Meaning of Auditing
An Audit – may be defined as an examination by an Auditor of the final accounts i.e. trading account, profit and loss account and Balance sheet of a business enterprise.
→Also it involves the checking of supporting documents from which these accounts are prepared.
→The main purpose of an Audit is to ascertain whether or not these accounts present a True and fair view of the financial position of a Business.
IAG3 Has defined Audit as under ;- Audit is an Independent examination of an expression of an opinion on, the financial statements of an entity, by an appointed Auditor in pursuance of that appointment and in compliance with any relevant statutory or other provision including in particular Tanzania statements of standard Accounting practice .(TSSAP’S.) Together with relevant Auditing standards and Guidelines.
Auditor; The word Auditor comes from Latin word ‘Audire’ which means to hear.
Is the one whom the Receipts and payments of an establishment were read and he was supposed to hear ‘or is an Independent person who is appointed by business enterprises to audit its accounts. The auditor may be an individual or a firm.
The Auditor’s Duty is to form an opinion and report on the financial statements of a business enterprise for a specific period.
Auditing; Is the process of examination of financial statement’s covering the transactions over a period of an organization on a certain date in order that the auditor may issue a report on them.
→It means Auditing is the Application of Auditing principles.
TYPES OF AUDITING
The following are the types of Auditing;
Statutory Auditing
Are those which are conducted under the provisions of the law of the country, According to companies Act of Tanzania all limited companies are required to get their accounts Audited, Similarly, co-operative societies Banks, Insurance companies and financial institutions are also required to get their accounts audited according to the provisions of respective Acts.
Private Audit
Private or voluntary Audit is that audit which is not legally required. Examples of private audit are audits of sole trader, partnership business and Management audit of a limited company.
Internal Audit
Internal Audit is conducted by the internal auditor who is an employee of an organization.
→ the main purpose of internal audit is to find out whether the internal control system is working successfully or not.
→The report of internal audit is used only by the management for the improvement of internal control system. The internal auditor carries out checking work throughout the year
→Although, he is an employee of the organization but he is given some form of Independence in order to perform his duties more efficiently.
External Audit
External Audit is carried out by an Independent Auditor who is not an employee of the organization
→Internal auditor is appointed by the owners of a business. In case of a e the limited company, the share-holders appoint an external auditor.
→The main purpose of an external auditor is to submit an audit report on the financial position of business enterprises.
The Report is accepted by the share holders and other concerned parties like Bank managers, creditors.
Procedural Audit;
- Is an examination and Review of the internal procedures and records of an organization. The main purpose of this audit is to ascertain whether the internal procedures are reliable or not.
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→The procedural audit is conducted in order to improve the efficiency of internal control system and to ensure the implementation of the procedures/laid down by the management
→Also the procedural Audit is very expensive but can be applied where the owners suspect the duplication of internal policies followed by the directors.
Management Audit
Management Audit is conducted to investigate the management aspects of a business
→The main purpose of this Audit is to prepare of report on the effectiveness of the management from the point of view of the profitability and efficient running of the business.
→This Audit can reveal strengths and weakness of the management.
Standard Audit
This is a type of audit which is conducted to ascertain whether the client accounting system complies with the required levels of standards set by the professional bodies
- Tanzania statement of standard Accounting practices (SSAP’S)U.K
- International Accounting standards (IAS)
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General Accepted Accounting principle (GAAP’s)
Continuous Audit/Detailed Audit
Is an Audit which involves regular intervals of say one or three months
→The Auditor visits his clients at regular or irregular interval during the financial year and checks each and every transactions
Balance sheet Audit
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Verification of the values of Assets, liabilities, the balance of reserves and provisions and the amount of profit earned or loss incurred by a firm during a year.
→This audit requires the auditor to report only on the balance sheet. In this case, he cannot ascertain whether the accounts supporting the balance sheet are kept or not.
→This type of Audit is more popular in USA and CANADA and is not common in UK and other countries including East Africa countries.
→ With Development of Industries and establishment of large companies, this type of Audit will be more widely used in the future.
Vouching Audit
Vouching Audit is that Audit where the auditor checks each and every transaction right from the origin in the books of prime entry till they are posted and the final accounts are prepared from the amount posted.
→This Audit requires lot of work.
→This system has become unpopular in large organizations where the numbers of transactions are into millions and where a good internal control system is in use. These days, the auditor relies on the examination of some of the transactions scientifically selected at Random. In UK, Kenya and other East African countries vouching audit is common approach.
Government Audit
Is the audit conduct in government Authorities, ministries departments by the controlled Auditor General(CAG) according to the Exchequer and Audit ordinance or act.
Note; It is the audit required by the government and it is conducted by controller and Auditor general (CAG) as per Audit act and Exchequer ordinance.
Financial Audit
Is the audit conducted to verify the accuracy of financial statements only and creating an opinion whether or not the financial statements portray the fair and true view of the firm’s financial position & operation results. Note it is mostly conducted by External Auditor who is Independent in his opinion.
Final Audit;
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Is the Audit conducted and carried out at the end of the financial year and normally after the preparation of financial statements
ADVANTAGES OF FINAL AUDIT
- Reduce chances of changing figures in the books of final Account
- It is less expensive and suitable for small business
- It is convenient to the client staff
- The work of auditing becomes chemical easy.
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DISADVANTAGES OF FINAL AUDIT
- Not suitable (Advisable) to large entities
- Delays in Auditors report due to short period (time of Auditing)
- Large possibilities of errors and frauds even after audit process