CLASSIFICATION OF AUDIT

1.0 INTRODUCTION

In this unit, you shall be exposed to the classification of audit in a greater detail – classification by nature as well as by method of approach. Also, you will learn how the provisions of the Companies and Allied Matters Act (1990) affect the auditor.
Finally the Generally Accepted Auditing Standards will be explained to you. These standards relate to the measuring of the quality of performance.

MUST READ: A

1. Auditors’ importance, responsibility and independence
2. Legal position and liability of auditors
3. Procedures for auditing transactions i - fixed assets and investments
4. Audit cycle and procedures
5. Audit evidence and procedures
6. Audit planning
7. Audit reports
8. Audit risks-types

2.0 OBJECTIVES

1. At the end of this unit, you should be able to: 
2. classify audit by nature 
3. classify audit by method of approach 
4. explain the provisions of CAMA (1990) as they affect the auditor 
5. distinguish auditing standards from auditing procedures. 

3.0 MAIN CONTENT

3.1 Classification of Audit by Nature

This will be discussed under the following sub-heads:

3.1.1 Private Audit

This form of audit is undertaken at the request of the interested party even though there is no legal obligation that an audit should be carried out. The scope of the private audit may be determined as normally or broadly as the client wishes, according to his requirements.

3.1.2 Statutory Audit

Statutory audit arises under CAMA (1990). It is a statutory obligation for the accounts of every limited liability company to be audited annually by a professionally qualified auditor.
The scope of statutory audit is largely determined by legislation which the directors, shareholders or even the auditors have no authority to vary or alter in any way.

3.1.3 Internal Audit

Both private and statutory audits are undertaken by independent (external) auditors. The internal auditor is an employee of the organisation engaged in such a work on behalf of the organisation. According to the Institute of Chartered Accountants in England and Wales (ICAEW), Internal Audit is defined as: …a review of operations and records, sometimes continuous, undertaken within a business, by specially assigned staff. American Institute of Internal Auditors gave a similar definition as follows: … internal auditing is an independent appraisal activity within an organisation for the review of accounting, financial and other controls, as a basis of service to management. It is a managerial control which functions by measuring and evaluating the effectiveness of other controls.

The nature of the internal auditor’s job/work requires that he should be given a degree of independence, but as an employee of the organisation, he takes directives from the management and reports to the management. Therefore, his independence may be impaired.

SELF-ASSESSMENT EXERCISE 1

1. Mention and explain the three classes of audit by nature.
2. How far can the external auditor rely on the work of the internal. audit team?

3.2 Classification of Audit by Method of Approach

3.2.1 Final or Completed Audit This is undertaken by the external auditors at the completion of preparation of final accounts of the business.
3.2.2 Interim Audit By this method of approach, auditors have a predetermined period, say, monthly, quarterly, etc. to audit the account being prepared so far. It has some advantages over the final audit in the sense that errors, omissions or frauds are detected early.
Secondly, the audit work is completed soon after the final accounts have been drawn. Thirdly, the presence of auditors acts as a check on the accountants who may have fraudulent motive to manipulate the company’s accounts.
However, the method has a little disadvantage in the sense that it interrupts a continuous accounting work.
3.2.3 Continuous Audit This occurs in a situation where the auditing firm, concerned with auditing the accounts of a particular company, sends its own staff to that

company to audit the accounts daily and work is completed at the same time as the final accounts are drawn. Time is saved, errors are minimised, and the possibility of fraud by the staff of the company may be ruled out. However, its flaw is that the audit staff may constitute a complete nuisance to the company.
3.2.4 Balance Sheet Audit A balance sheet audit is slightly different from the conventional audit in the sense that it begins by verifying all items appearing in the balance sheet by tracing each item at a time to confirm that the items actually exist.

SELF-ASSESSMENT EXERCISE 2

How would you classify audit by method of approach?

3.3 Companies and Allied Matters Act (1990) and the Auditors

The provisions of CAMA (1990) in Section 357 made it clear that auditors should be appointed to protect the shareholders and members of the public by reporting in fair manner on the financial statements of every limited liability company. The general duties of auditors are laid down in both the CAMA and engagement letter given to the auditors by the board of directors of the company.

The duties and ethical behaviours of auditors are also monitored by the relevant professional accounting bodies, namely, ICAN and ANAN. Specifically, CAMA (1990) provided for the following in relation to the auditors.
(i) Appointment
(ii) Remuneration
(iii) Resolutions as to appointment and removal of auditors
(iv) Rights
(v) Qualifications.

3.3.1 Rights of the Auditors

The rights of the auditors, as spelt out in CAMA (1990) are as follows.

1.  Every auditor of a company should have a right of access at all times to the books and vouchers of the company. 
2. He shall be entitled to require from the officers of the company such information and explanation as he thinks necessary for the performance of his (their) duties. 
3. The auditors shall be entitled to attend any general meeting of the company and to receive all notices of, and other communications relating to any general meeting which any member of the company is entitled to receive. 
4. A right to be heard at any general meeting, which he attends, on any part of the business of the meeting which concerns him as auditor. 

3.3.2 Qualifications as Auditors

CAMA (1990), as well as the Institute of Chartered Accountants of Nigeria (ICAN), stipulate the qualifications of auditors to practise in Nigeria. Basically, auditors must possess technical competence to perform audit engagement. Auditors of a company must be members of recognised professional accountancy bodies.

SELF-ASSESSMENT EXERCISE 3

Explain the rights of auditors as provided for by CAMA (1990).

3.4 Generally Accepted Auditing Standards

The Companies and Allied Matters Act of 1990 made it mandatory for audited financial statements to state that they are true and fair, and that the profit and loss account and the balance sheet comply with the provisions of the Act. The auditing standards apply to all reports in which the auditor expresses an opinion on the entire financial statement which is aimed at presenting a true and fair view of the state of financial affairs.
Auditing standards have universal acceptance among international accountancy bodies. These standards deal with the general standards expected from every auditor, the standards of fieldwork, and the standards of reporting.

Auditing standards and auditing procedures have been distinguished clearly by the accounting profession. While auditing standards relate to measures of the quality of performance, auditing procedures relate to the act to be performed. The standards measure the quality of job done based on the acts and the objectives to be attained by the use of the procedures undertaken.

Therefore, auditing standards deal with auditors’ professional qualities and also with the professional judgement to be exercised during the audit engagement. According to the American Institute of Certified Public Accountants in the Codification of Statement on Auditing, the Generally Accepted Auditing Standards are broken down into three sections as below.
B-1 The General Standards
B-2 The Standards of Fieldwork
B-3 The Standards of Reporting

3.4.1 The General Standards

The general standards are as follows.

1. The examination is to be performed by a person or persons having adequate technical training and proficiency as an auditor or auditors; 
2. In all matters relating to the assignments, independence in mental attitude, is to be maintained by the auditor or auditors; 
3. Due professional care is to be exercised in the performance of the examination and the preparation of the report. 

3.4.2 The Standards of Fieldwork 

The standards of fieldwork are as follows:

1.  The work is to be adequately planned and assistance, if any, is to be properly supervised.
2. There is to be proper study and evaluation of the existing internal control as a basis for reliance thereon and for the determination of the resultant extent of the tests to which auditing procedures are to be restricted. 
3. Sufficient competent evidential matters are to be obtained through inspection, observation, inquiries and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination. 

.4.3 The Standards of Reporting

The standards of reporting are as follows:

1.  The report shall state whether the financial statements are presented in accordance with the Generally Accepted Accounting Principles. 
2. The report shall state whether such principles have been consistently observed in the current period in relation to the preceding period. 
3.  Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. 
4.  The report shall either contain an expression of opinion regarding the financial statements taken as a whole, or an assertion to the effect that the opinion cannot be expressed. The reason, therefore, should be stated. In all cases, where the auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s examination, if any, and the degree of responsibility he is taking.