Admas University

Meskel campus

Accounting and Finance Level IV

 Learning guide
Unit of Competence: Perform auditing and reporting
Module Title: Performing auditing and reporting
TTLM Code : LSA AFC3 M12 1221
Lo1:- . Participate in planning an audit
LO2: Participate in conducting an audit

LO3: Report and follow up audit outcomes

 Occupational Standard: Accounting and Finance Level IV
Unit Title Perform auditing and reporting
Unit Code LSA ACF4 12 1221
Unit Descriptor This unit covers the knowledge, skills and attitudes required to
establish Audit in planning and implementing general standards of
Auditing procedures.

Elements Performance Criteria

1.2. Participate in 1.1 Roles and responsibilities for participating in the audit are
planning an audit Identified based on work requirements.
1.2 Purpose and scope of audit is identified according to plan.
1.3 Information and resources required to conduct audit are identified
and located based on work requirements.
3.4. Participate in 4.1. Information is collected that is adequate, representative and
conducting an meets audit requirements based on audit plan
audit 4.2. Information is analyzed to assess adequacy of performance
against program based on principles.
4.3. Records are reviewed to confirm compliance with program
according to work procedure.
4.4. Compliance with the program is observed within workplace.
4.5. Areas requiring corrective action are identified based on
work requirements.
5.6. Report and 3.1 Situations presenting an imminent and serious risk to program
follow up audit objectives are identified and reported in accordance with
outcomes reporting requirements.
3.2 Audit reports are prepared to address audit scope requirements
 based on results.
3.3 Results of audit are communicated according to audit purpose
and requirements
3.4 A corrective action plan is developed based on work
requirements.

Variable Range
Occupational Health Keep documents safely
and safety
Tools and -Stationary materials,
Equipment -Financial documents,
-Financial formats.
Types and sources of -Income statements and different financial records,
information -Previous records.
Lo1:- . Participate in planning an audit
Contents
\

I. Overview of Auditing
1.1 : Introduction
1.2 : Meaning and Nature of
Auditing 1.3: Need for Auditing
1.4: Distinction between Auditing and Accounting
1.5: Types of Audits and Auditors

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 1.1.Introduction:
 The 21st Century is characterized as the
information age and for the very existence of
any organization (business or non business)
dependable information is extremely essential.
 Most information seekers are depends on the
information provided by others.
 Auditors are individuals of professional
competence and integrity who can tell others
whether the financial information on which they
rely constitute a fair and complete picture of
what is really going on.
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 Introduction……….
For instance a decision by a bank to make a loan to a
business is usually based on careful study of the
company’s financial statements along other
information.
What if the financial statements submitted by the
company along with its loan application are not
dependable.
Assume the company overstated its current assets and
annual earnings and omitted its major liabilities.
The end result of making the loan, on the basis of
such misleading information, is likely to be that the
bank may not receive the expected interest income
and may have to write -off the loan as a loss.

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 Introduction……….
 Most economies today are characterized by a
large corporate organizations that have gathered
capital from millions of investors across the
world.
 The shareholders and top management in the
corporate headquarters are remote from the
operations of the company plants and branches and
must rely on financial statements and other reports to
control the company’s resources.
 The millions of individuals who have assigned their
savings insecurities of corporations rely upon
financial statements for assurance that their invested
funds are being used honestly and efficiently.

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 Introduction……….
 Thus good accounting and auditing aid
society in allocating its resources in the most
efficient manner.
 The goal is to allocate our limited capital resources
to the production of those goods and services for
which demand is greatest.
 However, inadequate accounting and
auditing may conceal waste and inefficiency
and thereby prevent our economic resources
from being allocated in rational manner.
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 Introduction……….
 Why auditing? The principal reason for the
existence of auditing profession is to perform the
attest function.
 To attest means to provide opinion as to the fairness
and dependability of financial statements.
 That is the contribution of the independent auditor
to give credibility to financial statements.
 Credibility in this sense means that the financial;
statements can be believed –that is they can be
relied upon by outsiders such as stockholders,
creditors, government and any other interested third
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 Introduction……….
parties.

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 1.2. Meaning and nature of auditing
 Auditing is the accumulation and evaluation of
evidence about information to determine and
report on the degree of correspondence between
the information and established criteria.
 International Federation of Accountants (IFA) and
Other professional Bodies have defined auditing in
several ways. But these definitions are in harmony
with each other in stating the meaning, objective,
and end product of auditing.

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 Meaning………
 International Federation of Accountants (IFA):
 An audit is an independent examination of
financial information of an entity, whether profit-
oriented or not and irrespective of its size or legal
form, when such an examination is connected
with a view to expressing an opinion thereon.
 The American Accounting Association (AAA):
Auditing is a systematic process of objectively
obtaining and evaluating evidence regarding
assertions about economic actions and events
to determine the degree of correspondence
between management assertions and
established criteria and communicating the
results to interested users.
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 Meaning………
 Auditing is a work performed by an auditor to enable
him/her to express an opinion on whether the
financial statements are prepared in all material
respects in accordance with generally accepted
accounting principles (GAAP) or IFRS.
 An important point that should be noted here
is that an auditor doesn’t certify or guarantee
that the financial statements are correct.
She or he just gives an opinion as to whether the
financial statements are free from material
misstatements.
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 Definition of Auditing
Auditing is a systematic process
of objectively obtaining and
evaluating evidence regarding
Financial Statements assertions about economic actions
(including footnotes) and events to ascertain the degree
of correspondence between the
assertions and established criteria GAAP/IFRS
and communicating the results to
interested users. Auditor's Report/
Persons who rely on Other Reports
the financial reports
•Creditors
Source: American Accounting Association Committee on
•Investors Basic Auditing Concepts. 1973. A Statement of Basic
Auditing Concepts, American Accounting Association
(Sarasota, FL).
 Essential Elements of the definition
1. Exercise/ work performed/
Examination(objectively obtaining
and evaluating evidence )
2. Of financial information/ assertions about
economic actions and events/ financial
statements
3. To express an opinion (reasonable
assurance) on the fairness of the financial
assertions , whether they are prepared and
reporting to the concerned parties
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 Meaning………
 Thus an auditor only gives a reasonable assurance
that the financial statements are free from material
misstatements.
 An auditor may fail to detect even material
misstatements because of two reasons: These are:
1- An audit is conducted based on a
sample(detection risk)
2- Auditors rely on internal control systems of
the auditee to determine the amount of work they
have to perform and the type and quantity of
evidence to be gathered.
However, internal control systems have their own
inherent limitations(Inherent risk and control risk)
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 Meaning………
Features of Auditing
1. Systematic Approach: Auditing is purposeful and logical
and it is based on the disciplines of a structured
approach to decision making. It is not haphazard,
unplanned or unstructured. Based on prescribed
methods
2. Obtaining and evaluating evidence: auditing
involves a process of obtaining and evaluating evidence
that ultimately guides the auditor’s decision. Evidence is
any information used by the auditor’s to determine
whether the information being audited is stated in
accordance with the established criteria.
3. Assertions about Economic actions and events: In
any audit engagement, an auditor is given financial
statements and other disclosures by management.
Through these reports the auditor obtains
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 Meaning………
managements’ explicit assertions about economic
events.

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 Meaning………
4. Ascertain the degree of correspondence between the
assertions and established criteria: The purpose of
obtaining and evaluating evidence is to ascertain the degree of
correspondence between the assertions and established
criteria.
5.Established criteria: In auditing the auditor checks
if financial statements are prepared in accordance
with some established and accepted criteria or
standard. The criteria usually used are called Generally
Accepted Accounting principles(GAAP).
6. Communicating the results: Auditors will
ultimately communicate their findings to interested
users through their final audit report.
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 1.3. Need for Audit
• An important question that might be
asked is “why do organizations require
an audit?”
• Dependable financial information is
essential to the very existence of our society.
• There are a number of advantages in
conducting auditing. The most significant of
these are:

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 Need for Audit……
1. A Tool for control: The first advantage of auditing is that it
serves as a tool to control over those who handle the
resources belonging to others.
Audit seeks to ensure that the officials use the public
funds properly.
It has been a function of auditing to act as a check on
those who handle the funds belonging to others.
The mere fact that there would be an audit of accounts
acts as a check on those using the funds and makes them
cautious.
More over, it acts as a moral check on employees, since
they fear that the auditor would discover any errors or
frauds.
 Thus, it acts as a means of protecting against misuse
of funds and reduces the possibility of errors and
frauds.
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 Need for Audit…….
2. Enhancing credibility of information: Another important
advantage of auditing is that it enhances the credibility of
economic information.
It is obvious that one would place greater reliance on
financial statement if it has been audited than would be
the case otherwise.
That is auditors lend credibility to the financial
statements.
This is because the auditor is an independent and
objective expert who has no any stake in the management
of the enterprise under audit.
Auditors in their audit report express an opinion that the
company’s presentation of financial position, results of
operations and changes in financial position is in accordance
with generally accepted accounting principles or some other
disclosed basis of accounting.
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 Need for Audit………
3. Improving economy and efficiency: In any type
of audit engagement, the auditor reviews the
activities of the enterprise and often forwards
suggestions to improve the efficiency of various
activities of the enterprise.
 Performance audit specifically is designed to
review the operations and activities.
 So that wastages and losses can be minimized,
weaknesses in the system can be identified and
overcome and controls can be strengthened.
 In general auditing enhances efficient utilization of
resources.
 REDUCED EXPENDITURE
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 Need for Audit………
4. Regulatory requirements make auditing mandatory:
In many countries, it is a must for business organizations
to file their audited financial statements to renew their
licenses and permits.
Some types of audits are conducted for certain special
purposes.
 Income tax laws of many countries provide for audit of
accounts of large businesses, primarily as an aid to the tax
authorities.
 Some organizations are legally required to get their financial
statements audited.
 For instance, the 1960 Commercial code of Ethiopia
requires any share company in Ethiopia to get books of
accounts audited annually so as to renew their license.

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 Need for Audit………
Though auditing has the above advantages along with
others, auditing has its own limitations.
Some of these limitations are:
1. Its opinion is based on sampling. i.e... It
does not look at 100% of transactions
2. It can not predict future events
3. It may fail to detect fraudulent transactions.
4. Evidence obtained is persuasive(convencing),
rather than conclusive(definite)
5. Provides reasonable assurance, not absolute
assurance
6. The inherent limitations in accounting still
exists in auditing
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 1.4. Distinction between Auditing and
Accounting
• Many financial statement users and members of the
general public confuse auditing with accounting.
• The confusion arises because most auditing is concerned
with accounting information and many auditors have
considerable expertise in accounting matters.
• The title ACCA or Certified Public Accountants (CPA)
which is given to individuals performing an audit
function has increased the degree of confusion.
• Auditing begins with the end results of accounting.

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 Auditing vs. Accounting
The comparison of Accounting and Auditing
Basis of comparison Accounting Auditing

Primary responsibility Preparation and presentation Audit of financial statements

of financial statement
Criteria in discharging IFRS ISA (International Standards
responsibilities on Auditing)

Its nature Constructive Analytical

End product Financial statements Audit reports

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 1.5. Types of Audits and Auditors
Types of Audits: There are different types of audits
conducted by different types of auditors.
Such difference is based on the scope and
objective of the audit and employment of the
auditors.
Auditors perform different types of audits.
Mainly there are four types of audits:
1. Financial statement audit,
2. Operational/performance audit,
3. compliance audit and
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4. forensic audit.

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 Types of Audits and Auditors
1. Financial statement audit:
This type of audit is conducted to determine whether the overall
financial statements such as income statement, balance sheet,
statements of retained earnings and cash flow statements are
stated in conformity with generally accepted accounting
principles
• The assumption underlying an audit of financial statements is that
different groups will use these statements for different purposes.
• Therefore, the contribution of an independent auditor is to give
credibility to financial statements.
• Credibility means that the financial statements can be
believed; that is they can be relied upon by outsiders.
• Audited financial statements are now the accepted means by which
business corporations report their operating results and the financial
position.
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 Types of Audits and
Auditors
2. Operational audit: An operational audit is a review of any
part of an organization’s operating procedures and
methods for the purpose of evaluating efficiency and
effectiveness.
At the completion of an operational audit,
recommendations to the management for improving
operations are normally expected.
This audit is designed to measure the performance of an
organization, which can be evaluated in terms of
efficiency and effectiveness.
This type of audit as it aims on measuring the performance
of the organization is some times called performance audit.
study to streamline(make something more efficient)
operations: It is a systematic check or assessment of the
efficiency or effectiveness of a company's business
operations.
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 Types of Audits and
Auditors
3. Compliance Audit: This type of audit helps
to determine whether the auditee is following
specific procedures or rules set out by some
higher authority such as management,
government, board of directors etc.
The performance of compliance audit is
dependent upon the existence of verifiable data
and of recognized criteria or standards established
by an authoritative body. A familiar example is the
audit of an income tax return by an auditor of
the Inland Revenue Authority (IRA).
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 Types of Audits and
Auditors
4. Forensic audit: A forensic audit’s purpose is the
detection of a wide variety of fraudulent
activities. Some of the examples where forensic
audit might be conducted include:
• Business or employee fraud
• criminal investigations
• shareholders and partners disputes
• Business economic losses
• Matrimonial disputes.
• Typically, fraud auditors have earned the Certified
Fraud Examiner (CFE) certification, which is
governed by the Association of Certified Fraud
Examiners (ACFE).
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 Types of Audits and
Types
types
Auditors
of Auditors :There are three most widely known
of auditor: these are Independent auditors,
Government auditors (including tax auditors) and internal
auditors.
1. Independent Auditors: An independent auditor, also
known as Chartered Certified Accountant (ACCA) or
Certified Public Accountants (CPA) i.e the external
auditor has no connection to the organization being
audited.
 Auditor’s primary responsibility is the performance of
the audit function on published financial statements of
the companies for a given period of time.
 The CCA or CPA certificate is not only a license to practice
but also a symbol of technical competence.
 Being a CCA or CPA involves passing rigorous
examinations, obtaining practical experience and maintaining
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 Types of Audits and
competence through continuing professional education
Auditors

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 Types of Audits and
• Auditors
2. Internal Auditors: These are auditors employed
individual companies and these are the employees of
by
the
organization. Internal auditors are often certified as a
Certified Internal Auditor (CIA) or a Certified Information
Systems Auditor (CISA).
A principal goal of the internal auditors is to investigate and
appraise the effectiveness with which the various
organizational units of the company are carrying out their
assigned functions. These auditors provide much attention to
the study and evaluation of both accounting and
administrative controls.
 A large part of the work of the internal auditor consists of
operational audits: however, they may conduct compliance audit
as well.
 To operate effectively internal auditors must be independent
of the line functions in an organization.
 How ever, they can not be independent of the entity as long as
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 Types of Audits and
an employer-employee relationship exists.
Auditors

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 Comparison of internal and external auditor
Internal Auditor External auditor

An employee of an organization An independent professional service provider

Serves management and the board of Serves third parties who require audited
directors financial information
Reviews all operations and controls the Reviews and reports to the board of directors
company for accuracy, integrity and or shareholders about the fairness of financial
efficiency statements prepared by management.
Directly concerned with the prevention of Incidentally concerned with the prevention of
fraud in the company’s operations fraud.
Independent of the activities audited but able Independent of management and the board of
to respond to the needs of the management. directors.
Reviews are conducted periodically in
Reviews activities continually conjunction with the certification of financial
statements
Reports on a continual basis to management Reports annually to the board of directors or
and the audit committee
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shareholders.
 Types of Audits and Auditors
3. Government Auditors: These are auditors employed
by federal, regional or local government agencies.
At the federal level, the three primary agencies are the
Office of the Auditor General (OAG), The Audit Service
Corporation, and The Federal Inland Revenue Authority.
The Office of the Auditor General (OAG) is a federal
organization headed by the Auditor general.
This office is responsible for conducting financial
statements audit, compliance audit and operational
audit of various federal government offices, before it is
submitted to the other government authorities like the
House of the peoples’ representatives.
Of course, an increasing portion of the OAG’s audit
efforts has been devoted to evaluate the operational
efficiency
 a8/ effectiveness of various government programs.
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n202d
0
II. Overview of AUDITING STANDARDS
1. GAAS (in brief)
2. ISA (in brief)
GAAS (for briefing)
Overview of Financial Statement Auditing
 Existence or occurrence
 Rights and obligations-
 Completeness
 Valuation or allocation
 Presentation and
disclosure
Overview of the Financial Statement Audit Process
ISA (International Standards on Auditing)

• Issued by the IAASB for the Auditors

being ACCA or related
• They are referred in the study guide for F8
Audit and Assurance study text (to be used
as the text book)

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 Chapter Two
Audit Processes and Approaches
1. Auditing and Assurance Standards
2. Acceptance of Audit Engagements-entry meeting
3. Understanding of the Environment and the Client
4. Audit Planning, Risk Assessments and Materiality
5. Review of Internal Control System – Control Tests
6. Obtaining Audit Evidence- Substantive Procedures
to examine accounts in the financial Statements
7. Organize and maintain working papers
8. Audit Review and Finalization
9. Conduct exit conference and issue final audit report
These auditing topics require advanced/high-level perspectives of learning up next!

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 1. Auditing and Assurance Standards
International Auditing and Assurance Standards Board (IAASB)
IAASB Pronouncements
International Standards on Auditing To be applied in the audit of historical financial
(ISAs) information
International Standards on Review To be applied in the review of historical financial
Engagements (ISREs) information
International Standards on Assurance To be applied in assurance engagements dealing
Engagements (ISAEs) with subject matters other than historical financial
information
International Standards on To be applied to compilation engagements,
Related Services (ISRSs) engagements to apply agreed-upon procedures
to information and other
related services engagements as specified by the
IAASB
International Standards on To be applied for all services falling under
Quality Control the IAASB's
(ISQCs) engagement standards (ISAs, ISREs, ISAEs, ISRSs)
International Auditing Practice Notes Provide practical assistance to auditors
(IAPNs)
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 2. Acceptance of Audit Engagements
• The ACCA's Code of ethics and conduct sets
out the five fundamental principles of
professional ethics and provides a conceptual
framework for applying them.
– integrity,
– Objectivity and independence,
– professional competence and due care,
– confidentiality and
– Professional behavior.
Independence threats Vs safeguards
Confidentiality Vs public interest
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3. Understanding of the Client and its Environment

 Obtain the legal stipulations in which the client is

working.
 Consider political, cultural and social matters in the
business environments of the client
 Understand the technology applied by the client
 Understand the economic conditions
 Review and understand the business nature and
operating style of the client.
– The auditor is required to obtain an understanding of
the entity and its environment in order to be able to
assess the risks of material misstatements.
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4. Audit Planning, Risk Assessments and Materiality
• Auditors are required to carry out the audit with an attitude
of professional skepticism, exercise professional judgement
and comply with ethical requirements.
• Just adequate planning and supervision.
• Audit risk is the risk that the auditor expresses an
inappropriate audit opinion when the financial statements are
materially misstated. It is a function of the risk of material
misstatement (inherent risk and control risk) and the risk that
the auditors will not detect such misstatement (detection
risk).
• Materiality for the financial statements as a whole and
performance materiality must be calculated at the
planning stages of all audits.
• It is important to document audit work performed
in working papers.
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 5. Review of Internal Control System
To Review and Understand:
I. Control Environment
II. Risk Assessment and Management System
III. Accounting and Other Information System
IV. Control Procedures
V. Monitoring of the System
• The auditors must understand the accounting
system and control environment in order to
determine their audit approach.
• The auditors shall assess the adequacy of the systems
as a basis for the financial statements and shall
identify risks of material misstatements to provide a
basis for designing and performing further audit
procedures.
• Thus, tests of control are applied to evaluate the ICS.
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 6. Obtaining Audit Evidence
• Auditors need to obtain sufficient appropriate audit
evidence to support the financial statement assertions.
Substantive procedures/tests can be used to obtain
that evidence.
• Techniques to obtain audit evidence include
inspection, enquiry and confirmation, observation,
recalculation, reperformance, and analytical
procedures.
• Auditors usually seek evidence from less than 100% of
items of the balance or transaction being tested by
using sampling techniques
• CAATs such as audit software and test data are used
to assist obtaining audit evidence. Use of the work of
an a u d itor's expert, internal auditors and service
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organ.
 Substantive Procedures to examine specific
accounts in the financial
Statements Auditing of common accounts:
I. Cash and Cash Equivalents
II. Trade Debtors and Other Receivables
III. Inventory
IV. Other Current Assets (NCAHFS)
V. PPE
VI. Leaseholds
VII. Intangible, Pre-operational, Investments
VIII. Trade Creditors and Other Payables
IX. Current Tax Payables
X. Borrowings, Leases payables
XI. Owners Equity …
XII. Revenues
XIII. Cost of Sales
XIV. Payroll
XV. Expenses
8/X28V/2I0.20 Capital Commitments
7. Audit review and Finalization

• Subsequent events
• Going concern
• Written representations
• Overall review of
financial statements

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 Audit Report
Auditor’s reports are covered by the following ISAs:
• ISA 700 Forming an opinion and reporting on
financial statements
• ISA 701 Communicating key audit matters in the
independent auditor's report
• ISA 705 Modifications to the opinion in the
independent auditor's report
• ISA 706 Emphasis of matter paragraphs and other
matter paragraphs in the independent auditor's
report
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 Audit Report
Auditor’s reports are covered by the following ISAs:
• ISA 700 Forming an opinion and reporting on
financial statements
• ISA 701 Communicating key audit matters in the
independent auditor's report
• ISA 705 Modifications to the opinion in the
independent auditor's report
• ISA 706 Emphasis of matter paragraphs and other
matter paragraphs in the independent auditor's
report
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 AUDIT RISK CAN DESTROY
THE FIRM AND OUR
PROFESSIONAL CAREER

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Adequate planning and supervision
Audit engagement team
discussion / activity
Aim Before You
oting / enquiry

Thank you for your attention!

So, what do you think, ready to be au