Audit | Principles of Auditing | Internal & External Audit

Nwabueze (1997) defined Audit as an exercise undertaken in order to find out the genuineness of the financial statements of an institution or organization, as prepared by the directors, for use by the owners (stakeholders) of the business, the creditors, the employees, the government etc, over a given period of time.

Taylor et al (1982) defined Audit as “an investigation by a qualified persons (auditors) into the evidence from which the final revenue accounts and balance sheet, or other statements of an organization have been prepared, in order to determine whether or not they present a true and fair view of the summarized transactions for the period under review and of the financial state of the organizations at the end date so as to enable the auditor to report thereon”

Santocki (1974), defined an audit as an examination and evaluation of the authenticity and therefore, the reliability of a firm’s business documents and records, through inquiries to ascertain if the financial statements on which the auditor is reporting and which have been prepared from their records display a true and fair view of the financial results for the periods under review.

Also, an Audit is an independent examination by a status person (auditor) to investigate the records and the financial statements there from, of an organization and subsequently form an opinion on the accuracy and reality of the financial statement.

Objectives of an Audit

  • To present an unbiased picture of the financial statements of an organization.
  • To detect fraud and accounting errors.
  • To prevent fraud
  • To give advice on accounting practices and standards.

Significance of Auditing

  • It assists management in achieving the most effective administration of the operations of the enterprise.
  • It enhances accountability on the part of the administrators.
  • It is a means of detecting errors, frauds and other hidden information.
  • It emphasizes compliance to approved accounting practices and standards.
  • It reveals the adequacy or otherwise of the internal control system.
  • It presents the situation of the establishment as it is, both in terms of finance and other material assets and liabilities.

Principles of Auditing

The principles a good auditor must adhere to includes:

Integrity: auditing should be undertaken with a high degree of integrity for the report to achieve its aim.

Accountability: the major essence of auditing is to ensure accountability on the part of the entire staff of an organization. Auditing is meant to reveal the level of accountability prevalent in an organization.

Independence: auditing should be carried out with a very high degree of independence of the auditor. This is to ensure that his report is not influenced by some interests.

Openness: auditing should make open all matters of information necessary for a clear understanding of the project.

Judgement: auditing should be based on sound professional judgement of the auditor based on competence.

Systematic: auditing should follow an approved plan of activities.

Efficiency: auditing be able to provide maximum utility at minimum cost to the organization being audited.

Relationship between internal and external Audit

Similarities:

  • Emphasis is on compliance with statutory and regulatory requirements.
  • Sufficient management information system.
  • Effective internal control system
  • Safe guarding of assets.

Difference:

Focus: while the internal audit may primarily be concerned with an examination of the operations of the internal control system and the flow of management information, external audit may concentrate on the reality of the financial statements.

Coverage: the extent of work coverage for internal audit is usually determined by the management but that of the external audit is conformable to laid down regulations.

Users: internal audit is often of interest to the management while for the external audit the interested parties includes: creditors, investors, the government and of course the general public.

Suggested Notes:

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