Statutory materials- governing conduct, accounts and audit of the enterprise
•The rules and regulations of the enterprise , example article and
memorandum of association
•Copies of documents of continuing importance such as letter of
engagement, minutes of appointment of auditor; trade, license, and royalty
agreements entered into by client, debenture notes, guarantees and
indemnities entered into.
•An organization chart; the principal dept and subdivision thereof with note for
number of peoples involved; and names of responsible officials
•List of books and other records and where they are kept, names , positions,
specimens of signature and initials of persons responsible for books and
documents should also be included. Account codes and classifications
should also be held
•An outline history of organization – eg. Share capital , reserves, provisions,
prospectuses, ; acquisition of subsidiaries and businesses. There should
also be a record of important account ratios
•List of accounting matters of importance. E.g. accounting policies for stock,
work in progress, depreciation,
–Notes of interviews and correspondence ( internal control matters and all past
letters of weakness)
–Clients’ internal audit and accounting instructions
–List of directors , their shareholdings and service contracts
–List of company’s properties and investments with notes on verification
–A list of company advisors, bankers, solicitors, lawyers
It is important that the permanent file is updated on the occasion of each audit.

@Sako Mayrick 2006@Sako Mayrick 2006
THE WORKING PAPERS……THE WORKING PAPERS……
•The current file
–A copy of accounts being audited, authenticated by director’s signatures
–An index of the file
–A description of the ICS in the form of an ICQ, flowchart, or written description
together with specimen documents
–An audit programme
•A list of work to be carried out by audit staff
•A list with details of tests actually carried out
•The result so the tests and the conclusions drawn from them
•Cross reference to IC record and letter of weakness
•Were rotational testing over a period of years is used , reference to appropriate part of
Permanent File
–A schedule for each items in the profit and Loss Account showing its make up
–Checklist for compliance with statutory disclosure requirements; IAS
–A schedule of each item in the Balance sheet. Each schedule should show;
•The item at the beginning of the year, changes during the year and the balance at the
end
•Details of how its existence , ownership , value and appropriate disclosure have been
verified
•Documents of external verification e.g. bank letter
–A record showing queries raised during the audit and coming forward from
previous years. This record will show how the queries have been dealt with, by
whom ( i.e. audit clerks, supervisor, manager or partner) and if not satisfactory
answered, the treatment adopted which may be a qualification of the auditor’s
report, and contingent liabilities.

@Sako Mayrick 2006@Sako Mayrick 2006
Current File cont….Current File cont….
–Schedule of important statistics. These will include quantitative
matters such as the output, sales composition, employment, and
also accounting ratios such as capital employed , gross and net
profit rations and liquidity rations. Comparison of these statistics
with those of previous years( note din the Permanent File) must
be made to determine significant variation. The variations need
to be investigated and explanation sought
–A record or abstract from the minutes of
•The company
•The directors
•Any internal committee of the company whose deliberations are
important to the auditor . E.g. internal audit committee, a budget
committee, a capital expenditure committee.
–Copies of letters to the client setting out internal control
weaknesses
–Letters of Representation- these are letters written by the
Directors ( or equivalent in organization other than companies)
to the auditors, being written confirmation of information given or
opinions expressed by the directors on such matters as the
value of stock, value of properties, uncertain obligations

@Sako Mayrick 2006@Sako Mayrick 2006
Working papers cont…..Working papers cont…..
•Both the permanent and current files contain
material on IC. It a matter of opinion where this
data is filed; some audit firms adopt a filing
system whereby IC matters are stored in a third
file, the Internal Control File.
•Throughout the current file , reference should be
as to how each item is used as audit evidence.
Conversely , for each type of transactions and
balance , the nature of the audit evidence
supporting it should be demonstrated. The
evidence may be from internal control reliance ,
substantive testing or from analytical review or
form a combination of these sources.

@Sako Mayrick 2006@Sako Mayrick 2006
INTERNAL CONTROL QUESTIONNAIRESINTERNAL CONTROL QUESTIONNAIRES
•Functions:
–A method of ascertainment of the system
–Enabling the auditor to review and assess
the adequacy of the system
–Enables the auditor to identify the areas of
weakness
–Enabling the auditor to design a series of
tests. In effect this means enabling the auditor
to draw up his audit programme
–Enables the auditors staff to familiarize
themselves with the system quickly and
comprehensively.

@Sako Mayrick 2006@Sako Mayrick 2006
I.C.Q CONT….I.C.Q CONT….
•Advantages
–The use of standardized I.C.Q. ensures that
all the important questions are asked and the
important characteristics of a system are
brought out
–The I.C.Q. is a comprehensive , all in ,
inclusive method of ascertaining , recording g,
and evaluating a system of IC
An example of a part of I.C.Q includes separate
columns for ; questions, Answers- if possible
Yes/N; assessment of IC strength; Disposal of
weakness and cress reference to audit
programmme

@Sako Mayrick 2006@Sako Mayrick 2006
INTERNAL CONTROL EVALUATION QUESTIONNAIRESINTERNAL CONTROL EVALUATION QUESTIONNAIRES
•Some audit firms uses ICQ's exclusively, others
prefer to ascertain the system by questioning
staff and recording the system by means of
flowcharts or by written notes.
•I.C.E.Q is a standardized set of questions which
has the advantage, like the I.CQ. , of ensuring
all right questions are asked and the strength
and weakness of a system are brought about.
•The basic questions in an I.C.E.Q are called
control questions, an example from the sale
area is “ can sales be invoiced but not recorded
in the books? Each control questions requires
an answer Yes or No.

@Sako Mayrick 2006@Sako Mayrick 2006
FLOWCHARTSFLOWCHARTS
•Flowcharts are a relatively new method of recording internal control system
form the auditor's standpoint
•Advantages
–It enable the system to be recorded in such a way that it can be understood by
•New staff coming to the audit
•Supervisors, managers, and partners
•Client staff, who can have weaknesses pointed out more easily
–The overall picture of the firm can be seen , and in particular the auditor can be
assured he has the whole picture as slow lines going nowhere can be easily
spotted
–Flowcharting is a consistent system of recording
–Flowcharting is a disciplined method of recording
–Flowcharting highlights relationship between different pats of a system
–Weaknesses are easier to spot
–Flowcharts are permanent record but are easily updated
–In complex cases, flowcharting is the only way to gain an understanding of the
system
•Disadvantages
–Time consuming
–Can become a fetish i.e. ends in themselves
–They are of little use in systems 9 e.g. small concerns) where internal control is
ineffective or very simple
–Numerous symbol systems abound which can cause confusion

@Sako Mayrick 2006@Sako Mayrick 2006
FLOWCHARTING… CONT….FLOWCHARTING… CONT….
The objective of a flowchart is that it is complete in itself and can be read and
understood quickly and comprehensibly.
The following are important in preparing flowcharting
•An organization chart is an essential concomitant
•Simplicity and clarity are fundamental
•It must not be congested
•Use only horizontal and vertical lines
•Chart the flow of goods and documents on separate charts
•Serial number the operations
•Cross reference to ICQ, ICEQ, Audit program , letter of weakness
•It must show
–Initiation for each document and operation
–Sequence of all operational on documents and all copies of documents ,
especially operations of control, inspecting, checking, comparing and approving
–To ultimate destination
–Sections or individuals who perform the operations
–Use chart symbols only , if possible
–Specimens of documents should be attached and cross referenced

@Sako Mayrick 2006@Sako Mayrick 2006
AUDIT PROGRAMMEAUDIT PROGRAMME
•It is simply a list of work an auditor does on the occasion
of his audit.
–Example: “vouch three months’” There would be columns for the
periods selected and of the initial of the audit clerk and the date
of the test.
•Advantages
–They provide a clear se of instructions on the work to be carried
out
–They provide a clear record of the work carried out and by whom
–Work can be reviewed by supervisors, managers
–Work will not be duplicated
–No important work will be overlooked
–Evidence of work done is available for use in defense actions for
negligence
•Disadvantages
–Work may become mechanical
–Parts may be executed without regard to whole system.

@Sako Mayrick 2006@Sako Mayrick 2006
ACCOUNTANT’S LIENACCOUNTANT’S LIEN
•Accountant’s are considered to have a
particular lien over an y books of account,
files and papers which their clients have
delivered to them and also over any
documents which have come into their
possession in the course of their ordinary
professional work
–In particular the lien gives the possessor the
right to retain goods until a debt arising in
connection with those goods is paid
•A leading case is Woodworth Vs Conroy 1976

@Sako Mayrick 2006@Sako Mayrick 2006
REPORT TO MANAGEMENTREPORT TO MANAGEMENT
•The ISA on IC indicates that the auditor should
report to his client's management on all
significant weaknesses that they came across
in the course of his audit whilst pointing out that
there may be other weaknesses which were not
discovered.
•The title to the letter to management varies from
firm to firm , such titles include ; letter of
weakness, management letter, post audit
letter, letter of comment, letter of
recommendation, internal control letter,
follow –up letter

@Sako Mayrick 2006@Sako Mayrick 2006
REPORTING TO MGT CONT…..REPORTING TO MGT CONT…..
•Purposes
–To enable the auditor to give his comments on the accounting
records, systems and controls
–To enable the auditor to bring to the attention of mgt areas of
weakness that might lead to material errors.
–In some audit engagements there is a requirement to make a
report. These includes local authorities, stock exchange firms
–To enable the management to be right matters that may
otherwise have led to audit report qualification
–To enable the auditor to point out areas where management
could be more efficient or more effective or where economies
could be made or resources used more effectively. E.g
unnecessarily large balances may occur occasionally in the
bank.

@Sako Mayrick 2006@Sako Mayrick 2006
LETTER OF WEAKNESSLETTER OF WEAKNESS
•Procedures
–As weaknesses or breakdowns are identified they
should be discussed in detail with the operating staff
included and / or with more senior management. It is
vital that the auditor has his facts right
–The report should be written, and then discussed with
addressee
–The report should then be sent
–An acknowledgement should be obtained form
management stating what they propose to do about
the weaknesses
–The weakness should be followed up on the next visit.

@Sako Mayrick 2006@Sako Mayrick 2006
LETTER OF WEAKNESS CONTENTSLETTER OF WEAKNESS CONTENTS
•The list of weaknesses in the structure of accounting
systems and internal controls
•A list of deficiencies in operation of the records or
controls.
•Unsuitable accounting policies and practices
•Non-compliance with accounting standards and
legislation
•Explanations of the risks arising from each weakness
•Comments on inefficiencies as well as weaknesses
•Recommendations for improvement
The first to third items may require the auditor to qualify the
report to the MEMBERS as required by statutes ( e.g.
company’s Act) on proper accounting records,
accounting requirements and true and fair view and
professional duty

@Sako Mayrick 2006@Sako Mayrick 2006
LETTER OF WEAKNESS - FORMATLETTER OF WEAKNESS - FORMAT
•An opening paragraph explaining the purpose of
the report
•A note that it contains only those matters which
came to the auditor’s ATTENTION and cannot
be a comprehensive list of all weaknesses
•If required that report may be tiered by having
major weaknesses separated from minor
weaknesses
•A request that management should reply to
each point made

@Sako Mayrick 2006@Sako Mayrick 2006
TRACING AND VOUCHINGTRACING AND VOUCHING
•Vouching in the examination of documents is the
direction of the search for audit evidence. In
vouching , an item of financial information is
selected from an account( e.g. , the posting of a a
sales invoice in a customer’s master file record),
then the auditor goes backward through the
accounting and control system to find the source
documentation that supports the item selected.
The auditor finds the journal entry or data input
list, the sales summary , the sales invoice copy
and the shipping documents, and finally , the
customer’s purchase order. Vouching does not
provide evidence to show whether all events were
recorded . This can be shown by tracing

@Sako Mayrick 2006@Sako Mayrick 2006
VOUCHING AND TRACING…VOUCHING AND TRACING…
•Tracing in the examination of documents
takes the opposite direction from vouching .
When an auditor performs tracing, he or she
selects sample items of basic source
documents and proceeds forward through the
accounting and control system to find the final
recording of the accounting transactions. For
example, samples of payroll payments are
traced to cost and expense accounts , sales
invoices to sales accounts , cash receipts to
accounts receivable subsidiary accounts, and
cash disbursements to accounts payable
subsidiary accounts.

@Sako Mayrick 2006@Sako Mayrick 2006
AUDIT WORKING PAPERSAUDIT WORKING PAPERS
•Working papers are the auditors’ record of
compliance with ISAs
•They should contain support for the decisions
regarding procedures necessary in the
circumstances and all other important
decisions made during the audit.
•Though the auditor is the legal owner of the
working papers professional ethics require
that they not be transferred without consent
of the client because of the confidential
information recorded in them.

@Sako Mayrick 2006@Sako Mayrick 2006
TYPES OF WORKING PAPERSTYPES OF WORKING PAPERS
•There are three categories
–The permanent file papers
–Audit administrative papers
–Audit evidence papers
•The last two categories are often called
the current file because they relate to
the audit of one year.

@Sako Mayrick 2006@Sako Mayrick 2006
PERMANENT FILE PAPERSPERMANENT FILE PAPERS
•The permanent file contains information of
continuing interest over many years’ audits of
the same client. This file can be used year
after year, while each year’s current audit
evidence papers are filed away after they
have served their purpose.
•The documents include
–Copies or excerpts of the corporate charter and
bylaws, or partnership agreements;
–Copies or excerpts of continuing contracts, such
as leases, bond indentures, and royalty
agreements;

@Sako Mayrick 2006@Sako Mayrick 2006
PERMANENT FILE CONT….PERMANENT FILE CONT….
–A History of the company,its products, and its
markets
–Copies of excerpts of stock holders, directors, and
committee minutes on matters of lasting interest
–Continuing schedule of accounts whose balances
are carried forward for several years, such as
owner's equity, retained earnings
–Copies of prior years’ financial statements and
audit reports may also be included.
The permanent file is a ready source of information
for familiarization with the clients by new
personnel on the engagement.

@Sako Mayrick 2006@Sako Mayrick 2006
AUDIT PLANNING AND ADMINISTRATIVE WORKING PAPERSAUDIT PLANNING AND ADMINISTRATIVE WORKING PAPERS
•The following items are usually among
the administrative working papers in
each year’s current working paper file
–Engagement letter
–Staff assignment
–Clients organization chart
–Memoranda of conferences with
management
–Preliminary analytical review notes
–Initial risk assessment notes
–Initial materiality assessment notes

@Sako Mayrick 2006@Sako Mayrick 2006
CURRENT PAPER FILE CONT….CURRENT PAPER FILE CONT….
–Engagement planning memorandum
–Audit engagement time budget
–Internal control questionnaire and control
analyses
–Management controls questionnaire
–Computer control questionnaire
–Internal control system flow chart
–Audit program

@Sako Mayrick 2006@Sako Mayrick 2006
ISA REQUIRES AUDIT WORKING PAPERS TO EXHIBITISA REQUIRES AUDIT WORKING PAPERS TO EXHIBIT
•The client’s accounting records agree with or
reconcile with the financial statement s
•The work was adequately planned and
supervised
•A sufficient understanding of control structure
obtained
•Sufficient competent evidential matters was
obtained as a reasonable basis for an audit
opinion
•Should be able to sufficiently show that the
financial statements conforms with IFRS and
that the disclosure are adequate.

@Sako Mayrick 2006@Sako Mayrick 2006
WORKING PAPERS ARRANGEMENT AND INDEXINGWORKING PAPERS ARRANGEMENT AND INDEXING
•Indexing- each paper is given an index
number, like a book page number
•Cross indexing- numbers or
memoranda related to to other papers
carry the index of the papers so that
connections can be followed
•Heading – each paper is titled with the
name of the company , audit period and
descriptive title of contents of the
working paper

@Sako Mayrick 2006@Sako Mayrick 2006
WORKING PAPERS ARRANGEMENT AND INDEXINGWORKING PAPERS ARRANGEMENT AND INDEXING
•Signatures and initials the auditor who
performs the work and the supervisor who
reviews it must sign the papers so personnel
can be identified
•Dates of audit work the date of performance
and review are recorded on the working
papers so reviewers of papers can tell when
the work work preformed
•Tick marks and explanations- “tick marks are
auditors\s shorthand for abbreviating
comments about work performed

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