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The word audit came from the Latin word audire, meaning to hear. According to Flint
(1988), audit is a social phenomenon which serves no purpose or value except if its practical
usefulness and its existence is wholly utilitarian. Flint (1988) further explains that the audit
function has evolved in response to a perceived need of individuals or groups in society who
seek information or reassurance about the conduct or performance of others in which they have
an acknowledged and legitimate interest.
Flint (1998) further argues that audit exists because interested individuals or groups are unable
for one or more reasons to obtain for themselves the information or reassurance they require.
Hence, an audit function can be observed as a means of social control because it serves as a
mechanism to monitor conduct and performance, and to secure or enforce accountability.
Mackenzie in the foreword to The Accountability and Audit of Governments made the following
remark:
Without audit, no control; and if there is no control, where is the seat of power?
All in all, an audit function plays a critical role in maintaining the welfare and stability of the
society.
Definition of audit
The Auditing Standard defined an audit as the independent examination of and an expression of
opinion on the financial statement of an enterprise by an appointed auditor in pursuance of that
appointment and in compliance with any relevant statutory obligation.
According to R. K. Mautz, auditing is concerned with the verification of accounting data, with
determining the accuracy and reliability of accounting statements and reports.
Lawrence R. Dicksee, puts it this way an audit is an examination of accounting records
undertaken with a view to establishing whether they correctly and completely reflect the
transactions to which they relate. In some instances, it may be necessary to ascertain whether the
transactions themselves are supported by authority.
Objectives Of Audit
Basic objective of auditing is to prove true and fairness of results presented by profit and loss
account and financial position presented by balance sheet. Its objectives are classified into two
groups which are given below:
1.
The main objectives of audit are known as primary objectives of audit. They are as follows:
Examining the system of internal check.
Checking arithmetical accuracy of books of accounts, verifying posting, costing,
balancing etc.
Verifying the authenticity and validity of transactions.
Checking the proper distinction of capital and revenue nature of transactions.
Confirming the existence and value of assets and liabilities.
Verifying whether all the statutory requirements are fulfilled or not.
Proving true and fairness of operating results presented by income statement and
financial position presented by balance sheet.
Audit engagement
Audit engagement refers to audit performed by an auditor. It is the very first stage of an audit
procedure where the client is notified by the auditor that the work pertaining to audit has been
accepted by him/her and also provides clarifications with regard to the scope and purpose of
audit.
To be more specific, audit engagement can be referred to the written letter that the auditor uses to
notify the client that he/she would be engaging in auditing services. Thus, the audit engagement
procedure is basically a negotiation based on professional terms that takes place between
prospective customer and a public accounting entity. This procedure is used for finding new
customers and offer accounting related services to different businesses.
The auditor uses the term audit engagement when the entity has to undergo the auditing
procedure. This could imply varied things and therefore it is necessary that the auditor clarifies
what she/he exactly means by the term. Irrespective of the definition followed by the auditor,
he/she makes it a point to follow certain specific guidelines and procedure for offering the
services.
I.
Pre-engagement procedures
Prior to actually beginning an audit, there are several important steps. First, the audit firm
should decide whether or not to accept the client, or whether to continue to perform work
on its behalf.
If the client has been involved in unethical business conduct or has changed its business to
a riskier industry, the renewal of an annual engagement is not an automatic process. The
important steps of pre-engagement procedures are given below.
An independence assessment
A pre-engagement assessment
Communications with the previous auditor (if applicable). Throughout this process, you
should expect a letter that discloses and communicates the auditors independence of the
entity and confirmation of the auditors compliance with relevant professional standards.
Disclosure of all relationships between the auditor and the entity and its related entities
that may reasonably be thought to bear on the auditors independence.
Once the pre-engagement assessment is completed, the auditor will then issue an
Engagement Letter, which will include the following:
Engagement objectives, scope and limitations
Managements responsibilities;
Responsibility for adjustments;
The auditor's responsibilities; and
Other matters, such as fees.
Engagement letter
An engagement letter defines the legal relationship (or engagement) between a professional firm
(e.g., law, investment banking, consulting, advisory or accountancy firm) and its client(s). This
letter states the terms and conditions of the engagement, principally addressing the scope of the
engagement and the terms of compensation for the firm.
Changes in the client's business operations, accounting systems, and internal control.
The reporting entity's business environment and operations, including any going concern
issues.
The entity's applicable financial reporting framework, and if a special purpose framework
is the most appropriate and reasonable presentation of financial position and results of
operations.
Questions from the review of the prior year's audit documentation, including whether
financial statements in the first year of transition to a special purpose framework will be
single period or comparative. (Restatements of prior period would be required.)
Possible modifications of the prior year's audit strategy to increase efficiency.
Suggestions for modifying the prior year's procedures and documentation to save time,
particularly considering the use of a new special purpose framework.
Staffing and on-the-job training suggestions.
Administrative details such as timing, budgets, and billing arrangements.
Audit Planning
Once the auditor has been formally retained by the client, substantive audit planning can begin.
A critical element of planning the audit is determining materiality. Materiality is a flexible
concept that is the subject of much academic research and professional best practices, but it is
basically a function of assets or income that would impact the decision-making of a user of
financial statements.
Planning procedures are the first and perhaps most important step in conducting a successful
internal audit. Without adequate planning, the likelihood of missing relevant control weaknesses
or encountering engagement-related problems increases considerably. Moreover, improper
planning can lead to changes in scope or objectives after much of the audit work has already
been completed.
Client operations
The engagement team should gain an understanding of the auditable unit's business and
operations as well as any of its unique characteristics or business practices. To begin, the team
should review any prior-year work papers related to the client. They should also consider
obtaining background information on the client's responsibilities and processes via web searches,
company document reviews, and discussions with senior management or other personnel familiar
with the client's business area.
Administrative steps
Administrative planning items help lay the foundation for planning work and should be
completed before fieldwork begins. Internal auditing should begin by creating a checklist to
guide the planning process, including items such as client notification, client contacts, any
documentation needed before fieldwork, and creation of the audit program and budget. Auditors
should also draft an announcement letter or similar communication to the auditable unit and
company leadership.
Audit program
The audit program sets forth the procedures necessary to complete an efficient and effective
audit. It consists of a detailed plan of the work to be performed and includes the steps required to
achieve audit objectives. In most instances, a well-structured audit program:
Risk Assessment
During the planning phase, auditors will gather information about your entity and its operating
environment by:
Making enquiries of all key employees to help identify potential risk factors; and
Reviewing results from previous year to identify any major changes and establish/confirm
the scope, materiality, timing, who will be assigned to the audit, and the basic audit approach.
In addition, we will seek information such as:
Financial statements, budgets, financial performance measures/metrics, audit committee
minutes, filings with regulators, judgements and estimates.
Vision, mission, values, objectives, strategies, organizational structure, board of directors
meeting minutes, job descriptions, operating performance, business drivers, policy &
procedure manuals and non-financial performance measures.
Creditors, media, analyst reports, government agency reports and the internet.
Professional standards require auditors to obtain a reasonable understanding of internal controls
in order to plan the audit. Documenting the systems of internal controls or updating existing
documentation can be made more efficient by having the appropriate staff from your office assist
the auditor in obtaining this information.
If there are any significant changes in specific business processes, you should inform the auditor
at once so that the potential impact of the changes can be assessed well in advance of the critical
audit completion target and so that audit plans can be adjusted accordingly.
For each significant business process identified, the auditor will perform a walkthrough to ensure
that they are operating as documented. A walkthrough includes making inquiries of personnel,
observing the application of specific controls and inspecting documents and reports. It addresses
control implementation at a point in time.
After the walkthroughs are completed, the design and implementation of internal control are
evaluated. The risk of material misstatement is evaluated and segments that require special
consideration are identified. Audit procedures are then designed by our staff.
Risk Response
The audit team spends much of this phase performing the procedures outlined in the risk
assessment phase. This typically involves obtaining confirmations, performing substantive tests,
analytical procedures and enquiring with management. Evidence obtained in the risk assessment
phase will continue to be evaluated.
The auditor should have provided you with information needs list prior to coming for their yearend visit.
This list should itemize schedules and working papers required by the auditor for each financial
statement component along with the scheduled completion date.
In addition:
We suggest that preparation of each schedule be assigned to specific employees in your
office in order to make the process easier to manage.
Schedule and working paper formats should be determined and agreed upon by both
yourself and the auditor. This should minimize the time spent by your staff in assembling
the information and help avoid the need to revise the material.
An effective way of providing the auditor with the schedules and documentation
identified in the information needs list is by assembling a well-structured financial
statement file.
A good file that supports the preparation of financial statements will decrease questions
and information requests by the auditor.
A good file has the following characteristics:
It supports all numbers in the financial statements and all numbers presented in the notes.
It includes all schedules and reports used to compile the financial statement numbers.
The schedules and reports tie directly to the accounting records. This should be done in
such a way that one is easily able to see that all accounts in the trial balance have been
completely included in the financial statements.
The organization of the file is driven by the financial statement components. For
example, the file could be organized in order of assets, liabilities, revenues and expenses.
Explanations of significant variances from year to year will always be required by the
auditors. Analytical review is a valuable tool for understanding the nature of changes in
the balances and transactions of an organization and in evaluating the reasonableness of
the numbers. An analysis of significant changes should be incorporated into the
supporting file.
Reporting
The audit matters and findings will be initially communicated to management in the form of an
audit report, which will include the draft audit opinion. A management letter will also be created
that will outline issues encountered during the year and recommendations for improvement.
Once the findings are agreed upon, a final version of the report will be approved by the Auditor
General and presented to the audit committee.
Summary;
Findings;
Summary
The report summary (sometimes called an executive summary) should contain the key points of
the report in very condensed form. It should contain about 400 words, summarising all sections
of the report but with most emphasis on the report's findings and what should happen in
response.
The summary should be written in plain, non-technical language as far as possible. Its intended
audience is anyone involved in or interested in the website.
Findings
Each report should contain a section containing the findings of the audit. You will probably want
to know straight away if your website achieves conformance rating Single-A, Double-A or
Triple-A with the WCAG. It should also give a high-level description of some of the main issues.
For example, it may report that the site contains a substantial number of images that did not have
alternative text. It should not, however, list every image without alternative text. This
information should be presented in a detailed appendix.
This section should be longer than the summary but not a page-by-page description of every
accessibility check.
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The organization of detailed appendices may vary. The essential requirement is a full listing of:
audit checkpoints;
pages checked;
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Conclusion
Audit, or more accurately, an audit of financial statements, is the verification of the financial
statements of a legal entity, with a view to express an audit opinion. The purpose of an audit is to
provide an objective independent examination of the financial statements, which increases the
value and credibility of the financial statements produced by management, thus increase user
confidence in the financial statement, reduce investor risk and consequently reduce the cost of
capital of the preparer of the financial statements. The engaged audit firm always try to follow
the rules and laws related with this. They always try to draw a reasonable opinion on their
observed evidences.
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