Auditing I

Auditing Principles and
Practices I
CHAPTER ONE
AN OVERVIEW OF AUDITING
1
1.2. NATURE OF AUDITING
1.2.1 Definition of Auditing
AAAs Committee on Basic Auditing
concepts developed a definition of
auditing as follows:
2
Cont’d…
 Auditing is
A systematic process of objectively /

factually obtaining and evaluating
evidence regarding assertions about
economic actions and events to ascertain the
degree of correspondence between those
assertions & established criteria and
communicating the results to interested
3 users.
Cont’d…
 Auditing is :
 The accumulation and evaluation of evidence

about information to determine and report on
the degree of correspondence between the
information and established criteria.
 Auditing should be done by a competent,
independent person.
4
Cont’d…
 Thus, auditing encompasses both an
investigating process and a reporting
process.
 In the audit of an entity's financial statements
–Called a financial statement audit :
investigation means :
5
Cont’d…
 systematic gathering & evaluation of
evidence as a basis for reaching an opinion
about whether assertions made by management
in an entity's financial statements correspond in
all material respects with generally accepted
accounting principles (GAAP) or International
financial reporting standard (IFRS). 6
Cont’d…
 The opinion an auditor express in all audit
report depends on the information
content of evidence gathered during the
audit and indicate either the financial
statements are presented fairly in conformity
with GAAP, IFRS or are not presented fairly. 7

Cont’d…
 The International Federation of Accountants
(IFAC) defines an audit as:
 a work performed by an auditor to enable him/her
to express an opinion whether the financial

statements are prepared, in all material respects, in
accordance with an identified financial reporting
framework. 8
Cont’d…
Therefore, an audit gives a reasonable
assurance that the financial statements must
be free from material misstatements.
9
1.3. Distinguish B/n Auditing and
Accounting
 Accounting is the recording, classifying, and
summarizing of economic events for the purpose of
providing financial information used in decision making.
 Auditing is determining whether recorded
information properly reflects the economic events
that occurred during the accounting period.
10
 Accounting Provide certain quantitative information that
management and others can use to make decisions.
 While Auditing is
 Analytical work that starts with the end product

of accounting to tend credibility and fairness of
the measurements.
 In auditing, the recorded information is properly
reflects the economic events that occurred during the
accounting period. 11
 The auditor must also possess expertise
knowledge in the accumulation/gathering
and interpretation of audit evidence /facts.
 When auditing accounting data, auditors focus
on determining whether recorded information
properly reﬂects the economic events that
occurred during the accounting period.
12
1.4 TYPES OF AUDITS AND AUDITORS
1.4.1. TYPES OF AUDITS

Generally there are three types of audits:
1. Financial statement audit
2. Compliance audits, and
3. Operational audit
13
1. Financial Statement Audit
 The audit of financial statements ordinarily
covers the balance sheet and the related
statements of income, retained
earnings, and cash flows.
 The goal is to determine whether these
statements have been prepared in
conformity with specified criteria. 14
 The criteria may be;
International Financial Reporting Standards (IFRS),
Generally accepted accounting principles (GAAP)

as in the USA,
National company laws as in Northern Europe, or
The tax code in South America
15
Financial statement audits are normally
performed by firms or certified public
accountants (CPA)
 Users of auditors' reports include
management, investors, bankers
(creditors) and government agencies
and etc 16
2. Compliance Audits
 Is a review of an organization’s procedures to determine
whether the organization is following specific procedures,
rules or regulations set out by some higher authority.
 The purpose of compliance audit is; Dependent upon the
existence of verifiable data and of recognized
criteria or standards, such as established laws and
regulations, and or an organization's policies and
procedures. 17
 Like an independent financial statement
audits, a compliance audit is designed to
determine whether an entity's financial
statements are presented fairly in accordance
with generally accepted accounting principles or not.
 Compliance audits are conducted by either
independent auditors or government auditors.
18
3. Operational Audits
 An operational audit involves a systematic

review of an organization's activities, or
a part of them, in relation to the efficient
and effective use of resources. Sometimes
this type of audit is referred to as a performance
audit or management audit:
19
 Effectiveness is a measure whether an
organization achieves its goals and objectives.
 Efficiency shows how well an organization uses its
resources to achieve its goals.
20
1.4.2 TYPES OF AUDITORS
1. Internal Auditors,
2. External Auditors and
3. Government Auditors.
One important requirement of each type of
auditor is independence, in some manner form
the entity being audited.
21
1. Internal Auditors
 A principal goal is to investigate and evaluate the
effectiveness with which the various organizational
units of the company are carrying out their assigned
functions.
 The institute of Internal Auditors (IIA) has developed a
set of standards that should be followed by internal
auditors and has established a certification program.
22
 An individual meeting the certification
requirements set by the IIA, passing a
uniform written examination, can become
a certified internal auditor (CIA).
 Like external auditors, internal auditors must be
objective/ and independent.
23
 The IAs are employees of the company in which
they work, subject to the employer – employee
relationship.
 Their primary activities are to conduct compliance
and operational audits within their organization.
 However, they may also assist the external
auditors with the annual financial statement
audit. 24
2. External Auditors
 External auditors are often referred to as independent
auditors or certified public accountants.
 Such auditors are called "external" because they are not
employed by the organization being audited.
 An external auditor conducts financial statement audits.
 They may also conduct compliance and operational
audits.
 An external auditor practice as a sole proprietor or as a
member of a CPA firm.
25
 Professionals standards require that external
auditors maintain their objectivity and
independence when providing auditing or
other attestation services for clients. Three
Requirements for Becoming a CPA.
26
27
3.Government Auditors
 The primary responsibility of the government
audit staff is to perform the audit function for
government.
 The extent and scope of the audits performed
are determined by legislation in the various
jurisdictions.
28
END OF CHAPTER ONE
29

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Auditing Principles and

AAAs Committee on Basic Auditing

concepts developed a definition of

A systematic process of objectively /

 The accumulation and evaluation of evidence

 The opinion an auditor express in all audit

report depends on the information

content of evidence gathered during the

audit and indicate either the financial

statements are presented fairly in conformity

with GAAP, IFRS or are not presented fairly. 7

 The International Federation of Accountants

(IFAC) defines an audit as:

 a work performed by an auditor to enable him/her

to express an opinion whether the financial

Therefore, an audit gives a reasonable

assurance that the financial statements must

be free from material misstatements.

 Analytical work that starts with the end product

1.4.1. TYPES OF AUDITS

1. Financial statement audit

2. Compliance audits, and

International Financial Reporting Standards (IFRS),

Generally accepted accounting principles (GAAP)

The tax code in South America

 The purpose of compliance audit is; Dependent upon the

existence of verifiable data and of recognized

criteria or standards, such as established laws and

regulations, and or an organization's policies and

 An operational audit involves a systematic

2. External Auditors and

objective/ and independent.

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