Principles Of Auditing
Aduit operational standards define aduit as the independent examination of and expression of opinion on the financials statementof an enterprise by an appointed auditor in pursuance of the appointment and in compliancnce with any relevants statutoryobligation.
Earlier bodies defined an audit as an examination or investigation by an auditor into the evidence from which financial statement (revenue accounts and balance sheet) of an organisation have been prepared, in order to ascertain that they present a true and fair view of the summarised transactions for the financial state of the organisation at the end of the accounting date, so enableing the auditor to report thereon.
Under the Companies Act 1968 (now companies and Allied Matters Decree 1990 S. 360) the auditor is to report whether in his opinion the balance sheet and profit and loss account give a true and fair veiw by finding out whether proper books of accounts have been kept by the company and proper return adequate for audit have been received from branches not visited by them and whether the companys balance sheet and profit and loss account are in agreement with the book of accounts and returns.
The above is the main purpose of the audit by the auditors. This will enable them express an opinion as to whether the financial statements presented to the members show a true and fair view. This then requires the auditor to carry out his duty in the most skillful and exhuaustive way especially in situations where his suspicion is aroused due perhaps to the weaknesses in the control system.
THE SECONDARY OBJECTS
- Detection of errors, frauds and other irregularies.
- The prevention of errors, frauds and other irregularities though these are his secondary objects it is not incumbent on an auditor to be a detective in order to discover fraud but where he finds any thing of a suspicious nature he will probe it to the full, but his approach to his work should never be in the nature of trying to expose fraud by dis honest employees.
The case of The Kingdom Cotton MILL Company Limited (1986) made it expicit that an auditior is not bound to approach his work with suspicion or with a foregone conclusion that ther is something wrong.In a terse language as used by the lopes L.J (the auditior is a watch dog, not a bllodhound)
MAIN FEATURES OF AUDIT
- It ensures that objectives of the audit is achieved.
- It helps to direct and control the work.
- It assists to ensure that critical aspects of the audit is given attention.
- It facilitates the completion of the work expeditiously.
In examination by an auditior to write a report on the truthfulness and fairness of the finacial statements he must investgate into a set of books, and into the documentary evidence from where such books have been compiled before he can be satisfied that in his opinion that the balance sheet, revenue account and other statements prepared thereon give a true and fair view of the finacial statement for the financial period under review.
MAIN AREAS OF EXAMINATION BY AUDITORS.
The auditors will compare the profit and loss account and balance sheets the books and records in order to see whether they are in accordance therewith
In addition, the auditors will make a critical review of the profit and loss account and balance sheet in relation to the following matters.
- The items in the balance sheet, with particular reference to the basis on which the amounts are stated:
- The existence of ownership and proper custody of assets.
- The existence of liabilities.
- The irrelation to the corresponding items at the end of the previous year and where necessary, earlier years.
- The suitability of the descriptions used.
- Theadequate disclosure of information.
2. The items in the profit and loss account with particular reference with adequate discriptions, disclosure of information and the significance of variations as compared with previous periods.
3. The compliance with requirements of the Act (Compaines and Allied Mattersn Decree).
Errors are referred to as unintentional mistakes in financial statements, whether of a mathematical or clerical nature or whether in the application of accounting principles, or whether due the oversight or misinterpretation of relevant facts.
In carrying out the foregoing examination, various errors could be detected and these can classified as follows:
- ERRORS OF OMISSIONS: An error of omission arises when any transaction is left either wholly or partially unrecorded. If the former is the case. the transaction does not appear anywhere in the books and consequently the Trail Balance will remain unaffected. The is, therefore, a difficult error to detect.
- ERRORS OF COMMISSION: These arise when transactions are incorrectly recorded wholly or partially. In the former case, the Trial Balance would not be affected; in the latter it would.
- CLERICAL ERRORS: These are further sub-division of errors of commission. Such errors are occasioned by incorrect posting or by the posting of an item to a wrong account but of the same class to which it should have been posted.
Instances of clerical errors include as follows:
- Items posted to the debit of an account instead of credit. This would have the result of throwing out the Trial Balance to the extentof double the error. For example, an item of #50.00 posted to the debit instead of the credit side of an accountwill result in the Trial Balance not agreeing for #100.00.
- An item of #100.10 posted as #10.10. The Trial Balance will not agree because of the difference between the amounts i.e. #90.00.
- Errors to posting accounts a appropraite accounting head or code.
- Errors in extracting ledger balances for the preparation of the Trail Balance.
- Errors in carrying forward total e.g. #289 carried forward as #298.
- Errors in addition of the Trial Balance itself.
4. ERRORS OF PRINCPLE: Such errors arise by reason of contravention of accounting principles although they have no effect on the Trail Balance they directly affect profits. E.g. Repairs, instead of being debited to Profit and Loss via the correct Norminal Account are debited to plant and machinery.
5. COMPENSATING ERRORS: A compensating error is one which is counter-balance by a similar error (or errors) so that it is not revealed by the Trial Balance. It will not affect the profit as long as both original and compensating error arise in Revenue Account. On the other hand, if one error arises in Revenue Account whilst the other arises in Asset
Account then the profit would be incorrect. Thus, the agreement of the Trial Balance must not be takenas an infallible proof of accuracy of the books from which it is extracted and the aduitors must examine great care the entriesin the books and the relative documentary evidence.
Fraud is used to refer to irregularities involving the use of criminal deception to obtain an objust or illegal benefit.
Fraud can be classified into two categories:
- Frauds involving the maniplation of the records and accounts, usually by the company senior officers with a view to benefitting in some way from the false picture which they convey (e.g. obtaining finance under false pretences. or conceling a material worsening of the companys true position).
- Frauds, usually by employees, involving the theft, misappropration or emblezzlement of the companys funds, usually in the form of cash, or its other assets.
Cash is the most readily susceptible target of fraud. Other areas of frauds inculdes:
- Inflation of payments vouchers.
- Inclusion of non-existing workers (ghost workers) in the wages sheet.
- Pilferage of stockes.
- Destruction of accounting documents with a view to obtaining the benefits attached thereto. e.g. debtors accounts or IOUs.
- Printing of illegal receipts and local purchase orders and and using such to convert the companys benefits to self etc.
Irregularities is referred to as intentional distortions of financial statements, for whatever purpose, and the misapprpration of assets, whether or not accompained by distirtions or financial statement. Fraud is one type of irregurality.
Series of fraud or errors could be prevented bybthe management introducing a goog system of internal control and check.