HARAMBEE UNIVERSITY BALE ROBE COMPUS

COLLEGE OF BUISNESS AND ECONOMICS

DEP :ACCOUNTING AND FINANCE

COURSE TITTLE: AUDITING

GROUP ASSIGNMENT

3rd year 3rd sem

Group member ID

1.Firehiwot Genene........... 20120

2. Yordanos Endale............2099

3. Elsa Fikadu.............. 2016

4.Mahlet Birehanu...... 2033

5.Betelihem Heniok......20105

6.Melat Jeyilan............20113

7.Bertukan Urge..........20104

8.Mebrate Abebe.........2035

9. Tsige Kiflu............ 2051

10.Addis Tegene...... 20108

11.Asaye Alemu........20109

13.Ribka Worku........20122

14.Tilahun Abera......20101

Submitted to:INS :Tsegaye

Date of sum:16/09/2017
 Chapter 3: Audit Planning
Audit planning is the process of determining an overall strategy for the conduct
and scope of the

engagement. There are many reasons for planning the audit work. Some of them
are discussed below.

 To enable the auditors to obtain sufficient and competent evidence for the
circumstance

 To keep reasonable audit cost. If the organization is complex, senior auditors

are required and high cost will be incur to perform the audit work. On the other
hand if the organization is small, junior auditors are required and less cost will
be incur.

 To avoid misunderstanding with the client

 To complete the audit work based on the schedule

 To assign assistant, if any.

3.2. Audit Planning Procedures

Audit Planning is one of the basic principles. Accordingly, it states the auditor
should plan his work to enable him to conduct an effective audit in an efficient
and timely manner. Plans should be based on knowledge of the client‘s
business. Plans should be made to cover, among other things acquiring
knowledge of the client‘s accounting systems, policies and internal control
procedures; establishing the expected degree of reliance to be placed on internal
control; determining and programming the nature, timing, and extent of the
audit procedures to be performed; and coordinating the work to be performed.
Plans should be further developed and revised as necessary during the course of
the audit

Audit planning process includes:

A. Pre-plan

B. Obtained back ground information

C. Obtain information about client‘s legal documents

D. Develop overall audit programs

E. Schedule the audit work

F. Assigning professional staff to engagement.

1. Pre-plan: before planning the audit work, auditors should do two things:

i. Client acceptance (accept or reject the audit contract)

ii. Obtain an understanding with the client Auditors should avoid clients who
lack integrity. That is auditors should evaluate public image, financial stability,
relationship with the previous auditors of a new client. To do this, the auditor
should read the past financial statements of the client, contract with past and
present business associates like banks and attorneys, by discussing with the
potential client the need for the audit, and by contacting the potential client‘s
former auditors with the consent of the organization. If there are no serious
doubts raised about the integrity of the client, then the auditor will sign to close
a deal. The audit contract is called an Engagement Letter. The audit engagement
letter includes the following expressed duties:

 The nature of the work to be performed

 The dead line of the audit contract

 The amount of the audit fee

 Limitations of the auditor with respect to detection of errors, irregularities,

and illegal acts.

2. Obtaining background information

Auditors should have feedback about the client‘s unique accounting

requirements, the possibility of risk, and the controlling system on its assets.
Different forms of enterprises require different accounting requirements. For
instance, if the client is Construction Company, percentage of contract
completion is applied or required to recognize revenue.

On the other hand if the client is government organization, government

accounting is used. Thus, the auditor should identify the client‘s accounting
requirement and follow appropriate audit procedures at times when he/she
performs the audit work. The possibility of risk also varied from client to
client. That means the chance of occurring errors, irregularities, illegal acts,
 and misuse of cash or other resources may vary from one organization to the
other. In order to adjust or aware themselves about their future activities,
auditors should get feedback about the problems of the client.

Finally, the auditor should tour (observe) the client‘s personnel and assets
controlling technique.

For example, if the auditor sees the store keeper sleeps at his/her desk with the
store door open, or the casher talking on the phone while he/she is counting
money, there will be the sign to weakness in the client‘s internal control system.
Or if the auditor sees broken or obsolete

equipment, that might be the signal that plant assets are possible overvalued.

3. Obtaining information about the client’s legal documents

There are three documents of the client that should be observed by the auditors.
Examining these documents and records enable auditors to enter prate related
evidences during their engagement.

The three legal documents are discussed below.

i. Corporate charters and by laws

ii.Minutes of meetings

iii.Contracts

Corporate charters and by laws: the corporate charter is granted by the

government in which the company is incorporated. It includes name, address,
date of establishment, types of business activities, voting right, dividend
allocation systems, etc. By laws include rules and regulations adopted by the
organization in order to accomplish different activities of the organization.

Minutes of meetings: are the official records to the meetings of the

management and higher body of the organization. These minutes of meeting
include the management decision such as compensation of officers, bonus rates,
dividend rates,etc.

Contracts: clients may enter in to different contracts to others like pension

plans, contracts with suppliers, government contracts with completion and
delivery of manufacturing products, lease, etc.
In general, if the auditor have information about the three legal documents of
the client before starting his/her main task, he/she will be aware and inform
about such information while examining and evaluating the difference
evidences of the client and finally he/she is adequate to give suggestion and
recommendation in his/her final report.

4. Develop overall audit report

An audit program is the detailed list of the audit procedures to be pertained by

the auditor in examining the financial statements. Before starting the work, the
auditor should ordinarily establish a preliminary program for a review this audit
program should be documented in a

manner that will permit the auditor to record completion of the audit work and
identify work that remains to be done. As the work progresses, the auditor
should evaluate the adequacy of the program based on information gathered
during the audit. The audit program may be modified if the auditor believes that
the planned procedures are not sufficient. The objectives of preparing audit
program are:

 To assist in planning the audits so that efficient and effective procedures

are applied in accordance with the audit strategy
 To provide clear instruction to staff as to the nature, extent, and
timing of the audit work.
 To provide a record of the work done and the conclusions drawn, as a
basis for effective quality control and to meet audit evidence
requirements.

An audit program has two major sections.

a. The system section: this section of the audit program focuses on the
procedures used to evaluate the effectiveness of the internal control structure
and it is organized around major transactions cycles of the internal control
structure.

b. The substantive test section: this section deals with the procedures for
substantive testing of financial statement amounts and the adequacy of financial
statement disclosures. Besides this section of the audit program is organized in
terms of major financial statement items.

5. Scheduling the audit work

Auditors should plan or forecast the beginning and ending of the audit work. In
order to complete based on the established time in advance. One of the
completeness of the auditors is measured whether they complete their work
based on the stated time in the contract.

6. Assigning professional staff to engagement

The final phase of planning of the audit work is assigning of professional staff
to engage the audit work. As we have been discussed earlier, the audit work
should be done by those having sufficient skill. Assistance should also assign,
if necessary. Once the auditor is clear about the objectives and internal control
system of the client, he/she has to collect and evaluate relevant evidence for
his/her audit work through different techniques. These various ways of
evidence accumulation techniques are discussed below.

A. Physical inspection: the auditor may physically inspect the actual existence
of certain assets.

For instance, the auditor may count cash box, observe the physical handling of
inventories though it is not necessary that handling of inventories means
ownership because goods may be handled on behalf of the others.

B. Examination of documents: the auditor may collect relevant data by

examining related documents. Thus, the auditor who wishes to verify the
payment of cash for any reason may examine or test checks stubs, for purchase
of merchandise on account he/she may verify purchase invoice, for receipts of
cash from any source the auditor may check receipt stubs, and so on.

Examination of documents can be performed through:

i. Vouching: examining documents started with the recorded transactions

(journals, ledger, F/S) back to source documents, called test of occurrence.

ii.Tracing: determining whether source documents have been properly

recorded in the accounting record, called of completeness.
iii.Scanning: verifying documents through quick or selective reading of the
recorded documents of the client.

iv.Mechanical accuracy: are checks of work performed by others such as

verifying client computations of the balance of accounts. For example, re
calculating the balance of A/P, A/R, cash, etc.

C. Questionnaires (Inquiry): the auditor also can collect relevant information

through preparing questionnaires. The auditor may obtain primary data (from
those related persons

e.g. employees) or secondary data (from unrelated persons e.g. outsiders) about
certain information.

D. Confirmation letter: the auditor may obtain evidences through confirmation

from the third parties such as banks, debtors, and creditors about the balance of
some accounts.

There are two confirmation letters- positive and negative.

i. Positive confirmation letter: is prepared when the client asks his/her or its
business associates such as banks, creditors, or debtors to give response to the
auditor whether or not the balance of the concerned account is similar.

For instance, the client may ask the creditor about the similarity or difference in
the balance of Accounts Receivable and a response to the auditor for the
auditor‘s address.

ii. Negative confirmation letter: is prepared when the audited organization

asks its business associates to give a response to the auditor only if there is
difference in the balance of accounts.

E. Analytical review: the auditor can compute significant ratios, carryout

a trend analysis or
compare and contrast different accounting data in order to gather necessary
evidence for his/her audit task. The comparison may be between current and
past data, current and
anticipated (budgeted) data, company information and industry average, or
current information with current information.
3.3. Designing of Audit program
The success of audit plan depends on sound and solid audit Program. An audit
plan is the Auditor‘s plan of action. The audit Program is specially designed
for each audit is a plan of the work of examination and a set of audit
procedures. A written audit Program begins with the recognition of specific
objectives followed by specification of procedure design to produce sufficient
competent evidential matter. An audit Program acts as a guide to arrange and
distribute
the work and also to check work against the possibility of omissions. Auditor
should first prepare
the preliminary audit Program for compliance testing of internal accounting
control systems and
substantive testing of accounting balance. After obtaining a thorough
understanding of the
client‘s business, the auditor formulates an overall audit strategy for the
engagement at hand.
Types of Audit Program: Following are the two types of audit Program –Fixed
AND Flexible
Fixed Audit Program − Audit staff has to follow the instructions mentioned
in the Audit
Program as laid down in it without any change. Even all are not applicable to
that particular
organization in a particular situation. Fixed audit Program is very rigid in
nature and any
modification or change is Program is not easily possible.
Flexible Audit Program − Flexible Audit Program gives only the outline of
the scope and the
procedures to be followed instead of any fixed audit instructions. Therefore an
Auditor has a
choice to develop, adopt and modify an Audit Program as per the needs and
requirements
depending on the internal control system and other situations of that particular
organization.
Advantages of Audit Program
The following are the advantages of audit Program;
 Audit Program gives complete coverage of audit work that can be
performed by the audit staff.
 Audit Program works as a road map for the upcoming years and the audit
staff can refer to this and understand the future course of action.
 Audit Program enhances the efficiency of the audit assistants as they are
very clear about their duties.
 Audit is more systematic through audit Program.
Disadvantages of Audit Program
The following are the disadvantages of audit Program −
1. It is not of great help to small business units.
2. Audit becomes mechanical and inefficient audit assistant may also take
shelter behind the audit Program.
3. Audit Program cannot be applied in uniformity to all business units as audit
work of all organization cannot be the same.
Generally, auditors perform auditing based on the following steps:
1. Engagement - When a new client hires an auditor, the auditor first
examines the client company.
The auditor studies the company's ethical background and history.

Successful auditors are always associated with ethics and professionalism. It

is foolish for an auditor to work for a client that has ethical issues in the past.
Auditors alsoensure that they are totally
independent from the client before accepting them. If the auditing firm has a
partner that was once a manager in the company, for example, if the audit firm
and the company are related, there might be serious independence issues.
Once the auditor decides to accept the client, he
drafts an agreement stating the terms of the audit and other details, such as
remuneration.
2. Understanding the company - Auditors study the industry and business
environment of the company.
Auditors must understand how the business works, the procedures of the
company, and so on.
3. Assess risks - the auditor assesses the risks of the company, and decides on
what is considered material or immaterial.
4. Develop audit plan - the auditor finally plans which areas of the business
he will focus on and how much time will be spent for the audit.
5. Collect evidence and test internal control systems - The auditor starts
collecting evidence to verify the financial records, using a wide range of tools.
It might involve interviews, observations, tests, calculations, confirming with
a professional expert on some area, and so
on. Auditors also review and conduct the company's internal control system.
A good and proper internal control system probably means that proper
financial records will be produced.
6. Conclusion and issuance of the auditor's report - The auditor issues his /
her conclusion in the auditor's report based on the findings objectively.
3.4. Audit Working Paper
During the course of audit, auditors should maintain all relevant documents
and records in the form of both hard and soft copy called audit working
papers. Audit working papers are those
papers which contain essential facts about accounts which are under audit.
The audit working papers contains the file of all analysis, summaries,
comments, and correspondence built up by
the auditors during the course of the fieldwork of an audit engagement. It is
the duty of auditors to maintain audit working papers as they support the audit
report.
The audit working papers provide the following purposes to the auditor:
a. To show the extent to which accounting principles and auditing standards
have been adhered.
b. To provide essential support for the auditors‘ opinion including evidence
that the examination was conducted in accordance with GAAS.
c. To reveal how the work was performed by the audit staff and thus helps to
the auditors in forming an opinion about their efficiency.
d. To assist auditors in justifying their position against criticism and can be
serve as legal evidence if the legal action is brought against the auditors due to
negligence in performing the audit work.
e. Help auditors in finalizing the audit report without much delay.
f. They enable the auditors to know the weakness of the internal check system
in operation and the inefficiency of the accounting system, if any. The
auditors may advice to their client about ways and means to improve
inefficiencies.
g. They serve as a guide to the auditors for audits of the same client in the
succeeding years.
Working papers should be carefully prepared as they are the bases of
conclusions and summarizations shown by the auditor in his/her report. As
such, they should be clear and significant matter which require strategic
judgment together with the auditor‘s conclusions
complete and contain all essential information sufficiently so that they may be
of greater utility.
Each complete working paper should be signed and dated by the persons
performing the work.
This will help in fixing responsibilities. They should be properly organized,
arranged, and documented.

General working paper preparation guidelines

 orking papers must be clean, neat, and legible
 All questions and exceptions noted in the working papers should be
resolved, hopefully before the end of the field work, and carefully before
the report is issued.
 Only statements of fact and professional judgment should appear on the
working papers.
 Brackets should be used to show negative numbers instead of red ink.
 Time should be economized as much as possible in the preparation of
working papers.
This can be achieved by assigning some work papers to be prepared for the
auditor By the Client‘s employee /PBC/, which are then examined by the
auditor. Another way to save time is by
analyzing balance sheet accounts and their related income instatement
accounts together on the same work paper.
Working papers should be stored/filed/ in a secure place and protected from
unauthorized use.
Current technology allows for working papers to be stored electronically on
computers, CDS, flash, etc. Working papers should be stored for as long as
the auditor has a potential liability for
the financial statement opinions, which the work papers support. The
Ethiopian commercial code of 1960 requires that organizations, which come
under its rules, keep books of accounts and accounting documents for ten
years after the last entry.
Ownership of working papers
A pertinent question arises as to whom the owner of these working papers.
The auditor claims the possession on grounds that he/she has collected the
information for the purpose of discharging his/her duties. He/she further
argues that if a suit is being filed by the client against
him/her for negligence in the performance of his/her duties, these working
papers can be furnished as evidence to show the exact work done by him/her.

These papers can be produced by the auditor to defend him/her. As such, these
working papers should not be handed over to the
client even after the audit ceased. On the other hand, the client claims that
since the auditor act as its agent, he/she has no right to keep these papers with
him/her. However, they also permit to see
the following cases to solve these controversies. In the first case, it was held
that the working papers belonging to the auditor because they were
independent contracts and not agent of the client.
In the second case, it was held that the working papers prepared by the
auditor for the sole purpose of producing financial statements belonged to the
auditor and not to the client.
It can therefore, be concluded that the working papers prepared by the auditor
or his/her staff to carry out the assignments are his/her property and the client
has no claim on such papers.
Finally, audit working papers are confidential in nature. The information
collected by the auditor or his/her staff should not be exposed to any unrelated
party other than his/her client without the consent of his/her client or
otherwise than as required by any law for the time being in force.
Thus , the auditor should always impress up on his/her staff to maintain
complete secrecy with regard to the working papers.
3.5. Audit Risk
In the audit planning process, the auditor should ordinarily established levels
of planning materiality such that the audit work will be sufficient to meet the
audit objectives and will use audit resources efficiently. For example, in the
review of an existing system the auditor will evaluate materiality of the
various components of the system in planning the audit program for the work
to be performed.
The auditor should consider both qualitative and quantitative aspects
in determining materiality. The main purpose of an audit is to express an
opinion on the truth and fairness of the financial statements. The concept of
materiality affects the nature and size of audit tests.
The auditor designs audit procedures to verify if financial statement items are
free of material error and irregularities. If financial statement audit, due to cost
and time only selected
transactions are examined, this implies accepting errors in the financial
statements to remain undetected. However, even 100% checking does not
guarantee 100% accuracy.
Therefore, either the whole transactions or selected transaction are checked,
there is certain level of risk. Thus, the auditor‘s main concern in the financial
statement audit is to minimize risk and to ensure that no material error
remains undetected.
An assessment of risk should be made to provide reasonable assurance that all
material items will be adequately covered during the audit work. This
assessment should identify areas with relatively high risk of existence of
material problems. Audit risk is the risk that the auditor will issue an
inappropriate opinion on the accounts. Or it is the risk that the auditor gives
unqualified opinion on the financial statements when he/she should have
qualified opinion on the financial
statements when he/she should have qualified opinion.
It is the chance that material misstatements exist in the financial statements
and the auditors do not detect the misstatements with their audit procedures.
Audit risk is the chance that:
I. A material misstatement in an assertion has occurred and
II. The auditors do not detect the misstatement
Audit risk has three components namely inherent risk, control risk, and
detection risk.
Inherent Risk: refers to the susceptibility of an account balances to material
error assuming the
client does not have any related internal controls.
Control Risk: is the risk that a material misstatement in an account balance
will not be
prevented or detected on a timely basis by the company‘s internal control.
Detection Risk: is the risk that auditor‘s procedures for verifying account
balances will not detect a material error when in fact such error exists. It is
the risk that the auditor‘s procedures will lead them to conclude that a material
misstatement does exist.

Therefore, detection risk is directly related to the effectiveness of the auditor‘s

procedures.
While inherent and control risk are functions of the client and its environment.
In planning the audit, the auditor should assess
the extent of inherent and control risk and then plan relevant audit procedures
to the effectiveness of the auditor‘s procedures. In planning the audit, the
auditor should assess the
extent of inherent and control risk and then plan relevant audit procedures to
reduce detection risk to the level tolerable. This turn helps auditors to reduce
the overall audit risk so as to issue an appropriate opinion.
3.6. Materiality
Materiality and audit risk are related both must be considered in the planning
stage so as to determine the extent, timing, and nature of the examination.
For planning purpose, materiality is the auditor‘s preliminary estimate of the
smallest amount misstatements that would affect the
judgment of a reasonable person relying up on the financial statements.
Assessing the level of materiality of misstatement would help auditors to
appropriately modify their opinions whenever
there are material deficiencies in the client‘s financial statements. However,
they may issue unqualified report if the deficiencies are immaterial. Assessing
level of materiality of misstatements in the financial statement items means
evaluating as to whether the financial
statements contain material misstatements or not.

Chapter 7: Auditing in Ethiopia

7.1. Historical Development of Auditing in Ethiopia

The process of auditing professionalization in Ethiopia appears to exhibit
distinct patterns during the three epochs when the state followed capitalist-
oriented (pre 1974), Communist (1974
through to 1991), and then capitalist-oriented (1991 onwards) ideologies.
Auditors in Ethiopia are classified in to external (independent) auditors which
are performed by certified and authorized private auditors, internal auditors
and government auditors. The Commercial Code of
Ethiopia contains articles that are related to the auditing practice in Ethiopia.
There are also different types of auditing in Ethiopia. These includes: Private
(External) auditing, internal auditing, performance auditing, and compliance
auditing, investigation auditing, project and contract auditing.
Pre 1974: In Ethiopian context, auditing is relatively new phenomenon in
earlier periods, the responsibility to administer and control the country‘s
revenue and expenditure was exclusively
performed by ministry of finance. Government auditing in Ethiopia dates back
to the establishment of an Audit Commission by proclamation No. 69/1944
during Emperor Regime.
 Major power and function of the Commissions were as follows:

 Responsible for the examination and control of the accounts of the

Ministry of Finance, and was directly accountable to the Prime Minister
 The power to control and examine the accounts of all other Ministries
was given to the Officers of the Ministry of Finance.

The Establishment of Audit and Control Office

In 1946, proclamation No. 79/1946 was provided to centralize the audit
control of all government accounts in one department by establishing the
Audit and Control office under the
direction of the comptroller and Auditor General who reported and was directly
responsible to the prime Minister. As a result of this proclamation, the powers
and duties of the new office were
clearly defined and the scope of its activities expanded. According to the
Revised Constitution of 1955 (1948 E.C.) provided even wider duties and a
large measure of independence.
Accordingly, the Auditor General reported to the Emperor and the Parliament
on the financial operations of the government and was given access to all books
and records of government accounts.
Functions of Auditors General Subsequently, the functions of the auditor
general were amended by decree No.32 of1958 which was later renumbered as
proclamation No.179/1961(1958E.c).
The major power and Functions of Auditor General were as follows:
 Auditing the accounts of all autonomous bodies existing by virtue of
Imperial charters
 Conducting the audit of the chartered organizations, established to provide
essential services to the public, through its charted organizations.
The Commercial Code of Ethiopia: the Commercial Code of Ethiopia, enacted
in 1960 contains articles that are related to the auditing practice in Ethiopia.
The Commercial Code of Ethiopia contains provisions requiring partnership
and corporation (Share Company) to keep books and accounts, related to
corporations specifically about appointment of auditors, competency of
auditors, professional secrecy and liabilities of auditors.
Furthermore, the code specifies persons who are founders and beneficiaries of
a company or its subsidiary, persons related by blood to the fourth degree, or
persons who receive remuneration from company founders cannot appointed
as auditor. It also states that directors are not to engage in auditing that
company (Principle of Independence).

In addition, according to the code, an auditor is liable for breach of

professional secrecy, for negligence in the performance of professional
services, and for breach of contract. According to the Commercial Code,
auditors are liable to client and third party for losses they cause, for issuing
inappropriate report, for failure to inform the law for any offences that they
knew was committed by the client that affects the public. 1974 – 1991:
Following a revolution in Ethiopia, a military government came into power in
Ethiopia in1974 and declared a communist ideology .
As a result, private companies underwent nationalization and the number of
state-owned companies in the country increased.
Following this, international public accounting firms that have been operating
in Ethiopia were closed.
However, beside the nationalization event an important landmark in the
history of accounting and auditing in this period was the formation of the
Audit Service Corporation (ASC) by Proclamation 126/1977 (Government of
Ethiopia, 1977).
Functions of Audit Service Corporations (ASC): the ASC mainly had
performed external audit of public enterprises. ASC had render audit services
to production, distribution and service giving organizations of which the
Government is the owner or majority shareholder.
Note
 The process of auditing professionalization in Ethiopia appears to exhibit
distinct patterns during the three epochs when the state followed capitalist-
oriented (pre 1974), Communist (1974 through to 1991), and then capitalist-
oriented (1991 onwards) ideologies.
 Auditors in Ethiopia are classified in to external (independent) auditors
which are
performed by certified and authorized private auditors, internal auditors and
government auditors.
7.2. Types of Audit in Ethiopia
There are three types of auditing in Ethiopia. These are Private/External
auditing in Ethiopia, Performance Audit and Compliance Audit
Private/External auditing in Ethiopia
Private auditing practice was started with the opening of a branch office of
Price Waterhouse Peat & Co. in Addis Ababa, following the establishment
and growth of multinational British
companies like A. Bessie & Co., Mitchell Cotts Ltd., and Shell; and the
issuance of the commercial Code of Ethiopia in 1960. The demand for
commercial audit has increased, as the Commercial Code of Ethiopia required
the multinational companies to present audited financial
statements for renewal of trade license. The Office of Auditor General audits
or causes to be audited the accounts of the Federal Government offices and
organizations. On the other hand, the Audit Service Corporation provides
auditing services to public enterprises.
The private businesses also need audited financial statements for various
purposes such as for bank loan and for tax purposes. Thus, private auditing
firms provide auditing, accounting services, tax services, and management
advisory services on fee basis primarily to the private businesses. The type of
audit conducted by private auditing firms is financial statement audit.
You can open a private auditing firm and provide auditing services to the
public if you meet the requirements of the Office of Auditor General. The
Office of Auditor General issues license to private auditors.
Audit Performance
In Ethiopia, performance audit is mostly done in governmental organizations
by both internal and external private auditors. However some private
organizations and nongovernmental organizations also employ external and
internal auditors and undertakes performance audit.
In Ethiopia it is the least developed type of audit. In Ethiopia there is no law
which enforces privately owned organizations to undertake performance audit.
Compliance Audit
Compliance Audit in Ethiopia mostly focuses on tax audit done by tax
auditors of Ethiopian government. A tax audit is a systematic examination of
business`s relevant commercial system to determine whether a taxpayer‘s
declaration states the tax liability correctly and complying with the provisions
of the tax laws and related subsidiary legislations. Auditing involves
examination of financial statements, books of accounts and vouchers of a
taxpayer by Tax Auditors so as to
ascertain whether the taxpayer has accurately considered revenues and
expenses when determining the taxes shown in the declarations as per the
requirements of the tax laws.
It also involves other approaches such as observation of premises, direct
monitoring of receipts in cash businesses, use of mark-up techniques and
analysis of key ratios. The overall objective is to
improve the compliance of taxpayers, whether they declare the correct amount
of tax and paid at the right time. The expectation by a taxpayer of an audit
should have a deterrent effect and encourage the taxpayer to declare as far as
possible a credible tax return. It also improves the
taxpayer‘s understanding and awareness of the relevant taxes.
7.3. Types of Auditors in Ethiopia
Internal Auditors
The history of the development of internal auditing in Ethiopia dates back to
about the middle of the 1940s just about the time when internal audit was
evolving as an organized profession in the
United States. Internal audit in Ethiopia, had its early legislative root in the
Constitution of 1923 which authorized the establishment of an ―Audit
Commission‖ (Articles 34); and the Audit
Commission itself was established much later by Proclamation 69/1944 to
audit the accounts of the Ministry of Finance. The same Proclamation
mandated the then Ministry of Finance to audit
other budgetary institutions as a measure of internal control over the financial
operations of the budgetary institutions. It appears that this early practice of
internal auditing as per Proclamation.
69/1944 was, in fact, to be the root of what the Inspection Department of the
Ministry of Finance
and Economic Development (MoFED) continued to perform to this day, until
the recent reorganization. The latter part of the 1940s witnessed the
establishment of internal audit functions in key public sector institutions such
as the national defense, education, road
construction, and other non-budgetary public sectors, which included the
Ethiopian Airlines, Telecommunication and the financial sector consisting of
the modern layer of the Ethiopian economy.
These institutions in one way or the other had external links or financing
operations, which created awareness of the need for internal controls to
sectarian appropriate financial management and to safeguard organizational
assets.
The period of the early 1950s, marked the introduction of a budgetary system
in government.
The commencement of an annual public budget in 1955 for the first time in
the history of the country ushered in a system of financial administration
based on the annual budget with all its attendant requirements for
strengthened internal control in the budgetary agencies. This entailed the
formation of internal audit as an integral part of the budgetary internal control
system.
The establishment at the time of the Addis Ababa Commercial School and the
Addis Ababa University College supplied with limited but better informed
manpower, for some key institutions in the economy.
Governmental Auditors
Government auditors are employed by various local, state, and federal
governmental agencies.
At the federal level, the three primary agencies are the Office of Auditor
General, the audit service corporation, and the federal Inland Revenue
authority. The office of Auditor General is a federal organization headed by
the auditor general. This office is responsible for conducting
financial statement audit, compliance audit and operational audit of various
Federal Government offices. The regional governments have also their own
regional audit bureau with similar functions.
The Federal Inland Revenue Authority (Recently renamed as Ministry of
Revenue) is responsible for administering the federal tax laws. Thus, the
authority‘s auditors audit the returns of taxpayers for compliance with
applicable tax laws.
That is, the auditors examine the tax returns of the taxpayer to ensure that it is
prepared in accordance with the tax laws and regulations. The authority‘s
auditors are known as tax auditors. Another government organ that performs
audit is the audit Service Corporation. The Audit services corporation audits
the financial statements of the public ente
prises.
Thus, the type of audit performed by the audit service corporation is financial
statement audit. Governmental Units that provides auditing
service in Ethiopia includes;
Independent (External) Auditor
An independent auditor, also known as certified public accountant or external
auditor, has no connection to the organization being audited. Independent
auditor conducts the audit on a fee basis, and is primary responsible to third
parties-creditors and shareholders. The type of audit carried out by an
independent auditor is financial statement audit. In Ethiopia, the authorized
auditors perform financial statement audit. In addition, the Audit service
corporation a government—owned organization, performs financial statement
audit.