TOPIC 1: INTRODUCTION TO AUDITING** SUMMARIZED CLASS NOTES FOR EXAM REVISION
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Course
AUDITING
Institution
AUDITING
**TOPIC 1: INTRODUCTION TO
AUDITING**
**1.1 Definition, Nature, and Scope of
Auditing**
**Definition**
1) According to the International Standards on Auditing (ISA), an audit is an independent
examination of an entity's financial statements by an appointed auditor, followed by an
expression ...
**1.1 Definition, Nature, and Scope of
Auditing**
**Definition**
1) According to the International Standards on Auditing (ISA), an audit is an independent
examination of an entity's financial statements by an appointed auditor, followed by an
expression of opinion. This process is conducted in compliance with relevant statutory
obligations.
2) Auditing involves the independent review of an enterprise's books of accounts and vouchers
by a qualified auditor to determine whether the enterprise has maintained proper books of
accounts in accordance with the Companies Act. The audit also assesses whether the financial
statements align with the books of accounts and whether they present a true and fair view of the
company’s financial position as of a specific date.
**Parts of the Definition of Auditing**
1) **Independent Examination:** An auditor must maintain an independent stance during the
examination to ensure objective reporting. This independence is crucial for both the business
owners and third parties or stakeholders who rely on the audited financial statements.
Independence implies impartiality, which is necessary for the accounts to be reliable and
credible. The profession requires maintaining independence both in practice and outside of it.
2) **Opinion:** As per International Standard on Auditing (ISA) No. 200, an auditor must provide
an opinion in their report. This opinion can be negative (a qualified opinion or report) or positive
(an unqualified opinion or report). The auditor's opinion is primarily addressed to the company's
owners, thus ensuring a duty of care to the shareholders and a secondary duty of care to other
stakeholders.
3) **Financial Statements:** These include the income statement, balance sheet, and cash flow
statement, on which the auditor must form an opinion regarding their representation of the
company’s financial state.
, 4) **Appointed Auditor:** The appointment of an auditor, especially for a company, is governed
by the Companies Act Chapter 486, Section 159, Subsections 1-6, which outlines the process of
appointing auditors during an Annual General Meeting (AGM), automatic appointments,
appointments by the Registrar of Companies, penalties for failing to inform the Registrar of an
auditor's appointment, and filling casual vacancies due to an auditor’s death, resignation, or
disability.
5) **Books of Accounts:** The Companies Act mandates that companies maintain a set of
books, including a cash book, relevant ledgers, and an assets register.
6) **Vouchers:** Vouchers serve as documentary evidence supporting transactions in the books
of accounts, such as invoices, agreements, and receipts. Auditors use vouching (examination of
vouchers) to verify whether:
- They pertain to the current financial period.
- They are properly authorized.
- They are recorded according to Generally Accepted Accounting Principles (GAAP).
- They support bona fide transactions of the business.
7) **True and Fair View:** This means that the company’s financial statements, assets,
liabilities, profits, or losses do not misrepresent its financial position to stakeholders.
**1.1.1 Nature of Auditing**
Auditing involves both assurance and non-assurance engagements.
**A. Assurance Engagement**
- **Audits:** As per ISA No. 200, the objective of auditing financial statements is to enable the
auditor to express an opinion on whether the financial statements are prepared in all material
respects according to a recognized financial reporting framework. The auditor assesses whether
the financial statements present a true and fair view of the company's state as of a specific date.
- **Reviews:** The objective of reviewing financial statements is to allow an auditor to state
whether any information has come to their attention that causes them to believe the financial
statements are not prepared according to a recognized financial reporting framework. Reviews
involve inquiries and analytical procedures but do not provide the same level of assurance as an
audit. The review uses audit skills and techniques, such as assessing accounting and internal
control systems, inspection, and observation, but offers less assurance than an audit report.
**B. Non-Assurance Engagement**
- **Agreed Upon Procedures:** An auditor is engaged to perform specific procedures of an audit
nature agreed upon by the auditor, the entity, and any relevant third parties, then report the
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