FACULTY OF MANAGEMENT SCIENCE
BACHELORS’ – PROGRAMME
Subject: Principles of Auditing
By: Buyera Saidi
E-mail: buyera.saidi@yahoo.com
Phone: +252634172883

This is the official examination
and verification of accounts and
records, especially of financial
accounts.
What is auditing?

An auditor is someone who is
responsible for evaluating the validity
and reliability of a company or
organization’s financial statements.
An accountant who checks another
accountant/s
Who is an Auditor?

An accountant is a practitioner
of accounting or accountancy, which is
the measurement, disclosure or
provision of assurance about financial
information that helps managers,
investors, tax authorities and others
make decisions about allocating
resource(s).
Who is an accountant?

“Methodical and independent
check of financial statements
by an auditor and to make an
expert opinion on the results
in the audit report”

An exercise whose objective is to enable auditors
to express an opinion on whether the financial
statements give a true and fair view (or
equivalent) of the entity’s affairs at the period
end and of its profit or loss (or income and
expenditure) for the period then ended and have
been properly prepared in
accordance with the applicable reporting
framework (e.g. relevant legislation and
applicable accounting standards) or where
statutory or other specific requirements
prescribe the term, whether the financial
statements “present fairly”.

 Audit has a well established role in society
 Auditor reports to the shareholders of the
company
 Report on the truth and fairness of the
financial statements
 High level of assurance
 Usually as a result of a statutory requirement
 SAS’s provide guidance on how to undertake
an audit
 An audit is required for all companies with a
turnover a certain amount.
 An audit is required by all PLC’s, banks or
insurance companies or a company registered
under the Financial Services Act.

Assignment whereby a professional
accountant is required to evaluate
or measure a subject matter that is
the responsibility of another party
against identified suitable criteria,
and to express a conclusion that
provides the intended
user with a level of assurance about
that subject matter.

 Assurance is a relatively new concept
 Auditor reports to the persons requesting the
assurance
 May be a low/moderate level of assurance
 Non statutory
 No standards available for guidance.
Examples of assurance engagements- internal
control review, report on compliance
with relevant laws and regulations, debt
management, etc.

 An audit helps to identify weaknesses in the
accounting systems and enables us to provide
suggestions for improvements
 An audit assures directors, who are not involved in
the accounting functions on a day-to-day basis,
that the business is running in accordance with the
information they are receiving. An audit also helps
reduce the risk of fraud and poor accounting.

 An audit facilitates the provision of advice that can have
real financial benefits for a business, including how the
business is running, what margins can be expected, and
how these can be achieved. Advice can cover anything
from the tightening of internal controls, to tax planning or
reducing the risk of fraud.
 An audit will enhance the credibility and reliability of the
figures being submitted to prospective investors. If an
owner is planning on attracting investment or selling
shares in the next three years, carrying out regular audits
is highly beneficial.

 Credit ratings may be affected by not having an audit.
Suppliers may not be prepared to give appropriate
credit limits. Banks and trade suppliers rely in part on
credit rating agencies’ assessment of the company, and
will look more favourably on companies that have an
audit.
 In the event of insurance claims, loss adjusters often
have more faith in audited accounts.
 An audit provides assurance to shareholders (if they are
not directors closely involved in the business) that the
figures in the accounts show a true and fair view

Frauds by management
Auditing fails to check planned frauds. The
management can play tricks to manipulate the
accounts in order to conceal their inefficiencies.
The audited accounts could not show the true
view.
Wrong certificate
Auditing is based on many certificates taken
from management and other persons. Auditing
may fail to provide the desired results. When
certificates provides wrong information.

False clarification
Auditing fails to disclose correct information.
The management may not provide correct
clarification. The auditor is bound to present his
report even of the clarification is not true.
Absence of true picture
The auditing does not present true picture.
Auditing fails to disclose true picture when
figures have been manipulated.
No correct view
Auditing fails to present correct view. There are
limitations of accounting so figures are not
facts. These figures are based on opinion. Thus
auditing is unable to disclose correct view.

No suggestion
Auditing is not concerned with the management
policies. The auditor cannot guide management
for better use of capital. He is unable to suggest
what should have been done.
Absence of honesty
Honesty and independence are highly essential
traits. The auditor must certify what is true. The
absence of honesty and independence means
failure of audit purpose.

Bias of auditor
The auditing fails to present fair view due to
bias of an auditor. It is the quality of an auditor
that he should be independent. The bias
auditing fails to help many people.
High cost
The audit work is completed without cost. The
cost of audit should not exceed of errors and
frauds. Auditing fails to serve million of
business entities.
Previous action
Auditing is nothing more than checking of past
activities. It is not concerned with present or
future. The audit fees increase the cost of
business. Such cost does not help to improve
market standing of enterprises.

Provided by the Auditing Practices
Board-APB
The board aims to
Establish high standards of
auditing
Ensure public confidence in the
auditing process
Meet the developing needs of
users of the financial statements.

In order to meet these aims the APB
issues the following forms of
guidance for auditors Form Nature
Authority Statements of Auditing
Standards (SAS’s) Basic principals
and essential procedures
Explanatory material to assist in
interpreting and applying the above
Mandatory-failure to comply could
lead to
disciplinary action.

Practice Notes (PN’s)
Guidance to assist auditors in applying SAS’s to
particular industries or circumstances
Persuasive but not prescriptive.
Indicative of good practice Bulletins Provide up
to date guidance on new or emerging issues
Persuasive but not prescriptive (rigid).
Indicative (revealing) of good practice.

Consider;
 Legal issues,
 Ethical issues,
 practical issues and substantive testing
 Ascertain document and confirm accounting
and internal control system
 Planning Preliminary evaluation of internal
controls
 Weak Internal controls
 Overall review of financial statements
 Audit report