AUDITING

1. AUDITING
Meaning of Auditing
An Audit – may be defined as an examinationbyan Auditor of the final
accountsi.e. trading account, profit and loss account and Balancesheet of a
businessenterprise.
→Also it involves the checking of supporting documents from which these
accountsareprepared.
→The mainpurposeof an Audit isto ascertainwhether or not these
accountspresent a True and fair view of thefinancialpositionof a Business.
IAG3 Has defined Audit as under ;- Audit is an Independent
examination ofan expressionof an opinionon, the financialstatementsof
an entity, by an appointed Auditor inpursuanceofthat appointment and in
compliancewith anyrelevant statutoryor other provisionincluding in
particularTanzaniastatementsofstandard Accountingpractice.(TSSAP’S.)
Together with relevant Auditing standardsand Guidelines.
Auditor; Theword Auditor comesfrom Latinword ‘Audire’which means to
hear.
Is the one whom the Receiptsand paymentsof an establishment wereread
and he was supposed to hear ‘or is an Independent person who is appointed
by business enterprisestoaudit itsaccounts. Theauditor maybe an
individualor a firm.
The Auditor’sDutyis to form an opinionand report on the financial
statementsof a business enterprisefor a specific period.
Auditing; Isthe process of examinationof financialstatement’scovering
the transactionsover a period of an organizationona certaindateinorder
that the auditor mayissue a report on them.
→It meansAuditing isthe ApplicationofAuditing principles.
TYPES OF AUDITING

2. The following are the typesof Auditing;
Statutory Auditing
Are those which areconducted under the provisionsof the law of the
country, According tocompaniesAct ofTanzania all limited companiesare
required toget their accountsAudited, Similarly, co-operativesocieties
Banks, Insurance companiesand financialinstitutionsarealso required to
get their accountsaudited according totheprovisionsof respectiveActs.
Private Audit
Privateor voluntary Audit is that audit which isnot legally required.
Examplesof privateaudit areauditsofsole trader, partnership business
and Managementaudit ofa limited company.
Internal Audit
Internal Audit isconducted by theinternalauditor who is an employee of
an organization.
→ the mainpurposeof internalaudit isto find out whether the internal
control system is working successfully or not.
→The report of internalaudit is used only by the management for the
improvement of internalcontrol system. The internalauditor carriesout
checking workthroughout theyear
→Although, he is an employee of the organizationbut heis given some
form of Independence in order to perform his dutiesmoreefficiently.
External Audit
ExternalAudit is carried out byan Independent Auditor whois not an
employee of the organization
→Internalauditor isappointed by the owners of a business. In case of a e
the limited company, theshare-holdersappoint anexternalauditor.
→The mainpurposeof an externalauditor istosubmit an audit report on
the financialpositionof businessenterprises.
The Report is accepted bythe share holders and other concerned parties
like Bank managers, creditors.

3. Procedural Audit;
1. Is an examinationand Review of the internalproceduresand records
of an organization. Themainpurposeof thisaudit is to ascertain
whether the internalproceduresarereliableor not.
→The proceduralaudit isconducted inorder to improvethe efficiencyof
internalcontrol system and to ensure the implementationofthe
procedures/laid downby themanagement
→Also the proceduralAudit isvery expensive but can be applied wherethe
owners suspect the duplicationofinternalpoliciesfollowed by the
directors.
Management Audit
Management Auditisconducted toinvestigatethemanagementaspectsof
a business
→The mainpurposeof thisAudit isto prepareof report on the
effectiveness of the management from thepoint of view of theprofitability
and efficient running of the business.
→ThisAudit canreveal strengthsand weaknessof the management.
Standard Audit
Thisis a type of audit which isconducted toascertainwhether theclient
accounting system complieswith therequired levels of standardsset by the
professionalbodies
1. Tanzania statementof standard Accountingpractices(SSAP’S)U.K
2. InternationalAccounting standards(IAS)
3. General Accepted Accountingprinciple(GAAP’s)
Continuous Audit/DetailedAudit
Is an Audit which involves regular intervalsof say one or three
months

4. →The Auditor visitshisclientsat regular or irregular interval during
the financialyear and checkseach and every transactions
Balance sheet Audit
Verificationofthe values of Assets, liabilities, thebalanceof reserves and
provisionsand the amount of profit earned or loss incurred bya firm
during a year.
→This audit requirestheauditor toreport only on the balancesheet. In this
case, he cannot ascertainwhether theaccountssupporting thebalance
sheet are kept or not.
→Thistype of Audit ismore popular in USA and CANADA and is not
commonin UK and other countriesincluding East Africa countries.
→ With Development of Industriesand establishment oflarge companies,
thistype of Audit will be morewidely used in thefuture.
Vouching Audit
Vouching Audit isthat Audit wheretheauditor checkseach and every
transactionright from theoriginin the books of primeentry till they are
posted and the final accountsareprepared from the amount posted.
→ThisAudit requireslot of work.
→Thissystem has becomeunpopular in largeorganizationswherethe
numbersof transactionsareintomillions and where a good internalcontrol
system is in use. These days, the auditor relieson the examinationofsome
of thetransactionsscientificallyselected at Random. In UK, Kenya and
other East Africancountriesvouching audit iscommonapproach.
Government Audit
Is the audit conduct ingovernment Authorities, ministriesdepartmentsby
the controlled Auditor General(CAG) accordingtotheExchequer and Audit
ordinanceor act.
Note; It is the audit required bythe government and it is conducted by
controller and Auditor general(CAG) as per Audit act and Exchequer
ordinance.

5. Financial Audit
Is the audit conducted toverifythe accuracyoffinancialstatementsonly
and creating anopinionwhether or not the financialstatementsportraythe
fair and true view of the firm’sfinancialposition& operationresults. Note
it is mostly conducted byExternalAuditor whois Independent in his
opinion.
Final Audit;
1. Is the Audit conducted and carriedout at the end of the financialyear
and normally after the preparationoffinancialstatements
ADVANTAGES OF FINAL AUDIT
1. Reduce chancesof changing figuresin the books of final Account
2. It is less expensive and suitablefor small business
3. It is convenient to the client staff
4. The work of auditingbecomeschemicaleasy.
DISADVANTAGES OF FINAL AUDIT
1. Not suitable(Advisable) to largeentities
2. Delays in Auditorsreport due to short period (timeof Auditing)
3. Largepossibilitiesof errorsand fraudseven after audit process
INTERIM AUDIT
Is the audit conducted and carried out beforethe end of the year normally
betweenthe accounting periods.
NOTE; If it is undertakentocover certainindateswithinthe financial
year(trading period) e.g. quarterly&sof half yearly. Mainlyfor determining
amount of profit to enable the companyto declarean interim dividend to
be distributed toshareholders.
ADVANTAGES INTERIM AUDIT
1. It makes easier the audit workat the end of the financialyear
2. Easy to determineerrorsand frauds
3. Final audit canbe completed very soon.

6. DISADVANTAGES OF INTERIM AUDIT
1. Figuresmay be altered after and it works.
2. Inconvenient to the client staff.
3. Additionalwork.
Partial Audit
Is the audit conducted onlyfor specific or particularpurposeon the
instructionsofthe owner (client).
O.) Complete Audit
Thisis theAudit conducted and carried out by examiningevery
transactionsof the firm through checking ofall vouchers, documents,
financialstatements, lettersand minutesindetails. This Audit issuitable
for the firmswith very weak internalcontrolsystems.
Note; These varioustypes of Audit canbe classified accordingto;-
1. Form of organization
Under thisclass, various typesof audit are;-
1. Audit of accountsof a sole proprietor
2. Audit of partnership accounts
3. Audit of accountsof limited companies
4. Audit of Government accounts
5. Other institutions
Nature of work
Varioustypesof audit are, but according tothe
1. Privateaudit
2. Statutoryaudit
3. Internal audit
4. Externalaudit
Time factor
Audit maybe conducted at different intervalsof time. These are;

7. 1. Final Audit
2. Interim Audit
3. ContinuousAudit
Method of approach
According tomethod of approach, varioustypesof audit are;
1. Proceduralaudit
2. Management audit
3. Standard audit
4. Balancesheet audit
5. Vouching audit
OBJECTIVESOF AUDITING
These objectivesof an Audit maybe classified as under;-
1. Primaryobjectives
2. Secondaryor subsidiaryobjectives
PRIMARY OBJECTIVES
The primaryobjectiveof an Audit isto enable the auditor todeterminethe
accuracyoffinancialstatementsor accounts.
The auditor formshis opinionthrough an audit whether or not the final
account show a True and a fair view of the financialpositionof a business.
If the Auditor isof theopinion that profit and loss account and the balance
sheet give a true and fair view of financialpositionofbusiness enterprises
then any reading and using primaryobjectiveofauditing arecontained in
the companyact. These areknown as statutoryobjectives. Theseinclude;
1. The auditor hasan obligationtoprove the true and fair view or other
wise of the company’sfinancialstateof affairs
2. He should confirm the proper books of accountsarebeing kept or
not.
3. The auditor isrequired tocommunicatehisfindingsto the
shareholdersof the companyin form of a report together with his
opinion.

8. SECONDARY OBJECTIVES
These secondaryor subsidiaryobjectivesofauditing are;-
1. To detect errorsand fraud
Errors and frauds canbe ascertained and detected bythe
management throughtheestablished internalcontrolsystem.
2. To prevent errorsand fraud i.e. through internalcontrolsystem
3. To assist the clientsto improve their accountingsystem
4. To find out whether the internalcontrolsystem is working properly
or not.
It must be emphasized that it is not the auditor dutyto discover fraudsbut
if he comes acrossthem during theaudit he should point out these frauds
to the concernspersons. He should also point out the errors.
FUNCTIONSOF AUDITING
1. Studying the Accounting system
It is the basic functionof Auditing inorder to determinethenature,
timing and extent of the audit procedures. Auditor should know the
accounting systems.
2. Internal control system
It is the process which determinesthat management policiesare
carried out according totheaccounting system. Thissystem is very
useful to safeguard theinterest of enterprises. TheAuditor
determinestheeffectiveness of thissystem.
3. Vouching
Thisis to determinetheaccuracyof the accountingofthe assets of the
business. The auditor cancheckthe existenceof asset.
4. Legal requirement;

9. It is the functionof auditingthat statement isprepared under the
legal requirement and variouslaws like companywith Income tax
ordinancewhich areintroduced bythe Government.
5. Liabilitiesverification
The liabilitiescanbeverified from the books of accounts. Theauditor
canwriteletter to a creditor for the verificationofliabilities. The
auditor receivesthecertificate from management.
6. Capital and revenue
Auditing should makedifferencebetween capitaland revenue items.
The capitalitemsarecompared tonotethe financialpositionof the
business. The revenue item is compared todeterminetheIncome.
The years Income and expenses related to many candivide in correct
and coming years.
7. Valuation of liabilities
Through Auditing thevalue of liabilitiesand auditor canapplythe
accounting principlestoassess the value of liabilities. TheAuditor
criticallyexaminesand takeshelp from theexpert
8. Valuation of assets
The management givesthevalue of assets and Auditor canapply the
accounting principletoassess the value of assets. The Auditor
criticallyexaminesand takeshelp from theexperts.
INTERNAL CONTROL
The whole system of controls, financialand otherwiseestablished by
the management inorder to carryon the business of the enterprisein
an orderly and efficient manner, safeguard theassetsand secureas
far as possiblethe completenessand occurrenceof the records.
The individualcomponentsof an internalcontrolsystem areknown
as ‘controls’ or Internal control varioustypes of Internal control are;
1. Control on purchasesand creditors
2. Control on stockand work in progress.

10. 3. Control on cash receiptsand payments
4. Control on wagespayments
5. Control on sales and debtors
6. Other controls
DETAILED INTERNAL CONTROL OBJECTIVES
An attempt ismadehere to systematizethevariousinternalcontrol
objectivesindependent of the typeof the client’sbusiness. The Internal
controls over the accounting system should be designed to ensure that the
following seven objectivesareachieved
1. Validity –The internalcontrol system should be designed to ensure
that recorded transactionsarevalid. The system should not permit
the inclusionof fictitiousor nonexistent transactionsinthe records.
2. Authorization –The system should be designed to ensure that
recorded transactionsareauthorized. Anunauthorized transactionis
a fraudulent one and leads to resourceswastage.
3. Completeness–The set proceduresmust ensure that existing
transactionsarerecorded to prevent omissionfrom the records.
4. Valuation – An adequateinternalcontrolsystem most include
proceduresto avoid errors in arriving at valuesof the transaction
amountsin the recording process
5. Classification– The laid proceduresmust ensure that proper
classificationofaccountsis madeif the financialstatementsareto be
properly stated
6. Timing – Proceduresinthe internalcontrolsystem should ensure
that transactionsarerecorded at proper time’si.e. not before or
delayed as thismay lead to mis – statement.
7. Posting and summarization –The internalcontrol system
procedureshave to be designed should ensure that
transaction properlyrecorded and included in the subsidiaryrecords
these are follows;
1. To promoteoperationalefficiency –The control withinan
organizationaremeant toprevent unnecessary duplicationofeffort
and wastein all aspectsof the businessand to discourageinefficient
use of other resources.
2. To encourageadherencetoprescribepolicies – Management
Institutesproceduresand rules in order to meet goals of the entity.

11. The internalcontrolsystem is meant to provide assurancethat the
policiesare as followed by the clients’personnel.
3. To safeguard theAssets – This relatesto physicalas well as non-
physicalassets which canbe stolen, misused, accidentallydestroyed
unless they areprotected by adequatecontrol
4. To provide reliabledata – Managementmust haveaccurateand
reliableinformationasthe basisfor its futuredecisionsand also for
carrying out itsoperation.
INTERNAL AUDIT
Internal audit – as an independent appraisalfunctionestablishedbythe
management ofan organizationfor thereview of the internalcontrol
system as a serviceto the management.
The mainobjectiveof InternalAudit is as under;
1. To safeguard thecompany’sFixed assets
2. To assist the management asfar as possible to run thebusiness
efficientlyand in orderly manner.
3. To act as a consulting departmenttoother departments
4. To detect and prevent errors and frauds perpetratedbythe client
staff.
5. To help in themaintenanceofa strong internalcontrolsystem
employed by the client.
6. To help the client to reducethe audit fee of the internalauditor.
EXTERNAL AUDIT
Is the audit conducted withintheorganizationbyan independent
appointed auditor from outsidetheorganizationwhois recognized by
NBAA. Externalauditor isappointed bythe owner of the firm and not the
management ofthe firm in caseof limited companytheshare holders
appointed theinternalauditor.
The mainobjective(primaryobjective) of externalaudit isto determinethe
accuracyoffinancialstatementsor accountsand form a true and fair view
of thefinancialpositionand operationresult of the business.
Other objectiveunder externalaudit is as follows;

12. 1. To confirm whether or not the proper books of accountsarekept
2. Detectionof errors and frauds
3. Present findingsto the owner in a report together with hisopinion
(auditing opinion)
4. Assist its client to improvetheir accounting system i.e. vouching and
internalcontrol system.
5. Finding out the weaknessor strength of internalcontrolsystem.
IMPORTANCE/SIGNIFICANCEOF INTERNAL AND EXTERNAL
AUDIT.
1. It helps to determinetheeffectiveness of internalcontrol system
2. It cutsdown thework of externalauditor and as a result the audit cost
of externalauditor reduces
3. It helps to prevent frauds
4. It facilitatesthemaintenanceofproper accounting recordsand
preparationof financialstatementsin time.
5. It helps to review of the implementationofcorporatepolicies, plans
and procedures.
6. It helps to examineof financialand operating informationfor
management detailed of transactionsand balances.
7. Specialinvestigations
SIMILARITIES BETWEEN INTERNAL AND EXTERNAL AUDIT
1. Both ensure the operationof an effectivesystem of Internal control
system
2. Both use almost similar techniquestoconduct audit
3. Both safeguard theassets of the company
4. Both follow the professional ethicsinthe conduct of Audit.
DIFFERENCESBETWEEN INTERNAL AND EXTERNAL
AUDIT
INTERNAL AUDIT EXTERNAL AUDIT
Is conducted bythe internal
auditor whois an employee of an
organization
Is an audit which carriedout by an
independent auditor whois not an
employee of the organization
The mainobjectiveisto find out
whether the internalcontrol
The mainobjectiveisto determine
the accuracyoffinancialstatement

13. system is working successfully or
not.
or accountsand form an
independent opinionor whether or
not financialstatementsshow true
and fair view of all financialposition
and operation.
AUDITOR'S WORKING PAPER
Nature and definition
Introduction –The efficiencyof theAudit work is enhanced through the
carefulcompilationand maintenanceofaudit work performed
documentationof audit workis done through preparationof Audit working
papers. Working papers
Meaning;
Working papers – are therecords kept by auditor of proceduresapplied,
tests performed, evidence(information) gatheredand thepertinent
conclusionsreached in the audit engagement
→Audit working papersshould be prepared as the audit proceedsso that
the detailsand problemsarenot omitted.
→Each audit working paper should be properly identified with information
such as client’sname, period covered, descriptionofcontents, initialsof the
person who prepared it, dateand an index code.
FORMS/TYPESOF AUDITOR’S WORKINGPAPER
Audit working papersareclassified intotwo categoriesand each category
assembled in a separatefile. Thisdivisioninto the twotypes is a matter of
convenienceto the auditor and there is no guidelineon it. These are as
follows;
1. Permanent Audit.} For the sameclient
2. Current Audit file.}
A.PERMANENT AUDIT
FILE

14. A permanent Audit fileis essential to theauditor ina continuousnature
and which will be of value to each successive audit
→The file actsas a constant sourceof referenceand helps avoid asking the
client the same questionsevery timethe auditor commencestheannual
audit. Thepermanent audit filetypicallycontainsthe following;
 Memoranda and Articlesofassociationand other appropriate
statutoryor legal regulations
 Copies of evidencing important agreementsentered bythe client e.g.
leases, debenturedeeds and other major contracts
 Brief descriptionofthe type of business
 Detailsof physicallocationof a business e.g. Factories, offices, shops
etc.
 Detailsof the client’saccounting system and internalaudit
procedures
 An organizationchartofthe client’s staff.
 Nameand address of client’s Advisers, including bankers, stock
brokersand management statement showing importantaccounting
matterssuch as historyand reserves, adopted basisof accounting e.g.
stock valuationdepartment
 Lists of accounting recordsand responsibleofficials
Note; Permanent Audit filesshould be updated at appropriate
B. CURRENT AUDIT FILE
The current audit fileis used to hold all the working papersapplicableto
the year under audit. It should normally containthe following;
1. A copy of thestatement on which the auditorsarereporting
authenticated bythedirectorssignatures
2. An index covering all working papersunless they arecross-referenced
to the relevant itemsin theaccounts.
3. Audit program
4. An internalcontrol questionnaireand other recordsincluding flow
chart ifdesigned to record and ascertaintheadequacyofthe internal
control system
5. A schedule for each item on the balance sheet including comparative
figures, showing its makeup, existenceownership

15. 6. A schedule supporting each item inthe statutoryprofit and loss
account including comparativefigures.
7. Checklist concerning compliancewith statutorydisclosureprovisions
8. Record of queriesand their manner of disposalincluding notesfor
futureattentionifnecessary
9. A schedule of the important statistic or working ratios, comparative
figuresincluded where appropriate.
10. A record or extract ofminutesof meetingsof the directors and
shareholders. These should be cross- retraced whererelevant to the
other working papers
11. Copies of letters to clientssetting out any materialweaknessesor
matterswith which theauditorsaredissatisfied regardingthe
accountsor control procedures.
12. Letter representation
Note; mattersnot of permanent importance, but which willrequire
attentionduring thesubsequent year’saudit should be listed with
references to therelevant working paper and a note transferred tothe
next current file while opened.
AUDIT REPORT AND OPINION
Audit report: Is a report prepared byan independent auditor tothe
management after examiningthecompany'sfinancialstatements. It
includesthe auditorsopinionregarding thetrue and fair view of the
company'sfinancialstatementrepresentation.
Audit opinion: Thisis the view given as a recommendationbyanauditor
after auditing thecompany'sfinancialstatement.
TYPES OF AUDIT OPINION
1.Unqualified opinion
Thisis givenwhen theauditor issatisfied with the presentation ofthe
company'sfinancialstatement, i.ethe company'sfinancialstatementshows
the true and fair view. The company'sfinancialstatement isprepared with
the complianceofinternationalaccountingstandards.
2.Qualified opinion
Given when an auditor failto give out his or her opinionregarding thetrue

16. and fair view of company'sfinancialstatement. Someof the itemsin the
financialstatement arenot presented in the way in which they are
supposed to be presented.
3. Disclaimer opinion
Given when there is thelimitationofscope i.e If the management limitan
auditor toaudit someof the documentsor to do physicalstock of the
company'sassets asa part of audit sampling.