Classification Of Audit

 

1.0 INTRODUCTION

In this note, you shall be exposed to the classification of audit in a greater detail – classification by nature as well as by method of approach.

Also, you will learn how the provisions of the Companies and AlliedMatters Act (1990) affect the

auditor.

Finally the Generally Accepted Auditing Standards will be explained to you. These standards relate to the measuring of the quality of performance.

2.0 OBJECTIVES

At the end of this note, you should be able to:

· classify audit by nature

· classify audit by method of approach

· explain the provisions of CAMA (1990) as they affect the auditor

· distinguish auditing standards from auditing procedures.

3.0 MAIN CONTENT

3.1 Classification of Audit by Nature

This will be discussed under the following sub-heads:

3.1.1 Private Audit

This form of audit is undertaken at the request of the interested party

even though there is no legal obligation that an audit should be carried

out. The scope of the private audit may be determined as normally or

broadly as the client wishes, according to his requirements.

3.1.2 Statutory Audit

Statutory audit arises under CAMA (1990). It is a statutory obligation

for the accounts of every limited liability company to be audited

annually by a professionally qualified auditor.

The scope of statutory audit is largely determined by legislation which

the directors, shareholders or even the auditors have no authority to vary

or alter in any way.

3.1.3 Internal Audit

Both private and statutory audits are undertaken by independent

(external) auditors. The internal auditor is an employee of the

organization engaged in such a work on behalf of the organization.

According to the Institute of Chartered Accountants in England and

Wales (ICAEW), Internal Audit is defined as:

…a review of operations and records, sometimes continuous,

undertaken within a business, by specially assigned staff.

The American Institute of Internal Auditors gave a similar definition as

follows:

… internal auditing is an independent appraisal activity within an

organization for the review of accounting, financial and other controls,

as a basis of service to management. It is a managerial control which

functions by measuring and evaluating the effectiveness of other

controls.

The nature of the internal auditor’s job/work requires that he should be

given a degree of independence, but as an employee of the organization,

he takes directives from the management and reports to the

management. Therefore, his independence may be impaired.

3.2 Classification of Audit by Method of Approach

3.2.1 Final or Completed Audit

This is undertaken by the external auditors at the completion of

preparation of final accounts of the business.

3.2.2 Interim Audit

By this method of approach, auditors have a predetermined period, say,

monthly, quarterly, etc. to audit the account being prepared so far. It has

some advantages over the final audit in the sense that errors, omissions

or frauds are detected early.

Secondly, the audit work is completed soon after the final accounts have

been drawn. Thirdly, the presence of auditors acts as a check on the

accountants who may have fraudulent motive to manipulate the

company’s accounts.

However, the method has a little disadvantage in the sense that it

interrupts a continuous accounting work.

3.2.3 Continuous Audit

This occurs in a situation where the auditing firm, concerned with

auditing the accounts of a particular company, sends its own staff to that

company to audit the accounts daily and work is completed at the same

time as the final accounts are drawn.

Time is saved, errors are minimised, and the possibility of fraud by the

staff of the company may be ruled out. However, its flaw is that the

audit staff may constitute a complete nuisance to the company.

3.2.4 Balance Sheet Audit

A balance sheet audit is slightly different from the conventional audit in

the sense that it begins by verifying all items appearing in the balance

sheet by tracing each item at a time to confirm that the items actually

exist.

3.3 Companies and Allied Matters Act (1990) and the

Auditors

The provisions of CAMA (1990) in Section 357 made it clear that

auditors should be appointed to protect the shareholders and members of

the public by reporting in fair manner on the financial statements of

every limited liability company.

The general duties of auditors are laid down in both the CAMA and

engagement letter given to the auditors by the board of directors of the

company.

The duties and ethical behaviours of auditors are also monitored by the

relevant professional accounting bodies, namely, ICAN and ANAN.

Specifically, CAMA (1990) provided for the following in relation to the

auditors.

(i) Appointment

(ii) Remuneration

(iii) Resolutions as to appointment and removal of auditors

(iv) Rights

(v) Qualifications.

3.3.1 Rights of the Auditors

The rights of the auditors, as spelt out in CAMA (1990) are as follows.

(a) Every auditor of a company should have a right of access at all

times to the books and vouchers of the company.

(b) He shall be entitled to require from the officers of the company

such information and explanation as he thinks necessary for the

performance of his (their) duties.

(c) The auditors shall be entitled to attend any general meeting of the

company and to receive all notices of, and other communications

relating to any general meeting which any member of the

company is entitled to receive.

(d) A right to be heard at any general meeting, which he attends, on

any part of the business of the meeting which concerns him as

auditor.

3.3.2 Qualifications as Auditors

CAMA (1990), as well as the Institute of Chartered Accountants of

Nigeria (ICAN), stipulate the qualifications of auditors to practise in

Nigeria. Basically, auditors must possess technical competence to

perform audit engagement. Auditors of a company must be members of

recognised professional accountancy bodies.

3.4 Generally Accepted Auditing Standards

The Companies and Allied Matters Act of 1990 made it mandatory for

audited financial statements to state that they are true and fair, and that

the profit and loss account and the balance sheet comply with the

provisions of the Act.

The auditing standards apply to all reports in which the auditor

expresses an opinion on the entire financial statement which is aimed at

presenting a true and fair view of the state of financial affairs.

Auditing standards have universal acceptance among international

accountancy bodies. These standards deal with the general standards

expected from every auditor, the standards of fieldwork, and the

standards of reporting.

Auditing standards and auditing procedures have been distinguished

clearly by the accounting profession. While auditing standards relate to

measures of the quality of performance, auditing procedures relate to the

act to be performed. The standards measure the quality of job done

based on the acts and the objectives to be attained by the use of the

procedures undertaken.

Therefore, auditing standards deal with auditors’ professional qualities

and also with the professional judgment to be exercised during the

audit engagement.

According to the American Institute of Certified Public Accountants in

the Codification of Statement on Auditing, the Generally Accepted

Auditing Standards are broken down into three sections as below.

· B-1 The General Standards

· B-2 The Standards of Fieldwork

· B-3 The Standards of Reporting

3.4.1 The General Standards

The general standards are as follows.

(i) The examination is to be performed by a person or persons

having adequate technical training and proficiency as an auditor

or auditors;

(ii) In all matters relating to the assignments, independence in mental

attitude, is to be maintained by the auditor or auditors;

(iii) Due professional care is to be exercised in the performance of the

examination and the preparation of the report.

3.4.2 The Standards of Fieldwork

The standards of fieldwork are as follows:

(i) The work is to be adequately planned and assistance, if any, is to

be properly supervised.

(ii) There is to be proper study and evaluation of the existing internal

control as a basis for reliance thereon and for the determination of

the resultant extent of the tests to which auditing procedures are

to be restricted.

(iii) Sufficient competent evidential matters are to be obtained

through inspection, observation, inquiries and confirmations to

afford a reasonable basis for an opinion regarding the financial

statements under examination.

3.4.3 The Standards of Reporting

The standards of reporting are as follows:

(i) The report shall state whether the financial statements are

presented in accordance with the Generally Accepted Accounting

Principles.

(ii) The report shall state whether such principles have been

consistently observed in the current period in relation to the

preceding period.

(iii) Informative disclosures in the financial statements are to be

regarded as reasonably adequate unless otherwise stated in the

report.

(iv) The report shall either contain an expression of opinion regarding

the financial statements taken as a whole, or an assertion to the

effect that the opinion cannot be expressed. The reason,

therefore, should be stated. In all cases, where the auditor’s name

is associated with financial statements, the report should contain

a clear-cut indication of the character of the auditor’s

examination, if any, and the degree of responsibility he is taking.

4.0 CONCLUSION

In this note, you have learnt about the relevance of the Generally

Accepted Auditing Standards (GAAS). You are now aware of how the

quality of job being done is measured and how quality is assured.

5.0 SUMMARY

In this note, you have learnt the classification of audit by nature and by

method of approach. Private, statutory and internal audits fall under the

classification by nature, while final, interim, continuous and balance

sheet come under the classification by method of approach. The

provisions of CAMA (199) as they affect auditors were highlighted.

Finally, you looked at the Generally Accepted Auditing Standards

(GAAS) and how it relates to the measuring of the quality of job done.

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