CHAPTER ONE

AN OVERVIEW of AUDITING
 1.1. Nature and Definition of Auditing
• The word audit is derived from the Latin word “Audire” which
means ‘to hear’.
• The available evidence indicates that a system of auditing
existed even in times of ancient civilizations.
• For example:-
• Mesopotamian:- leftovers of commercial transactions in
Mesopotamian reveal tiny marks, dots, ticks, and circles at the
side of the figures which indicates that those figures had been
checked.
• In ancient Egypt:- there were two officials: the one who
record fiscal receipts and other official conduct the audit.
 Cont’d….
• In Greece:- the accounts of public officials were reviewed at
the expiring of their terms of office which has a sense of
auditing concept.
• In United kingdom:- In the UK during the 12th century records
revealed that the existence of a system of accounting and
auditing of the transactions of the state.
• In recent period (1960s-1990s). This period marked an
important development in technological advancement and
the size and complexity of the companies.
– For example:- in the 1970s Auditors involved in evaluating
credibility of financial information and the operations of an
effective capital market.
 Cont’d….
• Since the early 1990s, the audit profession began to take
increased responsibility to detect and report fraud and to
assess & report more clearly in collaboration with corporate
governance matters.
• Currently, the ultimate objective of auditing is to lend
credibility to financial and non-financial information provided
by management in annual reports.
 Definition of Auditing

• The term auditing is defined in different ways.

• Auditing:- is defined as ‘an examination of accounting records
undertaken with a view to establishing whether they correctly
and completely reflect the transactions to which they relate
(Howard, 2000)’.
• Ray (2003) defined as: auditing is concerned with the
verification of accounting data, with determining the accuracy
and reliability of accounting statements and reports. 
 Cont’d….
• Spicer and Peglar also defined auditing as “An examination of
the books, accounts and vouchers of a business’s that enable
the auditor to satisfy himself whether or not the balance
sheet is properly drawn up so as to exhibit a true and correct
view of the state of the business.
 Cont’d…..
• According to Arens, Elder, and Beasley (2012), auditing is
defined as;
• ‘The accumulation and evaluation of evidence about
information to determine and report on the degree of
correspondence between the information and established
criteria.’
– This definition contains several key words that are
currently the main functions of auditors.
a) Information and established criteria:
– To conduct an audit, there must be information in a
provable form and some standards [criteria like GAAP,
IFSR] by which the auditor can evaluate the information.
 Cont’d…
b). Economic Entity: whenever an audit is conducted, the scope
of the auditor's responsibility must be made in a clear form.
• Defining the economic entity and time period is primary
method in conducting an audit work.
• i.e.
– Economic Entity:- corporation, unit of government,
partnership, individual etc.
– Time period:- typically one year, but there is also
audits for a month, a quarter, other time period.
 Cont’d….
• C). Accumulating and evaluating evidence:
– Evidence is defined as any information used by the auditor
to determine whether the information being audited is in
accordance with the established criteria.
– Evidence takes different forms;
• Oral testimony of the auditee (client),
• written communication with outsiders, and
• observations by the auditor that are important to
satisfy the purpose of the audit.
 Cont’d…
• d). Competent, independent person:
– The auditor must be:
– qualified to understand the criteria used and
– competent to know the types and amount of evidence
required to reach at proper conclusion.
– The auditor also must have an independent mental
attitude.
• e). Reporting: is the final audit process. It is the findings of
auditors from the evidence and communicating to the
interested users.
 Some basic features of Auditing
a. Audit is a systematic and scientific examination of books of accounts of
a business;
b. Audit is undertaken by an independent person or body of persons who
are duly qualified for job.
c. Audit is a verification of results shown by profit and loss account and
the state of affairs as shown by balance sheet.
d. Audit is a critical review of the system of accounting and internal
control.
e. Audit is done with the help of vouchers, documents, information and
explanations received from authorities.
f. Auditor has to inspect, compare, check, review, scrutinize vouchers
supporting transactions and examine correspondence, minute books of
shareholders, directors, Memorandum of Association and Articles of
association etc., in order to establish correctness of books of accounts.
 1.2. Difference Between Auditing and Accounting
• The following are the difference;
 1.3 Types of Audit and Auditors
a). Types of Auditors
1. Independent (external auditors): have no connection to firm as an
owner or employee/manager.
 He/she is a person licensed by the state to practice public accounting as a
profession based on having passed the uniform CPA examination and having
met certain education and experience requirements.
 The basic task of independent auditor is to confirm to owners that the
employees are correctly reporting on their financial position and performance.
• The most important of CPAs’ characteristics are;
– a responsibility to serve the public,
– a complex knowledge (evaluating in a multidimensional),
– standards of admission to the profession and a need for public
confidence.
– Credibility of evidences
 Cont’d…..
2. Internal auditor: paid salary as employee of an organization
that is being audited.
 is an appraisal activity established within an organization
to examine and evaluate the effectiveness of internal
control policies and procedures designed to meet all of the
organizations’ objectives.
It investigate the performance and give
recommendation/counsel/ to top management.
Internal auditors represent high level of control that
functions by evaluating the effectiveness of other
internal control policies and procedures.
 Cont’d….
• 3. Government auditors:- A government audit is conducted primarily
to ensure that financial transactions are recorded with proper sanction
and authorization.
– They are paid a salary by government.
• Government auditors examine;
– Whether transactions are correctly recorded and activities
conform to the rules and regulations
– Ensure that public funds are not misused
– Examine the efficiency and effectiveness of selected
projects or program run by government.
 b). Types of Audits

Audits are often viewed as falling into three major types:

1. Operational audits: study some specific unit of an
organization for the purpose of measuring its performance.
operational audit evaluates efficiency and effectiveness of
any part of an organization’s operating procedures and
methods.
• In another way, it is systematic review and evaluation of an
organizational unit to determine whether:
– It is functioning effectively and efficiently,
– It is accomplishing established objectives and goals, and
– It is utilizing all of its resources appropriately.
 Cont’d…
2. Compliance audits: It is conducted to determine whether the
auditee is following specific procedures, rules, or regulations set
by some higher authority.
– Such rules can originate from;
• Internal:- as corporate bylaws, policies, and procedures
or
• External:- as laws and regulations.
– Characteristic of compliance audits are the yes/no aspects
of the evaluation.
 Cont’d….
3. Financial statements audits: to determine whether financial
statements have been prepared in conformity with generally
accepted accounting principles/GAAPS/ or international financial
reporting standards/IFRS/ .

Examples of three types of audit as follows in the next slide;

Cont’d…
 1.4 Economics and Scope of Auditing
• Economics (demand) of Auditing
•  There are many advantages of auditing to the modern society;
– Tool of control over those who harm resources belonging to others.
• It provides protection against misuse of funds and reduces the
possibility of errors and frauds.
– Tool for Enhancing Credibility of Economic Information
• If the auditor expresses a true and fair view of F/st, shareholders
of a company would give greater reliance on it.
– Tool for Improving Economy and Efficiency
– After auditing the operation ( or Mgt), the auditor generally
recommends for improving the economy and efficiency within which
resources are employed.
 Scope of Auditing
• The scope of audit is increasing with the increase in the complexities of
the businesses.
– It covers cost audit, management audit, social audit, technology audit
etc.
• The scope of internal audit activity:- includes examining and evaluating
the policies, procedures and systems to ensure;
– reliability and
– integrity of information in compliance with plans of the firm.
• The scope of external audit:- is aimed at carrying out audit work to form
an opinion as to whether:
a) the accounts are properly kept; and
b) the annual financial statements are prepared in accordance with
the Accounting Standards.
 Thank you!!

End of
Chapter One