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AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
INTRODUCTION
Economic decisions in every society must be based upon the information available at the time the
decision is made. For example, the decision of a bank to advance a loan to a business is based upon
previous financial relationships with that business, the financial condition of the company as
reflected by its financial statements and other factors.
If decisions are to be consistent with the intention of the decision makers, the information used in
the decision process must be reliable.
Unreliable information can cause inefficient use of resources to the detriment of the society and to
the decision makers themselves. In the lending decision example, assume that the bank advances
the loan on the basis of misleading financial statements and the borrower Company is ultimately
unable to repay, as a result, the bank has lost both the principal and the interest. In addition, another
company that could have used the funds effectively was deprived of the money.
As society become more complex, there is an increased likelihood that unreliable information will
be provided to decision makers. There are several reasons for this: remoteness of information,
voluminous data and the existence of complex exchange transactions.
A common way to obtain such reliable information is to have some type of verification (audit)
performed by independent person. The audited information is then used in the decision making
process on the assumption that it is reasonably complete, accurate and unbiased.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia,
Greece, Egypt. Rome, U.K. among others
The original objective of auditing was to detect and prevent errors and frauds.
Auditing evolved and grew rapidly after the industrial revolution in the 18th century. With the
growth of the joint stock companies, the ownership and management became separate. The
shareholders who were the owners needed a report from an independent expert on the accounts of
the company managed by the board of directors who were the employees.
The objective of audit shifted and audit was expected to ascertain whether the accounts were true
and fair rather than detection of errors and frauds.
In conclusion, it can be said that auditing has come a long way from hearing of accounts to taking
the help of computers to examine computerized accounts.
DEFINITION OF AUDITING
The term auditing has been defined by different authorities.
Prof. L.R.Dicksee. "Auditing is an examination of accounting records undertaken with a view to
establish whether they correctly and completely reflect the transactions to which they relate.
The international auditing practices committee defines auditing as “the independent examination
of financial information of any entity whether profit oriented or not and irrespective of size/legal
form when such an examination is conducted with a view to express an opinion thereon”.
Spicer and Pegler: "Auditing is such an examination of books of accounts and vouchers of
business, as will enable the auditors to satisfy him/herself that the statement of financial position
is properly drawn up, so as to give a true and fair view of the state of affairs of the business and
that the profit and loss account gives true and fair view of the profit/loss for the financial period,
according to the best of information and explanation given to him and as shown by the books; and
if not, in what respect he is not satisfied."
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
Auditing is a systematic and scientific examination of the books of accounts and records of
business to enable the auditor to satisfy him/herself that the profit and loss account and the balance
sheet are properly drawn up so as to exhibit a true and fair view of the financial state of affairs of
the business and profit or loss for the financial period.
AN AUDITOR
In the modern world today, the understanding of an auditor is quite different from the early days.
An auditor is an independent person or firm (group of persons) who is required to examine the
accounting records and financial statements of the business in order to form an opinion and submit
the report to the management and shareholders.
Accountancy body established in the United Kingdom under the Companies Act of 1985 Section
161, For a certified accountant (Auditor), he/she should attain one of the courses from the
recognized Accounting Bodies in the world like:
Association of Chartered Certified Accountants (ACCA)
Association of Certified Accountants (ACA)
Certified Public Accountants (CPA)
Institute of Chartered Secretaries (ICS)
Certified Institute of Secretaries (CIS)
SCOPE OF AUDIT.
An audit-ISA 200 on the general principles, nature, scope and objectives of an audit defines an
audit authoritatively as “Independent examination of and expression of an opinion on the financial
statements of the reporting entity by an appointed auditor in pursuance to his appointment and
in compliance with any other relevant statutory obligations.”
The scope of audit is increasing with the increase in the complexities of the business. It is said that
long range objectives of an audit should be to serve as a guide to the management future decisions.
Today, most of the economic activities are largely conducted through public finance. The auditor
has to see whether these larger funds are properly used. The scope of audit encompasses
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
verification of accounts with an intention of giving opinion on its reliability. Hence, it covers cost
audit, management audit, social audit etc.
It should be remembered that an auditor just expresses his/her opinion on the authenticity of the
account.
He/she has no power to take action against anybody. In this regard it’s said that “an auditor is a
watch dog but not a blood hound”.
AUDIT FIRMS
Audit firm means either the partners of a firm providing audit services or sole practitioner
providing audit services as appropriate.
The common and international practicing audit firms in
Rwanda include;
(a) Ernst and Young (EY)
(b) Pricewaterhousecoopers (PWCs)
(c) KPMG Uganda
(d) PKF Uganda
(e) Delloitte & Touché
(f) Among others.
An audit firm registered may practice as;
(a) Sole practitioner
(b) Partnership
(c) Company
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
(b) Taxation services like completing the annual tax returns on behalf of the client, assisting
the company secretary to complete the tax liability, lodging on behalf of the client any tax appeals
with the commissioner of Income Tax and educating the client about the management,
computations and payments of VAT, PAYE and corporation taxes.
(c) Audit and related services like background information about the client, planning for
the audit of the client, analytical review procedures, obtaining audit evidence, completing
the audit and reporting the finding.
(d) Management and consultancy services like recruitment of management trainees on behalf
of the client, organizing seminars and training workshops for the client employees, preparing
training schemes manual for the staff of the client among others.
(e) Technical and manpower development. The firm would assist the client in setting up
and maintaining a computerized systems, ensuring for effective changes in the systems and
assisting the management for full implementations of the new system.
Manager
Accountant-in-charge
Audit Staff
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
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AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
(C) ACCOUNTANT-IN-CHARGE
Execute audit assistant functions to check the accuracy of accounting systems and
procedures.
Review, assess and recommend changes in accounting systems and controls of a business
unit.
Verify and inspect accounts receivable and payable ledgers and general ledger for its
accuracy.
Check, inspect and reconcile bank deposits and payments.
Inspect, test and assess software and hardware systems for its failure.
Check all accounting and clients’ databases are updated and functioning properly.
Study, inspect and assess, budgets, balance sheets and other related financial statements and
records.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
OBJECTIVES OF AUDITING.
Auditors are basically concerned with verifying whether the accounts exhibit true and fair view of
the business. The objectives of auditing depend upon the purpose of his appointment.
PRIMARY OBJECTIVE.
The primary objective (duty) of an auditor is to report to the owners whether the business (balance
sheet) gives a true and fair view of the state of affairs of the business and the profit and loss A/C
gives a correct figure of profit or loss for the financial year. It should be remembered that in case
of a company, he reports to the shareholders who are the owners of the company and not to the
directors The auditor is also concerned with verifying how far the accounting system is successful
in correctly recording transactions. He has to see whether accounts are prepared in accordance
with recognized accounting policies and practices and as per statutory requirements.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
SECONDARY OBJECTIVES:
The following objectives are incidental to the main objective of auditing.
(1) Detection and prevention of errors: Errors are mistakes committed unintentionally because
of ignorance, carelessness. Errors are of many types:
Errors of Omission: These are the errors which arise on account of transaction into being recorded
in the books of accounts either wholly partially. If a transaction has been totally omitted it will not
affect trial balance and hence it is more difficult to detect. On the other hand if a transaction is
partially recorded, the trial balance will not agree and hence it can be easily detected.
Errors of Commission: When incorrect entries are made in the books of accounts either wholly,
partially. Eg: wrong entries, wrong Calculations, postings, carry forwards etc such errors can be
located while verifying.
Compensating Errors: when two/more mistakes are committed which counter balances each
other. Such an error is known as Compensating Error. Eg: if the amount is wrongly debited by Frw
100 less and Wrongly Credited by Frw 100 such a mistake is known as compensating error.
Error of Principle: These are the errors committed by not properly following the accounting
principles. These arise mainly due to the lack of knowledge of accounting. Eg: Revenue
expenditure may be treated as Capital Expenditure.
Clerical Errors. A clerical error is one which arises on account of ignorance, carelessness,
negligence etc.
LOCATION OF ERRORS:
It is not the duty of the auditor to identify the errors but in the process of verifying accounts, she/he
may discover the errors in the accounts. The auditor should follow the following procedure in this
regard.
Check the trial balance.
Compare list of debtors and creditors with the trial balance.
Compare the names of account appearing in the ledger with the names of account in the trial
balance.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
Check the totals and balances of all accounts and see that they have been properly shown in
the trial balance.
Check the posting of entries from various books into ledger.
Make sure that all accounts from the ledger are taken into accounts.
Compare the various items from the trial balance with that of the previous year.
Find out the amount of difference and see whether an item of half or such amount is entered
wrongly.
Check differences involving round figures as Frw 1,000; Frw 100 etc .
See where there is misplacement or transposition of figures that is 45 for 54; or 81 for 18 etc.
See that no entry of the original book has remained un posted.
(2) Detection and Prevention of Fraud. A fraud is an Error committed intentionally to deceive/
to mislead/ to conceal the truth/ the material fact. Frauds may be of 3 types.
(i) Misappropriation of Cash. This is one of the major frauds in any organization. It normally
occurs in the cash department. This kind of fraud is either by showing more payments/ less receipt.
The cashier may show more expenses than what is actually incurred and misuse the extra cash.
E.g. showing wages to dummy workers. Cash can also be misappropriated by showing less receipt.
E.g. not recording cash sales. Not allowing discounts to customers.
The cashier may also misappropriate the cash when it is received. Cash received from 1st customer
is misused and when the 2nd customer pays, it is transferred to the 1st customer’s account. When
the 3rd customer pays it goes forever. Such a fraud is known as “Teeming and Lading”.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
(ii) Misappropriation of Goods. Here, records may be made for the goods not purchased or not
issued to production department. Goods may be used for personal purpose. Such a fraud can be
deducted by checking stock records and physical verification of goods.
(iii) Manipulation of Accounts. This is finalizing accounts with the intention of misleading
others. This is also known as “WINDOW DRESSING”. It is very difficult to locate because it’s
usually committed by higher level management such as directors. The objective of WD may be to
evade tax, to borrow money from bank, to increase the share price etc.
WAYS OF WINDOW DRESSING (MANIPULATION OF A/C)
Inflation of sales by including fictitious invoices for credit sales, etc
Inflating gross profit by omitting purchases or wages or other manufacturing expenses.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
Reduction in purchases by entirely omitting certain invoices, post dating certain purchases
invoices. Etc
Over valuation of company’s assets and liabilities
Showing revenue expenditure as capital expenditure and vice versa.
By creating a secret reserve only known by the directors under finances from under valuing
the company’s assets, under provision for depreciation and doubtful debts.
Showing better financial state of affairs of the balance sheet than what it actually reflected by
the accountant.
Provision of none or less depreciation so as to reflect high profit, more tax, large working
capital
WHY PEOPLE COMMIT FRAUD (THE CAUSES OF FRAUD TODAY)
There is no such thing as an accidental fraud. What separates error from fraud is intent; the
accidental from the intentional.
Poor internal controls
Lack of proper authorization
No separation of authorization, custody, record keeping
No independent checks on performance
Lack of clear lines of authority
Inadequate documentation
Management override of internal controls
Collusion between employees and 3rd parties
Collusion between employees and management
Poor or non-existent of ethics policy
Limited, unclear or no policies and procedures to direct business function processes
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
To conclude, it can be said that it is not the main objective of the auditor to discover frauds and
irregularities. He is not an insurance against frauds and errors. But if he finds anything of a
suspicious nature, he should probe it to the fullest.
ADVANTAGES OF AN AUDIT TO SOLE PROPRIETORSHIP
(a) Tax liability. The previous years audited accounts are generally acceptable by the income
tax authority as a basis for ascertainment of tax liability due from the proprietor.
(b) Errors and frauds. The presence of auditors in the business shall help in the detection and
prevention of errors and frauds. This is because during the audit the accountant, bookkeepers
and the cashiers are naturally fearful to the auditor and therefore they will try their level
best to be accurate and update, vigilant and objective in their day record keeping.
(c) Insurance claims. The previous years’ audited statement of financial position and
comprehensive income shall be used by the insurance company to find out and settle on
any insurance claim due from the insurance company to the client business against insurance
risks like fire, theft or burglary.
(d) Loan negotiation. The managers and owners of the business may be intending or willing
to borrow from lenders of financial institutions for expansion programmes and they may be
intending to use the statement of financial position
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
LIMITATIONS/DISADVANTAGES OF AUDITING
Generally the following are the Limitations of auditing
1. Non-detection of errors and frauds. Auditor may not be able to detect certain frauds which
are committed with mollified intentions.
2. Dependence on explanation by others. Auditor has to depend on the explanation and
information given by the responsible officers of the company. Audit report is affected adversely if
the explanation and information prove to be false.
3. Dependence on opinions of others. Auditor has to rely on the views or opinions given by
different experts viz; Lawyers, Solicitors, Engineers, Architects etc. he cannot be an expert in all
the fields
4. Conflict with others. Auditor may have differences of opinion with the accountants,
management, engineers etc. In such a case personal judgment plays an important role. It differs
from person to person.
5. Effect of inflation. Financial statements may not disclose true picture even after audit due to
inflationary trends.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
6. Corrupt practices to influence the auditors. The management may use corrupt practices to
influence the auditors and get a favourable report about the state of affairs of the organisation.
7. No assurance. Auditor cannot give any assurance about future profitability and prospects/going
concern of the company.
8. Inherent limitations of the financial statements. Financial statements do not reflect current
values of the assets and liabilities. Many items are based on personal judgment of the owners.
Certain non-monetary facts cannot be measured. Audited statements due to these limitations
cannot exhibit true position.
9. Detailed checking not possible. Auditor cannot check each and every transaction. He may be
required to do test checking.
TYPES OF AUDIT:
Statutory Audit: any audit carried on as per the requirement of law is called as a statutory audit.
eg: all private and public limited companies that fulfill two out of three of the criteria below
do need the statutory audit.
(a) A turnover in excess of £5.6m (Frw.5.6bn).
(b)A net asset value of £2.8m (Frw2.8bn).
(c) Employ more than 50 people
All entities, registered under Companies’ Act, must get their books of account audited. Various
other bodies require an audit under law, including; Banks, insurance companies, NGOs, among
others.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
Auditors in the course of their work will give advice to the management about the
improvements of the ICS.
It is important when valuing shares and bonds.
It eases comparability between two firms or within the financial periods.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
of errors and frauds in cost accounting records. The companies act implies the central government
to order cost audit in case of specifies companies.
Management audit. Management audit may be defined as a comprehensive examination of an
organizational structure of a company, institution/government and its plans and objectives it means
of operations and use of human and physical facilities. The main objective of management audit
is to see how far the objectives of management are fulfilled. It aims to ascertain whether sound
management prevails throughout the organisation and evaluates its efficiency in the system of its
operation.
Continuous audit. A continuous audit is one in which the auditor visits his client’s office at
regular intervals throughout the year to verify the account. The objective of CA may be;
To get final account audited immediately after the closure of accounting year.
When the business is very large.
When interval control system is into effective.
When regular final accounts are required.
iii) That auditors test everything in the financial statements. It is not true. They simply sample.
iv) That the audit report gives assurance that no fraud has been committed. An auditor does not
have a statutory duty to represent and detect fraud, although many people think he does.
v) That the audit report gives assurance that the figures are absolutely correct.
vi) That the balance sheet valuation represents a fair valuation of the reporting entity.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
vii) That the amounts in the financial statements are stated precisely (materiality is misunderstood).
viii) That a clean audit report means that the entity will continue to exist.
HOW TO REDUCE THE EXPECTATION GAP
By educating the public on the role of the auditors.
By auditors improving their performance
By improving the auditing standards
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
responsibility of the directors to adopt consistent and appropriate accounting policies in order to
prepare and present the financial statements. The financial statements have to comply with national
legislative requirements and International Financial Reporting Standards (IFRSs).
Accounting is the process of recording, classifying, summarizing and reporting financial
information in a logical/systematic manner for the purpose of decision making. To provide relevant
& reliable information, accountants must have a thorough understanding of the principles and rules
that provide the basis for preparing the financial statements.
In auditing the financial statements, the concern is with determining whether the presented
financial statements properly (true and fair) reflect the financial information that occurred during
the accounting period. Since auditors are primarily concerned with the end result of this work i.e.
do the financial statements show a true and fair view? In order to arrive at their conclusion the
auditors must have a deep knowledge and understanding of accounting (including applicable
accounting standards) and in practice, the directors will consult with the auditors as to appropriate
accounting policies to follow.
Many financial statement users and members of the general public confuse auditing with
accounting. The confusion results because most auditing is concerned with accounting
information, and many auditors have considerable expertise in accounting matters. The confusion
is increased by giving the title “Chartered Accountant” to individuals performing a major portion
of the audit functions.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
AUDITING Vs INVESTIGATION
Points of Auditing Investigation
difference
1. definition Auditing is the act of examining books Investigation is the act of detail
of accounts so as to prove true and examination of activities so as
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AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
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AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
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AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
In order to show a true and fair view the auditor should ensure that:
The final accounts agree with the books of accounts.
The provision for depreciation is proper.
The closing stock is physically verified and valued properly.
Intangible assets like goodwill, patents, preliminary expenses or other deferred revenue
expenses are written off properly.
Proper provision is made for bad and doubtful debts.
Capital expenses are not treated as revenue expenses and vice versa.
Capital receipts are not treated as revenue receipts.
Effect of changes in rate of foreign exchange on value of assets and liabilities is recorded in
the books properly.
Contingent liabilities are not treated as actual liabilities and vice versa.
Provision is made for all known losses and liabilities
3. Disclose all material facts: The books of accounts must disclose all material facts regarding
revenue, expenses, assets and liabilities. Material means important and essential. The disclosure
of important matters in the accounts helps the users in taking business decisions. There should be
neither suppression of vital facts nor misstatements.
4. Legal requirements: In case of limited company the account must disclose the matters required
to be disclosed under the Companies Act.
Special companies such as banks, insurance, electricity supply companies prepare accounts as
prescribed under special laws. A co-operative society, a trust etc. must also prepare the accounts
as required under relevant laws.
QUALITIES OF AN AUDITOR
Integrity: This is an essential quality of an auditor. He should be honest with his profession and
must abstain from reporting as per the wish of management simply due to fear (for example he
may not be appointed as auditor next year) or favour (auditor should be financially embarrassed,
need to be financially OK, in order to impair independence).
Independence: It means that the auditor should not subordinate his judgment to that of the client.
It is important that the auditor should not only appear to be independent but should be in reality.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
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Objectivity: The auditor’s view point must be complete objectivity that is detached, fair,
impersonal and unbiased. An independent state of mind and an unbiased and objective judgment
are the cornerstones of the profession of auditors.
Logical abilities: The auditors have an ability to analyze logically, to interpret problems and facts
and to draw a logical conclusion.
Communication ability: The auditor must have proficient written and oral communication ability.
Technical competence: The enterprise always expects that professional accountant engage as
auditor command full technical competence. Therefore, the auditor must have full knowledge of
technicalities of accounts, audit, taxation, financial management, economics, other laws,
mathematics, etc.
Continuing awareness of latest developments: The auditor should keep himself aware of
continuing developments in business as well as his profession. The introduction of E-commerce
or E-business and fast developing information technology has changed the business mode globally.
Therefore, the auditor must keep his knowledge level intact through continued professional
education.
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
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The audit should be performed and the report prepared with due professional care by person who
have adequate training, experience and competence. This can be acquired through a combination
of general education, technical knowledge obtained through study and formal courses concluded
by a qualifying examination recognized for this purpose and practical experience under proper
supervision.
4. Work performed by others:
When the auditor delegates work to assistant or uses work performed by other auditors or experts,
he will continue to be responsible for forming and expressing his opinion on the financial
information. At the same time, he is entitled to rely on work performed by others provided he
exercises adequate skills and care and is not aware of any reason to believe that he should not have
relied. The auditor should carefully direct, supervise & review work delegated by assistants. He
should obtain reasonable assurance that work performed by other auditors or experts is adequate
for this purpose.
5. Documentation:
The auditor should document matters, which are important in providing evidence that the audit
was carried out in accordance with the basic principles.
6. Planning:
The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner. Plans should be based on knowledge of client's business. They should be further
developed and revised, if required, during the course of audit.
7. Audit evidence:
The auditor should obtain sufficient appropriate audit evidence through the performance of
compliance and substantive test procedure. It will enable him to draw reasonable conclusions there
from on which he has to base his opinion on the financial information.
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AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
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The auditor should gain an understanding of the accounting system and related internal controls.
He should study and evaluate the operation of those internal controls upon which he wishes to rely
in determining the nature, timing and extent of other audit procedures.
9. Audit conclusions and reporting:
The auditor should review and assess the conclusions drawn from the audit evidence obtained and
from his knowledge of business of the entity as the basis for the expression of his opinion on the
financial information.
6.1 MATERIALITY:
ISA 320 audit material states; Information is material if its misstatement or omission could
influence the economic decisions of users taken on the Basis of the financial information.
The assessment of what is material is a matter of professional judgement.
Materiality depends on the size and Nature of the item, judged in the particular circumstances of
its misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary
qualitative characteristic which the information must have if it is to be useful.
The concept of materiality recognizes that some matters, either individually or in the aggregate,
are relatively important for true and fair presentation of financial information in conformity at both
the overall financial information level and in relation to individual account balances and classes of
transactions.
Materiality may also be influenced by other considerations, such as the legal and regulatory
requirements, non-compliance with which may have a significant bearing on the financial
information, and consideration relating to individual account balances and relationships. This
process may result in different levels of materiality depending on the matter being audited.
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AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
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GOING CONCERN:
When planning and performing audit procedures and in evaluating the results thereof, the auditor
should consider the appropriateness of the going concern assumption underlying the preparation
of the financial statements.
The auditor’s report helps establish the credibility of the financial statements. However, the
auditor’s report is not a guarantee as to the future viability of the entity.
An entity’s continuity as a going concern for the foreseeable future, generally a period not to
exceed one year after the balance sheet date, is assumed in the preparation of financial statements
in the absence of information to the contrary.
Accordingly, asset and liabilities are recorded on the normal course of business. If this assumption
is unjustified, the entity may not be able to realize its assets at the recorded amounts and there may
be changes in the amounts and maturity dates of liabilities. As a consequence, the amounts and
classification of assets and liabilities in the financial statement may need to be adjusted.
FINANCIAL INDICATORS
i) Excess of liabilities over assets or having a net current liabilities position.
ii) Inability to pay debts as falls due.
iii) Significant liquidity crisis and inability to raise new finance
iv) Defaults on loans
v) Falling turnover and increasing losses
vi) Loss of key suppliers or customers
vii) High levels of static stock, debtors and creditors
viii) Competition, cheap products
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UGANDA CHRISTIAN UNIVERSITY, MBALE UNIV. COLLEGE
AUDITING LECTURE NOTES FOR BBA, YEAR THREE, DAY SESSION,
ADVENT SEMESTER, 2017 BY OWINO SAMSON
OPERATIONAL INDICATORS
1. Change in market or technology and an entity is unable to adapt the new market requirements
or technological requirements.
2. Loss of key management or staff
3. Poor management
4. Unproductive workforce
5. Loss of franchise or license to operate.
6. Non-compliance with capital or other statutory requirements
7. Facing a major litigation the outcome of which may affect the entity
8. Changes in the law.
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