Audit is an independent examination and expression of opinion on the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and compliance with any relevant law and regulation.
Whenever a fiduciary relationship with financial implications exists, there is a need for a knowledgeable outsider to independently and objectively review the accounts of stewardship and to express an opinion as to their honesty or otherwise.
The accounts of stewardship within a company is how the directors have dealt with the investments or assets of the company on behalf of the shareholders. The end product of the stewardship being the financial statements (Profit or Loss Account, Statement of Financial Position, Cash Flow Statement, Value Added Statement and Director’s Report)
Audit is deeply rooted in the concept of separation of ownership from management in the affairs of companies. There is now an urgent need to safeguard the interests of the owners (The Shareholders) who are not involved in the day-to-day decision made by the management (The Board of Directors). Now the services of professionals are being employed to take up the demanding task of independent examination of financial records produced by management and to express an opinion as to their truth and fairness.
In Nigeria, Companies and Allied Matters Act CAPC20LFN2004 has made it an obligation for every public liability company to have its annual financial statements audited before circulating it to members. Specifically, Section 357 (1) states as follows: ‘Every company shall at each general meeting appoint an auditor to audit the financial statements of the company’. Other countries have similar legislation that makes the audit of financial statements of public companies a mandatory requirement.
The appointed auditor (who should be a member of a recognized professional accountancy body and duly licensed to practice and not disqualified by any legislation) is expected to express an opinion on the truth and fairness of the financial statements (Profit or Loss Account, Statement of Financial Position, Cash Flow Statement, Value Added Statement), all of which would have been prepared by the directors and presented to the shareholders at an annual general meeting.
AUDIT SERVICES RENDERED
Financial Statement Audit
Information System Audit
Value for Money Audit
Financial Statement Audit
Financial statement audit determines whether the financial statement are presented fairly under specified criteria. This type of audit usually covers the basic set of financial statement (statement financial position and statement of financial performance) serve as the criteria. However, certain financial statement audits may entail the use of other criteria, such as the audit of bank entails the use of BOFIA (in Nigeria).
A compliance audit determines the extent to which policies, rules, laws, covenants or government regulations are followed by the entity being audited. For example, a company may have auditor determine within the organization. The corporate rules and policies serve as the criteria for measuring the departments’ compliance.
An operational audit involves the systematic review of an organization’s activities, or a part of them concerning the efficient and effective use of resources. The purpose of an operational audit is to assess performance, identify areas for improvement, and develop recommendations. Sometimes this type of audit is referred to as performance audit or management operational audits. Operational audits are generally more difficult to conduct than financial statement audit or compliance audits because it can be very difficult to identify objective; measurable criteria that can be used to assess effectiveness and efficiency. Organizations seem to be realizing that there are advantages in having an operational audit.
This is an audit of transaction or situation with the utmost intention of determining the nature, extent, involvement and impact of fraud. The purpose is the detection or determination of a wide variety of fraudulent activities. The use of auditors to conduct forensic has grown significantly, especially when the fraud involves financial issues. Some examples where a forensic audit might be conducted include:
- Business or employee fraud
- Criminal investigations
- Shareholder and partnership disputes
- Business economy losses
- Matrimonial disputes
For example, in a business fraud engagement, the process of audit might involve tracing funds or asset identification and recovery. An employee fraud investigation might involve the existence, nature, extent and identification of the perpetrator of asset misappropriation. A forensic audit can also be conducted to trace and locate assets in a divorce proceeding.
This is the tax returns submitted by an individual or corporate body, to see if the tax information, as well as the resulting tax payment, is valid.
Information System Audit
This is the review of the controls over software development, data processing and as well as access to computer systems. The objective of this type of audit is to spot any issues that could impair the ability of IT systems to provide accurate information to its users and also to ensure that unauthorized persons do not have access to data therein.
Value for Money Audit
In this audit engagement, the auditor assesses the entity’s achievement on the economy, efficiency and effectiveness of a project. The details of value for money for audit are:
Economy: the auditor performs an audit assessment to assess whether the organization uses the available resources for the project in the economic principle or not. Projects are expected to have written procurement policies and procedures that ensure that the procurement process could perform at the best interest of the projects and minimum fund will be spent for the acceptable quality and quantity of products.
Effectiveness: this review focuses on the effectiveness of getting the desired output using minimum resources.
Efficiency: this usually takes place at the end of a project. Here, the auditor identifies the objective, funds and output of the project.
OBJECTIVES OF AN AUDIT
The objectives of an audit are the basic things that auditing seeks to achieve, which can be broken down into:
The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, under an identified financial reporting framework and that the financial statements give “a true and fair view” or “present fairly, in all material respects” the financial results and state of affairs of the client entity.
The secondary objectives of the audit are:
- To prevent fraud and errors
- To detect any form of irregularity
- To evaluate the effectiveness or otherwise, of the internal control system within the enterprise
- To assist the management in the establishment of an effective auditing system
- To advice on financial matters for efficient decision making by the management
- To ascertain and ensure that an enterprise conforms to the statutory and professional requirement
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THE NEED FOR AUDIT
The separation between ownership and management
Unlike other types of business organization where there is a fusion of ownership and management, company’s fusion of ownership and management, wherein the mangers of the business (directors) as agents are obliged to report to the owners the principal (shareholders) on how their business has been managed. The owners will like to know whether or not the rendition of account of stewardship contains errors or misleading information.
To enhance the credibility of financial statements
The appointment of an independent person, referred to as an auditor, to investigate the report and express his opinion on it will increase the credibility of the financial statement.
Multinational entities complex reporting environment
Multinational companies have investment and investor been expanded across political boundaries, the preparation of accounts for such companies is complex since it encompasses various legislations, standards, conventions, policies and control systems. It is therefore essential that such accounts are examined by independent experts who have skills and experience in examining financial statements, financial statements are required to comply with various legislations and standards. Compliance with this requirement can be assured if the audit is carried out on financial statements.
In most companies have many shareholders which will make it slightly difficult for them to do independent verification of the companies individually.
Many interested parties use financial statements as a basis for making decisions. Bankers, creditors, employees, potential investors, etc., all have an interest in the state of affairs of the company. The independent audit requirement fulfils the need to ensure that those financial statements are objective, free from material misstatements, and are relevant to the need of the users.
Fulfilment of the legal requirement
Financial statements are required to comply with various legislations and standards. There is the legal requirement that any company that is quoted on the stock exchange must have their financial statement audited by an external auditor. Compliance with this requirement can only be assured if the audit is carried out on financial statements.
MERITS OF AUDITING
An audit is carried out to add credibility to the financial statements concerned and to assure stakeholders of the truth and fairness of the statements.
- Auditing serves as a deterrent to fraudulent staff within an enterprise.
- Disputes between partners may be largely avoided especially where complicated profit-sharing arrangements subsist. Independent examination of partnership accounts will ensure accurate assessment and division of profits.
- During amalgamation or acquisition, the audited financial statement serves as a basis of determining the net worth of business to ascertain the purchase consideration of the about-to-be acquired or amalgamated business.
- Audited financial statements serve as a reliable source of information for banks and other financial institutions when it comes to assessing the strength of loan/overdraft applications.
- A financial statement examined independently by an auditor will be readily accepted by the tax authority for taxation.
- The audited financial statement serves as a basis for measuring performances by the would-be investors (potential investors).
- Audited financial statements are one of the requirements of the Nigerian Stock Exchange for a business that is willing to be listed on the floor of the Nigerian Stock Exchange.
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CHRONOLOGY OF AUDIT
Auditing is a practical discipline and in detail, each audit differs from the other. However, each audit assignment follows a systematic approach as outlined below:
The objective of this stage is to discover the background and operational system. Means of achieving the objective include:
- Ascertain background and nature of the business
- Selected management interview
- Reference to procedural manual and organizational chart
The objective of this stage is to discover the operational system in practice. This is achieved by:
- Conducting selected walk through the test on transactions
The objective is to discover the strengths and weaknesses in the control systems in detail. This is achieved by:
- Completing all applicable sections of the internal control questionnaire
- Conducting compliance tests
The audit objective is to evaluate the relative effect of weakness in each major operational area. The specific task to achieve the objective include:
- Completing internal control evaluation schedule after the total effect of weakness already noted
- Reporting effect of major weakness to management
The objective is to confirm the reliability of the records as a basis for the preparation of final accounts. Means of achieving this objective include:
- Preparation of detailed audit programme, specifying the nature of the substantive tests and the extent of substantive tests of transactions and balances.
- Executing audit programme by application of deep testing techniques
The objective is to ensure that the financial statements are in agreement with underlying records. This is achieved by:
- Preparing a detailed year-end schedule (profit and loss account schedules), summarizing individual items by cross-reference to the records and statement of financial position
- Reconciling the movement of each item from the previous balance sheet position to the current balance sheet position
The objective is to form an opinion as to whether the accounts as presented give a true and fair view and comply with statutory and other requirements. Means of achieving the objective include:
- Obtaining a letter of opinion from the chief executive
- Completing verification of assets and liabilities
- Analytical review
The objective of this final stage is to express an opinion in the audit report to members. The auditor:
- Reviews draft contents of Director’s report
- Considers the need for qualification
- Draft final audit report for inclusion in the published accounts
For your Financial Statement Audit, Compliance Audit, Operational Audit, Forensic Audit, Tax Audit, Information System Audit, Value for Money Audit, schedule a consultation with us today and you will be glad you did.
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