THE MEANING OF ASSURANCE

Definition of assurance
‘Assurance’ means confidence. In an assurance engagement, an ‘assurance firm’ is engaged
by one party to give an opinion on a piece of information that has been prepared by another
party. The opinion is an expression of assurance about the information that has been
reviewed. It gives assurance to the party that hired the assurance firm that the information can
be relied on.
Assurance can be provided by:
i. audit: this may be external audit, internal audit or a combination of the two
ii. review.
A statutory audit is one form of assurance. Without assurance from the auditors, the
shareholders may not accept that the information provided by the financial statements is
sufficiently accurate and reliable. The statutory audit provides assurance as to the quality of
the information.
The provision of this assurance should add credibility to the information in the financial
statements, making the information more reliable and therefore more useful to the user.
However, there are differing levels or degrees of assurance. Some assurances are more
reliable than others.
b. Levels of assurance
The degree of assurance that can be provided about the reliability of the financial statements
of a company will depend on:
i. the amount of work performed in carrying out the assurance process, and
ii. the results of that work.
The resulting assurance falls into one of two categories:
iii. Reasonable Assurance – A high (but not absolute) level of assurance provided by the
practitioner’s conclusion expressed in a positive form.
E.g. “In our opinion the accounts are true and fair”. The objective of a statutory audit is to
provide reasonable assurance.
iv. Limited Assurance – A moderate level of assurance provided by the practitioner’s
conclusion expressed in a negative form. E.g. “Based on our review, nothing has come to
our attention that causes us to believe that the accompanying financial statements do not give
a true and fair view”. The objective of a review engagement is often to provide limited
assurance.
An audit provides a high, but not absolute, level of assurance that the audited information is
free from any material misstatement. This is often referred to as reasonable assurance.
The assurance of an audit may be provided by external auditors or internal auditors.
v. An external audit is performed by an appropriately qualified auditor, appointed by the
shareholders and independent of the company.
vi. Internal audit is a function or department set up within an entity to provide an appraisal
or monitoring process, as a service to other functions or to senior management within the
entity. Typically, internal auditors are employees of the entity. However, it is also common
for entities to ‘outsource’ their internal audit function, and internal audit work is sometimes
carried out by firms of external auditors.
Definition: Assurance engagement
This is an engagement in which a practitioner aims to obtain sufficient appropriate evidence
in order to express a conclusion designed to enhance the degree of confidence of the intended
users other than the responsible party about the subject matter information (that is, the
outcome of the measurement or evaluation of an underlying subject matter against criteria).
Each assurance engagement is classified on two dimensions:
  Either a reasonable assurance engagement or a limited assurance engagement
 Either an attestation engagement or a direct engagement.
Elements of an Assurance Engagement
assurance engagement performed by a practitioner will consist of the
following five elements:
i. A three party relationship:
1. Practitioner – the individual providing professional services that will review the subject
matter and provide the assurance. E.g. the audit firm in a statutory audit
2. Responsible party – the person(s) responsible for the subject matter. E.g. the Directors are
responsible for preparing the financial statements to be audited
3. Intended users – the person(s) or class of persons for whom the practitioner prepares the
assurance report. E.g. the shareholders in a Statutory audit
ii. Subject matter: This is the data such as the financial statements that have been prepared
by the responsible party for the practitioner to evaluate. Another example might be a cash
flow forecast to be reviewed by the practitioner.
iii. Suitable criteria: This can be thought of as ‘the rules’ against which the subject matter is
evaluated in order to reach an opinion. In a statutory audit this would be the applicable
reporting framework (e.g. IFRS and company law).
iv. Evidence: Information used by the practitioner in arriving at the conclusion on which
their opinion is based. This must be sufficient (enough) and appropriate (relevant).
v. Assurance Report: The report (normally written) containing the practitioner’s opinion.
This is issued to the intended user following the collection of evidence.

PLANNING AN AUDIT: ISA 300

AUDIT PLANNING MEMORANDUM
Definition: Audit Planning Memorandum (APM) refers to the audit plan documentation
prepared by the Auditors, containing all of the information obtained and the decision reached
in the process of Audit Planning Programme. It is a standing arrangement made by the
auditor for the continuing engagement of a particular client. The objectives of Audit Planning
Memorandum are to provide formal record of the planning process and the programme,
communicated to the Audit team to facilitate the audit process.
CONTENTS OF AUDIT PLANNING MEMORANDUM
The contents of audit planning memorandum can be outlined under five (5) broad categories.
(i) Background Information of the client, which covers the following:
 A brief historical background of the entity
 The nature and trend of the enterprise’s business.
 The organizational and management structure of the enterprise.
 Significant accounting policies followed by the entity in the preparation of its financial
statements.
 The terms of reference of the audit assignment.
 The Accounting and Internal control procedures of the entity.
(ii) Audit Strategy Memorandum, which contain the following:
 The audit objectives.
 The overall audit approach
 Audit Risk analysis for the various sections of the financial statements and the
approaches to be adopted in respect of each section.
 Areas requiring special audit attention and the procedures to be applied.
(iii) Jobs or Assignment Administration Memorandum, which includes:
 The Partner in charge of the Audit Assignment.
 The Manager in charge of the Audit.
 The Seniors and other staff in charge of the Audit.
 Dates of the audit visits including any interim visits, and final audit visit.
 Dates and details of such events as:
 Manager’s field review; Manager’s final review;
 Circularization of Debtors and Creditors;
 Confirmation of bank balances.
 Stock takes
 Cash count.
 Management Representation Letter.
 Partner’s final review
 Reporting deadline.
 The Audit time Budget
 The Audit Procedures.
 Audit Programme
Benefits of Audit Planning Memorandum
(i) Assists in the review of audit work.
(ii) Shows logical approach adopted in the plan of work
(iii) Serves as a guide for future audit planning.
(iv) Provides evidence of proper audit planning in case of litigation.
(v) It is useful for training audit staff.
(vi) It provides evidence of work performed in case of disagreement on scope.
(vii) It is a basis for comparison of Audit plan and actual performance.
AUDIT PLAN
An audit plan is an overview of the engagement that outlines the nature and characteristics of
the client and its environment and the overall audit strategy. It highlights the preparations
made for one specific audit engagement.
A typical audit plan includes details on –
1. Objectives of the audit (e.g reporting to shareholders, special- purpose audit or reporting
to any other party).
2. Nature and extent of other services to be performed for the client e.g taxation services.
3. Timing and scheduling of the audit work – what to do before balance sheet date, on the
balance sheet date or after, including dates for cash count, observing of inventory, third party
confirmations/circularization.
4. Description of the client company and its environment.
5. Work to be done by the client staff eg production/presentation of T/balance, schedules,
reconciliations etc
6. Staffing requirements during the engagement.
7. Discussions among team members about significant risks.
8. Target dates for completing major segments of the engagement eg consideration of internal
control, audit report, filing of tax returns etc
9. Significant risks of material misstatement due to fraud or error and auditor’s response to
those risks.
10. Preliminary judgments about materiality levels for the engagement.
With respect to the auditor’s consideration of fraud, it is important to document in the audit
plan the following –
i. Discussions among team members about fraud risks held during planning.
ii. Procedures performed to identify fraud risks.
iii. The fraud risks identified and the response to those risks.
iv. Any other conditions that caused the auditors to perform additional fraud related
procedures.
v. The nature of any communication made to management, audit committee or any other
party about fraud.
The Planning Process (Points for Consideration in Audit Planning)
It is important that the planning is documented in a document called the Audit Planning
Memorandum.
The planning process will involve:
1. Review of previous years’ working papers for key issues and problem areas (for a
continuing engagement).
2. Considering the impact of any changes in legislation, auditing or accounting standards,
especially in relation to their effects on the operations and/or reporting requirements of the
enterprise.
3. Considering the background of the client and any changes in the industry or issues that
may affect the audit work.
4. Considering changes in the business, its management or ownership. A change in them
CEO, CFO, a new management structure, establishment of a new business line, new branch
etc will result in significant changes in the circumstances of the company that will affect the
audit plan.
5. If there are changes in systems, accounting procedures and policies, review their effect on
the audit.
6. Carry out analytical review of management accounts and note key performance indicators
(KPIs).
7. Decide on the audit approach (substantive, systems-based or risk-based).
8. Agree on timing of the audit work – interim, final including established deadlines for the
submission of audit report.
9. Agree on time for availability of draft accounts, supporting schedules, analyses and
summaries by client.
10. Evaluate internal controls and decide on level of reliance to be placed on them.
11. Consider the use of experts, if necessary, and incorporate in plan.
12. Plan rotational visits and testing, where many branches exist.
13. Work out time budget.
14. Plan and arrange staffing requirement and decide on likely fee chargeable.
15. Organize liaison with the audit committee (if any) and joint auditors, in case of group
audits.
3.6 BENEFITS OF AUDIT PLANNING
Adequate planning helps to ensure that:
1. The audit objective is established and achieved.
2. Attention is devoted to important areas of the audit, that is, to critical and high risk areas.
3. Potential problems are identified and resolved on timely basis.
4. The resources needed for the engagement, including the use of experts, are identified and
procured.
5. Works are properly/appropriately assigned to engagement team members.
6. The audit engagement is properly organized and managed for effectiveness and efficiency.
7. The direction and supervision of the audit, including the review of the works of team
members, are facilitated.
8. The co-ordination of the works of joint auditors ( in the case of a group audit) and experts
are facilitated.
9. The audit engagement is completed economically and within time schedule.
The purpose of an audit plan
A plan sets out what needs to be done to achieve an objective. In the case of an external or
internal audit, the objective is the production of an audit report containing an opinion on the
information subject to audit. An audit plan should be prepared as a means of achieving this
objective efficiently and effectively.
Content of an audit plan
Preparing an audit plan is the first stage in the conduct of an audit engagement.
The plan sets out answers to three main questions (the ‘3Ws’):
Who will perform the audit work? (Staffing)
When will the work be done? (Timing)
What work is to be done? (The scope of the audit)
To prepare a suitable audit plan, the auditor needs to have an in-depth knowledge and
understanding of:
 the entity to be audited, and
 the environment in which the entity operates.
The auditor needs this knowledge and understanding in order to assess the risk attached to the
audit. Risk assessment is a key feature of the audit planning process and the assessment of
risk in the audit will affect:
 the amount of audit work performed in general, and
 the areas on which the auditor will focus his attention.

QUALITY CONTROL IN AUDIT

The output of any audit engagement is largely dependent on the firm-wide quality control system in
existence and the application of this system to the individual audit engagement.
It is important that auditors should perform their professional work with due skill and care
and with a proper degree of technical competence. Audit work may be performed by
members of a large team of auditors (the ‘engagement team’) with different levels of
knowledge and experience. This makes it necessary that audit firms have a strong system of
quality control which provides guidance to engagement team members.
Quality audit work reduces legal action by the client for negligence and also helps the
firm/auditor avoid:
 legal damages and legal costs
the loss of the client
adverse publicity and damage to the reputation of the audit firm and the profession as a
whole
disciplinary proceedings by a professional body such as ICAN
Quality control procedures can be considered at two levels:
the audit firm as a whole
each individual audit engagement
Quality control at audit firm level:
a “firm should establish a system of quality control designed to provide it with reasonable
assurance that the firm and its personnel comply with professional standards and regulatory
and legal requirements, and that reports issued by the firm or engagement partners are
appropriate in the circumstances.”
The elements to be addressed in a firm’s system of quality control are:
1. leadership responsibilities for quality within the firm;
2. ethical requirements;
3. acceptance and continuance of client relationships;
4. human resources/assignment of engagement teams;
5. engagement performance; and
6. monitoring (internal and external)
7. Documentation
Quality Control on an Individual Audit (ISA 220 - Quality Control for an Audit of
Financial Statements
This standard applies the principles of ISQC 1 to an individual audit. It requires firms to
apply quality control procedures over individual audit engagements.
Quality Control Review
The engagement partner may appoint a quality control reviewer with sufficient technical
expertise, if necessary. Such review must be completed before the audit report is signed.
Quality control reviews usually include selective review of working papers relating to
significant judgments made, review of financial statements, other matters, the report and
consideration of whether the report is appropriate.
Generally, the review for a listed company will include:
Discussion of significant matters with the engagement partner;
Review of financial statements and the proposed report;
Evaluation of the firm’s independence in relation to the specific engagement
Significant risks identified during the audit and the responses to those risks
Judgments made with respect to materiality and significant risks
Any consultations on matters involving differences of opinion, or other difficult or
contentious matters and conclusions arising from those consultations
The significance and disposition of corrected and uncorrected misstatements identified
during the engagement
The matters to be communicated to management and those charged with governance, and
where applicable other parties such as regulatory agencies.
Evaluation of the conclusions reached in formulating the auditor’s report.
The appropriateness of the report to be issued.
Review of Audit Work
A very important aspect of any quality control system is the review of audit work. Ideally, an
auditor with a higher level of competence and experience than the audit team members who
performed the audit work should conduct the review. The review process may take any of the
following forms:
Peer review: This is a review carried out by another partner in the assurance firm.
Engagement quality control review (EQCR): A peer review performed before the audit
report is signed as required by ISQC1 during the audit of a listed or public interest entity. An
EQCR forms part of the quality control procedures specific to an individual assignment.
Hot review: Also review carried out before the audit report is signed. It is similar in
substance to an EQCR except that the hot review is not performed as a direct requirement of
ISQC1. For example, it may be done when an engagement partner wants a second opinion or
to monitor the work of a new partner during probation.
For individual engagements, it is also a review of working papers done by a more senior
member of staff during the course of the audit. It is performed soon after the work is
completed. The review ensures that the work has been performed in line with the audit
programme and that the conclusions are consistent with the results obtained.
Monitoring review (also called a ‘cold review’): This is a peer review performed after the
audit report is signed. A cold review forms part of the monitoring of quality control
procedures.
A cold review at individual engagement level is performed at the end of the audit by the audit
manager or engagement partner. It involves a review of the whole file together with the
financial statements, to ensure that the work has been fully completed and that the results and
conclusions for the entire audit are consistent. The manager or part conducts this review
before the audit report is signed off.
The purpose of audit review is to check whether:
i. the audit work was carried out to proper professional standards
ii. the objectives of the audit have been achieved
iii. the work carried out during the audit and the audit evidence are suitably documented, and
that the audit evidence supports the conclusions that have been reached.
The review of the audit work should cover the audit planning process and audit procedures,
including:
documentation (the audit working papers)
the audit tests performed and the audit evidence gathered
compliance with the audit work programme
the resolution of problems encountered on the audit

Professional scepticism
It is a requirement of ISA 200 that, when planning and performing an audit, the auditor
should adopt an attitude of professional scepticism. Professional scepticism is defined by
ISA 200 as: “An attitude that includes a questioning mind, being alert to conditions which
may indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence”. This does not mean that the auditors should disbelieve everything they are told,
but they should view what they are told with a sceptical attitude, and consider whether it
appears reasonable and whether it conflicts with any other evidence.
In other words, they must not simply believe everything management tells them.
The objective of the auditor, per ISA 300 Planning an audit of financial statements is to plan
the audit work so that the audit will be performed in an effective manner.
Adequate planning benefits the audit by:
 helping the auditor to devote appropriate attention to important areas of the audit
 helping the auditor to identify and resolve potential problems
 helping the auditor organise and manage the audit engagement so that it is in an effective
and efficient manner
 assisting in the selection of staff with appropriate experience and the proper assignment of
work to them
 allowing for the direction and supervision of staff and review of their work.
ISA 300 requires the auditor to:
 involve the whole engagement team in planning the audit
 establish an understanding of the terms of the engagement as required by ISA210
 establish an overall strategy for the audit that sets the scope, timing and direction of the
audit and that guides the development of the audit plan
 develop an audit plan which includes a description of the nature, timing and extent of
planned risk assessment procedures and planned further audit procedures
document the overall audit strategy and the audit plan, including any significant changes
made during the audit.

Ethical issues in Audit

Fundamental principles

The law regulates some aspects of auditing to a degree. Company law regulates the
requirement for external auditing, but internal auditing is not normally subject to statutory
regulation.
However, all accountants who are members of a professional body such as ICAN are required
to comply with the regulations of that professional body. Such professional regulations
therefore apply to both external auditors and assurance providers and internal auditors. The
reason for the wide reach of ethical guidelines is that the accountancy profession accepts that
it has a responsibility to act in the public interest. See next section for explanation of ‘public
interest’.
There are five fundamental principles in The Code. These are set out below:
 Integrity. Members shall be straightforward and honest in all professional and
business relationships. Integrity implies not just honesty but also fair dealing and
truthfulness.
 Objectivity. Members are not to compromise professional or business judgements
because of bias, conflict of interest or undue influence of others.
 Professional competence and due care. Members have a duty to attain and maintain
their professional knowledge and skill at the level required to ensure that a client or
employer receives a competent professional service, based on current technical and
professional standards and relevant legislation. Members shall act diligently and in
accordance with applicable technical and professional standards.
 Confidentiality. Members shall respect the confidentiality of information acquired as
a result of professional and business relationships and shall not disclose such
information to third parties without authority or unless there is a legal or professional
right or duty to disclose. Confidential information acquired as a result of professional
and business relationships must not be used for the personal advantage of members or
third parties.
 Professional behaviour. Members shall comply with relevant laws and regulations
and avoid any conduct the professional accountant knows or should know might
discredit the profession.

Due skill and care

It is a fundamental principle that ICAN members should carry out their work with
professional competence and due care. This requirement reinforces a basic principle of the
law of contract as it operates in many countries – that a contract for the provision of services
should be performed with a reasonable degree of skill and care.
The concept of ‘due care’ or ‘reasonable care’ is important. The implication is that audit work
performed by an auditor for a client must be adapted to the specific circumstances and
characteristics of the client. There is no such thing as a ‘standard’ audit.
If the auditor fails to exercise a proper degree of care, a number of consequences may follow:
 There may be legal claims against the auditor in the law of contract or the law of tort.
(‘Tort’ means wrong doing.)
 There may be disciplinary proceedings against the auditor by ICAN.
 The auditor or audit firm may earn a reputation in the business community for poor
standards of work, and may therefore lose clients.
The application of the fundamental principles set out above is considered by The Code within
a conceptual framework. This framework acknowledges that these principles might be
threatened by a broad range of circumstances. This approach identifies the following five
potential categories of threats to the fundamental principles:
 Self-interest threat (for example, if the auditor earns a large proportion of his revenue
from a particular client, he may be unwilling to upset that client by issuing an
unfavourable auditor's report).
 Self-review threat (for example, if the auditor performs accountancy work for a client
in addition to the audit, he may find himself in a situation where he is reviewing his
own work and may therefore not be as critical of it as he might be if he was reviewing
someone else’s work).
 Advocacy threat (for example, supporting the client in a legal case may lead to a
perceived loss of independence).
  Familiarity threat (for example, acting for a client for a long period of time may
mean that the auditor becomes less critical of that client’s reporting practices).
 Intimidation threat (for example, a strong finance director may intimidate junior
members of the audit team and persuade them not to report errors found during their
testing).
Members are required to identify, evaluate and address such threats. If identified threats are
not at a level that would be regarded as acceptable (being where a reasonable and informed
third party would conclude that compliance with the fundamental principles has been
compromised) these must be addressed by:
 eliminating the circumstances creating the threat, or
 applying safeguards to reduce the threats to an acceptable level, or
 declining or ending the specific professional activity.

Threats
In the exam you could be required to recognise threats in a given situation and to explain why
those threats arise. The framework gives a list of circumstances which could give rise to each
of the five threats. These are set out below but these lists are not exhaustive. The later
sections of this chapter then look in more detail at some of the more common situations
which might be tested in the exam, the threats which arise and the action which should be
applied to address the threats.

Self-interest threats
Self-interest threats may occur as a result of the financial or other interests of members or
their immediate or close family members. An immediate family member is defined by the
Code as a spouse (or equivalent) or dependant. A close family member is a parent, non-
dependent child, brother or sister, who is not an immediate family member.
Such financial interests might cause members to be reluctant to take actions that would be
against the interests of the client. For example, if a member holds shares in a client company,
he may be unwilling to give an unfavourable auditor's report. This would threaten the
fundamental principle of objectivity.
Circumstances which may give rise to self-interest threats for members include:
 financial interests, loans or guarantees incentive-based fee arrangements
 Concern over employment security
 Commercial pressure from outside the employing organisation
 Inappropriate personal use of corporate assets
 close personal or business relationships
 holding a financial interest in a client or jointly holding a financial interest with a client
 Undue dependence on fees from a client.
Self-review threats
Self-review threats occur when a previous judgement needs to be re-evaluated by members
responsible for that judgement. For example, where a member has been involved in
maintaining the accounting records of a client he may be unwilling to find fault with the
financial statements derived from those records.
Again, this would threaten the fundamental principle of objectivity.
Circumstances which may give rise to self-review threats for members include:

 business decisions or data being reviewed by the same person who made those decisions or
prepared that data
 being in a position to exert direct and significant influence over an entity’s financial
reports
 the discovery of a significant error during a re-evaluation of the work undertaken by the
member
 reporting on the operation of financial systems after being involved in their design or
implementation
 a member of the assurance team being, or having recently been, employed by the client in
a position to exert direct and significant influence over the subject matter of the engagement
 performing a service for a client that directly affects the subject matter of an assurance
engagement.

Advocacy threats
Advocacy threats occur when members promote a position or opinion on behalf of a client
to the point that subsequent objectivity may be compromised. Although it is natural for
members to support their client’s or employer’s position this could mean that they adopt a
position so closely aligned with that of their client or their employer that there is an actual or
perceived threat to the fundamental principle of objectivity.
Circumstances which may give rise to advocacy threats for members include:
 commenting publicly on future events
 situations where information is incomplete or where the argument being supported is
against the law
 promoting shares in a listed company which is also an audit client
 acting as an advocate for an assurance client in litigation or dispute with cate for an
assurance client in litigation or dispute with third parties.

Familiarity threats
Familiarity threats occur when, because of a close relationship, members become too
sympathetic to the interests of others. Circumstances which may give rise to familiarity
threats for members include:
 where a member in a position to influence financial or non-financial reporting or business
decisions has an immediate family member who could benefit from those decisions
 Long association with business contacts influencing business decisions
 Acceptance of gifts or preferential treatment, unless the value is trivial and inconsequential
 Over-familiarity with the management of the organisation such that professional judgment
could be compromised
 A former partner of the firm being a director or officer of the client or an employee being
in a position to exert direct and significant influence over the subject matter of the
engagement.
In auditing, a familiarity threat occurs when a senior member of the audit team (such as the
audit engagement partner) has worked on the same audit for several years. There is a risk that
the individual will become too familiar with the audit client and its management, and may
then be unable to take an objective view and make objective decisions concerning the audit.
Intimidation threats
Intimidation threats occur when a member’s conduct is influenced by fear or threats (for
example, when he encounters an aggressive and dominating individual at a client or at his
employer). Circumstances which may give rise to intimidation threats for members include:
 threat of dismissal or replacement of the member, or a close family member, over a
disagreement about the application of an accounting principle or the way in which
information is to be reported
 A dominant personality attempting to influence the member’s decisions
 being threatened with litigation
 being pressured to inappropriately reduce the amount of work performed in order to reduce
fees.
Safeguards
Safeguards which may remove or reduce threats to members fall into three categories:
 Safeguards created by the profession, legislation or regulation
 safeguards in the work environment
 Safeguards created by the individual.
Each of these categories is considered below. Later sections of this chapter consider the
specific threats which might apply to specific situations.
Safeguards created by the profession, legislation or regulation include:
 Educational, training and experience requirements for entry into the profession
 Continuing professional development requirements
 Corporate governance regulations
 Professionals standards (such as ISAs)
 Professional or regulatory monitoring and disciplinary procedures (such as the ICAN’s
own disciplinary procedures)
 External review by a legally empowered third party (such as a regulator appointed by the
Government) of the reports or information produced by a member.
Safeguards in the work environment include:
 the employer’s own systems of monitoring and ethics and conduct programmes (such as an
internal training or a mentoring programme)
 Recruitment procedures, ensuring that only high-calibre, competent staff are recruited
 Appropriate disciplinary processes
 Strong internal controls
 Leadership that stresses the importance of ethical behaviour and which expects employees
to behave ethically
 Policies and procedures to implement and monitor the quality of employee performance
 Policies and procedures to implement and monitor the quality of engagements
 documented policies regarding the identification of threats to compliance with the
fundamental principles, the evaluation of those threats and the implementation of appropriate
safeguards
 Communication of such policies and procedures and training on them
 The use of different partners and engagement teams for the provision of non-assurance
services to assurance clients
 Policies and procedures to stop individuals who are not members of an engagement team
from inappropriately influencing the outcome of the engagement
 policies and procedures to give employees the power to report ethical issues to senior staff
at the employing firm, without fear of retribution from those about whom they are making the
report
 discussing ethical issues with the client
 disclosing to the client the nature of the services provided and the fees charged (this could
be done via the audit committee)
 Consultation with another appropriate professional accountant.
Safeguards created by the individual include:
 complying with continuing professional development requirements
 keeping records of contentious issues and approach to decision-making
 having a broader perspective on how other organisations operate by forming business
relationships with other professionals
 using an independent mentor
 keeping in contact with legal advisors and professional bodies
PUBLIC SECTOR AUDIT
Regulatory/Legal framework
1. The constitution of the Federal Republic of Nigeria
2. Finance (Control and Management Act, Ca. F.26 LFN 2004
3. The Act or Edict setting up a particular Parastatals, corporation or Agency
4. The Financial regulations (revised)
5. The Public procurement (Due process) Act 2007
6. The Pension reform Act (for Pension Audit) 2014

Sect.85, 1999 constitution (as amended) establishes the Office of the Auditor-General for the
Federation with a primary role of ensuring that there is accountability by the executive arm of
Government and for the proper administration of the activities, functions, operations and
programmes of the government and its agencies.
Sect. 85 of the Constitution requires that the Auditor-General shall, within ninety (90) days
of receipt of the Accountant-General’s financial statements, submit his reports to each House
of the National Assembly, which shall cause their respective Public Accounts Committees to
consider the reports.
Thus, the institutional arrangements make the Auditor- General for the Federation responsible
for auditing the accounts of the Federal Government and reporting to the National Assembly.
The Public Accounts Committee (PAC), a committee of the National Assembly is responsible
for the public accounts in accordance with sect 85 (5) of the Constitution. The PAC
deliberates on the Auditor-general’s report, considers all queries raised by him in his report
and makes a report, including its recommendations, to the whole House.
Similar arrangement exists at the state level where there are State Auditors-General and
Auditors-General for local governments. Currently, there are 73 Auditors-General in Nigeria.
Auditor- General for the Federation
Appointment
Sect. 86, 1999 constitution provides that the Auditor-General for the Federation shall be
appointed by the President on the recommendation of the Federal Civil Service Commission,
subject to confirmation by the Senate.
Roles and Powers
The Auditor- General:
Shall audit the accounts of all accounting officers and of all persons entrusted with the
collection, receipt, custody, issue, sale, transfer or delivery of any stamps, securities,
stores or other property of the Government of the Federation.
Is responsible for carrying out surveys of the cash, stamps, securities, stores or other
properties of government that are held by such officers or persons.
Shall ascertain whether the objectives of government auditing are met; and in this regard
shall state whether in his opinion:
a. The accounts relating to public funds have been properly kept;
b. All public monies have been fully accounted for and the rules and procedures applied are
sufficient to secure effective check on the assessment, collection and proper allocation of
revenue;
c. Essential records have been maintained and the rules and procedures applied are adequate
to safeguard and control public property and funds;
d. Monies have been expended for the purposes for which they were appropriated and
expenditures have been made as authorized.
Shall sanction any erring officer
Shall alert the President of any audit alarm of importance and serious audit queries for
which the accounting officer is liable.
May undertake the examination of the accounts of any organization that receives funds
from the government such as statutory corporations, parastatals and voluntary agencies.
Functions
The AGF’s functions include:
Auditing and reporting in respect of treasury accounts, accounts of
ministries/extraministerial
departments and accounts of parastatals;
Detection and prevention of fraud;
Control of loss of funds by ensuring that effective control systems are in place;
Serving as the chairman of the audit alarm committee and the chairman of the Lsses
committee.
Attending the PAC sessions as an adviser.

Types of Public Sector Audits

There are three main types, namely:
Regulatory or Compliance
Financial; and
Money-for-value Audit
Regulatory (Compliance) Audit
This is aimed at ensuring that expenditures have been incurred on approved services and in
accordance with the enabling statutory provisions and regulations governing the particular
expenditure.
Documents an auditor requires for this type of audit include -
The Nigerian Constitution (as amended)
Civil Service rules
Treasury circulars
Establishment circulars
Official Gazettes of government
Financial regulations
Budgets etc
Audit of projects or contracts fall within this category.
Financial Audits
These are conducted to ensure that the accounting and financial control systems are effective
and efficient in operation as well as to ensure that financial transactions are properly
authorized and accounted for.
Financial audits seek to confirm that the financial statements have been prepared to faithfully
represent the state of affairs of the establishment within the period covered by the audit.
Audit of Treasury accounts fall within this category.
Value for Money Audit
Value-for- money audit, also referred to as Performance, seeks the maximization of the use of
resources for the welfare of the public by ensuring that activities and programmes are carried
out
at low cost and to high standard. In addition to ensuring that financial statements faithfully
represent the affairs of the establishment in relevant cases, the audit objective includes an
ascertainment of whether the establishment being audited is achieving the purposes for which
its
programmes are authorized and whether it is doing so efficiently, effectively and
economically.
Elements of Value-for-money Audit
 The elements of Value-for-money audit are economy, efficiency and effectiveness (the 3Es).
Economy: This involves minimization of input costs for an activity while having regard for
quality. An economical operation acquires resources in appropriate quality and quantity at the
lowest cost.
Efficiency: This involves an attainment of a high input-output ratio. Thus, efficiency is
concerned with the achievement of maximum useful output from resources deployed to an
activity. It ensures that only minimum level of resources is devoted to achieving a given level
of quality output.
Effectiveness: This is concerned with the extent to which objectives have been achieved.
Thus,
effectiveness connotes the achievement of desired results by the output.
Techniques of Value-for money audit.
i. Analysis of KPIs and trends and the investigation of deviations/exceptions. This is aimed
at identifying areas that need specific attention.
ii. Management and systems review: For the purpose of investigating the processes of
establishing objectives, implementing policies and monitoring results. This is with a view
to evaluating efficiency.
iii. Analysis of planning and control processes: With a view to evaluating the effectiveness
of the oversight function.
iv. Effectiveness review for the purpose of ascertaining whether activities and programmes
are achieving the objectives for which they have been undertaken.
v. Efficiency assessment involving specific investigation into some activities with high unit
cost, poor performance measures etc with a view to identifying appropriate remedial
action for the poor performance.
vi. Reporting on the VFM audit – Discuss draft with appropriate officers/committees before
finalizing.

The Role of the Public Accounts Committee (PAC) in Nigeria

The Public Accounts Committee (PAC) is a vital body within the Nigerian National
Assembly, playing a crucial role in ensuring accountability and transparency in public
financial management.expand_more Here's a breakdown of its key functions:

1. Examining Public Accounts:

 The PAC is responsible for examining the audited accounts of the Federation, which
includes:
o Accounts of the Federal Government ministries, departments, and agencies (MDAs)
o Accounts of parastatals and corporations owned by the government
o Reports of the Auditor-General on these accounts
 Its focus lies on scrutinizing government expenditure to ensure:
o Proper appropriation of funds allocated for various projects and programs
o Compliance with relevant financial regulations and laws
o Identification of any irregularities, inefficiencies, or misappropriation of funds

2. Holding Government Institutions Accountable:

 Based on their examination of public accounts, the PAC can summon and question:
o Ministers and heads of MDAs
o Officials responsible for managing public funds
 This enables the committee to:
o Investigate potential financial improprieties and mismanagement
o Obtain clarifications and justifications for financial decisions
o Recommend corrective actions or disciplinary measures for individuals or institutions found
to be negligent or culpable

3. Reporting to the National Assembly:

 The PAC submits reports to the National Assembly after examining the public accounts and
conducting investigations.
 These reports:
o Highlight any identified irregularities, weaknesses, or inefficiencies in public financial
management
o Recommend corrective measures and changes to improve accountability and transparency
o Hold relevant institutions and individuals accountable for any identified financial
mismanagement

4. Promoting Transparency and Accountability:

 The work of the PAC contributes to:

o Deterring corruption and fostering transparency in government spending
o Strengthening public confidence in the financial management practices of the government
o Improving public financial accountability and ensuring that public funds are used effectively
and efficiently for the benefit of the citizens

Additional Points:

 The PAC is a bipartisan committee, meaning it includes members from both the ruling and
opposition parties in the National Assembly.
 Its activities are governed by the Public Accounts Committee Act of 2004, which outlines its
powers, functions, and procedures.

In conclusion, the Public Accounts Committee plays a crucial role in ensuring accountability
and transparency in the management of public funds in Nigeria. By examining public
accounts, holding institutions accountable, and reporting to the National Assembly, the PAC
contributes significantly to good governance and strengthens public financial management
practices in the country.

FORENSIC AUDIT AND DUE DILIGENCE

Forensic accounting: The application of accounting, auditing, and investigative skills to
conduct an examination into a company’s financial statements. The objective of forensic
accounting is to provide an accounting analysis that is potentially suitable for use in court.
Forensic accounting covers both forensic investigations and forensic audits. It includes the
audit of financial information to prove or disprove a fraud, the interview process used during
an investigation, and the act of serving as an expert witness. Thus it encompasses both
litigation support and investigative accounting.
Note: Forensic accounting can be used in situations other than fraud, e.g. settling monetary
disputes in relation to a business closure, marriage break up, insurance claim, etc.
Forensic investigation: This is a process of carrying out procedures by a forensic
accountant, to gather evidence which could ultimately be used in legal proceedings or to
settle disputes. Alan Zysman defines forensic investigation as the utilization of specialized
investigative skills in carrying out an inquiry conducted in such a manner that the outcome
will have application to a court of law. This could include, for example, an investigation into
money laundering. A forensic
investigation involves many stages (similar to an audit), including planning, evidence
gathering, quality control reviews and reporting.
Forensic auditing: is the specific use of audit procedures within a forensic investigation to
find facts and gather evidence, usually focused on the quantification of a financial loss. It
refers to the procedures carried out in order to obtain reliable and acceptable evidence for
anticipated disputes or litigation. Thus, to Alan Zysman, forensic audit is an examination of
evidence regarding an assertion to determine its correspondence to established criteria carried
out in a manner suitable to the court. This could include, for example, the use of analytical
procedures, and substantive procedures to determine the amount of a payroll fraud or an
insurance claim, or the amount of rent owing under a lease agreement that is the subject of
litigation etc.
Qualities of a forensic Auditor
The qualities of a forensic auditor include (i) Ability to identify fraud with minimal
information
(ii) Identification of financial issues significant to the matter (iii) Knowledge of investigative
techniques (iv) Knowledge of the rules of evidence in court (v) Ability to interpret financial
information (vi) Ability to communicate findings in a language that is understandable by a
layman (vii) Possession of investigative skills(viii) Possession of investigative mentality (ix)
Computer literacy
Differences between Forensic Audit and Financial Audit
The procedures and skills needed in carrying out forensic audit and financial statement audit
are the same but the following differences could be noted between the two types of audits.
i. The objective in financial audit is to give an audit opinion on the financial statements while
forensic audit aims at detecting material frauds and misstatements
ii. Financial audit depends on examination of audit trail while forensic audit depends on
examination of events and activities behind the documents.
iii. Financial audit is conducted strictly according to standards, guidelines and applicable
legislations and framework whereas no such restriction is placed on the scope of forensic
audit
iv. Financial audit is usually statutory whereas forensic audit is on ad hoc basis
v. The financial auditor reports to members of the client entity while forensic auditor
reports to the persons who appointed him.
Objectives of Forensic Investigation
1. To determine if a deliberate fraud with the intention of stealing the assets of entity or
individual has actually taken place. There is a possibility that the matter under
investigation could have arisen through mistake or through deliberate criminal action.
2. To discover the perpetrator(s) of the fraud, and ultimately to assist in their prosecution.
The investigation will gather evidence, which may include an interview with the
suspected fraudster, which can then be used in criminal procedures against the
individual(s) concerned. Where a primary suspect exists, it is important to extend the
investigation to discover if there are other people involved, as frauds often involve
collusion between several individuals.
3. To quantify the financial loss suffered by an individual or entity as a result of the fraud.
The evidence gathered will determine the amount which involved in the fraud. It is
 important for the loss to be quantified, as legally a crime is said to have been committed
if a victim has suffered a financial loss.

Due Diligence Procedure

Due diligence is work commissioned by a client, involving agreed inquiries into aspects of an
organization, its accounts or activities of another organization the client is interested in
making substantial investment in or even a complete takeover. Thus due diligence is usually
associated with takeovers and mergers and other buy –in arrangements. A typical due
diligence engagement involves performing an assessment of the material risks associated
with a merger or takeover transaction (including validating the assumptions underlying the
acquisition) to ensure that the acquirer has all the necessary facts and that the business
opportunities are real.
Due diligence may include the following aspects:
Financial due diligence: A review of the financial position and obligations of a target to
identify such matters as covenants and contingent obligations. This will involve a
confirmation of title to all assets as well as their existence. A review of liabilities
including contingent liabilities and all banking/funding covenants.
Operational and IT due diligence: A review of operational and IT risks, including quality
of systems, associated with a target’s business.
People due diligence: A review of the key staff positions under the new structure,
contract termination costs and costs of integration.
Legal/regulatory due diligence: A review of the target’s level of compliance with
relevant laws/regulation.
Environmental due diligence: A review of the environmental, health and safety and
social issues in a target company, including compliance and procurement of all necessary
approvals and licenses from relevant authorities.

AUDIT REPORTS
An audit report is a formal document issued by an auditor upon the completion of
an audit engagement. It communicates the auditor's findings, conclusions, and
opinions regarding the financial statements, internal controls, compliance with laws
and regulations, and other matters specified in the engagement.

Types of Audit Reports:

1. Unqualified Opinion (Clean Opinion): This is the most desirable type of audit
report. It indicates that the auditor found the financial statements to be free from
material misstatements and in accordance with the applicable accounting standards.
The auditor concludes that the financial statements present a true and fair view of
the company's financial position and performance.
2. Qualified Opinion: A qualified opinion is issued when the auditor believes that
overall the financial statements are fairly presented, but there is a limitation or scope
restriction in the audit that prevents the auditor from expressing an unqualified
opinion. The qualification is specific to the area affected and is disclosed in the audit
report.
3. Adverse Opinion: An adverse opinion is issued when the auditor concludes that the
financial statements are materially misstated and do not present a true and fair view
 of the company's financial position and performance. It indicates serious issues with
the financial reporting and internal controls.
4. Disclaimer of Opinion: A disclaimer of opinion is issued when the auditor is unable
to express an opinion on the financial statements due to significant limitations in the
scope of the audit or inability to obtain sufficient and appropriate audit evidence.
This may arise due to restrictions imposed by management, lack of access to records,
or other circumstances beyond the auditor's control.

Limitations of Audit Reports:

1. Reliance on Representations: Auditors rely on representations made by

management and other responsible parties. If these representations are inaccurate or
misleading, it can impact the reliability of the audit report.
2. Sampling Risk: Auditors typically use sampling techniques to gather audit evidence.
There is always a risk that the sample selected may not be representative of the
population, leading to potential misstatements going undetected.
3. Inherent Limitations of Internal Controls: While auditors assess the effectiveness
of internal controls, they cannot provide absolute assurance that all errors and
irregularities will be detected. Controls may be circumvented by collusion,
management override, or human error.
4. Complexity of Financial Reporting: Financial reporting standards are complex and
subject to interpretation. Auditors may encounter challenges in applying these
standards consistently, leading to differences in judgments and estimates.
5. Time and Cost Constraints: Auditors operate within time and budget constraints.
This may limit the extent of audit procedures performed and the depth of audit
testing, potentially affecting the reliability of the audit findings.
6. Fraud Risk: Auditors design procedures to detect material misstatements due to
error or fraud. However, fraud may involve collusion, deliberate concealment, or
override of controls, making it difficult to detect through audit procedures alone.

It's essential for stakeholders to understand the type of audit report issued and the
associated limitations. While audit reports provide valuable assurance, they do not
guarantee the absence of all errors or irregularities, and users should exercise
judgment when relying on them for decision-making.