TRAININGS ON 21 DECEMBER

2023
CONTENT

1. Participant presentation
2. Introduction to Audit
3. Audit processes (Understanding the entity,Risk
assessment,Materiality ,Draw a
sample,Performing the audit,Audit query
writing)
Objectives of this session
 1.Understanding the meaning of audit and its purpose
 2.Understanding the audit process
1.INTRODUCTION TO AUDIT
 Audit is an important term used in accounting that describes the
examination and verification of a company’s financial records. It is to
ensure that financial information is represented fairly and accurately.

 Also, audits are performed to ensure that financial statements are

prepared in accordance with the relevant accounting standards and if
organizations comply rules and regulations.
The three primary financial statements are:

1. Income statement
2. Balance sheet
3. Cash flow statement
1. INTRODUCTION TO
AUDIT(NEXT)
 Financial statements are prepared internally by management utilizing relevant
accounting standards, such as
International Financial Reporting Standards (IFRS) or Generally Accepted
Accounting Principles (GAAP) They are developed to provide useful information
to the following users:Shareholders,Creditors,Government
entities,Customers,Suppliers,Partners
 fnancial statements capture the operating, investing, and financing activities of
a company through various recorded transactions. Because the financial
statements are developed internally, there is a high risk of fraudulent behavior
by the preparers of the statements.
 Without proper regulations and standards, preparers can easily misrepresent
their financial positioning to make the company appear more profitable or
successful than they actually are.
 Auditing is crucial to ensure that companies represent their financial
1. INTRODUCTION TO
AUDIT(NEXT)
Types of Audits
There are three main types of audits
 1. Internal audits
 Internal audits are performed by the employees of a company or
organization. These audits are not distributed outside the company. Instead,
they are prepared for the use of management and other internal
stakeholders.
 Internal audits are used to improve decision-making within a company by
providing managers with actionable items to improve internal controls. They
also ensure compliance with laws and regulations and maintain timely, fair,
and accurate financial reporting.
 Management teams can also utilize internal audits to identify flaws or
inefficiencies within the company before allowing external auditors to review
the financial statements.
1. INTRODUCTION TO
AUDIT(NEXT)
 2. External audits
 Performed by external organizations and third parties, external audits provide an
unbiased opinion that internal auditors might not be able to give. External financial
audits are utilized to determine any material misstatements or errors in a company’s
financial statements.
 When an auditor provides an unqualified opinion or clean opinion, it reflects that the
auditor provides confidence that the financial statements are represented with accuracy
and completeness.
 External audits are important for allowing various stakeholders to confidently make
decisions surrounding the company being audited.
 The key difference between an external auditor and an internal auditor is that an
external auditor is independent. It means that they are able to provide a more unbiased
opinion rather than an internal auditor, whose independence may be compromised due
to the employer-employee relationship.
1. INTRODUCTION TO
AUDIT(NEXT)
 Government audits
 Government audits are performed to ensure that financial statements have been prepared
accurately to not misrepresent the amount of taxable income of a company.
3.AUDIT PROCESSES

 1. Acceptance of the engagement

 2. Planning and control
 3. Risk assessment and responses to the assessed risks
 4. Execution
 5. Completion
AUDIT PROCESSES (NEXT)
1.Acceptance of the engagement

 Ensure sufficient information has been obtained to enable the firm to decide whether to accept the entity as a
client of the firm.
2.Planning and control
 Audit plan as required by International Standards on Auditing in order to provide a method of gathering sufficient
relevant reliable audit evidence to support the audit opinion.
 Develop an Overall Audit Strategy and Plan
 Estimate Materiality levels at the planning stage by reference to the latest available information and updated once
the current year's financial statements are available
 Review the client's business in order to reach preliminary conclusions on the degree of risk associated with the
respective audit areas and to determine the risk reduction factors and sampling intervals that can be applied when
determining the sample sizes.
 Prepare a time budget and job allocation to the respective staffs in line with the scope of work and deadlines.
3 Risk assessment and responses

Part I – risk identification and assessment

 Where do inefficiencies stem from?
 Risk identification – understanding
 Risk assessment – significant risk, SPANS risk and other RMM
 Engagement team discussion (including fraud considerations)

Part II – responding to the risk assessment

 Where do inefficiencies stem from?
 Response specifics
 Questions, Key messages and change agent point
Risk identification and assessment where do
inefficiencies seem from
When understanding becomes focused on collecting information/facts about client.
 Ef Rather than identifying sources of risk
fic Failure to use focused RAP to identify and assess RMM.
ie
We often focus on the “effects” of a risk, not the “cause”.
nc
Ignoring “likelihood” and “magnitude (impact)” considerations when assessing significant
y
risks.
al
Failure to focus on the “big issues” first.
er
SPANS risk and significant risk – “NOT same, but actually different”
t
Not recognising the team discussion as a “STOP sign” (before proceeding to response stage).
Risk assessment has two distinct parts

 First part – risk identification

 “What can go wrong” and result in RMM in FS?

 Second part – risk assessment

 Determining the significance of each risk by considering likelihood and magnitude (impact).
What understanding?

 A. External factors
 B. Nature of entity
 Accounting policies
 D. Entity objectives & strategies
 E. Measurement/review of financial performance
 F. IC relevant to audit
Big picture – fraud

 Remember that fraud is all about intentional “LIES” and “THEFT”.

 When doing RAP, audit team needs to consider existence of 3 conditions that
often provides clues to existence of fraud.
Forensic auditors often refer to this as the “fraud triangle”
 Pressure
 Opportunity
 Rationalisation
Risk assessment and responses(next)

 Understand the business and its Environment

 obtain an overall understanding of the internal controls in specific audit
areas in order to assist the engagement team to assess the extent of
reliance that can be placed on the internal controls as part of the
preliminary assessment of risk and can also help identify improvements
in internal controls for client purposes. Where reliance is placed on
internal controls these need to be tested specifically before assessment of
control risk
4.Execution
 Collect the requisite documents / information some of which are mentioned below in order to obtain
audit evidence:
 MoU’s and Agreements
 Financial Management Manual
 Human Resource procedures manual
 Procurement rules and procedures for works goods and services
 Draft Financial Statements
 Bank Reconciliation Statements
Execution(NEXT)
 Bank Statements
 General ledger
 Copy of contracts with suppliers / consultants
 Other accounting and financial data such as payroll asset register

 Stock management reports

Example how to conduct an audit

1. Analytical review procedures
 Definition
 Analytical procedures are evaluations of financial information through analysis of plausible relationships
among both financial and non-financial data.
 Analytical procedures are also used to investigate necessary identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a significant amount
CASE STUDY

General information

You are auditing a local authority with the year-end 30 June 2020. DNR PARTNERS CPA
LTD is required to submit the audit report to Client. East Africa Council(EAC) records and
accounts for their transaction using the IPSAS Accrual basis.


 The audit methodology for the DNR is risk-based i.e. it focuses on the risks that matter
or will affect the economic decision of the users. EAC uses IFMIS to record
transactions(Refer to case study separate document)
Application of analytical review
procedures
 AR can be used as:
i. Risk Assessment Procedures (RAP). i.e. preliminary analytical review (PAR) e.g. comparison of number
of debtors days between CY & PY…sample sizes.
 A risk assessment AR is used to understand the entity and to identify and assess risk, while the SAP is
used to AUDIT the ALREADY ASSESSED risk.
 The summary below explains the main differences between risk assessment AR (preliminary analytical
review) and SAP.
 AUDIT OF REVENUE AUDIT OF REVENUE

 AUDIT OF REVENUE
AUDIT REVENUE

Definition:
Revenue is gross inflow of economic benefits during the period arising in the
course of ordinary activities of an entity when those inflows result in increases in
equity.

Is it difficult to audit revenue?

 Timing and valuation/accuracy of revenue
 Involves judgement
 Earnings management
 Sometimes it is difficult to determine which standard to use
Audit revenue

Why audit revenue? Prone to fraud!

ISA 240 – ‘’based on presumption that there are risks of fraud in revenue
recognition’’, (premature revenue recognition, fictitious revenue,
improperly shifting revenues to a later period). The area of revenue that is
susceptible to fraud must be documented.

If the auditor concludes that there is no risk of material misstatement, he/she

should document his/her reasons.
Audit of revenue – Assertions

Completeness – have all transactions giving rise to revenue been recorded.

Occurrence - incorrectly recorded transactions as giving rise to revenue.

Accuracy/valuation - errors may also arise through incorrect application of an

inappropriate accounting policy

Cut-off - revenue is recognized in the wrong period.

Audit of revenue

Tests carried out on revenue - Substantive and compliance tests:

 Control tests (comprehensive system notes including receipt from debtors)
 Cut-off
 Completeness
 Pricing (should form part of key business process)
 Delivery notes
 Credit notes (should form part of key business process)
 Proof it total
 Accounting policy – revenue recognition
5.COMPLETION

 The senior staff review the work of the staff under them and communication to them
and ensure that the queries are cleared
 Communicate the client on the issues which we came up with during the field visit in
the exit meeting.
 Draft the audit reports management letter and report of factual findings and we give
them to Auditee
 Obtain the management comment on the findings raised in the management letter and
ensure that they address the findings
 Prepare the final audit report management letter and report of factual findings