ACCOUNTANCY FORM 6 – AUDITING

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INTERIM AUDIT

Is the  audit conducted and carried out before the end of the year normally between the accounting periods.

NOTE; If it is undertaken to cover certain in dates within the financial year(trading period) e.g. quarterly &s of half yearly. Mainly for determining amount of profit to enable the company to declare an interim dividend to be distributed to shareholders.

ADVANTAGES INTERIM AUDIT

1. It makes easier the audit work at the end of the financial year
   
2. Easy to determine errors and frauds
   
3. Final audit can be completed very soon.

 

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DISADVANTAGES OF INTERIM AUDIT

1. Figures may be altered after and it works.
   
2. Inconvenient to the client staff.
   
3. Additional work.

   Partial Audit
   

 

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Is the audit conducted only for specific or particular purpose on the instructions of the owner (client).

O.) Complete Audit

This is the Audit conducted and carried out by examining every transactions of the firm through checking of all vouchers, documents, financial statements, letters and minutes in details. This Audit is suitable for the firms with very weak internal control systems.

Note; These various types of Audit can be classified according to;-

1. Form of organization
   

   Under this class, various types of audit are;-
   

2. Audit of accounts of a sole proprietor
   
3. Audit of partnership accounts
   
4. Audit of accounts of limited companies
   
5. Audit of Government accounts
   
6. Other institutions
   

   Nature of work
   

   Various types of audit are, but according to the
   

7. Private audit
   
8. Statutory audit
   
9. Internal audit
   
10. External audit
    

    Time factor
    

    Audit may be conducted at different intervals of time. These are;
    

11. Final Audit
    
12. Interim Audit
    
13. Continuous Audit
    

    Method of approach
    

    According to method of approach, various types of audit are;
    

14. Procedural audit
    
15. Management audit
    
16. Standard audit
    
17. Balance sheet audit
    
18. Vouching audit
    

 

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OBJECTIVES OF AUDITING

These objectives of an Audit may be classified as under;-

1. Primary objectives
   
2. Secondary or subsidiary objectives 
   

 

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PRIMARY OBJECTIVES

The primary objective of an Audit is to enable the auditor to determine the accuracy of financial statements or accounts.

The auditor forms his opinion through an audit whether or not the final account show a True and a fair view of the financial position of a business.

If the Auditor is of the opinion that profit and loss account and the balance sheet give a true and fair view of financial position of business enterprises then any reading and using primary objective of auditing are contained in the company act. These are known as statutory objectives. These include;

1. The auditor has an obligation to prove the true and fair view or other wise of the company’s financial state of affairs
   
2. He should confirm the proper books of accounts are being kept or not.
   
3. The auditor is required to communicate his findings to the shareholders of the company in form of a report together with his opinion. 
   

 

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SECONDARY OBJECTIVES

These secondary or subsidiary objectives of auditing are;-

1. To detect errors and fraud
   

   Errors and frauds can be ascertained and detected by the management through the established internal control system.
   

2. To prevent errors and fraud i.e. through internal control system
   
3. To assist the clients to improve their accounting system
   
4. To find out whether the internal control system is working properly or not.
   

 

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It must be emphasized that it is not the auditor duty to discover frauds but if he comes across them during the audit he should point out these frauds to the concerns persons. He should also point out the errors.

FUNCTIONS OF AUDITING

1. Studying the Accounting system
   

   It is the basic function of Auditing in order to determine the nature, timing and extent of the audit procedures. Auditor should know the accounting systems.
   

2. Internal control system
   

   It is the process which determines that management policies are carried out according to the accounting system. This system is very useful to safeguard the interest of enterprises. The Auditor determines the effectiveness of this system.
   

3. Vouching
   

   This is to determine the accuracy of the accounting of the assets of the business. The auditor can check the existence of asset.
   

4. Legal requirement;
   

   It is the function of auditing that statement is prepared under the legal requirement and various laws like company with Income tax ordinance which are introduced by the Government.
   

5. Liabilities verification
   

   The liabilities can be verified from the books of accounts. The auditor can write letter to a creditor for the verification of liabilities. The auditor receives the certificate from management.
   

6. Capital and revenue
   

   Auditing should make difference between capital and revenue items. The capital items are compared to note the financial position of the business. The revenue item is compared to determine the Income. The years Income and expenses related to many can divide in correct and coming years.
   

7. Valuation of liabilities
   

   Through Auditing the value of liabilities and auditor can apply the accounting principles to assess the value of liabilities. The Auditor critically examines and takes help from the expert
   

8. Valuation of assets
   

   The management gives the value of assets and Auditor can apply the accounting principle to assess the value of assets. The Auditor critically examines and takes help from the experts.
   

   INTERNAL CONTROL
   

   The whole system of controls, financial and otherwise established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, safeguard the assets and secure as far as possible the completeness and occurrence of the records.
   

   The individual components of an internal control system are known as ‘controls’ or Internal control various types of Internal control are;
   

9. Control on purchases and creditors
   
10. Control on stock and work in progress.
    
11. Control on cash receipts and payments
    
12. Control on wages payments
    
13. Control on sales and debtors
    
14. Other controls
    

 

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DETAILED INTERNAL CONTROL OBJECTIVES

An attempt is made here to systematize the various internal control objectives independent of the type of the client’s business. The Internal controls over the accounting system should be designed to ensure that the following seven objectives are achieved

1. Validity – The internal control system should be designed to ensure that recorded transactions are valid. The system should not permit the inclusion of fictitious or nonexistent transactions in the records.
   
2. Authorization – The system should be designed to ensure that recorded transactions are authorized. An unauthorized transaction is a fraudulent one and leads to resources wastage.
   
3. Completeness – The set procedures must ensure that existing transactions are recorded to prevent omission from the records.
   
4. Valuation – An adequate internal control system most include procedures to avoid errors in arriving at values of the transaction amounts in the recording process
   
5. Classification – The laid procedures must ensure that proper classification of accounts is made if the financial statements are to be properly stated
   
6. Timing – Procedures in the internal control system should ensure that transactions are recorded at proper time’s i.e. not before or delayed as this may lead to mis – statement.
   
7. Posting and summarization – The internal control system procedures have to be designed should ensure that transaction  properly recorded and included in the subsidiary records these are follows; 
   
8. To promote operational efficiency – The control within an organization are meant to prevent unnecessary duplication of effort and waste in all aspects of the business and to disnglish-swahili/courage” target=”_blank”>courage inefficient use of other resources.
   
9. To ennglish-swahili/courage” target=”_blank”>courage adherence to prescribe policies – Management Institutes procedures and rules in order to meet goals of the entity. The internal control system is meant to provide assurance that the policies are as followed by the clients’ personnel.
   
10. To safeguard the Assets – This relates to physical as well as non- physical assets which can be stolen, misused, accidentally destroyed unless they are protected by adequate control
    
11. To provide reliable data – Management must have accurate and reliable information as the basis for its future decisions and also for carrying out its operation.
    

 

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INTERNAL AUDIT

Internal audit – as an independent appraisal function established by the management of an organization for the review of the internal control system as a service to the management.

The main objective of Internal Audit is as under;

1. To safeguard the company’s Fixed assets
   
2. To assist the management as far as possible to run the business efficiently and in orderly manner.
   
3. To act as a consulting department to other departments
   
4. To detect and prevent errors and frauds perpetrated by the client staff.
   
5. To help in the maintenance of a strong internal control system employed by the client.
   
6. To help the client to reduce the audit fee of the internal auditor. 
   

 

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EXTERNAL AUDIT

Is the audit conducted within the organization by an independent appointed auditor from outside the organization who is recognized by NBAA. External auditor is appointed by the owner of the firm and not the management of the firm in case of limited company the share holders appointed the internal auditor.

The main objective (primary objective) of external audit is to determine the accuracy of financial statements or accounts and form a true and fair view of the financial position and operation result of the business.

Other objective under external audit is as follows;

1. To confirm whether or not the proper books of accounts are kept
   
2. Detection of errors and frauds
   
3. Present findings to the owner in a report together with his opinion (auditing opinion)
   
4. Assist its client to improve their accounting system i.e. vouching and internal control system.
   
5. Finding out the weakness or strength of internal control system.
   

 

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IMPORTANCE/SIGNIFICANCE OF INTERNAL AND EXTERNAL AUDIT.

1. It helps to determine the effectiveness of internal control system
   
2. It cuts down the work of external auditor and as a result the audit cost of external auditor reduces
   
3. It helps to prevent frauds
   
4. It facilitates the maintenance of proper accounting records and preparation of financial statement s in time.
   
5. It helps to review of the implementation of corporate policies, plans and procedures.
   
6. It helps to examine of financial and operating information for management detailed of transactions and balances.
   
7. Special investigations