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CHAPTER ONE

NATURE AND PURPOSE AUDITING


1.1 ORIGIN OF AUDITING
Auditing came into being as a result of business practice of separating
ownership from control. It was instituted at the early part of 17 th century
when the company form business came into being for trading and other
purposes.
The main essence was to protect the interest of the owner by ensuring
accountability. Auditing is one of the most important and perhaps the best
known service rendered by accountant (Auditors). Audited financial
statements and report prepared by the managers of a company are not
only on interest to the shareholders, but also the employees of the
company, trade creditors, bankers, government and the public (community
and special interest groups).
As a result of separations of ownership and control, it became
necessary for those managers trusted with owners financial and economic
resources to present their financial report (Stewardship report) at the
appropriate period to the interest groups as required by the law. The reports
or statements of economic transactions presented might contain errors,
refuse to disclose fraud and mismanagement, be inadvertently or
deliberately misleading or refuse to disclose relevant information. For these
reason, the owners may hold some reservations, about the credibility of the
managers (stewards) reports.
For the stake holders in the business concern to be satisfied and
even for the interest of the managers to be protected in terms of
establishment and maintenance of their (managers) integrity, it became
necessary to invite an independent party, one who is not involved with
either party to examine the stewardship reports for the purposes of
expressing an independent opinion as to the truth and fairness of the
reports. This competent independent party is the auditor. Regulations
designed to enhance and properly reposition the auditor in the performance
of auditing job is contain in the companies and Allied matters act (CAMA)
1990.
1.2 INTRODUCTION
The international auditing guideline issued by the international federation of
accountant describes the basic principles and procedures governing the
auditors professional responsibilities, which should be complied with
whenever an audit is carried out. The guidelines are issued to facilitate the

understanding objectives an d operating procedures of the international


auditing practices, as approved by the council of the federation of
accountants, (IFAC). The international federation of accountants (IFAC)
came to light on 7th October 1977 courtesy of an agreement signed by sixthree (63) accountancy body representing forty-nine countries. The main
objectives and goals of IFAC as set out in paragraph two (2) of its
constitution are:
-the development and
-advancement of a coordinated worldwide accountancy profession with
harmonized standard. The international auditing practices committee (IAPC)
also empowered and given the responsibility to issue, on behalf of the
council of IFAC, exposure drafts and guidance on auditing. Members of
international auditing practice committee (IAPC) are usually nominated by
the member bodies in the countries selected by the council of international
federation of accountant committee (IFAC). The representative designates
by the member body or bodies to serve on international auditing practice
committee (IAPC) are always members of one of such bodies. Member,
tenure is a five year period. The pioneer members of international auditing
committee were representatives from: Japan, Netherlands, Indian, and
Mexico, Philippines, United Kingdom (UK), Ireland and united states of
America (USA).
International auditing guidelines and local regulatory authorities
Inside each country, local regulations govern, to a great and within an
acceptable standard the practices of auditing of financial information. Such
regulations may be either of a statutory nature or they may be in the form
of statement, or standard issued or set by the regulatory or professional
bodies in the countries concerned. The international auditing practice
committee in most cases issues statements on local authorities auditing
regulations and that of IAPC regulations. This issue of international auditing
guideline is nonetheless intended for international auditing acceptance.
Note that statements issued by international auditing practice committee
(IAPC) are not meant to override the local regulations of countries.

1.3 DEFINITIONS OF AUDITING:


International auditing guideline 3, basic principles governing an audit,
states [paragraphs 3-4] that an audit is the independent examination of
financial information of any entity, whether profit oriented or not and
irrespective of its size, or legal form, when such an examination is
conducted with a view of expressing an opinion there on Compliance with

the basic principles required application of auditing procedures and


reporting practices appropriate to the particular circumstances
Auditing is defined as a process, carried out by an appointed qualified
person or body, whereby the records and financial statements of an entity
are subjected to independent examination in such detail as will enable the
auditor form an opinion as to their truth and fairness of the financial
statements.
1.4 OBJECTIVE OF AUDITING
The objective of an audit of financial statements is to enable the auditor to
express an opinion whether the financial statements are prepared, in all
material respects, in accordance with an identified financial reporting
framework and that the financial statements give a true and fair view
or present fairly, in all material respects the financial results and state of
affairs of the client entity.
Although the auditors opinion enhances the credibility of the financial
statements,

the

user cannot assume that the opinion is an assurance as to the future


viability

of

the

entity nor the efficiency or effectiveness with which management has


conducted

the

affairs of the entity.


The subsidiary objectives are:
-To detect errors and fraud
-To prevent errors and fraud
-To help the client to improve upon his accounting and internal control
systems.

It must be emphasized that audit is not designed to identify errors, detect


fraud

and

discover significant weaknesses in the clients systems but the audit work
should

be

carried out in such a manner as to be able to unearth errors, frauds and


weaknesses

(if

they exist).
1.5 TYPES OF AUDITS
Private Audit and Statutory Audit
A private audit is one undertaken at the instance of an interested party
(e.g. a sole trader) or parties (partners of a partnership), even though
there is no legal obligation that an audit be carried out.
In the case of private audit, the scope of the audit may be determined as
narrowly or as broadly as the client wishes.
A statutory audit arises under the Company law as a result of which it is a
statutory
obligation for the accounts of every limited liability company to be audited
annually
by a professional qualified auditor. Statutory audits have their scope
largely
determined by the governing legislation which the client or the
auditor

has

no

authority to vary in any way. Despite the fact that the appointment of an
auditor

is

statutory requirement, the relationship between the company and the


auditor
governed by contract.

is

External and Internal Audit


External audit is where independent persons are brought in from
outside

an

organization

to

review

the

accounts

prepared

by

management.
Internal audit is where an organization appoints a full time staff to monitor
and report on the running of the companys operations.
Complete Audit, Interim Audit and Continuous Audit
Complete audit applies to smaller concerns where the volume of
transactions and complexity of records do not require the auditors
attendance more than once each year. This visit normally takes place as
soon as the businesss financial year ends and continues until it has been
completed and the audit report signed.
Interim Audit: In the case of larger clients, the auditor will often find it
necessary

to

proceed with the audit on an interim basis in view of the volume of


testing

to

be

undertaken in order to reach an opinion on the reliability of the records.


Interim audits, as arranged with the co-operation of the client, may be biannual, quarterly or even monthly, depending on the volume of audit work
considered necessary.
Continuous Audit: Where the system of internal control operated
by a large company displays fundamental and material weaknesses, the
auditor may be obliged to check a higher proportion of transactions than
would

otherwise

be

necessary,

and

in

exceptional

circumstances,

members of the audit team may be required to execute checking work


continuously throughout the period to which the accounts relate.

CHAPTER TWO

BASIC PRINCIPLES OF AUDITING


2.1 INTRODUCTION
Just as other disciplines or professions have certain rules or codes of
conduct to guide the practitioners, so also the auditing profession.
The international auditing guidelines 3 on basic principle governing an
audit, describes the principle governing the auditors professional
responsibilities and the rules that should be complied with whenever an
audit is to be carried out, the main principles are:
-Integrity
-Confidentiality
-Skill and competence
- Objectivity
- Independence
2.2 INTEGRITY
By principle of integrity, the auditor is expected to be straightforward,
objective, honest and sincere in his/her approach to professional
assignment/duty. The auditor should be fair and not allow prejudice or bias
to override his/her sense of objectivity. Maintenance of impartial attitude,
free of any interest that might be regarded or adjudged as being
incompatible with integrity and objectivity. The rule forbids the auditor from
taken part in any act of cover up or concealment of fraud or financial
irregularities either directly or indirectly.
2.3 CONFIDENTIALITY
Under this principle of confidentiality, the auditor is expected to respect the
confidentiality of information acquired in the course of his/her work and
should not disclose any such information to a party without specific
authority unless there is a professional or legal duty to disclose.
This rule forbids the auditor from discussing his/her client account with any
unauthorized person or body regarded here as third party.
Information emanating from the audit exercise of a client accounts can only
be discussed with the audit manager or partner as the case may be and
with top management cadres in the organization and subsequently disclose

to the board of directors and shareholders at the annual general meeting


(AGM) in form of audit reports.
Abridged account expected by the law to be published for public knowledge
consumptions are exempted from this rule.
2.4 SKILL AND COMPETENCE:
This principle expects the auditor to be academically, professional and
proficiently qualified before carried out an audit exercise.
The auditor requires specialized skills and competence, which is, through a
combination of general education, technical knowledge obtain through
study and formal courses conclude by a qualifying examination and
practical experience under proper supervision. In addition, the auditor
requires a continuing awareness of development including relevant
international and national pronouncement on accounting and auditing
matters and relevant regulation and statutory requirements.
The audit should be performed through the report prepared with due
professional care by person who has adequate training, experience and
competence in auditing. It is important to here that violation of any of the
golden rule of auditing attracts possible and serious sanctions when
reported to the relevant accounting body.
2.5 INDEPENDENCE
By this principle, auditors must exercise objectivity and independence
required of an auditor. He or she must have both independence of
mind and independence of appearance. He or she must be in a position
to give an honest and unbiased opinion. Under no circumstances must a
member knowingly allow his name to be associated with a financial
statement that is misleading. Pursuant to the above and, in order to
exercise his independence, members in public practice must not:
I.
II.

Possess any direct and/or indirect beneficial interest in any company


for which he/she or his/her firm acts as auditors.
Accept fees, the amount of which is based on the success of an
assignment, except where this cannot be avoided because of

III.

legislation or agreement to which he is not a party.


Accept fees, the amount of which is based on the turnover of the
company for which he is acting as auditor.

IV.

Act for any two opposing parties in respect of a negotiation,


claim or settlement unless appointed as an arbitrator under due

V.

process or law
Carry out the work as an auditor concurrently with carrying out work

VI.

for the client in an executive capacity


Give or take loan from clients. Similarly anyone closely connected
with him/her should not make loans to his/her client nor receive
loan from clients. The same applies to guarantee. Overdue fees
may in some circumstances constitute a loan

2.6 OBJECTIVITY
By this principle, auditors essential for any professional person exercising
professional judgement. It is as essential for members in business as for
practicing members. Objectivity is the state of mind which has regard to all
considerations relevant to the task in hand but no other .
It is sometimes described as independence mind.

The need for

objectivity is particularly evident in the case of a practicing accountant


carrying out an audit or some other reporting role where his or her
professional opinion is likely to affect rights between parties and decision
they take.
Objectivity is contrasted with subjectivity. Subjective decisions are taken
from the point of view of the individual concerned, taking into account the
things that matter to them. These considerations might be friendship,
loyalty or the instinct for self-preservation, while these subjective
considerations are vital to making life go on, they have no place in
professional decision making.

The auditor should assemble all the

relevant information available based on the books of account submitted


to him and express his opinion or base decisions only on that data and the
guiding principle of the profession.

2.7 Case study

The managing director of JUDE INTERNATIONAL PLC, on 31/12/2012 invited


Akintola, Angulu, Adaora and co-chartered accountants (an auditor firm) to
audit the account of his organization for the year January to December
2012.
During the course of auditing, a fraud of 1,000, 000 perpetrated by the
chief accountant (Friday) and the deputy chief purchasing officer (Benjamin)
was uncovered/discovered. On 20th Feb, 2013, Akintola and Angulu
connived with the deputy chief accountant to conceal the fraud. Adoara
who was not a party to the cover up, but knew about the illicit deal neither
reported to the audit manager nor raise an alarm. Adoara confided her
mother (a journalist) and revealed the fraudulent practice of Friday and
Benjamin to her. Akintola was a history graduate of a certain university.
Require
Analyses the case study starting whether you think the three golden rules
of auditing have been violated.
This case study is meant test the students /readers knowledge or
understanding of basic principles discussed above
Solution / analysis
The principle of integrity
From the case study it will be seen that the rule of integrity, that require
the auditor to be honest, straightforward, objective and unbiased was
violated by the auditors:
- Akintola and angulu violated the golden rule of integrity by conniving
with the deputy chief purchasing officer and the chief accountant to
conceal the fraud of 100,000.00 .
- Adoara, though was not party to the cover up violated the golden rule
of integrity by not reporting the matter or cover up to audit
manager/partner.
The principle of confidentiality
Adoara violated the rule of confidentiality that forbids the auditor from
disclosing from the third party information about their clients,.
-Adoara violated the rule by revealing to her trusted mother (a journalist)
the fraudulent practices of Friday and Benjamin. This revelation should have
been made only to the audit manager or partner and subsequently reported
to the directors.
Principle of skill and competence

Under the rule of skill and competence a person to carry out audit exercise
is expected to have adequate training, experience and the proficiency to
audit.
Akintola being a history graduate lacks the basic training,
experience and proficiency to carry out audit job and there for violate the
rule of skill and competence.
The analysis and solution above showed that three rules has been
violated.

CHAPTER THREE

INTERNAL AND EXTERNAL AUDITING


3.1 Internal auditor:
An internal auditor is an employee in the internal audit department or unit
of an organization. The duties of an internal auditor are usually given or
spelt out by the organization. Internal auditor in most cases does not take
part in policy formulation, but once the policies are formulated the Onus of
ensuring strict adherence administratively fall on him.
Internal audit is an element of internal control set up by the management
for the smooth running of the organization
An internal auditor always head internal audits units or department of an
organization. The internal auditor is expected among other qualification to
have a degree in accounting, economic or business studies
The internal auditor must not necessarily be a professional auditor
accountant but post graduate experience in auditing assignment is very
relevant.
The internal auditor needs to work very hard in hand with the external
auditor in order to ensure that organizational goal and objectives and
mission statements are realized.
The extents auditor to which the external auditor is able to take in to
account the work of internal auditor will depend on his (external auditor)
assessment of the effectiveness of the internal audit functions. In making
this assessment the internal auditor will be concern with:
- The degree of independent of the internal auditor

The number of suitably qualified and experienced staff employed in


the internal audit department
The scope, extent, direction and timing of the tests made by the
internal auditors.
The evidence available on the work done by the internal auditor and
of the review of that work.
The extent to which management takes action based on the reports of
the internal audit functions. Provided that relevant internal audit work
has been carried out effectively, the internal auditor may be able to
reduce the level of his tests.

3.2 External auditor


An external auditor is required to be independent of the enterprise usually
having a statutory responsibility to report on the financial statements,
giving account of management stewardship. The external auditor is
required to be academically and professionally qualified in addition to being
a practicing accountant. His appointment is effected at annual general
meeting (AGM)or done on behalf of the shareholders by the board of
directors in the absence of such meeting (AGM).

3.3 Relevant statutory requirement


The company acts of 1968 as amended by company and allied matters
acts (CAMA) 1990 made the following provisions relating to:
-auditors appointment (section 152)
-auditors removal (section 153)
-auditors qualification (section 154)
-auditors duties section 155 (1)
-auditors right or (powers) section 155

3.4. Appointment of auditors

The first auditors are usually appointed by the directors, acting as agent of
the company. They are to hold office until the conclusion of the next annual
general meeting, when they may be re-elected or removed. Section 152 of
the company Acts 1968, which covers the appointment of auditors,
provided as follow:
1. Every company shall at each annual meeting appoint an auditor or
auditors to hold office from the conclusion of that, the conclusion of the
next annual general meeting.
2. At any annual general meeting a retiring auditor, appointed however
shall be reappointed without any resolution being passed unless:(A)He is not qualified for appointment or

(B) A resolution has been passed at that meeting appointing some other
person instead of him or providing expressly that he not be appointed or
(C) He has giving the company notice in writing of his unwillingness to be
appointed. Provided that where notice is giving of an intended resolution to
appoint some person or persons in place of a retiring auditor, by reason of
death, incapacity or disqualification of that person or of all those persons,
as the case may be, the resolution cannot b e proceeded with, the retiring
auditor shall not be automatically reappointed by virtue of this subsection.
3. Where at any annual general meeting no auditors are appointed or
reappointed, the commissioners may direct the registrar to appoint a
person to fill the vacancy.
4. the company shall within one week of the power of the registrar under
sub section (3) of this section becoming exercisable, give notice of that fact
to registrar; and if a company fails to give notice as required by this
subsection, the company and every officer of the company who is in default
shall be liable to fine a ten naira for every day during which the default
continues.
5. subject as herein provided, the first auditors of the company may be
appointed by the directors at any time before the first annual general
meeting, and auditors appointed shall hold office until the conclusion of the
meeting provided that:(a) the company may at a general meeting remove any such auditors
and appoint in their place any other persons who have been
nominated as noticed has been given to the members of the company
not less than fourteen days before the date of the meeting; and
(b) If the directors fail to exercise their powers under subsection,
the
Company in general meeting may appoint the first auditors and
thereupon the said powers of the directors cease.
6. The directors may fill any casual vacancy in the office of auditor, but
while any such vacancy continues, the surviving or continuing auditors, if
any may act.

3.5. Removal
Section 153 of the Companies Act 1968 covers resolution as to the
appointment and removal of auditors. The section lays down the steps,
which a company must follow if a change of auditor is proposed. The steps,
as set out below, are designed to protect the auditor from unwarranted
dismissal:

1. Special notice shall be required for a resolution at a companys


annual general meeting appointing as auditor a person other than a
retiring auditor or providing expressly that retiring auditor shall not be
reappointed.
2. On receipt of notice of such an intended resolution as a foresaid, the
company shall forthwith send a copy thereof to the retiring auditor (if any).
3. Where notice is given of such an intended resolution as a foresaid and
the retiring auditor makes with respect to the intended resolution,
representation in writing to the intended resolution, representations in
writing to the company (not exceeding a responsible length) and request
their notification to members of the company, the company shall, unless
the representation are received by it too late for it do so:
(a) In any notice of the resolution given to members of the company, state
the fact of the representations having been made; and
(b) send a copy of the representations to every member of the company to
whom notice of the meeting is sent (whether before or after receipt of the
representation by the company); and if a copy of the representations is not
sent as aforesaid because received too late or because of the companys
default the auditor may (without prejudice to his right to be heard orally)
required the representations to be read out at the meeting. Provided that
copies of the representations need not be sent out and the representations
need not be read not in the meeting if, on the application either of the
company or of any parsons who claims to be aggrieved, the court is
satisfied that the rights conferred by this section are being abused to
secure needles publicity for defamatory matter; and the court may order
the companys costs on an application under this section to be paid in
whole or in part by the auditor, notwithstanding that he is not a party to the
application.
4. Subsection (3) of this section shall apply to a resolution to remove the
first auditors by virtue of Section 152(5) of this Act as it applies in relation
to a resolution that a retiring auditor is in order if the twenty notice- eighty
days for a resolution to be passed for his statutory tenure of office, i.e.
between two annual general meeting. It is incumbent on the prospective
auditor to ensure that the former auditor has been properly remove and this
can only be done at an animal general meeting. Failure to allow the
procedure should attract sanction if report to the institute of chartered
Accountants of Nigeria.
It is important to note the following resolutions at a general meeting for
which special notice ( I. e. twenty eighty days ) is require:

i) remove the auditor before expiration of tenure of office;


ii) Appointing an auditor other than the retiring auditor;
iii) Filling a vacant vacancy.
iv) Re-appointing a retiring auditor originally appointed by the director to fill
a casual vacancy.

3.6. Qualification
1. The provision of the institute of chartered accountings act 1965 shall
have effective in relation to any investigation of audit for the purpose of the
companies Act 1968, so however that none of the following person shall be
qualified for appointment as an audit of a company
(a) An officer of servant of the company; or
(b) A person who is a partner of or in the employment of an officer or
servant of the company; or
(c) A body co-operate;
And reference in this subsection to an officer or servant shall be construed
as not including references to an auditor
2. in the application of subsection (1) of this section, the disqualification
shall extend and apply to persons who in respect of any period of audits,
then were in the employ of the company or where in otherwise connected
there with in any manner.
3. a person can also qualified for appointment as auditor of a company if he
is, by virtue of subsection (1) or (2) of this section, disqualified for
appointment as a auditor of any other body corporate which is the
companys subsidiary or holding company, or would be so disqualified if the
body cooperate were a company.
4. Anybody cooperate which act as the auditor, of a company shall be
reliable to a fine not exceeding two hundred naira.
The position of auditor, as entrenched in the statute, is to make them
independent.

3.7. Duties
The duties of auditor are spelt out in this section 155 (1) of the companies
Act 1968, as follow:
The auditor shall make a report of the members on the accounts examine
by them, and every balance sheet every profit and loss account and all
group account laid before the company in general meeting during their
tenure of office, and the report shall contain statement as to the following
matters mentioned in schedule 9 of the Act:

1. Whether they have obtained all the information and the explanation that
to the best of their knowledge and behalf were necessary for the purpose of
their audit.
2. Whether their opinion, proper books of account have been kept by the
company, so far as appear from their examination of those books and
proper returns adequate for the purpose of their audit have been receive
from branches not visited by them.
3. (i) whether the company balance sheet and (unless it is frame as a
consolidated profit and loss account) profit and loss account dealt with by
the report are in agreement with books of books of and returns.
(ii) Whether, in their opinion and best of their information according to the
explanation given them, then account give the information required b y the
companies Acts 1968 in the manner so required and give a true and fair
view:
(a) In case of the balance sheet, of the state of the company affaires as at
the end its financial year;
(b) In the case of the profit and loss account for it financial year;
Or as the case may be, give a true and fair view thereof subject to the nondisclosure of any matters (to be indicated in the report) which by virtue of
part III of schedule 8 of the Act are not required to be disclosed.
4. in the case of a holding company submitting group accounts whether, in
their (auditors) opinion, the group account have been properly prepared in
accordance with the provisions of the Acts so as to give a true and fair view
of the state of affairs and profit or loss of the company and its subsidiaries
dealt with hereby, so far as concerns members of the company, or as the
case may be, so as to give to give a true and fair view thereof subject to the
nondisclosure of any matters (to be indicated in the report) which by virtue
of part III of schedule 8 of the act are not required to be disclosed.

3.8 Rights (or powers)


Section 155 of the company Act 1968 deals with the right or powers of the
auditors. Its provide that:
(a) Every auditor of a company should have right of access at all time to the
books, account and vouchers of the company, and should be entitled to
required from the officers of the company such information and explanation
as he thinks necessary for the performance of the duties of the auditors.
(b) the auditor of the company shall be entitled to attend any general
meeting of the company and to receive all notice of and other
communication relating to any general meeting which any member of the
company is entitle to receive and to be heard at any general meeting which

they attend on any part of the business of the meeting which concerns
them as auditors.
Then auditor also has the following rights:
(1) Right associated with the proposal to replace him or remove him
from office;
(2) Right to require subsidiaries and their auditors to provide such
information and explanation as may be needed in course of his duties.
Provision as to liability of officers and auditors: in other to avoid situations
were provision is made in the articles or contract relieving officers from
liability, the company Act 1968, section 196 provides as follows:
Subject as hereinafter provide, any provision, whether contained in the
articles of a company or otherwise, for exempting any officer of the
company or any person (whether an officer of the company or not)
employed by the company as auditor from, or indemnifying him against, an
y liability which by virtue of any rule of law, would otherwise attached to
him in respect of negligence, default, breach of duty or breach of trust of
which he may be guilty in relation to the company shall be void:
(a) nothing in this section shall operate to deprive any person of any
exemption or right to be indemnified in respect of any done or omitted to
be done by him while any such provision was in force; and
(b) notwithstanding anything in this section, a company may, in pursuance
of any such provision as aforesaid indemnified in respect of any such officer
or auditor against any liability incurred by him in defending any
proceedings whether civil or criminal in which judgment is given in his favor
or in which he is acquitted or in connection with any application under
section 388 of the company Act 1968 in which relief is granted to him by
the court.

3.8 Evaluation of internal audit function


Before the external audit can rely on the work of the internal auditors, he
has to evaluate the function of internal auditors in order to determine
reliance. The following factors should be considered.
1. Degree of independence
Although the internal auditor is an employee of the organization, he should
be able to operate with reasonable degree of independence. He should be
able to plan and carry out his work with initiative and have access to
highest level of management.
2. The scope and objectives of internal audit function

The external auditor should examine the internal auditors term of


reference and should access the relevance of his scope of work to the
auditor overall objectives.
3. due profession care
Consideration should be given to whether the work of the internal auditor is
properly planned, controlled, recorded and review.
4. Technical competence
The external auditor should consider the qualification and experience of
internal auditor before placing reliance on their work.
5. Internal audits reports
The external auditor should consider and evaluate the issues by the internal
auditor vis--vis the recognition accorded such report by the management.
6. Resources available to internal auditor
That is, whether there is a provision for training and profession
development on the job.
The internal auditor could be of help to the external auditor in the following
areas
a)
Recording of accounting and internal control system.
b)
Audit of stock and WIP
c)
Cash count
d)
Circularization.
E)
Analytic review
F)
Investigations
G)
Detailed test of transaction and substantive test.

CHAPTER FOUR

LETTER OF ENGAGEMENT
4.1 INTRODUCTION
Prior to the commencement of any audit work, the auditor should agree
in writing, the precise scope and nature of the audit work to be
undertaken. The letter of engagement serves this purpose.
The letter of engagement is therefore a letter sent by the auditors to
a

client

at

the

beginning of any audit. It sets out the terms of the engagement and

forms

the

basis

of

the contract.
Purpose of a Letter of Engagement
I.
II.

To define clearly the extent of the auditors and directors


responsibilities.
By formalizing the terms of the

engagement, it helps

to

minimize the possibilities of any misunderstanding between the


III.

auditors and the client.


It
provides
written

IV.

acceptance of the appointment.


It confirms in writing verbal arrangements in respect of scope of

confirmation

of

the

auditors

the audit, the form of their report and the scope of any non-audit
service.

4.2.

Content of Letter of Engagement

The main emphasis of this letter is on the relevant responsibilities of


the directors and the auditors and the scope of the audit.

It should

also identify any report which the auditor must submit in addition to the
statutory audit report.

Specific contents are outlined below:


a. The board of directors responsibilities in respect of the proper
books of accounts and financial statements.
b. The auditors responsibilities to report

on

the

financial

statements; the scope and basis of the audit work to be


undertaken.
c. Fees and billing arrangement (it does not state the fees payable)
d. Where appropriate, arrangement concerning the involvement of
other auditors and experts in some aspect of the audit.
e. Any agreement for the auditor to provide taxation services.
f. Arrangements, if any, to be made with the predecessor auditors.

g. Any restriction of the auditors liabilities to the client (this is not


possible with limited companies).
h. A reference to any further agreements between the auditors and
the clients.
i. A proposed time-table for the agreement.
j. A request for written acknowledgement of the letter.

4.3 SAMPLE OF LETTER OF ENGAGEMENT


JUDE &Co. Chartered Accountants
26 Odu street, Makurdi
30th July 2015
The Board of Directors
Primetime Plc.
Makurdi
Dear Sir,
Letter of Engagement
The purpose of this is to set out the basis on which we are to act as
auditors

of

your

company

and

the

respective

areas

of

our

responsibility and that of the directors.


Responsibility of Directors
As Directors of Primetime Plc, you are responsible for ensuring that
the company maintains proper accounting records for preparing
financial statements which give a true and fair view of the financial
statements.

You are also responsible for making available to us, as

and when required, all the companys accounting records and all
other records and related information, including minutes of all

management

and

shareholders meetings.
Responsibility of Auditors
As auditors, we have a statutory responsibility to report to the
members

whether

in

our opinion the financial statements give the true and fair view of
the

state

of

the

companys affairs and of the profit or loss for the year and whether
they

have

been

properly prepared in accordance with the Companies and Allied


Matters

Act

Companies Code. In arriving at our opinion, we are required to


consider

the

following matters, and report on any in respect of which we are not


satisfied.
We are required to report:
Whether proper accounting records have been kept by the company
and proper returns have been received from branches not visited by us,
Whether the companys balance sheet and profit and loss account are
in agreement with the accounting records and returns,
Whether we have obtained all information and explanations which
we think are necessary for the purpose of our audit; and
Whether the information in the directors report is consistent with
the financial statements.
In addition, there are certain other matters which, according to the
circumstances, may need to be dealt with in our report. For example,
where the financial statements do not give full details of directors
remuneration or their transactions with the company, the Companies
Act/Code requires us to disclose such matters.

We have professional responsibility to report if the financial statements


do not comply (in any material respect) with applicable accounting
standards, unless in our opinion, the non-compliance is justified in
the circumstance. In determining whether the departure is required,
we consider:
Whether the departure is required in order for the financial statements
to give a true
and fair view; and whether adequate disclosure has been made
concerning the
departure
Our professional responsibilities also include:
a. Including

in

our

report,

description

of

the

directors

responsibilities for the financial statements where the financial


statements and accompanying information do not include such a
description; and
b. Considering whether other information in documents containing
audited financial statements is consistent with those financial
statements.
Scope and Basis of Audit
Our audit will be conducted in accordance with approved auditing
standards

and

will

include such tests of transactions and of existence, ownership and


valuation

of

assets

and liabilities, as we consider necessary.


understanding

We shall obtain an

of

accounting and internal control systems in order to assess their


adequacy

as

basis

for

the preparation of the financial statements and to establish whether


proper

accounting

records have been maintained by the company. We shall expect to


obtain
appropriate

such
evidence,

as

we

consider

sufficient

to

enable

us

draw

reasonable

conclusions therefrom.
The nature and extent of our procedures will vary according to our
assessment

of

the

companys accounting system and where we wish to place reliance on


it,

the

internal

control system and may cover any aspect of the business operations.
Our

audit

is

not

designed to identify all significant weaknesses in the companys


system

but,

if

such

weakness come to our notice during the course of our audit which we
think

should

be

brought to your attention, we shall report them to you. Any such report
would

not

be

provided to third parties without your prior written consent.


consent

will

Such

be

granted only on the basis that such reports are not prepared in the
interest

of

anyone

other than the company in mind.


As part of our normal audit procedures, we may request you to
provide written
confirmation of oral representations which we have received from you during the
course of the audit on matters having a material effect on the financial statements. In
connection with representation and supply of information to us generally, we draw your
attention to the provisions in the Companies Act/Code under which it is an offence for
an officer of the company to mislead the auditors.

In order to assist us in the examination of your financial statements, we shall request


sighting of all documents or statements, including the chairmans statement; operating and
financial review and the directors report, which are due to be used with the financial

statements. We are also entitled to attend all general meetings and receive notices of all
such meetings.
The responsibility for safeguarding the assets of the company and prevention and
detection of fraud, error and non-compliance with laws or regulations rests with
yourselves. However, we shall endeavour to plan our audit so that we have a
reasonable expectation of detecting material misstatements in the financial statements
or accounting records (including those resulting from fraud, error or non-compliance
with law or regulation), but our examination should not be relied upon to disclose all
such material misstatements or fraud, errors, or instances of non-compliance as may
exist.
Once we have issued our report, we have no further responsibility in relation to
the financial statements for the financial year. However, we expect that you will
inform us of any material event occurring between the date of our report and
that of the Annual General Meeting which may affect the financial statements.
Other Services
You have requested that we provide other services in respect of taxation. The
terms
under which we provide these other services are dealt with in a separate letter.
We
will also agree in a separate letter, the provision of any services relating to
investment business advice.
Our fees are computed on the basis of the time spent on your affairs by the
partners
and our staff and on levels of skill and responsibility involved. Unless otherwise
agreed, our fees will be billed at appropriate intervals during the
course of the year and will be due on presentation.
Applicable Law

The agreement letter shall be governed by, and construed in


accordance with the laws of West African Countries.

The

courts of countries in West Africa shall have exclusive


jurisdiction relating to any claim, dispute or differences
concerning the engagement letter and any matter arising from it.
Once it has been agreed, this letter shall remain effective from
one

audit

appointment

to another, until it is replaced. We shall be grateful if you could


confirm

in

writing

your agreement to these terms by signing and returning the


enclosed copy of this letter or let us know if they are not in
accordance

with

your

understanding

of

our

terms

of

engagement.
Yours faithfully,
JUDE & Co Chartered Accountant

CHAPTER FIVE

AUDIT PLANNIG AND DOCUMENTATION


5.1. AUDIT PLAN
The auditor should develop an audit plan for the audit in order to
reduce audit risk to an acceptably low level. The audit plan is more
detailed than the overall audit strategy and includes the nature, timing
and extent of audit procedures to be performed by engagement team
members in order to obtain sufficient appropriate audit evidence to
reduce audit risk to an acceptably low level.

Documentation of the

audit plan also serves as a record of the proper planning and

performance of the audit procedures that can be reviewed and


approved prior to the performance of further audit procedures.
The audit plan includes:
1. A description of the nature, timing and extent of planned risk
assessment procedures sufficient to assess the risks of material
misstatement;
2. A description of the nature, timing and extent of planned
further audit procedures at the assertion level for each
material class of transactions, account balance, and disclosure;
3. The plan for further audit procedures reflects the auditors
decision whether to test the operating effectiveness of controls,
and the nature, timing and extent of planned substantive
procedures; and
4. Such other audit procedures required to be carried out for the
engagement. Planning for these audit procedures takes place
over the course of the audit as the audit plan for the
engagement develops.

For example, planning of the auditors

risk assessment procedures ordinarily occurs early in the audit


process.

However, planning of nature, timing and extent of

specific further audit procedures depends on the outcome of


those

risk

assessment

procedures

for

some

classes

of

transactions, account balances and disclosures before completing


the more detailed audit plan of all remaining further audit
procedures.

5.2. Audit Working Papers


Audit working papers refer to the materials the auditors prepare or
obtain, and retain in connection with the performance of the audit work.

Working papers may be in the form of data stored on paper, file,


electronic media or other media.
Working papers are the record of planning and performance of
the audit, the supervision and review of the audit work and the
evidence resulting from the audit work performed to support the
auditors opinion.
Form and Contents of Working Papers
Working papers should record the auditors planning, the nature, timing
and extent of the auditing work procedures performed and the
conclusions drawn from the evidence.
Working papers should conclude the auditors reasoning on all
significant

matters,

which

require

the

exercise

of

judgement,

together with the auditors conclusions therein.


The form and content of working papers are affected by matters such
as:
a)
b)
c)
d)

The
The
The
The

nature of the engagement


form of the auditors report
nature and complexity of the entitys business
nature and condition of other entitys accounting and internal

control system
e) The needs in

the

particular

circumstances

from

direction,

supervision and review of the work of assistants and;


f) The specific methodology and technology the auditors use.
Working papers are designed and organized to meet the
circumstances and the auditors needs for each individual audit.
The use of standardized working papers, (for example checking
list,

specimen

letters,

standard

organization

of

working

papers), may improve the efficiency with which such working


papers are prepared and reviewed.

To improve audit efficiency, the auditors may use schedules,


analyses and other documentation prepared by the entity. In such
circumstances the auditors require evidence that such information is
properly prepared. Working papers include the following:
a. Information

concerning

the

legal

and

structure of the client company


b. Extracts or copies of important
agreements, and minutes
c. Evidence of the planning

process

organizational

legal

documents,

including

audit

programmes and any changes thereto


d. Evidence of the auditors understanding of the accounting
and internal control system
e. Evidence of the inherent and control risk assessments and
any revisions thereof
f. Evidence of the auditors consideration of the work of
internal audit and their conclusions thereon
g. Analyses of transactions and balances
h. Analyses of significant ratios and trends
i. A record of the nature, timing and extent of auditing
procedures undertaken and the results of such procedures.
j. Details of procedures regarding companies whose financial
statements are audited by other auditors
k. Copies of communications with other auditors, expert and
other third parties
l. Copies of correspondence with the entity, reports to
management and note of discussions with the entitys
management
m.A summary of the significant aspects of the audit including
details of the information
involved,

management

available,
views,

the

amounts

the conclusions reached

and how these matters are resolved or treated, and


n. Copies of the approved financial statements and the
auditors report.

Confidentiality, Custody and Ownership of Working Papers


The auditors should adopt appropriate procedures for maintaining the
confidentiality and safe custody of their working papers.
There are no specific statutory requirements regarding the period of
retention of audit working papers. The auditors need to exercise
judgement

to

determine

the appropriate period of retention.

However, it is considered advisable for auditors to retain their working


papers for a period of at least six years from the completion of the
relevant audit and then, prior to their destruction, to obtain satisfaction
that there is unlikely to be a need to refer to them again.
Working papers are the property of the auditors.

They are not a

substitute for the entitys accounting records.

5.3. Audit Files


In the case of recurring audits, some working papers may be classified
as permanent audit files which are updated with new information of
continuing importance as distinct from current audit files which
contain information relating primarily to the audit of a single period
Permanent Files
The permanent file usually contains documents and matters of
continuing importance which will be required for more than one
audit. It is usually indexed. Contents include the following:a. Statutory materials governing the conduct, accounts, and
audit of the enterprise e.g. Companies Code, stock Exchange
Regulations, etc.
b. The rules and Regulation of the enterprise
c. Copies of documents of continuing importance and relevant
to the auditors
d. Letter of engagement and minutes of appoint of the auditor

e. Trade license and royalty agreements entered into by the


client
f. Debenture deeds
g. Leases
h. Addresses of the registered office and all other business
locations of the client company
i. An organization chart showing the various departments,
sections, authority - responsibility relationships and names
of responsible managers and officers.
j. Lists of books and other records and where they are
kept, together with designation, names and signatures of
responsible officers.
k. An outline history of the organization including history of
Stated

Capital/Share

capital,

Capital

Surplus/General

Reserve, Prospectuses and record of important ratios.


l. List of accounting matters of importance e.g. Accounting
policies

with

respect

to

Stocks,

work-in-Progress,

Depreciation, Research and Development etc.


m.Notes of interviews and correspondence in respect of
Internal Control matters and all past management letters.
n. Clients internal audits and Accounting Instructions.
o. A list of the Companys Directors, their shareholdings and
p.

service contracts.
A list of the Companys properties and investments with

notes on verifications.
q. A list of the Companys bankers, stockbrokers, solicitors,
valuers, insurance brokers etc.
It

is

essential

that

the

permanent

file

be

updated

prior

to

commencement of a new financial years audit.

The Current Files


The Current file contains matters relating to the current years audit.
The contents include the following:-

a. A copy of the accounts being audited


b. An index to the file
c. A description of the Internal Control System in the form of ICQ,
Flowcharts, or written description together with supervision
documents.
d. Cross reference to the Internal Control record and letter of
weakness.
e. A schedule for each item in the Balance Sheet.
f. A schedule for each item in the Profit and Loss Accounts showing
its makeup.
g. A schedule

of

important

statistics

including output,

sales

composition, employment, accounting ratios.


h. Letters of representation
i. Letters to the client setting out Internal control weaknesses.
CHAPTER SIX

AUDIT EVIDENCE, VERIFICATION PROCEDURE AND


SAMPLING
6.1. Audit Evidence:
The auditors operational manual (auditing standard) paragraph four states
in reference to audit evidence that the auditor should obtain relevant and
reliable audit evidence sufficient to enable him to draw reasonable
conclusions there from
The international auditing guideline also gives guidance on the usage and
application of audit evidence.
Audit evidence is defined as the information obtained by the auditor in
arriving at the conclusions on which he bases his opinion in the financial
statements. Sources of audit evidence include the accounting system and
underlying documentation of the enterprise, its customers, suppliers and
other third parties who have dealings with or knowledge of the organization
or its business.
The sources and evidence needed to achieve required level of
assurance are questions for the auditor to determine by exercising his
judgment in the light of the opinion called for under the terms of his
engagements. The auditor will be influenced by the materiality of the
matter being examined, the relevance and reliability of evidence available
from each source and the cost and time involved on obtaining it.

Sometimes the auditor will obtain evidence from several sources, which
together will provide them with the necessary assurance.
The relevance of the audit evidence should be considered in relation
to the overall audit objective of forming an opinion and reporting on the
financial statements. To achieve this objective, the auditor needs to obtain
evidence to enable him to draw reasonable conclusions in answer to the
following:
Balance Sheet items:
a) Whether all the assets and liabilities were received.
b) Whether the amounts attributed to the assets and liabilities
were arrived at in accordance with the stated accounting
policies.
c) Whether the assets, liabilities, capital, reserves have been
properly disclosed.
Profit and Loss account items:
a) Whether all income and expenses have been recorded.
b) Whether the recorded income and expenditure transactions did occur.
c) Whether income and expenses have been properly disclosed and
appropriately.

6.2 Compliance and substantive tests:


Audit evidence is obtained by carrying out tests classified as
substantive or compliance to their primary purpose. Both sometimes are
achieved concurrently.
Substantive Tests
Are defined as those tests on transactions and balances, and other
procedure such as analytical review, which seek to provide audit evidence
as to the completeness, accuracy and the validity of the information
contained in the accounting records or in the financial statements.

Compliance Tests
Compliance tests are those tests that seek to provide audit evidence
that internal control procedures are being applied and strictly adhered to
as prescribed.
Auditors Opinion:
The auditor may rely to a great extent on appropriate evidence
obtained by substantive testing to form his opinion. Alternatively, the
auditor may be able to obtain assurance from the presence from the
presence of reliable internal control mechanism and therefore reduce the

extent of substantive testing. The audit procedures which are


appropriates when the auditors wishes to place reliance on the
organization internal controls are set out in the auditing guideline in
internal controls.

6.3 Audit tests Techniques:


Techniques of Audit testing are categorized as follows:
(a) Inspection: This involves reviewing or examining records,
documents or tangible assets. Inspection of records and documents
provides evidence of varying degree of reliability depending upon their
nature and source. Inspection of tangible assets provides the auditor
with reliable evidence as to their existence, but not necessarily to their
ownership, cost or value.
(b) Observation: Looking at an operation or procedure being performed
by others with a view to determine manner of its performance.
Observation provides reliable evidence as to the manner of the
performance at the time of observation, but not at any other time.
(C) Enquiry:
This involved seeking relevant information from knowledgeable person
inside or outside the enterprises, whether formally or informally orally or
in writing. The degree of reliability that the auditor attaches the evidence
obtained in this manner is depended on his opinion of the competence,
experience, independence and integrity of the respondent.
(d) Computation:
This involves checking of the arithmetical accuracy of accounting
records or performing independent calculations.
(e) Vouching
Vouching is a process used by auditors during an audit exercise to trace
accounting document or enable accounting document to books of
original entries. It is also a process used to ensure that the accounting
documents like invoices, receipt, credit and debit notes petty cash
vouchers, and other are posted to correct or appropriate books of
accounts.
Vouching sometimes involve casting recasting and re-confirming of the
entries made on individual vouchers with the aim of ensuring that correct
totals amount as regards totals and subtotals are contained in the said
vouchers.
Under vouching exercise the auditors traces accounting documents or
vouchers like cash receipts, payment vouchers, sales invoice and they
likes to their books of originals entries.

Document like cash receipts are trace to the debit or left hand side of the
cash book. Payment vouchers trace to the credit or right hand side of the
cash book. While sales invoice is trace to the sales day book. This kind of
tracing under vouching is seen as the first in the list of actions or
processes an auditor intend to take or undertake when embarking on an
audit exercise in a client office.
Assets verification
Vouching
Vouching means the examination of business together with documents
and other evidence of sufficient validity to satisfy the auditor that such
transaction are in other have been properly authorize and are correctly
calculated and recorded.
For example, vouching, the auditor should ensure that
1. Invoice is address to the company.
2. Invoice appears at least to be authentic.
3. The goods relate to the ordinary course of the companys business
4. The invoice should be signed and dated
5. Invoice date should relate to the current accounting period.
Verification
Verification on the other hand means establishment of ownership,
existence and valuation of assets as at the balance sheet dates.
The auditor has a duty to verify all the assets appearing on the balance
sheet as at the date to ensured completeness of those assets. The
following aspects of each asset must be verified:
(a) Cost i.e. establishment of the cost of purchase
(b) Authorization by the relevant authority
(c) Value- this has to do with market value that may have to be
compared with cost.
(d) Existence- this has to do with determination of physical existence of
some assets.
(e) Beneficial ownership such assets must be by the company and must
be serving a useful purpose for the company.
(f) Presentation in the account- this deals with companies with various
statute and accounting standard as to adequacy of disclosure.

6.4 Audit Programme


An audit programme is the list of work an auditor does or proposes to
do during an audit. It is a standards set of instruction to be carried by an
auditor.
Advantages

1. It provides a clear list of a institution to be carried out.


2. It facilitated review by partner and managers.
3. It ensures that work is not duplicated.
4. It provides a record of work done and by whom.
5. It provides evidence of work done in the case of litigation.
6 it facilitate quality control for the audit.
Disadvantages
1. It makes audit work to become mechanical.
2. It does not respond quickly to changes in clients system.
3. Fixed audit program me may not allowed auditors to probe matters to
the bottom when put on enquiry.
4. Fraud may be perpetrated where the client is aware of the auditors
plan and procedure.

6.5. Audit stock and WIP


The auditors should pay particular attention on the audit of stocks and
WIP because of the following reason:
1. Stock usually constitutes one the largest items in the balance sheet of
the company especially, a manufacturing concern. A relatively small
error on stock will have the material effect on the financial statements.
2. Closing stocks affect cost of sales and thereafter profit and loss
directly; stock can be manipulated to achieve a profit or loss.
3. Different accounting bases are use on the valuation of stock and work
in process.
4. There may be problems of valuation and determination of existence of
some specialized stocks e.g. animals that gaze plantation agriculture,
fish in the cold room etc.
5. Inventories are most susceptible to major error and manipulation. The
auditor must focus his attention on two main issued in the audit of stocks
and WIP. These are quantity and evaluation.
Quantity
The auditor has a duty to obtain evidence that stock items as
reflected on the financial statement are physically in existence as at
year-end. Management should ensure that stocks are accurately and
correctly recorded in the financial statement, since it is the duty of
management to establish an adequate system of internal control over
stocks WIP.
In order to achieve this management organizes stock count or stock
taking either annually or periodically.

General Objectives of Stock Count


1. To provide a basis for determining the quantity required for the
valuation of stocks and WIP.
2. To verify the existence of stocks and WIP.
3. To provide a basis for checking the correction of stock records.
4. To verify the condition of stock and WIP.
5. To determine the accuracy of cut off.
6. To establish title to stock.
7. To determine the accuracy of stock valuation at the lower cost or
Net Realizable Value (NRV).
8. To ensure that adequate provision had been made for slow moving
and obsolete stock.
The tasks for the auditor in the observation of stock count can be
discussed under three phases.
1. PLANNING
2. OBSERVATION
3. FOLLOW UP
1. Planning before the date of stock count
The auditor carries out the following:
a) Review of previous years working papers for matters of continuing
importance to stock.
b) Discuss stock taking arrangement with the companys management.
c) Consider the location of stock and assess the implication of the
location for the controlling and recording of stock.
d) Review the system of internal control relating to stocks in order to
identify the potential area of difficulty.
e) Consider the involvement of internal audit with a view to placing
reliance on their work.
f) Arranging for confirmation from third parties of stock made by them or
even attends stock count in third partys premises.
g) In exceptional circumstances where experts are needed, arranging for
contact with such experts.
2. Observation during the stock account
a) Observe whether the client staffs are carrying out their instruction
properly.
b) Make test count to obtain assurance that the internal controls are
working as intended.
c) Review the adequacy and efficiency of the cut off procedure.
d) Ascertain that stocks held on behalf of the third parties identified and
accounted for.

e) Review the procedure for determining slow moving and obsolete


stock.
f) Review the arrangement of stocks in the warehouse for security
reasons.
g) Record the detail of sequence of stock sheet and serial number of the
goods received notes and goods delivered note.
Follow up after the stock count
a) Follow up all observations recorded on the working paper requiring
discussions with the management.
b) Collate all rough stock sheets, check their numerical sequence and
decide whether a proper stock count was carried out.
c) Investigate materials difference between the physical count and
stock records.
d) Checks replies from third parties and expects where engaged.
e) Recommend any necessary adjustment in favor of physical count
and stock records.
f) Review the adequacy or otherwise of insurance cover in place.
g) Write a comprehensive stock count report to the companys
management
highlighting
the
problems
encountered
and
suggestions to approve stock condition.
AUDIT SAMPLING
Definitions
Audit sampling involves the application of audit procedures to less
than 100% of items within a class of transactions or account balance
such that all sampling units have a chance of selections.

This will

enable the auditor to obtain and evaluate audit evidence about some
characteristic of the items selected in order to form or assist in
forming a conclusion concerning the population from which the
sample is drawn. Audit sampling can use either a statistical or a nonstatistical approach.
Error means either control deviations, when performing tests of
controls, or misstatements, when performing tests of details. Similarly,

total error is used to mean either the rate of deviation or total


misstatement.
Anomalous error means an error that arises from an isolated event
that has not recurred
occasions

and

is

other

therefore

than

on

specifically

identifiable

not representative of errors in the

population.
Population means the entire set of data from which a sample is
selected and about which the auditor wishes to draw conclusions. For
example, all of the items in a class of transactions or account balance
constitute a population. A population may be divided into strata, or
sub-populations, with each stratum being examined separately. The
term population is used to include the term stratum.
Sampling

risk

arises

from

the

possibility

that

the

auditors

conclusion, based on a sample may be different from the conclusion


reached if the entire population were subjected to the same procedures
Statistical sampling means any approach to sampling that has the
following characteristics:
I.
II.

Random selection of a sample; and


measurement of sampling risk. Use of probability theory to
evaluate sample results, including:

Stratification i.e. process of dividing a population into subpopulations,


each of which is a group of sampling units which have similar
characteristics (often monetary value) and

Tolerable Error i.e. the maximum error in a population that the auditor
is willing to accept.

CHAPTER SEVEN

FRUAD, ERROR, IRREGULARITY AND THE AUDITOR

7.1 FRUAD
Accounting fraud may be briefly defined as an act of deceit by an
individual, group of person or even a body corporate. Here the person or
group of persons deceitfully converts through an illegitimates, or
unwholesome means, what belongs to another person (the victim) into
his own (fraudster) use or possession.
Fraud can be perpetrated in the following three major ways:
i. Cash receipt defalcations.
ii. Sales invoice defalcations.
iii. Store vouchers manipulations
The international auditing guidelines set out the responsibilities of the
auditor with regard to detection and prevention of the fraud and other
irregularities. It also gives guidance on the extent to which the auditors
finding should be reported to management, shareholders and other
stakeholders.
Whereas,

the responsibility described in the guideline are consistent

with responsibilities of auditors operating in the public sector, in certain


respects, the duties of the auditor in the public sector accounting with
regard to irregularity are somewhat greater than those of his
counterpart in the private sector. In any event, the auditor should have
regard to any statutory, constitutional or contractual requirements in
addition to his general responsibilities.

7.2 Accounting Errors


The word errors are referred to as unintentional mistakes in financial
statements, whether of a mathematical or clerical nature, or whether in

the application of accounting principles or whether due to oversight or


misinterpretation of relevant facts.
Accounting irregularities:
The word irregularities are referred to as intentional distortion of
financial statements, for whatever purposes and to misappropriation of
assets, whether or not accompanied by distortions of financial
statements; accounting fraud is a type of financial irregularity. In the
international audit guideline fraud is referred to as irregularity involving
there of criminal deception to obtain an unjust or illegal advantage
(materials or kinds).
Prevention and detention of errors and irregularities
According

to

international

auditing

guideline

on

internal

control

paragraphs eighteen, the primary responsibility for the prevention and


detention of errors and irregularities rest on management. This
responsibility may be partly discharged by the institution through the
maintenance of adequate system of internal control including for
example authorization controls and controls covering segregation of
duties. Management has particular responsibilities for ensuring that a
strong system of internal control exists where assets are held in a
fiduciary capacity on behalf of the public or a third party. In such
circumstances, management may consider it appropriate to agree with
the auditor that he performed additional work.
The needs to remind managements of their responsibilities to
maintained a proper system of internal controls as an adequate
deterrent to errors or irregularities. The auditor does this in the audit
engagement letters or through other communication during the audit.
The auditor may ask management to provide details of any irregularities
that have come to their attention during under review.

Section 393 of the company Act 1965 declares guilty of offence a person
who recklessly makes a statement which is misleading false or
deceptive in a material. An auditor is therefore entitled to accept
representations as truthful in the absence of any indication to the
contrary and provided these are consistence with other audit evidence
obtained through substantive and compliance tests.

7.3 Procedures When There is an Indication that Fraud


or Error May Exist
When the application of audit procedures indicates that fraud or
error may exist, the auditors should consider the potential effect
on the financial statements.

If the auditors believe that the

indicated fraud or error could have a material effect on the


financial statements, they should perform appropriate modified
or additional procedures.
The extent of such modified or additional procedures depends on
the auditors judgement as to:
The types of fraud or error indicated;
The likelihood of their occurrence; and
The likelihood that a particular type of fraud or error could
have a material effect on the financial statements.
Unless circumstances clearly indicate otherwise, the auditors
cannot assume that an instance of fraud or error is an isolated
occurrence.

If necessary, the auditors should adjust the nature,

timing and extent of their substantive procedures.


To the extent that suspicion of fraud or error is not dispelled by the
results of modified
or additional procedures, the auditors should discuss the matter
with management, the
directors or audit committee and consider whether the matter has
been properly reflected or corrected in the financial statements.

They should also consider the implications in relation to other


aspects of the audit, particularly, the reliability of management
representations. If the performance of the modified or additional
procedures supports their suspicion of fraud or error, the auditors
need

to

consider

the

legal

consequences.

This

involves

considering whether it is appropriate to contact the entitys


lawyers or whether to seek their own legal advice and what future
action they need to take.

7.4 Reporting Fraud and Error to Management


The auditors should communicate factual findings to management,
the board of directors or the audit committee as soon as
practicable if:
a) they suspect fraud may exist, even if the potential effect on
the financial statement is immaterial; or
b) material error is actually found to exist.
In determining an appropriate representative of the entity to
whom to report the occurrences of apparent fraud or material
error, the auditors need to consider all the circumstances. With
respect to apparent fraud, the auditors should report the matter to
the next higher level of authority within the entity that they do not
suspect anybody of involvement in the fraud. For example, if the
auditor suspects that members of senior management, including
members of the board of directors are involved, it may be
appropriate to report the matter to the audit committee. Where
no higher authority exists, or the auditors are precluded by the
entity from obtaining sufficient appropriate audit evidence to
evaluate whether fraud or error which is material to the financial
statement has, or is likely to have occurred, or if the auditors

believe that the report may not be acted upon or are unsure as to
the person to whom to report, they may wish to have legal advice.

7.5 Reporting Fraud and Error to Members of the


Company
Auditors should consider the implications for their report if:
a) They conclude that a suspected instance of fraud or
error has a material effect on the financial statements
and they disagree with the accounting treatment or
with the extent, or the lack of any disclosure in the
financial

statements

of

the

instance

or

of

its

consequences, or
b) They are unable to determine whether fraud or error
has occurred.
They should not refrain from qualifying their opinion on the
grounds that the position has been corrected since the balance
sheet

date

or

because

of

the

possible consequences of

qualification.
Reporting Fraud and Error to Third Parties
When the auditors become aware of a suspected instance of fraud
(or in particular cases, error) which is supported by strong
evidence, and considering the fact that the matter may be one
that ought to be reported to a proper authority in the public
interest, they should ensure that the matter is drawn to the
attention of the directors, including any audit committee.

If,

having considered any views expressed on behalf of the entity and


in the light of any legal advice obtained, they conclude that the
matter should be so reported; they should report it themselves if:
a. They are under statutory duty to do so; or

b.

The entity does not do so itself or is unable to provide


evidence that the matter has been reported.

In extreme cases, auditors should report a matter directly to a


proper authority in the public interest and without discussing the
matter with the entity if they conclude that the suspected instance
of fraud (or, in particular cases, error) should be so reported and it
has caused loss of confidence in the integrity of the directors.
Confidentiality is an implied term of the auditors contract. The
duty of confidentiality, however, is not absolute.

In certain

exceptional circumstances, auditors are not bound by the duty of


confidentiality and have the right to report matter to a proper
authority in the public interest. Auditors need to weigh the public
interest in maintaining confidential clients relationships against
the public interest in disclosure to a proper authority.
Auditors whose suspicions have been aroused need to use
their

professional

judgement

to

determine

whether

their

misgivings justify them in carrying the matter further or are too


insubstantial to deserve report.
Examples of circumstances which may cause the auditors not to
have confidence in the integrity of the directors include situations:
I.

Where they suspect or have evidence of the involvement or


intended involvement of the directors in possible fraud which

II.

could have a material effect on the financial statements; or


Where they are aware that the directors are aware of such
fraud, and contrary to regulatory requirements or the public
interest, have not reported it to a proper authority within a
reasonable period.

Auditors are protected from the risk of liability for breach of


confidence or defamation provided that in the case of breach of
confidence:

disclosure is made in public interest;


such disclosure is made to an appropriate body or person;
there is no malice motivating the disclosure, and In the case
of defamation:
disclosure is made in their capacity as auditors of the entity
concerned, and there is no malice motivating the
disclosure.
In addition, auditors are protected from such risks where they are
expressly

permitted

or

required

by

legislation

to

disclose

information.
Matters to be taken into account when considering whether
disclosure is justified in the public interest may include:
a. the extent to which the suspected fraud is likely to affect
members of the public;
b. whether the directors have rectified the matter or are taking,
or are likely to take, effective corrective action;
c. the extent to which non-disclosure is likely to enable the
suspected fraud to recur with impunity;
d. the gravity of the matter; and
e. the weight of evidence and the degree of the auditors
suspicion that there has been an instance of fraud.
When reporting to proper authorities in the public interest, it is
important that, in order to retain the protection of qualified
privilege, auditors only report to one who has a proper interest to
receive the information.

Which body or person is the proper

authority in a particular instance depends on the nature of the


fraud.

Proper authorities could include Serious Fraud Office, the

Police Service, Bureau of National Investigations (BNI), recognized


Professional Bodies, the Stock Exchange, the Central Bank, the

Inland/Internal Revenue Service, the VAT Service, the Customs,


and Excise& Preventive Service (CEPS) etc.
Auditors who can demonstrate that they have acted reasonably
and in good faith in informing an authority of an instance of fraud
which they think has been committed would not be held by the
court to be in breach of duty to the client even if, an investigation
or prosecution proves that there had not been any offence.
Auditors need to take legal advice before making a decision on
whether the matter should be reported to a proper authority in the
public interest.
Auditors need to remember that their decision as to whether to
report, and if so to whom, may be called into question at a future
date, for example, on the basis of:
a.

what they knew at the time;

b.

what they ought to have known in the course of their audit;

c.

what they ought to have concluded; and

d.

what they ought to have done.

Auditors may also wish to consider the possible consequences if


financial loss is occasioned as a result of fraud while they suspect
(or ought to suspect) has occurred but decide not to report.

CHAPTER EIGHT

AUDIT REPORT
8.1 INTRODUCTION
International Auditing Guideline 13 [paragraph 13] states

The reports should be dated. This informs the reader that the auditor
consider the effect on the financial statement and of his reports of event or
transactions about which he became aware that occurred up to that date
International accounting standard [IAS] 10 on contingencies and event
occurring after the balance sheet date issue by the accounting committee
deals with the treatment in financial statements of event occurring after the
balance sheet date.
The auditor should date and sign his report as of the date he completes his
examination. Which include performing procedures relating to events
occurring to the date of his reports? However, since his responsibility is to
report on financial statements as prepared and presented by the
management the auditor should not date his report earlier than the date on
which the financial statement are approved by the management.
The auditor obtains assurance that management approved the financial
statements for example by obtaining a signed copy of the financial
statements or an authorized or an authorized representation to that effect.

8.2 BASIC ELEMENTS OF THE AUDITORS REPORT


The auditors report includes the following basic elements, ordinarily in the
following layout
I.
II.
III.

IV.

Title;
Addressee;
Opening or introductory paragraph
Identification of the financial statements audited;
A statement of the responsibility of the entitys management
and the responsibility of the auditor;
Scope paragraph (describing the nature of an audit)

A reference to the International Standards of Auditing (ISAs) or


relevant national standards or practices;
A description of the work the auditor performed
V. Opinion paragraph containing
A reference to the financial reporting framework used to
prepare the financial statements (including identifying the
country of origin of the financial reporting framework when
the framework used is not International Accounting
Standards); and
An expression of opinion on the financial statements;
vi. Date of the report;
vii. Auditors address; and

viii. Auditors signature.


A measure of uniformity in the form and content of the auditors report is
desirable because it helps to promote the readers understanding and
to identify unusual circumstances when they occur

8.3 SAMPLE OF AUDIT REPORT


Audit Report to the Members of ABC Plc)
We have audited the accompanying balance sheet of the ABC
Company as of 31December, 2008, and the related statements of
income, and cash flows for the year then ended.

These financial

statements are the responsibility of the Companys management.


Our responsibility is to express an opinion on these financial statements
based on our audit.
We

conducted

our

audit

in

accordance

with

International

Standards on Auditing (or refer to relevant national or practices).


Those Standards require that we plan and perform

the

obtain

the

reasonable

assurance

about

whether

statements are free of material misstatement.

audit

to

financial

An audit includes

examining on a test basis, evidence supporting the amounts and


disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements give a true and fair view of
(or present fairly, in all material respects) the financial position of the
Company as of 31December, 2008, and of the results of its operations
and its cash flows for the year ended in accordance with International
Accounting Standards/International Financial Reporting Standards
Date: 1 October, 2015
PAP Chartered Accountants
JOS PLATEAU
OKOLI J.

SIGNATURE
TYPES OF AUDIT REPORT

8.4 UNQUALIFIED AUDIT OPINION


This report is issued when an auditor determines that each of the
financial record provided by the management is free from material
misstatement.
An illustration of an unqualified audit opinion

in an auditors report

follows:
In our opinion, the financial statements give a true and fair view of (or
present fairly, in all material respects) the financial position of the
Company as of 31December, 20X1, and of the results of its operations
and it cash flows for the year then ended
International

Accounting

Standards/

in accordance
International

with

Financial

Reporting Standards

8.5 A QUALIFIED OPINION


A

qualified

concludes

opinion

should

be

expressed

that

when

the

auditor

an

unqualified opinion cannot be expressed but that the effect of any


disagreement with management, or limitation on scope is not so material
and pervasive as to require an adverse opinion or a disclaimer of opinion.
A qualified opinion should be expressed as being except for the effects
of the matter to which the qualification relates.
Conditions for qualifying audit opinion
I.

There is a limitation on the scope of the auditors work; or

II.

There is a disagreement with management regarding the


acceptability of the accounting policies selected, the method of their
application or the adequacy of financial statement disclosures

Illustrations of Qualified Opinion

In our opinion,, except for the effects of such adjustments, if any, as


might have been determined to be necessary, had we been able to
satisfy ourselves as to physical inventory quantities, the financial
statements give a true and fair view of (or present fairly, in all material
respects) the financial position of the Company as of 31December, 20X1,
and of the results of its operations and its cash flows for the year then
ended in accordance with International Accounting Standards/
International Financial Reporting Standards,

Adverse opinion
This is issued when the financial statement provided by the organization
has shown gross material misstatement and the financial statement to not
conform with generally accepted accounting principle (GAAP)

DISCLAIMER OPINION
This opinion is issued when the auditor is unable to conclude his audit . it
states that the auditor could not arrive at a concluding opinion due to
limiting factors disclose therein.
8.6 CONCEPT OF TRUE AND FAIR VIEW
True and Fair
from

means that the financial statements are free

material misstatement, proper books of accounts have been

kept, the financial statements are consistent with the underlying


records, the financial statements have been prepared in accordance
with the acceptable accounting standards and relevant legislation,
the assets and liabilities shown exist, properly valued and pertain to the
entity and that all expenses and revenues stated relate to the
operations of the business.

True implies that the information is factual and conforms to


reality

with

no

material errors; it is not false. In addition, the information conforms


to

required

standards and law. The accounts have been correctly extracted from
the

books

and

records.
Fair means that the information is free from discrimination and
bias and in compliance with expected standards and rules.

The

accounts should reflect the commercial substance of the companys


underlying transactions.

CHAPTER NINE

Internal control system


9.1 DEFINITION OF INTERNAL CONTROL
The operational standard (guideline) defines internal control as The
whole system of controls, financial and otherwise, established by the
management in order to carry on the business of the 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.
To guarantee the effectiveness of the I.C.S, the following factors must be
observed;
1. Management must not override the control.
2. The control should be documented and communicated to all concerned.
3. The control must be review periodically to prevent them from being
obsolete.
4. The objective of the control must be discussed among all the staff.
5. There should be an established procedure for internal check.

6. The control should not be too complex.


7. Henry Fayol of recording must be in place where responsibility is
recorded to commensurate authority.
9.2. OBJECTIVES OF INTERNAL CONTROL
The striking thing about the definition is its all-embracing nature and it
is

clear

that

internal control is concerned with the controls operative in every area


of

corporate

activity as well as with the way in which individual controls interrelate.

The

individual components of an internal control system are known as


controls

or

internal control. The above definition establishes four objectives


of

internal

controls as:
a) To carry on the business of the company in an orderly and efficient
manner;
b) To ensure adherence to management policies;
c) To safeguard the asset of the organization; and
d) To secure completeness and accuracy of the records.
9.3 THE ESSENTIAL FEATURES OF INTERNAL CONTROL
The detailed nature of the controls operative within any commercial
organization will depend upon:
a.
b.
c.
d.
e.

The
The
The
The
The

nature and size of the business conducted;


number of administrative staff employed;
volume of transactions;
materiality of transactions concerned;
importance placed upon internal controls by the

organisations own management;

f. The management style of the entity particularly the trust


placed in the integrity and honesty of the key personnel and
the latters ability to supervise and control their own
subordinate staff; and
g. The geographical distribution of the enterprises and many
other factors.
9.4 TYPES OF INTERNAL CONTROL
The common types of internal control are
1. Physical control
Assets must be kept physical secure and this is particularly important for
valuable portable item such as cash balance, motor vehicle, stocks.
2. Authorization and approval
This require every document or transaction process be authorize by a
responsible person with a clearly define limitation of responsibility.
3. Personnel controls
These controls are developed so that staff allocated to duties is capable and
sufficiently motivated to ensure that they carry out their duties efficiently
either complete integrity.
4. Arithmetic and accounting controls.
These controls are designed to ensure that transactions are correctly
calculated, recorded and processed e.g. the use of Total A/c and trail
balance.
5. Management controls.
These are control outside the day today routine control system. They may
include the use of internal audit, budge control operations.
6. Organisation control.
A plan of the organization exist defining and allocating responsibilities as
well as identifying lines on reporting.
7. Supervisory controls
These are control exercise by high level managers of the subordinates.
They are not necessarily part of the day-day internal check but are
designed to ensure that the company is operating as intended
8. Segregation of duties.
Ensuring that no one person is responsible for all the aspect of the
transaction, it is fundamental to good internal control.

9. The involvement of more persons reduces the risk of accidental error or


deliberate fraud
Illustration
You are in-charge auditor in the audit of medium scale training company for
year ended 31/12/2000.
You are required to suggest to the management of the company, type of
control over petty cash in their organization.
Solution:
1. Petty cash must be kept on impress system.
2. Petty cash must be of stated amount at any point in time
3. A standard should be set for expense ranking for petty cash
4. petty cash balance must be kept with the cashier in his safe
5. Request for payment advance, IOU must be properly authorized and
document on petty cash voucher forms (PCV).
6. IOUs and cash at hand should be liquidated with in specific period of
time.
7. Paid PCV must be pre-numbered and cancelled.
8. There should be daily reconciliation of petty cash Account.
9. Persons other than cashier should make pre-audit surprise cash
counts,
10.
The petty cash book must be approved on daily basis by the
accountant or other designated person.
The audit approach involve here is the compliance test.
This is a test to provide audit evidence that internal controls are being
applied as prescribed by management.
For small companies or big ones where internal control is limited, the
auditor performs only substantive test.

9.5 IMPORTANCE OF INTERNAL CONTROLS TO AUDITORS


a. They prevent errors and frauds or material misstatement
b. They detect errors and frauds or material misstatement.
c. They ensure complete and adequate recording

of

transactions.
d. They ensure that all recorded transactions are real, properly
valued, related to the correct period, properly classified,
correctly authorized and posted.

e. They

help

to

ensure

reliable

financial

reporting

and

compliance with relevant laws, regulations and standards.


f. They provide management with reasonable assurance that
goals and objectives it believes important to the company,
which is equally important to the auditor will be met.

9.6 The main features of an audit of internal control system


are:
For New Clients
1.
Ascertain the internal controls in operation by enquiring from
management, inspection of records, observation etc
But for an existing client, the procedure should be updated to reflect
current situation.
2.
Ascertain the correctness of the system by carrying out a walk
through test.
3.
Record the controls through narrative notes or system flowchart.
4.
Evaluating the controls to determine whether they are satisfactory in
principle.
5.
Test the controls by the conduct of compliance test to determine
whether the controls are in operation as intended.
6.
Report weakness in the internal controls to management.

9.7 Internal Control Questionnaire (ICQ)


ICQ remains the longest used internal control assessment and recording
technique. Its function is to highlight precisely the areas of strength
and weakness in internal control.
The questionnaire is a standardized pre-printed document designed by
the audit firm using it, and comprises a series of questions designed to
determine whether desirable controls are present. They are formulated
so that there is one to cover each of the major transaction cycles.
The following points are worth-noting about the use of ICQ.
I.

An ICQ will normally be used if the size and complexity of the


client organization justifies it.

II.

A complete ICQ should have an effective life of approximately


three years during which only updating would be necessary.
The completion of new ICQ would be necessary if a major change

III.

in the system had taken place (e.g. a change over from manual).
The ICQ should be completed by a senior member of the audit
staff after putting the questions to the responsible officers of

IV.

the client company.


Observation and selected tests will ensure that the ICQ
accurately reflects the strengths and weaknesses within the

V.

procedures that operate from day to day.


The auditor should not place reliance on controls on the basis of
this

preliminary

evaluation.

He

should

conduct

further

compliance tests designated to give a reasonable assurance


VI.

that the controls are functioning properly.


The questions should be formulated in such a way that the
relevant internal control criteria are implicit, so that no more
than a yes/no answer is required to indicate compliance or noncompliance. This degree of simplicity is not possible for every
question, for example cases where it is necessary to know the
names of executive officer authorized to sign cheques, or the
limit on the authority of a particular

officer to authorize

expenditure.

9.8 Sample of Internal Control Questionnaire


S/N
TRANSACTION
RESPONSE
1
Purchases and Trade Creditors

Are official orders issued showing names of suppliers, quantities


ordered and prices?
Are copies of orders retained on files?
Who authorizes orders and what are their authority limits?

YES

NO

Is a record kept of orders placed but not


executed?
Are goods from suppliers inspected on arrival as to quantity and
quality?
Are all invoices received compared with copy
orders?
Are the invoices checked for calculation, extensions and
additions?
Are the purchases ledger personnel independent of those
responsible for approving invoices and credit notes?
Are the purchases ledger personnel independent of those
responsible for approving invoices and credit notes?
Is the control account function independent of purchases ledger
function?
2

Cheque Payments
Is the signing of blank cheques prohibited?
Is the signing of cheques restricted to
directors/Secretaries/other senior officials?
Is the duly authorized invoice produced in
respect of each payment before cheques are signed?
Are all cheques (other than those for cash) suitably crossed?
Are paid cheques returned by the bank
monthly?
Are these cheques filed in the order in which they appear in the
cash book?

Cash Payments
Apart from salaries and wages, are all payments made from
an imprest?
Are supporting vouchers examined and authorized by a party
other than the cashier or accountant?
Are expenditures appropriately analysed?
Are checks made on the balance of cash in hand at random
intervals by an independent official?

9.9 Advantages and disadvantages of ICQ


Advantages include the following:
- If drafted thoroughly, they can ensure that all controls are considered
- They are quick to prepare.
- They are easy to use and control.
- A manager or partner reviewing the work can easily see what has been
done.
Disadvantages include the following:
- The client may overstate controls.
- ICQ may contain a large number of irrelevant controls.
- They can give the impression that all controls are of equal weight.
- They may not include unusual controls, which are nevertheless
effective in particular circumstances.

CHAPTER TEN

AUDITORS LIABILITY AND LEGAL RESPONSIBILITY


10.1 INTRODUCTION:
Auditors may be liable for professional negligence. In recent years, this
has become an issue of great concern to auditors. Some audit firms
have

resorted

to

taking

professional

indemnity

insurance

to

safeguard their businesses, which in no certain terms, does not solve


the problem.
Auditors can also be liable under statute and can face penalty under
the criminal law for deception and reckless negligence. It is also not
uncommon for auditors to be held liable under civil law for
damages. What is more, auditors by nature of their contractual
relationship with their clients, face potential liability under law of
contract. A client may bring an action under contract law to
enforce auditors responsibility for loss which has occurred

through

the failure of the auditor to carry out their duties imposed by the
contract with the client. Furthermore, an auditor may be held liable
under the law of tort for duty of care, especially, where a third party is
involved.

10.2 Liability under Statute


Civil liability
Auditors may be liable for financial damages in respect of civil
offences

of misfeasance and breach of trust. This normally

happens when the auditors have misused their position of authority


for personal gains.

Criminal Liability
An auditor who makes a misleading statement and/or falsifies records
with the intent of deceiving, may face criminal liability.
Liability under Contract Law
When auditors accept appointment, they enter into a contract which
imposes certain obligations on them. These obligations arise from the
terms of the contract.

Both express and implied terms of contract

impact upon auditors. In the case of a statutory audit, the Company


Laws e.g. (Companies and Allied Matters Act and Companies Code)
prescribe the auditors duties, responsibilities and rights and express
terms of the audit contract cannot override the statutory provisions.

10.3

AUDITORS

LIABILITY

FOR

NEGLIGENCE

UNDER

COMMON LAW
An auditor will incur liability under common law if he is found
negligent

in

the

performance of his duty and the client suffers a loss as a result of such
negligence.

At

the same time, where loss has resulted but no negligence can be
attributed

to

the

auditor, he cannot be held liable for damages. Common law may be


referred

to

as

the

generally accepted code of conduct, or customs in interpersonal


relationship,

it

is

based on whatever is common in different cultural practices of the land.

What is Negligence?
Negligence means some act or omission which occurs because the
person concerned (e.g. an auditor) failed to exercise that degree of
reasonable skill and care which is reasonable to be expected in the
circumstances of the case.

What is reasonable is not what a super

careful and expert auditor would do but what an ordinary skill man (or
woman) would do in the circumstances.

CHAPTER ELEVEN

AUDITING IN COMPUTERISE ENVIRONMENT


11.1. INTRODUCTION:
Until recently, auditing firms used computers for very basic administrative
functions.
Programs have now been developed which allow more sophisticated use of
computers in the audit.
International guideline 15 on Auditing in an electronic data processing
environment provides additional guidelines necessary to comply with on the
basic principle when an audit is considered, in an electronic data processing
(EDP) environment or computerized accounting system.

The purpose of the guidelines is to provide specific guideline on the study


and evaluation on the accounting system and related international controls
in and computerized accounting environment. International Auditing
guidelines 15 defined an EDP environment as a situation when a computer
of any type or size is involved in the processing by the entity of financial
information significance to the audit whether that computer is operated by
the entity or by a third party. The use of computer to process financial
information may a significant impact on entitys accounting system and
related internal controls. In this guideline the term financial information
encompasses financial statements.
The guidelines contained in this IAG relates to EDP environment in general.
The manner and extent to which the guidelines are applied, however, we
vary according to the characteristics of the particular EDP environment. For
instance, in the introduction of all desired EDP control may not be
practicable when the microcomputers are used irrespective of the size of
the business.

11.2. CHARACTERISTICS OF AN ELECTRIC DATA PROCESSING


(EDP) EVIRONMENT:
The auditor needs to understand and consider the characteristics of the
EDP environment because the affect the design of the accounting system
and related internal controls, the selection of internal controls upon which
he intend to rely, and the nature, timing and extent of his procedures such
are usually segmented into
Organizational structure
Nature of processing
Design and Procedural Aspects
ORGANISATIONAL STRUCTURE:
An entity operating in EDP environment is expected to establish an
organizational structure and procedures to manage the EDP activities.
Attribute of an EDP organizational structure are
I. Concentration of function and knowledge;
In as much as most system employing electronic data processing
(EDP) method will among other things include certain manual
operation, generally the number of persons involved in the processing
of financial information is to a large extent reduced.
Certain data processing personal may be the only ones with a detailed
knowledge of the inter-relationship between the source of data, how it
is processed and the distribution and use of the output.

II.

Concentration of programs and data;


Transaction and master file data are often concentrated usually in
machine readable form, either in the computer installation located
centrally or in a number of installations distributed throughout an
entity. Computer programs which provide the ability/ access to data,
are likely to be stored at the same location as the data, absence of
appropriate controls will likely lead to an increase potential for
unauthorized access to and alteration of programs and data?
Ii nature of processing:
The use of computers may result in the design of system that
provided less visible evidence than those using manual producers. In
addition, these may not be assessable to a large number of persons.
System characteristic that may result from the nature EDP
processing are
i. absence of input document: data may be entered directly in to the
computer system without supporting documents. In some online
transaction system, (approved variation order) may be replace by other
procurers such authorization control contained in computer programs
(example credit limit approval).
ii. Lack of visible output: some data may be maintained normally possible to
follow a transaction through the system by examining source documents,
books of account, records, file etc. but in EDP environment, the transaction
trail may be partly in machine readable form and may exist for only a limit
period of time.
iii. Lack of invisible output: some transaction or results of processing may
not be printed in a manual system. In some EDP system, its normally
possible to examine visually the results of the processing. In other EDP
system, the result of processing may not be printed or only summary data
may be printed meaning the lack of visible output may result in the need to
access data retained on file readable only by the computer.
Iv. Ease of access to data and data and computer programmed: data and
computer programs may be accessed and altered at the computer or
through the use of computer equipments at remote location. So that in
absence. Of appreciate control, there is an increase potential for
unauthorized access to alteration of data and programs by the person
inside or outside the organization.
Design and procedural Aspects:
The introduction of EDP system will usually result in design and procedural
characteristics that are different from those found in manual systems.

This
-

different design and procedural aspects of EDP system include:


Consistence of performance
Programmed control procedures
Single transaction update of multiple or data base computer files
System general transactions
Vulnerability of data and programs storage media.

Programme/software package:
The auditor should ensure that access to computerized salary (payroll)
software package operating in an organization is restricted to only authorize
persons within the organization. This will be done by the use of PASSWORD
inbuilt into the computer program. The use of PASSWORD serves as a
means of preventing potential fraudster from gaining access to the payroll
system.
In organizations where computer networking is maintained there is usually
a computer configuration system that makes it possible for internal audit.
Unit department to view from their offices the entries into the salary system
by the finance department as the entries are being made.

11.3 THE AUDITORS APPROACH


Introduction

Audits are performed in a computer environment wherever


computer-based accounting systems, large or small, are operated by an
enterprise, or by a third party on behalf of the enterprise, for the
purpose of processing information supporting the amounts included in
the financial statements.
The nature of computer-based accounting systems is such that the
auditors are afforded opportunities to use either the enterprises or
another computer to assist them in the performance of their audit work.
Techniques performed with computers in this way are known as
Computer Assisted Audit techniques (CAATs) of which the following
are the major categories:
Use of Audit Software: computer programs used for audit purposes to examine the contents
of the enterprises computer files.
Use of Test Data: data used by the auditors for computer processing to test the operation of the
enterprises computer programs.
Knowledge and Skills

When auditing in a computer environment, the auditors should


obtain a basic understanding of the fundamentals of data processing
and a level of technical computer knowledge and skills which, depending
on the circumstances, may need to be extensive.

11.4 AUDIT TRAILS


The original purpose of an audit trail was to preserve details of all
stages

of

processing on paper.

This meant that transactions could be followed

stage-by-stage through a system to ensure that they had been processed


correctly: thus a sales system transaction record could be traced right
through the system because the audit trail would show a reference to the
customer order, delivery note, invoice and cheque receipt.
a.

Around the computer


Traditionally, therefore, it was widely considered that auditors could
fulfil their function without having any detailed knowledge of what
was going on inside the computer.
The auditors would commonly audit round the computer, ignoring
the procedures which take place within the computer programs and
concentrating solely on the input and corresponding output.

Audit

procedures would include checking authorization, coding and control


totals of input and checking the output with source documents and
clerical control totals.
However, besides consuming vast amounts of paper and computer and
printer
time,

the

traditional

approach

does

reality
computerized
manipulate

not

reflect

the

modern

of
accounting,

where

computers
and

are

used

to

interpret data to assist in the management of the business, as much as


to
the

satisfy
record-keeping

and

reporting

complexity

requirements.

As

the

of

computer systems has increased there has been a corresponding loss


of

audit

trail.
b. Through the computer
The round the computer approach is now frowned upon.

Typical

audit
problems that arise as audit trails move further away from the hard
copy

trail

include:
a. Testing computer generated totals when no detailed
analysis is available;
b. Testing the completeness of output in the absence of control
totals. Its recognized that one of the principal problems
facing the auditors is that of acquiring an understanding of
the workings of electric data processing and of the computer
itself.
Auditors now customarily audit through the computer. This involves an
examination of the detailed processing routines of the computer to
determine whether the controls in the system are adequate to ensure
complete and correct processing of all data. In these situations it will often
be necessary to employ computer assisted audit techniques.
CHAPTER TWELVE

BALANCE SHEET AUDIT


12.1 INTRODUCTION:
In the auditing standard, it is expected of the auditor to ascertain the
existence of the companys assets and liabilities at a balance sheet date.
This would enable the auditor to be able to form an opinion on the true and

fair view of the financial statements as at the balance sheet date, the
auditor has a duty to verify all the assets and liabilities appearing on the
balance sheet as well as to ensure that there are no other assets and
liabilities which ought to appear on the balance sheet.

12.2. VERIFICATION OF ASSETS:


In assets verification, the auditor seeks to establish:
a) Cost;
b) Authorisation;
c) Value;
d) Existence;
e) Beneficial ownership; and
f) Presentation in the account.
These aspects can be remembered by the mnemonic CAVEBOP. It is very
important that the clients internal accounting system be studied,
documented, tested and evaluated by the auditor. When verifying assets
at a balance sheet date, it is possible to divide the assets into four classes:
i) Valuation;
ii) Existence;
iii) Beneficial/ownership; and
iv) Presentation and the disclosure in the accounts
However, the cost and authorization of such assets would have been
verified in the year of acquisition hence, we use another mnemonic
VEBOP.

In respect of assets acquired during the current year under

review, the verification steps of CAVEBOP will apply.


Verification of Trade Debtors and Creditors

Reference has been made to the independent verification of certain


assets and liabilities by means of externally derived confirmations. This
method has the obvious advantage of minimizing the risk of collusion

between third parties and the companys staff with a view to deceiving the
auditor.

As a general rule, we may regard any form of independent

documentary evidence as superior, in terms of usefulness to the


auditor, to documentary evidence compiled by members of the
companys staff, irrespective of their level of authority.
It is common practice for auditors to circularize a carefully selected
sample of the companys debtors and creditors respectively as means of:
a) ensuring the accuracy of book entries in the sales and bought ledger,
and the resulting balances;
b) ensuring the proper functioning of the system of credit control as laid
down by the directors;
c) identifying accounts in dispute; and
d) ensuring that records concerned are completely up to date.
Where

suppliers

are

circularized,

the

independence

confirmations

received will support not only the creditors ledger balances, but also the
monthly statements which most suppliers send to their customers anyway.
Verification of Stock And Work In Progress
It is the responsibility of the management of an entity to ensure that the
amount of which stocks are shown in the financial statements
represents stocks physically in existence and includes all stocks owned
by the entity, while the auditor has a duty to obtain necessary evidence
to satisfy himself as to the ownership, existence and condition of
stocks valued at the year end.
The reasons why auditors pay particular attention to audit of stocks and
W.I.P are stock usually constitute one of the largest items in the balance
sheet, hence a relative small error in stock will have a material effect on
the financial statements. The following are other reasons:
a. Closing stock affects cost of sales and therefore profit and loss directly

b. Stock could be manipulated to achieve a targeted profit and loss


c. Different accounting bases are used in the valuation of stock
d. There may be problem of valuation, determination of the existence and
stages of development of some specialized stock in livestock, production
product etc.

12.3. Liability Verification


A balance sheet will contain many liabilities grouped under
various headings. The heading may include:
a) Share capital;
b) Reserves;
c) Creditors: amounts falling due after more than one year;
d) Provisions for liabilities and charges;
e) Creditors: amount falling due within one year; and
f) Contingent liabilities
However, the auditors duty is to:
i. verify the existence of liabilities shown in the balance sheet
ii. verify the correctness of the money amount of such liabilities
iii. verify the appropriateness of the description given in the accounts and
the adequacy of disclosure
iv. verify that all existing liabilities are actually included in the accounts

12.4 Verification Procedures


It is not possible to detail the procedures for verifying all possible
liabilities. However, some general principles can be discerned and
these should be applied according

to

the

particular

set

of

circumstances met within practice or in an examination. Some of them


are:
a. Schedule: Request or make a schedule for each liability or
a class of liabilities;
b. Cut-off: Verify cut-off. For example a trade creditor should not
be included unless the goods were acquired before the year
end;
c. Reasonableness: Consider reasonableness of the liability;

d. Internal control: Determine, evaluate and test internal control


procedures;
e. Previous date clearance: Consider the liabilities at the previous
accounting date. Have they all been cleared?;
f. Authority: The authority for all liabilities should be sought;
g. Description: Ensure that the description in the accounts of each
liability is adequate;
h. Documents: Examine all relevant documents. These will
include invoices, correspondence, debenture title deeds etc
according to the type of liability;
i. Vouching: The creation of each liability should be vouched, e.g.
receipt of a loan;
j. Accounting policies: The auditor must satisfy himself that
appropriate accounting policies have been adopted and applied
consistently.;
k. Disclosure: All matters which need to be known to receive a
true and fair view must be disclosed;
l. External verification: With many liabilities, it is possible to verify
the liability directly with the creditors;
m.Materiality: Materiality comes into all accounting and auditing
decisions;
n. Post-balance sheet event: Very important in this area than in
any other;
o. Accounting standards: Liabilities must be accounted for in
accordance with the relevant accounting and auditing
standards; and
p. Risk: Assess the risk of misstatement

Verification of Fixed Assets


The verification of fixed assets will often commence with an examination
of asset registers. One main use of asset registers to the auditor
is

to

facilitate the identification of assets during a physical check.

They also form an important part of the system of internal control. The
register must be agreed with the financial records and enquiries as to
the extent and frequency of checks by company officials on the
reconciliation of financial records, assets register and physical assets.

An asset register will normally contain the following information for each
asset:
a.

Suppliers name;

b.

date of purchase;

c.

original cost;

d.

estimate useful life;

e.

estimate residual value;

f.

summary of expenditure on repairs to date;

g.
estimated replacement cost entered at annual
intervals; and
h.

details of eventual disposal

12.5 AUDIT OF INTANGIBLE ASSET


The types of assets we are likely to encounter under this heading include
goodwill, patents, trademarks, copyrights etc.

All intangibles have a

finite economic life and should hence be amortized.

The following

special points may provide a brief but useful summary of documents to


be examined and procedures to be observed in relation to these types of
assets.
a. Goodwill
In a company situation will arise on purchase of a business. Then:
i. examine contract and allocation of purchase price to asset; and
ii. Normally remains in accounts at cost.
b. Patents
i. Examine patent and assignment, which can only be granted to
individual (perhaps employee), who will assign to company;
ii. Payment of renewal fees; and
iii. Accounting for royalties receivable.
c. Trademarks

i. Certificate issued by patent office;


ii. Assignment if purchased;
iii Reasonableness of design costs capitalized; and
iv. Payment of renewal fees.
d. Copyrights
i. Document of title;
ii. Assignment if purchased; and
iii. Life is authors life plus 50 years.

Practical questions:
1. . Name and discuss the qualities of an auditor.
2. Johnson Nig Ltd has propose to engage Paul & co chartered
accountants for the auditing of its statement of accounts. It has
been discovered that the principal partner of Paul & co is the
husband of madam Ngozi okere the financial controller of Johnson
Nig Ltd. There is also a discovery that the audit manager of Paul
& co. Mr. Denis had served 3 years jail term for fraudulently
swindling his former employer. PATO micro finance bank. Financial
consultant of Johnson Nig Ltd has approach you for advice; clearly
state what your advice would be and the professional basis of such
advice.
3. What are the differences between internal and external auditors
4. What is internal control and what are the qualities of a good
internal control system
5. Distinguish between fraudulent misapplication of asset and
fraudulent manipulation of account.
6. What step would you take in auditing balance sheet items

7. To what extent would an auditor be held responsible in his duty as


to detection of fraud in accounts
8. Discuss the steps necessary to remove an auditor
9. The internal auditor plays a complementary role to that of the
external auditor. Do you agree?
10. a. Define Fraud
b. Succinctly write on two major ways in which fraud can be
perpetrated.
c. mention three ways in which fraud can be prevented.
11. You are in charge of audit leading team of three other auditors to
examine the account books of Jude & co plc. Prepare an audit
memorandum for your audit managers approval.
12. How do you think the following auditing concepts can affect the
conduct and performance of an auditor.
a) Audit Evidence
b) Professional ethics
c) Audit Reporting techniques
13. Succinctly write on the following auditing terms
a) Audit plan
b) Audit programme
c) Audit planning memorandum
d) Accounting errors
14. What are the preliminary areas the auditor needs to explore
when embarking on audit in a computerize environment.
15. The Company and Allied Matters Act 1990 outlined the steps
necessary in the appointment and removal of an auditor of a
quoted company.

REFERENCES
Adeniyi A. Adeniyi (2004) Auditing and investigations wyse associates
limited mary land lagos
Ajayi .C. A. (1989) Financial control in public sector. 1989 annual
conference.

Akanbi, M. M. (2002) paper presented at national workshop on the


role of internal
auditors under full university autonomy
Companies and Allied Matters act 1990
Green B.S. (1994) Audit independence The Nigeria Accountant Vol,
25,
No.2, pp 20.
Harper, L. (1997) Fundamentals of management. London: prentice Hall
inc Ltd
Ibok, K. U. (1997) The audit of expenditure control records under the
uniform accounting system for Nigerian Universities. A position
paper FUTO owerri
ICAN professional code of conduct and guide for members
ICAN study pack on audit and assurance (intermediate)
Leslie, H. (1982) Principles of auditing 1st edition. Mc Donald and
Evans, Estover Plymouth.
Mautz R.R. and Shiraf .A. (1991) The philosophy of auditing American
Accounting Association
Millichamp, .A. H. (1987) Auditing manual . DE Publication ltd
Tunde, O. (1987) Auditing standards and guidelines. West African
publishers ltd Lagos Nigeria
WOOLF, .E. (1998) . Auditing Today, 3rd edition. New York Prentice Hall
Int.
Zeiger. R.E. (1986) Modern Auditing 4th edition john willey and sons
canada

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