Auditing

STUDY SESSION I: DEVELOPMENT AND EXECUTION OF AUDIT STRATEGY

Introduction

Auditors should plan their audit work to perform the audit effectively. Planning involves developing a general strategy and a detailed approach concerning the expected nature, timing, and extent of the audit. Auditors formulate the general audit strategy in an overall audit plan that sets the direction for the audit and provides guidance for developing the audit program. The audit program outlines detailed procedures required to implement the strategy.

LEARNING OUTCOMES FOR STUDY SESSION I

At the end of this study session, you should be able to:
1.1 State the objectives of audit planning
1.2 Mention issues for consideration in audit planning
1.3 Explain audit strategy
1.4 Define the concept of materiality
1.5 Explain the audit strategy to employ in auditing clients with multiple locations
1.6 Explain consolidated organizations

1.1 OBJECTIVES OF AUDIT PLANNING

Planning is essential for audits of all sizes. The objectives of planning the audit work, which occurs before detailed audit work begins, include:

• Assuring appropriate attention is devoted to different areas of the audit.

• Identifying and resolving potential problems in a timely manner.

• Facilitating work review performed.

• Ensuring proper assignment of work to team members and their briefing.

• Assisting in the coordination of work performed by other auditors or experts for efficient and timely audits.

1.2 ISSUES FOR CONSIDERATION IN AUDIT PLANNING

Audit planning requires a high degree of discipline from the auditor. To make planning more meaningful, auditors should consider the following matters related to audit engagement:

• Preliminary work to be conducted aside from the core audit work.

• Changes in legislation or auditing standards or guidelines.

• Analytical review of available management accounts and other management information related to the accounts.

• Changes in the business or management.

• Changes in the accounting system.

• Deadlines for submitting the audit report.

• Use of rotational testing and verification techniques.

1.3 CONCEPT OF AUDIT STRATEGY

Audit strategy aims to gather relevant and reliable audit evidence to support the expression of an opinion on the accounts. In executing an audit assignment, the auditor should:

• Consider responsibilities as defined in the engagement terms.

• Become familiar with the client’s business and organization.

• Obtain preliminary understanding of the principal features of the client’s accounting system and internal controls.

• Determine and record the audit strategy to adopt.

• Critically review and evaluate aspects of the client's accounting system, procedures, and internal controls on which some reliance will be placed.

• Discuss any weaknesses in the system with the client to ascertain whether they are compensated by other controls.

• Test the system to check whether the controls on which reliance is intended are operational during the period.

• Report any weaknesses or breakdowns in internal control to the client through a management letter.

• Obtain detailed descriptions of accounting systems and internal controls and review transactions to confirm understanding of the system.

• Carry out an audit work program based on results to substantiate amounts appearing in accounts and related notes to ensure they present a true and fair view.

1.4 CONCEPT OF MATERIALITY

Materiality reflects the relative significance of a particular amount, balance, or transaction concerning the financial statement as a whole. According to Statements of Auditing Standards No. 220, auditors should consider materiality and its relationship with audit risks during audits. Materiality is not assessed based on individual items but rather in the context of its effect on the financial statements if inaccurately reported, misclassified, omitted, or not disclosed. Materiality is present in the following circumstances:

1. If its omission would reasonably influence decisions of an addressee of the auditor's report (e.g., shareholders).

2. If a misstatement would have a similar influence.

Materiality has both quantitative (amount) and qualitative (nature) aspects. The assessment of what is material is a matter of professional judgment. Auditors should be aware of potential misstatements of relatively small amounts that can cumulatively impact the financial statements significantly. For example, a minor error in a month-end procedure could indicate a possible material misstatement if it recurs monthly. Auditors should also be vigilant about qualitative aspects of misstatement, such as inadequate or inaccurate descriptions of accounting policy that may mislead financial statement users.

Materiality must be evaluated at the overall financial statement level and concerning individual account balances, transaction classes, and disclosures. Factors like legal and regulatory requirements can influence materiality considerations.

1.4.1 Materiality and Audit Work

SAS 220 recommendations include:

1. Materiality must be contemplated when determining nature, timing, and extent of audit procedures.

2. Materiality should be assessed during audit planning based on latest available financial information to determine an efficient and effective audit approach and identify items for examination and whether to apply sampling techniques.

3. Preliminary materiality assessments may change as circumstances or auditor knowledge evolve due to unexpected operational results or financial position discrepancies.

4. If judges reassess materiality, they should consider implications for audit methods and may adjust nature, timing, and extent of planned procedures.

1.4.3 Evaluating Effects of Misstatements

1. When assessing whether financial statements provide a true and fair view, auditors should evaluate aggregate uncorrected misstatements.

2. Aggregated uncorrected misstatements consist of:

   • (a) Specific misstatements identified in current or prior periods affecting the current period’s financial statements.

   • (b) Best estimates of other misstatements that cannot specifically be quantified.

3. If misstatements appear material, auditors should consider extending audit procedures or requesting directors to adjust financial statements.

4. If directors refuse to adjust financial statements and extended audit actions do not resolve whether aggregates of uncorrected misstatements or immaterial, consequences for the audit report should be evaluated.

1.5 CLIENTS WITH MULTIPLE LOCATIONS

Organizations with branches, depots, or shops in various locations require a distinct audit strategy to avoid delays in overall audit conclusions. Significant considerations include:

1. Acquire from the client a list of all branches, depots, and shops.

2. Visit client offices to review accounting systems and controls related to multiple locations, and check types of returns submitted to head office.

3. Certain organizations require branches to bank sales intact while cash is sent from head office for overheads, wages, etc. Considerations here include:

   • (i) List of all bank accounts and locations of banks.

   • (ii) Review bank account reconciliations, noting outstanding items for verification during branch or depot visits.

4. Assess internal auditor work, as it impacts the planned audit scope.

5. Arrange audit team visits to each branch, ensuring the client covers expenses with a prepared schedule for branch audits.

6. Plan an audit review on-site to resolve issues before the team returns.

7. Designate a time and cost budget for professional fees to prevent excessive client costs.

8. For overseas branches, it may be necessary to appoint local auditors to conduct the audit, with primary auditors assuming full responsibility.

1.6 CONSOLIDATED ORGANIZATIONS

Consolidated organizations encompass group companies, including a parent company, subsidiaries, associates, and affiliates. Audit planning and control considerations include:

1. Where the primary auditor also audits subsidiaries, the audit plan should prioritize auditing subsidiaries before the holding company to verify data and information gathered from subsidiary audits.

2. Audit programs should create an overall item list under a distinct working paper section to avoid oversight.

3. For publicly listed associated companies, published financial statements should be accessible to primary auditors for incorporation into the investing company’s accounts per IAS 28 principles.

4. Timely communication with the parent company is essential to ensure the availability of accounts.

5. Subsidiaries audited by other auditors necessitate attention at audit planning stages:

   • i) Use of audited questionnaires specific to group circumstances and discussed in advance with secondary auditors.

   • ii) Coordinate with secondary auditors in their planning stages to communicate primary audit requirements.

   • iii) Inform shareholders of accounts audited by other auditors, highlighting their material significance in the group context. Potential methods of disclosure include indicating in the principal subsidiaries schedule, in directors' reports, or accounting notes.
     Note: It is inappropriate for primary auditors to address companies in the group they have not audited, as it could imply limitations on their opinions.

SUMMARY OF STUDY SESSION 1

In this study session, you learnt that:

1. Objectives of audit planning ensure timely completion of the audit assignment.

2. Important issues to consider in planning audits.

3. The concept of audit strategy focuses on gathering evidence to support audit opinions.

4. Materiality is significant for understanding amounts, balances, or transactions regarding the financial statements.

5. Specific audit strategies apply to organizations with multiple locations to maintain on-time audit conclusions.

6. Consolidated organizations consist of a parent company and its subsidiaries, associates, and affiliates.

SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 1

1.1 Objectives of audit planning?
1.2 Matters to consider in audit planning?
1.3 Concept of audit strategy?
1.4 Define materiality?
1.5 Describe a client with multiple locations?
1.6 Describe a consolidated organization?

STUDY SESSION 2: AUDIT RISK

Introduction

Audit risk is the risk that an auditor reaches an incorrect opinion or conclusion based on their audit work on financial statements. Each chapter will involve learning about audit risk definitions, components, assessment benefits, limitations, and risk-reducing factors.

LEARNING OUTCOMES FOR STUDY SESSION 2

At the end of this study session, you should be able to:
2.1 Define audit risk
2.2 Explain the components of audit risk
2.3 Discuss benefits of audit risk assessment
2.4 State the limitations of audit risk assessment
2.5 Outline factors that could minimize audit risk

2.1 DEFINITION OF AUDIT RISK

SAS 300 defines audit risk as "the risk that the auditors may give inappropriate audit opinions on financial statements." Some major firms have collapsed after issuing clean reports and subsequently failing, highlighting the importance of thorough audits in risks related to false or misleading reports.

2.2 COMPONENTS OF AUDIT RISK

Audit risk includes three components:
(a) Inherent risk – The likelihood that an account balance may be materially misstated regardless of related internal controls.
(b) Control risk – The risk of a material misstatement not being detected or corrected by internal controls.
(c) Detection risk – The risk of audit procedures failing to identify misstatements present in an account balance or transactions.

The relationship can be expressed as:
$AR = IR imes CR imes DR$
Where:

• $AR$ = Audit Risk

• $IR$ = Inherent Risk

• $CR$ = Control Risk

• $DR$ = Detection Risk

Assessment of Inherent Risk

To assess inherent risk, auditors should leverage professional judgment considering various risk factors, including:

• Integrity of management and team knowledge levels.

• External pressures influencing management.

  • Nature of the industry, technological obsolescence, and related parties.

  • Specific transactions that might result in misstatements.

2.3 BENEFITS OF AUDIT RISK ASSESSMENT

The benefits of audit risk assessment include:

• Cost and fee savings.

• Expedite the completion of audit work.

• Minimize avoidable pitfalls.

• Reduce under- or over-auditing risks.

• Enhance the efficiency and effectiveness of audit work.

• Focus the auditor’s attention on areas likely leading to misstatements.

• Facilitate the use of sampling and its advantages.

2.4 LIMITATIONS OF AUDIT RISK ASSESSMENT

Audit risk assessment limitations include:

• Subjective values for inherent and control risk assessments.

• Risk assessments leading to mechanical approaches that neglect auditor judgment.

• Time allocation focusing more on process mechanics rather than evidence collection.

• Often non-specific assignment of risk leading to questions about conclusion validity.

2.5 FACTORS THAT COULD MINIMIZE AUDIT RISKS

Factors that can reduce audit risk include:

• Financial stability and reasonable expectations of continued stability.

• Profitability encouraging justifiable success.

• Active involvement of proprietors, particularly in smaller firms.

• Strong internal controls and skilled accounting personnel.

• Past audits revealing efficient accounting practices without significant issues.

• Positive rapport with regulatory authorities.

SUMMARY OF STUDY SESSION 2

This session focused on:

1. Components of audit risk: inherent risk, control risk, detection risk.

2. The significance of audit risk assessment.

3. The effect of audit risk assessment in determining audit strategy.

4. Advantages linked to assessing audit risk.

5. Factors capable of mitigating audit risk.

SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 2

2.1 Define audit risk.
2.2 List the components of audit risk.
2.3 Explain the advantages of audit risk assessment.
2.4 Enumerate limitations in audit risk assessment.
2.5 Identify risks that can be mitigated.

STUDY SESSION 3: STANDARDS FOR ASSURANCE ENGAGEMENT

Introduction

Assurance is a professional service aimed at enhancing the quality of information provided to management and other decision makers. The objective involves improving information, rather than dispensing advice. Assurance engagements typically involve a practitioner or auditor enhancing the credibility of information concerning specific subjects.

LEARNING OUTCOMES FOR STUDY SESSION 3

At the end of this study session, you should be able to:
3.1 Define assurance engagement
3.2 State concepts of assurance engagement
3.3 Discuss elements of assurance engagements
3.4 Outline characteristics of assurance engagements
3.5 Review types of assurance engagements
3.6 State peculiarities of assurance engagements
3.7 Enumerate implications of assurance engagements on the profession.

3.1 DEFINITION OF ASSURANCE ENGAGEMENT

Assurance engagements, according to ISA No. 100 on Assurance Engagements, refer to engagements where a practitioner expresses a conclusion intended to enhance the confidence of intended users regarding the evaluation or measurement outcome against specified criteria. Relating this to audits indicates that audits are assurance engagement aiming to provide independent opinions on the truth and fairness of financial statements.

3.2 UNDERLYING CONCEPTS OF ASSURANCE ENGAGEMENT

The separation of ownership and control necessitates assurance for management reports. Therefore, the need for assurance services arises from:

1. Growth of international communication methods and internet reporting.

2. Increasing requirements for information in varied areas, such as corporate social responsibility and governance reporting.

3.3 ELEMENTS OF ASSURANCE ENGAGEMENT

Key elements of assurance engagements include:

• Existence of a three-party relationship: practitioners, responsible parties, and intended users.

• Identification of subject matter.

• Existence of suitable criteria, such as frameworks or mechanisms for evaluation.

• Sufficient and appropriate evidence availability.

• A written assurance report containing appropriate conclusions.

3.4 CHARACTERISTICS OF ASSURANCE ENGAGEMENT

Characteristics include:

1. Being identifiable.

2. Capable of consistent evaluation and measurement.

3. Subjected to procedures and evidence gathering. Examples include various audits, management performance assessments, risk assessments, corporate governance reviews, and environmental assessments.

3.5 TYPES OF ASSURANCE ENGAGEMENT

There are two main types:

1. Assertion-based engagements where the accountant claims a given assertion as true (e.g., statutory audit).

2. Direct reporting engagements where the accountant reports on matters arising during evaluation (e.g., management performance reports).

3.6 PECULIARITIES OF ASSURANCE ENGAGEMENT

Peculiarities vary based on elements or subject matter, impacting the level of assurance provided:

• Reasonable assurance represents high assurance; for example, statutory audits constitute reasonable assurance.

• Limited assurance suggests potential conformity without definitive proof.

3.7 IMPLICATIONS OF ASSURANCE ENGAGEMENTS

Audit firms must consider implications, including:

• Enhanced liability due to diverse engagements.

• Broader skill requirement for accountants to meet non-audit assurance service needs.

• Potential decreased audit demand resulting in lower audit fees, compensated by increases in other assurance services income.

• Heightened expectation gaps and misinterpretation of non-audit assurances as audits.

SUMMARY OF STUDY SESSION 3

In this session, you learned that:

1. Statutory audits fall under assurance services.

2. There are two primary assurance service types.

3. Five elements characterize assurance services, including:

   • Three-party relationships.

   • Identification of the subject matter.

   • Existence of criteria.

   • Availability of sufficient evidence.

   • Written assurance reports.

4. Assurance engagement peculiarity indicates reliance on entity-specific characteristics.

SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 3

3.1 Define assurance engagement.
3.2 Outline the reasons for assurance services.
3.3 Identify elements of assurance engagement.
3.4 Mention characteristics of assurance engagements.
3.5 Describe the two types of assurance engagement.
3.6 Discuss the peculiarities of assurance engagements.
3.7 List the implications of assurance engagement on accountants.

STUDY SESSION 4: QUALITY CONTROL PRACTICES AND PROCEDURES

Introduction

This session introduces quality control practices and procedures related to auditing, including advertising/publicity, fee charges, engagement letter fundamentals, and issues pertaining to auditing standards, fraud, and error.

LEARNING OUTCOMES FOR STUDY SESSION 4

At the end of this study session, you should be able to:
4.1 Explain quality control practices concerning individual assurance engagements.
4.2 Discuss rules governing advertising and publicity related to the profession.
4.3 Explain the rationale behind charge fees.
4.4 Discuss tendering processes and their issues for accountants.
4.5 Outline contents and purposes of engagement letters.
4.6 Correctly explain the significance of consultations.
4.7 Discuss auditor opinion types based on circumstances.
4.8 Explore the concept of expectation gap in auditing.
4.9 Distinguish between fraud and error in auditing contexts.
4.10 Discuss auditors' liability across various roles/engagements.

4.1 QUALITY CONTROL PRACTICES AND PROCEDURES

For effective control, the audit engagement partner, along with the team, should implement applicable quality control measures for each audit engagement. The Quality Control Standard encompasses various sections:

• Leadership responsibilities.

• Ethical requirements.

• Acceptance/continuation of client relationships or specific audit engagements.

• Assignment of engagement teams.

• Engagement Performance: This covers the careful consideration of several factors for which the engagement partner is responsible.

  • Direction of the engagement team regarding responsibilities, the business nature, risk issues, and detailed performance approaches.

  • Supervision by the engagement partner across the assignment; typically, senior members supervise junior ones.

  • Constantly review the work done to ensure engagement procedures achieve intended objectives, with thorough reviews by the partner before report issuance.

  • Consultations over contentious issues should yield proper documentation by the partner.

  • Differences in opinions among staff, managers, or the engagement partner should be reconciled as per firm policy.

  • A quality control review involves appointing a reviewer to discuss significant matters with the engagement partner prior to report issuance.

4.2 RULES GUIDING ADVERTISING AND PUBLICITY

ICAN acknowledges that members may seek advertising and publicity for their services (noted in Statement No.8 of Professional Conduct). Guidance on acceptable advertising/publicity includes:

• Advertisements must be distinctly identifiable.

• Comply with legal standards to ensure legal, decent, clear, honest, and truthful advertisements.

• Avoid unsolicited promotional materials to non-clients via fax or electronic means.

• Restrict unsolicited personal visits or calls to potential non-clients regarding professional services.

• Avoid disparaging comparisons with other professionals.

• Publicity should reflect dignity consistent with professionalism.

• Members refraining from fee comparisons in advertisements are advised, especially against competitors.

4.3 BASIS OF CHARGING FEES

According to ICAN guidelines, chartered accountants can charge fees based on:

• Specific agreements or established client-firm agreements.

• Staff seniority, expertise level, time spent on assignments, work risk involved, prioritization/importance of tasks, and incurred expenses, when no clear agreements exist.

• Clarification on fee structures should be communicated in engagement letters prior to the actual assignment.

• Fee comparisons should be transparent to clients, defining covered services and scope.

4.4 TENDERING

Tendering implies an auditor's proposal presented to a client, initiated upon client approaches, confirming capability to conduct assignments at reasonable fees. Factors to consider include:

• Willingness to perform the work considering ethical factors.

• Verify compliance to ensure no legal disqualifications exist.

• Assess the availability of qualified staff for the task and potential requirements for additional training.

• Evaluate the proposed fee structure and non-accounting skills that may be needed.

4.5 ENGAGEMENT LETTER

According to auditing guidelines:

• Engagement letters should be addressed to the client's board of directors.

• They define the auditor’s responsibilities, minimizing misunderstandings regarding engagement parameters.

• The letter should confirm auditor appointment, audit scope, and reporting formats.

• Each company’s subsidiaries should receive separate letters for clarity.

• Joint auditor scenarios require distinct descriptions for respective auditors' roles.

4.6 CONSULTATION

Establish policies ensuring consultation effectiveness on contentious issues by:

• Conducting appropriate consultations and providing ample resources.

• Documenting nature/scope of consultations; conclusions should also be documented and executed.

• External consultations may also involve reaching out to knowledgeable professionals outside the firm if necessary.

4.7 PERFORMANCE AND REPORTING STANDARDS

Audit reports culminate every audit assignment; registered companies must appoint qualified auditors to report annually to shareholders on the truthful impression of their financial statements. Audit opinions can vary as follows:

• Unqualified audit opinion – Indicates that accounts present a true and fair view.

• Modified audit reports – Stating, “Accounts show a true and fair view except for…” due to specific material items.

• Adverse audit opinion – Specifies non-conformance with true and fair views.

• Disclaimer of opinion – Issued when audit constraints preclude confirmation of a true and fair view concerning material items.

• Modified audit report - For parameters showing discrepancies in account items.

4.8 EXPECTATION GAP

The expectation gap reflects differences between public understanding of auditor duties versus actual auditing tasks. Gaps could stem from misunderstandings regarding management roles in preparing financial statements, perceived auditor responsibilities, and misunderstandings regarding the guarantee of financial statements’ correctness.

4.9 ERROR, IRREGULARITY AND FRAUD

• Fraud: Intentional misrepresentation of financial information by management or third parties for illegal advantages.

• Error: Unintentional mistakes within financial statements, e.g., arithmetic errors or genuine oversights.

• Irregularity: Intentional distortions with various purposes.

4.10 AUDITOR’S LIABILITY

Auditors are liable under common law to exercise due care, diligence, and skill during their duties while disallowing delegation of authority or disclosure of confidential client information.
In fiscal terms, an auditor can be found liable for damage caused due to negligence in discharging functions.

SUMMARY OF STUDY SESSION 4

This session focused on:

1. Quality control practices enhancing audit effectiveness and efficiency.

2. Ethical considerations surrounding advertising and publicity.

3. Fee structures regulating charge standards for professional services.

4. Tendering necessitating considerations pertinent to the audit process.

5. Processes governing engagement letters to outline responsibilities.

6. Consultation importance in clarifying audit issues.

7. Different audit opinion types resulting from various circumstances.

8. Expectation gaps involving public perceptions.

9. Distinctions between errors, irregularities, and fraud.

10. Auditor liability implications surrounding their duties.

SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 4

4.1 Discuss factors affecting engagement performance quality control.
4.2 Outline advertising restrictions for professional accountants.
4.3 Describe fee assignment regulation in absence of agreement.
4.4 Enumerate factors for auditor's tender considerations.
4.5 List essential engagement letter contents.
4.6 Identify necessary procedures for effective consultations.
4.7 Enumerate the various types of auditor's opinions.
4.8 Define expectation gap in auditing terms.
4.9 Distinguish between fraud and error.

STUDY SESSION 5: PUBLIC SECTOR AUDIT

Introduction

This section emphasizes that auditing is equally crucial in the public sector as it is in the private sector, highlighting its significance in ensuring accountability, transparency, and effective fund management in public organizations.

LEARNING OUTCOMES FOR STUDY SESSION 5

By the end of this study session, you should be able to:
5.1 State and explain categories of government auditing.
5.2 Discuss the audit of treasury accounts.
5.3 Explain the audit of ministries and departmental accounts.
5.4 Detail the audit processes for parastatals.

5.1 CATEGORIES OF GOVERNMENT AUDITING

For effective understanding, governmental auditing can be divided into 3 major categories:

1. Audit of Treasury Accounts

2. Audit of Ministries/Departments and Agency Accounts

3. Audit of Accounts of Parastatals

5.1.1 Audit of the Treasury Accounts

The Treasury Department, overseen by the Accountant General of the Federation, functions as the primary custodian of public funds, maintaining comprehensive financial control over the Federation’s accounts. Responsibilities include:

• Custodian of funds like the Consolidated Revenue Fund and Development Fund.

• Management of fund disbursements across the three governance tiers.

• Supervision and training of public sector accountants regarding financial control.

• Preparation and publication of annual financial statements.

• Ensuring financial statements adhere to government accounting principles.

5.1.2 Audit of Ministries/Departments and Agency Accounts

In public sector contexts, each ministry or department serves as its own accounting unit categorized into three main groups:

1. Self-Accounting Units: Engage in independent accounting functions under an accounting officer approved by the Ministry of Finance, maintaining detailed records.

2. Non-Self Accounting Units: Work under the primary treasury for financial transactions and require complete records of specific payments while maintaining incomplete records of others.

3. Sub-Accounting Units: Maintain delegated accounting functions and must submit records aggregating transactions to the Accountant General, accompanied by original vouchers.

5.1.3 Audit of Government Parastatals

Government parastatals function as public agencies fulfilling discrete objectives, often financed via service fees or taxes. Audits ensure:

• Proper accounting practices are followed.

• Timely collection and recording of revenue.

• Adequate control over organizational funds and assets.

• Compliance with financial regulations and statutes.

• Accurate representation in audited financial statements.

SUMMARY OF STUDY SESSION 5

You have learned that:

1. Government auditing categories include treasury accounts, ministries/departments, and parastatals.

2. Accounting units through which the public sector organizations operate are:

   • Self-Accounting Units.

   • Non-Self Accounting Units.

   • Sub-Accounting Units.

SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 5

5.1 Identify the major categories of government auditing.
5.2 Outline qualification criteria for self-accounting units.

STUDY SESSION 6: SPECIALIZED PUBLIC SECTOR AUDITS

Introduction

In this session, you will explore special attributes necessitating focused public sector audits due to specific operational needs.

LEARNING OUTCOMES FOR STUDY SESSION 6

Upon completion, you should be able to:
6.1 Discuss audits of specific contracts or projects and importance.
6.2 Review strategies for auditing Nigerian foreign missions.
6.3 Explain audit practices for defense and security agencies.
6.4 Conduct audits concerning pensions and benefits.
6.5 Distinguish types of public sector audit.
6.6 Describe ‘Value for Money’ audit arrangements.
6.7 Discuss ‘Due Process Review’ outcomes.

6.1 AUDIT OF CONTRACTS OR PROJECTS

Handled by the Project Audit Division, the objective centers on comprehensive auditing of significant government contracts or expenditures to confirm return on government investments.

6.1(b) Audit of Nigerian Foreign Missions

The audit of foreign missions is crucial to ensure that resources allocated towards diplomatic relationships yield appropriate governmental benefits. This audit task falls under the purview of the Ministry of External Affairs and is conducted periodically.

6.1(c) Audit of Defense and Security Agencies

The audit process involves overseeing financial transactions within defense-related organizations to ensure accountability and integrity in operations.

6.1(d) Pension Audits

Pension audits are essential to ensure correct disbursement of pensions and gratuities, requiring extensive verification of claims while adhering to stipulations set by the Auditor General.

6.2 TYPES OF PUBLIC SECTOR AUDIT

1. Regulatory Audit: Also known as compliance audits, aimed at ensuring expenditures align with statutory regulations.

2. Financial Audit: Assessment of financial controls and accuracy related to financial transactions.

3. Value-for-Money Audit: Focus on economy, efficiency, and effectiveness in resource utilization, assessing whether returns align with expectations set forth in objectives.

6.3 ELEMENTS OF VALUE FOR MONEY AUDIT

Aspects involve determining economy, efficiency, and effectiveness:

1. Economy Audit: Scrutinizes cost-efficiency in resources acquisition.

2. Efficiency Audit: Evaluates service provision versus resource input.

3. Effectiveness Audit: Assesses whether organizational objectives meet established results.

6.4 DUE PROCESS REVIEW

Due process entails all measures instituted for organizational orderliness in government activities, emphasizing compliance during contracting operations to achieve public policy goals. Impacts include increased transparency and improved revenue collection.

SUMMARY OF STUDY SESSION 6

You learned that:

• Specialized audits address particular public sector needs.

• Types of public sector audits include regulatory, financial, and value-for-money audits.

• Value-for-money audits emphasize resource management effectiveness and efficiency.

SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 6

6.1 What is the objective of pension audits?
6.2 Enumerate different types of public sector audits.
6.3 List three elements of Value for Money Audits.
6.4 Explain the implications of Due Process Review.

STUDY SESSION 7: SPECIALIZED AUDIT AND INVESTIGATION

Introduction

This session emphasizes the necessity for auditors to adapt to the distinct characteristics of various organizations in managing audits effectively.

LEARNING OUTCOMES FOR STUDY SESSION 7

By the end of this session, you should be able to:
7.1 Discuss general and specific approaches to auditing specific institutions.
7.2 Elucidate the audit practices for distinct sectors including banks, hospitals, and hotels.
7.3 Explain the reasons for conducting joint audits.

7.1 GENERAL AND SPECIFIC APPROACHES

Generally, auditors must be wholly familiar with laws such as the Companies and Allied Matters Act (CAMA) and sector-specific regulatory frameworks to ensure proper compliance. Common methodological steps include:

• Establishing a permanent audit file.

• Planning the audit by documenting relevant risks and preventive measures.

7.2 AUDIT OF SPECIFIC INDUSTRIES

Consistent with the ICAN syllabus, specific audit protocols need to be crafted for industries such as:

• Farming: Requires acknowledging operational structure (sole proprietorship vs. corporation) impacting record-keeping complexity.

• Professional Services: Considerations include legal/government regulations and ethical codes inherent within professions.

• Hospitals: Must evaluate both financial profit motives and service quality metrics.

• Hotels: Analyzing ownership types, service standards, and regulatory compliance are critical points of focus.

• Banks & Financial Institutions: Compliance with guidelines set forth in BOFIA and CBN regulations and annual financial disclosures.

• Insurance Companies: Similar to banks but categorized under different operational mandates.

• Primary Mortgage Institutions: Subject to BOFIA restrictions, emphasizing unique activities in real estate financing.

7.3 JOINT AUDITS

Joint audits involve collaboration between more than one audit firm on the same financial statements. This arrangement arises due to:

• Client demand for comprehensive assurance.

• Large or complex operations necessitating multiple auditing perspectives.

• Legal criteria necessitating dual auditor engagements.

• Situations benefiting from local expertise in audits involving subsidiaries based far from headquarters.

SUMMARY OF STUDY SESSION 7

This study session focused on:

1. Unique audit methods required for specialized industries.

2. The importance of understanding the unique operational contexts of banks, insurance companies, and not-for-profit organizations.

3. Joint auditing as a method for thorough audits in multifaceted organizations.

SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 7

7.1 List issues considered in specific approaches to auditing specialized institutions.
7.2 Classify non-performing loans identified by banks.
7.3 Define joint auditing.

STUDY SESSION 8: INVESTIGATION

Introduction

Investigations should not be confused with audits. These are typically undertaken to acquire specific information for particular parties, culminating in a report about the findings.

LEARNING OUTCOMES FOR STUDY SESSION 8

Upon completion, you should be able to:
8.1 Define investigation.
8.2 Compare and contrast auditing with investigating.
8.3 Classify various investigation types and methods.
8.4 Describe auditor involvement concerning prospectuses.
8.5 Explain practices related to forensic investigations.

8.1 DEFINITION OF INVESTIGATION

An investigation refers to carefully examining and inquiring into particular matters for specific purposes, typically focused on financial and non-financial information beyond statutory requirements.

8.2 DISTINCTION BETWEEN AUDITING AND INVESTIGATION

1. Statutory Requirement: Audits follow statutory guidelines, whereas investigations may not.

2. Purpose and Scope: Audits have definitive scopes as mandated, while investigations operate on directives from management.

3. Objectives: Auditors serve shareholder interests; investigators typically assist management.

4. Regulatory Compliance: Auditing procedures align with standards such as IAS while investigations may not require strict adherence.

5. Independence: Fundamental to audits; it might not be required throughout investigations.

8.3 NATURE, CLASSES, AND METHODS OF INVESTIGATION

Classes of Investigation: Could be categorized based on their purpose:

• Proposals for equity purchase, banking assessments, partnerships, mergers, statutory inquiries, and special incident investigations.
  Methods of Investigation:

1. Preparation: Includes preliminary reviews, written instructions, and planning.

2. Field Work: Gathering relevant data includes fact ascertainment and verification.

3. Reporting: Interpretation and evaluation leading to formal report preparation.

8.4 AUDITORS’ INVOLVEMENT WITH PROSPECTUSES

An auditor's perspective on prospectuses involves careful assessments of financial forecasts and ensuring accuracy in financial representation before publication. Auditors prepare reports detailing financial summaries and significant operational information for stakeholder awareness.

8.5 FORENSIC INVESTIGATION AND AUDIT

Definition of Forensic Accounting: This term describes accounting analysis suitable for legal contexts, combining investigative skills for disputes or financial misconduct evaluations. Tasks may encompass assessing employee theft or fraud scenarios.

SUMMARY OF STUDY SESSION 8

In this study session, you learned that:

1. An investigation defines a detailed review for specific intents.

2. Key distinctions between audits and investigations.

3. Classifications of investigative assignments based on distinct objectives.

4. Auditor contributions to constructing corporate prospectuses.

5. Importance of forensic accounting in legal contexts.

SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 8

8.1 Define investigation.
8.2 Contrast auditing and investigations.
8.3 Classify frequent investigation purposes.
8.4 List necessary adjustments for accountants in a prospectus.

STUDY SESSION 9: INSOLVENCY

Introduction

Insolvency entails an inability to meet short or long-term financial obligations. Corporate or individual insolvency reflects financial health-threatening scenarios that require structured responses.

LEARNING OUTCOMES FOR STUDY SESSION 9

At the end of this study session, you should be able to:
9.1 Explain insolvency.
9.2 State factors leading to corporate distress.
9.3 Elaborate on receiverships.
9.4 Define bankruptcy.
9.5 Discuss liquidation procedures and winding-up modalities.
9.6 Address implications of insolvency for governance and going concern threats.

9.1 DEFINITION OF INSOLVENCY

Insolvency is the inability to settle debts promptly. Specifically, corporate insolvency involves a company’s failure to meet its financial commitments.

9.2 CORPORATE DISTRESS

Corporate distress appears when firms cannot achieve their financial and non-financial targets, constituting a concerning state requiring immediate action.

Causes of Corporate Distress

Internal Factors include:

1. Poor management

2. High debt ratios

3. Recurrent operating losses

4. Over-commercial reliance on few projects.
   External Factors involve adverse regulatory changes, economic climates, and operational interruptions from natural disasters.

9.3 RECEIVERSHIPS

A receiver is appointed to facilitate asset recovery for a company's creditors during insolvency. Distinct forms include charges such as fixed charges, floating charges, and court-appointed receivers to manage or liquidate assets.

9.4 BANKRUPTCY

Bankruptcy, a judicial step excluding insolvent individuals from further debt responsibilities, arises through voluntary or involuntary processes with various conditions preceding and necessitating a declaration.

9.5 LIQUIDATION

Liquidation or winding up entails dissolving a company's affairs through asset realization and debt settlements.

Modes of Winding Up

1. Court-Initiated: Under specific statutory conditions.

2. Voluntary: Initiated by the enterprise management.

3. Supervision: Court-monitored liquidation processes.

9.6 IMPLICATIONS ON CORPORATE GOVERNANCE

Insolvency threatens governance structures and raises concerns about the organization’s operational viability, necessitating managerial reconstruction.

SUMMARY OF STUDY SESSION 9

This session covered:

1. Understanding insolvency parameters for corporations and individuals.

2. Factors contributing to corporate distress.

3. Overview of receiverships and roles.

4. Detailed bankruptcy definitions with outlined processing.

5. Liquidation processes governing the decisions.

SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 9

9.1 What is insolvency?
9.2 Outline factors contributing to corporate distress.
9.3 Name causes leading to crystallization of floating charges.
9.4 List acts recognized as bankruptcy indicators.
9.5 Describe winding-up processes involved in liquidation.

STUDY SESSION 10: INTERNATIONAL STANDARDS ON AUDITING

Introduction

This session outlines international auditing standards essential for maintaining quality and integrity in audit practices, enhancing accountability in financial reporting.

LEARNING OUTCOMES FOR STUDY SESSION 10

Upon completion, you should be able to:
10.1 Discuss ISA 200.
10.2 Discuss ISA 300.
10.3 Discuss ISA 315.
10.4 Discuss ISA 320.
10.5 Discuss ISA 450.
10.6 Discuss ISA 500.
10.7 Discuss ISA 505.
10.8 Discuss ISA 530.
10.9 Discuss ISA 580.
10.10 Discuss ISA 700.

10.1 ISA 200: OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR

According to ISA 200, the auditor aims to secure reasonable assurance that financial statements are free from material misstatements, allowing for informed opinions to be issued accordingly.

Audit Scope Requirements

The audit must comply with all relevant ISAs and ethical standards, supported by sufficient evidence for the reasons. Procedures involve evaluating documentary integrity, responsiveness from management, and identifying the suitability of accounting policies.

Audit Phases

• Interim Audit: Conducted pre-year-end to support initial audit strategies.

• Final Audit: Carried out post-year-end to finalize financial reports.

10.2 ISA 300: PLANNING AN AUDIT OF FINANCIAL STATEMENTS

According to ISA 300, robust planning directs audit performance, helping allocate resources efficiently while addressing potential issues ensuring quality delivery. Approaches include team involvement, engagement understanding, and detailed scheduling.

10.3 ISA 315: RISK IDENTIFICATION AND ASSESSMENT

The objective involves assessing material misstatement risks through comprehensive understanding of the entity and its surrounding environment, with specific emphasis on internal controls relevant to operations.

10.4 ISA 320: MATERIALITY IN AUDIT PLANNING

Materiality assesses whether omitted or misstated information affects decision-making based on financial reports.

10.5 ISA 450: EVALUATION OF MISSTATEMENTS

Focuses on the need for auditors to accumulate all misstatements, both corrected and uncorrected, evaluating their significance to the overall audit assessment and possible implications for financial statements.

10.6 ISA 500: AUDIT EVIDENCE

Involves obtaining appropriate audit proof supporting audit opinions, emphasizing the importance of quantitative and qualitative evidence.

10.7 ISA 505: EXTERNAL CONFIRMATIONS

This principle underscores the significance of obtaining external confirmations to enhance the robustness of audit evidence obtained, emphasizing management's and auditor's roles in ensuring confirmation effectiveness.

10.8 ISA 530: AUDIT SAMPLING

Highlights the methodology employed in sample selections, covering aspects such as its design, size, and effective execution to facilitate valid conclusions based on population characteristics.

10.9 ISA 580: WRITTEN REPRESENTATIONS

This mandates obtaining written confirmations from management regarding various aspects of the audit process to substantiate claims made during the audit.

10.10 ISA 700: THE UNMODIFIED AUDIT REPORT

Identifies essential components and structures of an unmodified audit report to ensure clarity in communicating audit outcomes and objectives.

SUMMARY OF STUDY SESSION 10

1. Defining the auditor's mandate as ensuring financial statements' integrity.

2. Emphasizing the need for thorough audit planning and evaluation of internal controls.

3. Distinguishing materiality for audit relevance.

4. Highlighting mechanisms for evidence gathering.

5. Outlining structures and requirements for effective reporting.

SELF-ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 10

10.1 Define the auditor's primary objective.
10.2 Justify the need for audit planning.
10.3 Identify integral factors for understanding an entity's environment.
10.4 Explain materiality within audit context.
10.5 Assess implications associated with misstatements.
10.6 List main procedures for gathering audit evidence under ISA 500.
10.7 Determine conditions warranting negative confirmations.
10.8 Differentiate between statistical and non-statistical sampling methods.
10.9 Justify why auditors require management written representations.
10.10 Identify fundamental elements of an audit report.