AUDIT I

Auditing Principles and Practices I

CHAPTER ONE

AN OVERVIEW OF AUDITING

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 1.2. NATURE OF AUDITING

1.2.1 Definition of Auditing

GAAs Committee on Basic Auditing concepts

developed a definition of auditing as follows:

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 Cont’d…
Auditing is

A systematic process of objectively / factually obtaining

and evaluating evidence regarding assertions about

economic actions and events to ascertain the degree of
correspondence between those assertions & established
criteria and communicating the results to interested users.

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 Cont’d…
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.
Auditing should be done by a competent, independent

person.
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 Cont’d…
 Thus, auditing encompasses both an investigating
process and a reporting process.
In the audit of an entity's financial statements –Called a
financial statement audit :

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 Cont’d…
Investigation involves a systematic gathering &
evaluation of evidence as a basis for reaching an opinion
about whether assertions made by management in an entity's
financial statements correspond in all material respects
with generally accepted accounting principles (GAAP)
(IFRS).

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Cont’d…
For example, management asserts all inventories exist
represent properties or rights of the entity, reflect all
related transactions for the period, are valued at
appropriate amounts, and are presented properly in the
financial statements.

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Cont’d…

The opinion an auditor express in all audit report

depends on the information content of evidence

gathered during the audit and indicate either the

financial statements are presented fairly in conformity

with GAAP or are not presented fairly.

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1.3. Distinguish B/n Auditing and Accounting
Accounting is the recording, classifying, and summarizing of
economic events for the purpose of providing financial information
used in decision making.
Auditing is determining whether recorded information properly
reflects the economic events that occurred during the accounting
period.
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Accounting is

Provide certain quantitative information that management and others

can use to make decisions.

 Accounting is constructive. It starts with the raw financial data to

process and produce financial statements.

While Auditing is Analytical work that starts with the end product of
accounting to lend credibility and fairness of the measurements.

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Do the Auditors make more money than accountant?
Accountants are of three types.
1.Accountants who is employed in a company or an Enterprise.
2.Accountants who works in one Auditor office permanently.
3.Accountants who works in many auditor offices as part time.
1. Accountants who is employed in a company or an Enterprise.
The salary of the accountant who is working in a company or a business unit
will be based on the turnover, work experience, others factors, etc.
2. Accountants who works in one Auditor office permanently.
The earning of an accountant who works permanently in an Auditor office ( as employee or
paid assistant etc) is based on the clients of that office and his work in that office. The
principal or his superior decides his salary.

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3. Accountants who works in many auditor offices as part time.
The person who works in two or more auditor offices. Here comes the big
picture. He earns from every office. So he will get more income based on
how many files he manage.
1.4 TYPES OF AUDITS AND AUDITORS
1.4.1. TYPES OF AUDITS
Generally there are three types of audits:

1. Financial statement audit

2. Compliance audits, and

3. Operational audit
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 1. Financial Statement Audit
The audit of financial statements ordinarily covers the balance
sheet and the related statements of income, retained
earnings, and cash flows.
The goal is to determine whether these statements have been
prepared in conformity with specified criteria.

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The criteria may be;

International Financial Reporting Standards (IFRS),

Generally accepted accounting principles (GAAP) as in the

USA,
National company laws as in Northern Europe, or The tax code

in South America

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Financial statement audits are normally performed by firms
of certified public accountants (CPA)
 Users of auditors' reports include management, investors,
bankers (creditors) and government agencies and etc.

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 2. Compliance Audits
Is a review the organization’s procedures to determine whether
the organization is following specific procedures, rules or
regulations set out by some higher authority.

The purpose of compliance audit is; Dependent upon the existence

of verifiable data and of recognized criteria or standards, such

as established laws and regulations, and or an organization's

policies and procedures.

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Like an independent financial statement audits, a
compliance audit is designed to determine whether an
entity's financial statements are presented fairly in
accordance with generally accepted accounting
principles or not.
Compliance audits are conducted by either independent
auditors or government auditors.
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 3. Operational Audits
An operational audit involves a systematic review of an
organization's activities, or a part of them, in relation to the
efficient and effective use of resources. Sometimes this type of
audit is referred to as a performance audit or management
audit:

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Effectiveness is a measure of whether an
organization achieves its goals and objectives.
Efficiency shows how well an organization uses its
resources to achieve its goals.

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1.4.2 TYPES OF AUDITORS

1. Internal Auditors,

2. External Auditors and

3. Government Auditors.
One important requirement of each type of auditor is
independence, in some manner form the entity being
audited.
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 1. Internal Auditors
A principal goal is to investigate and evaluate the effectiveness
with which the various organizational units of the company are
carrying out their assigned functions.
The institute of Internal Auditors (IIA) has developed a set of
standards that should be followed by internal auditors and has
established a certification program.

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An individual meeting the certification
requirements set by the IIA, passing a uniform
written examination, can become a certified
internal auditor (CIA).

Like external auditors, internal auditors must be

objective/ and independent.

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The IAs are employees of the company in which they work,
subject to the employer – employee relationship.
Their primary activities are to conduct compliance and
operational audits within their organization.
However, they may also assist the external auditors with the
annual financial statement audit.

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 2. External Auditors
External auditors are often referred to as independent auditors or certified

public accountants.

Such auditors are called "external" because they are not employed by the

organization being audited.

An external auditor conducts financial statement audits.

They may also conduct compliance and operational audits.

An external auditor practice as a sole proprietor or as a member of a CPA

firm.
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 3.Government Auditors

The primary responsibility of the government audit staff is

to perform the audit function for government.
The extent and scope of the audits performed are
determined by legislation in the various jurisdictions.

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 THE NATURE OF EXTERNAL AUDITING IN ETHIOPIA

In Ethiopia audits seem to be done primary on account of

government regulation. For example, NGOS are audited
because the assets of the NGO are deemed a “national
asset,” the use of which is ultimately accountable to the
government of Ethiopia.
Auditing in Ethiopia could be viewed in five main areas.

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1. The office of the auditor general (OAG)
The powers and functions of the office of the OG are circumscribed through the
proclamations that established it, its sphere of activity lies in government audit.
2. The audit service corporation. The duty and functions of this entity involve
mostly commercial audits of commercial and productive enterprises wholly or
partially owned by government.
3. Private audit firms.
4. Ministry of finance audit and inspection.
1. Auditing activity in this area includes audit of ministries and government
departments by MF auditors and inspectors, including tax audit by Inland
Revenue authorities.
5. State corporations’ and enterprises’ auditors.
These are audits performed by internal auditors within enterprise.

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END OF CHAPTER ONE

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