AUDITING BOOK

ACCOUNTING PROFESSION OPTION

for Rwandan Schools

Senior
6 Teacher's Guide

EXPERIMENTAL VERSION

Kigali, 2023
 © 2023 Rwanda Basic Education Board
All rights reserved
This book is the property of the Government of Rwanda. Credit must be
provided to REB when the content is quote

ii Auditing | Teacher's guide | Senior Six | Experimental version

FOREWORD
Dear Teachers,
Rwanda Basic Education Board is honoured to present the teacher’s guide for
Auditing in the Accounting Profession Option. This book serves as a guide to
competence-based teaching and learning to ensure consistency and coherence
in the learning of the Auditing Subject. The Rwandan educational philosophy is
to ensure that students achieve full potential at every level of education which
will prepare them to be well integrated in society and exploit employment
opportunities.
Specifically, the curriculum for Accounting Profession Option was reviewed to
train quality Accountants Technicians who are qualified, confident and efficient
for job opportunities and further study in Higher Education in different programs
under accounting career advancement.
In line with efforts to improve the quality of education, the government of
Rwanda emphasizes the importance of aligning teaching and learning materials
with the syllabus to facilitate their learning process. Many factors influence what
students learn, how well they learn and the competences they acquire. Those
factors include the relevance of the specific content, the quality of teachers’
pedagogical approaches, the assessment strategies and the instructional
materials.
High Quality Technician Accounting program is an important component
of Finance and Economic development of the Rwanda Vision 2050, “The
Rwanda We Want” that aims at transforming the country’s socioeconomic
status. The qualified Technicians accountants will significantly play a major role
in the mentioned socioeconomic transformation journey. Auditing textbooks
and teacher’s guide were elaborated to provide the mathematical operations,
algebraic functions and equations, and basic statistics that are necessary to
train a Technician Accountant capable of successfully perform his/her duties.
The ambition to develop a knowledge-based society and the growth of regional
and global competition in the jobs market have necessitated the shift to a
competence-based curriculum.
The Auditing teacher’s guide provides active teaching and learning techniques
that engage students to develop competences. In view of this, your role as an
auditing teacher is to:
• Plan your lessons and prepare appropriate teaching materials.
• Organize group discussions for students considering the importance of
social constructivism suggesting that learning occurs more effectively

Auditing | Teacher's guide | Senior Six | Experimental version iii

 when the students work collaboratively with more knowledgeable and
experienced people.
• Engage students through active learning methods such as inquiry
methods, group discussions, research, investigative activities and
group or individual work activities.
• Provide supervised opportunities for students to develop different
competences by giving tasks which enhance critical thinking, problems
solving, research, creativity and innovation, communication and
cooperation.
• Support and facilitate the learning process by valuing students’
contributions in the class activities.
• Guide students towards the harmonization of their findings.
• Encourage individual, pair and group evaluation of the work done in
the classroom and use appropriate competence-based assessment
approaches and methods.
To facilitate you in your teaching activities, the content of this book is self-
explanatory so that you can easily use it. It is divided in 3 parts:
The part I explains the structure of this book and gives you the methodological
guidance;
The part II gives a sample lesson plan;
The part III details the teaching guidance for each concept given in the student
book.
Even though this Teacher’s guide contains the guidance on solutions for all
activities given in the student’s book, you are requested to work through each
question before judging student’s findings.
I wish to sincerely express my appreciation to the people who contributed
towards the development of this book, particularly, REB staff, Office of Auditor
General, UR Lecturers, Teachers from TTC and General Education and experts
from different Education partners for their technical support. A word of gratitude
goes also to the administration of Universities, Head Teachers and TTCs
principals who availed their staff for various activities.

Dr. MBARUSHIMANA Nelson

Director General, REB.

iv Auditing | Teacher's guide | Senior Six | Experimental version

ACKNOWLEDGEMENT
I wish to express my appreciation to the people who played a major role in the
development of this teacher`s guide for Auditing in the Accounting profession
option. It would not have been successful without active participation of different
education stakeholders.
I owe gratitude to different universities and schools in Rwanda that allowed their
staff to work with REB in the in-house textbooks production initiative.
I wish to extend my sincere gratitude to Auditor General Officers, lecturers and
teachers whose efforts during writing exercise of this teacher`s guide was very
much valuable.
Finally, my word of gratitude goes to the Rwanda Basic Education Board staffs
who were involved in the whole process of in-house textbook writing.

Joan MURUNGI

Head of Curriculum, Teaching and Learning Resources Department/

REB

Auditing | Teacher's guide | Senior Six | Experimental version v

TABLE OF CONTENT
FOREWORD................................................................................................................................ iii
ACKNOWLEDGEMENT...........................................................................................................v
PART I. GENERAL INTRODUCTION................................................................................ 1
1.1. The structure of the guide............................................................................1

1.2. Methodological guidance.............................................................................1

PART II: SAMPLE LESSON PLANS...............................................................................15

PART III: UNIT DEVELOPMENT .....................................................................................22
UNIT 1: FUNDAMENTAL CONCEPTS IN AUDITING ...............................23
1.1. Key unit competence ...........................................................................23

1.2. Prerequisite (knowledge, skills, attitudes and values)......................... 23

1.3 Cross-cutting issues to be addressed:................................................... 23

1.4. Guidance on introductory activity ........................................................... 24

1.5 .List of lessons/sub-heading ..................................................................... 25

1.6. Summary of the unit ................................................................................... 38

1.7. Additional information for teachers.......................................................... 44

1.8. End unit assessment .................................................................................. 46

1.9. Additional activities (Questions and answers)...................................... 48

UNIT 2: LEGAL AND PROFESSIONAL REQUIREMENTS .......................52

2.1. Key Unit competence.................................................................................. 52

2.2. Prerequisite (knowledge, skills, attitudes and values)......................... 52

2.3. Cross-cutting issues to be addressed................................................... 52

2.4 Guidance on introductory activity ............................................................ 53

2.5. List of lessons/sub-heading ..................................................................... 54

2.6. Summary of the unit.................................................................................... 60

2.8. End unit assessment................................................................................... 63

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 2.9. Additional activities (Questions and answers)...................................... 64

UNIT 3: AUDITOR’S APPOINTMENT ...........................................................67

3.1. Key unit competence.................................................................................. 67

3.2. Prerequisite (knowledge, skills, attitudes and values)......................... 67

3.3. Cross-cutting issues to be addressed:.................................................. 67

3.5. List of lessons/sub-heading .................................................................. 70

3.6. Summary of the unit ................................................................................... 74

3.7. End unit assessment................................................................................... 78

3.8. Additional activities (Questions and answers)...................................... 82

UNIT 4: AUDITORS REQUIREMENTS .........................................................84

4.1. Key unit competence.................................................................................. 84

4.2. Prerequisite (knowledge, skills, attitudes and values)......................... 84

4.3. Cross-cutting issues to be addressed:.................................................. 84

4.4. Guidance on introductory activity ........................................................... 85

4.5. List of lessons/sub-heading ..................................................................... 86

4.6. Summary of the unit.................................................................................... 91

4.7. Additional information for the teachers................................................... 92

4.8. End unit assessment................................................................................... 93

4.9. Additional activities (Questions and answers)...................................... 93

UNIT 5: AUDITOR RESPONSIBILITIES .......................................................97

5.1. Key Unit competence.................................................................................. 97

5.2. Prerequisite (knowledge, skills, attitudes and values)......................... 97

5.3. Cross-cutting issues to be addressed:.................................................. 97

5.4. Guidance on introductory activity ........................................................... 98

5.5. List of lessons/sub-heading ...................................................................101

5.6. Summary of the unit..................................................................................108

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 5.7. Additional information for the teacher...................................................112

5.8. End unit assessment.................................................................................113

5.9. Additional activities (Questions and answers)....................................119

UNIT 6: AUDITOR REGULATION AND ETHICS....................................... 123

6.1. Key unit competence................................................................................123

6.2. Prerequisite (knowledge, skills, attitudes and values).......................123

6.3. Cross-cutting issues to be addressed:................................................123

6.4. Guidance on introductory activity .........................................................124

6.5. List of lessons/sub-heading ...................................................................125

6.6. Summary of the unit...................................................................................130

6.7. Additional information for teachers........................................................131

6.8. End unit assessment.................................................................................132

6.9. Additional activities (Questions and answers)....................................134

UNIT 7: AUDIT EVIDENCE AND SAMPLING............................................ 136

7.1. Key unit competence................................................................................136

7.2. Prerequisite (knowledge, skills, attitudes and values).......................136

7.3. Cross-cutting issues to be addressed:................................................136

7.4. Guidance on introductory activity .........................................................137

7.5. List of lessons/sub-heading ...................................................................138

7.6. Summary of the unit..................................................................................149

7.7. Additional information for the teacher...................................................152

7.8. End unit assessment.................................................................................153

7.9. Additional activities (Questions and answers)....................................153

UNIT 8: AUDIT EVIDENCE AND SAMPLING............................................ 159

8.1 Key unit competence.................................................................................159

8.2. Prerequisite (knowledge, skills, attitudes and values).......................159

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 8.3. Cross-cutting issues to be addressed:................................................159

8.4. Guidance on introductory activity .........................................................160

8.5. List of lessons/sub-heading ...................................................................161

8.6. Summary of the unit..................................................................................172

8.7. Additional information for the teacher...................................................177

8.8. End unit assessment.................................................................................178

8.9. Additional activities (Questions and answers)....................................180

UNIT 9: AUDIT DOCUMENTATION............................................................. 184

9.1. Key unit competence................................................................................184

9.2. Prerequisite (knowledge, skills, attitudes and values).......................184

9.3. Cross-cutting issues to be addressed:................................................184

9.4. Guidance on introductory activity .........................................................185

9.5. List of lessons/sub-heading ...............................................................187

9.6. Summary of the unit..................................................................................190

9.7. Additional information for teachers........................................................193

9.8. End unit assessment ................................................................................194

9.9. Additional activities (Questions and answers)....................................195

UNIT 10: INTERNAL CONTROL SYSTEM.................................................. 198

10.1. Key unit competence..............................................................................198

10.2. Prerequisite (knowledge, skills, attitudes and values)....................198

10.3. Cross-cutting issues to be addressed:.............................................198

10.4. Guidance on introductory activity .....................................................199

10.5. List of lessons/sub-heading ................................................................201

10.7. Additional information for teachers.....................................................213

10.8. End unit assessment..............................................................................214

10.9. Additional activities (Questions and answers).................................219

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UNIT 11: TEST OF CONTROL...................................................................... 222
11.1. Key unit competence..............................................................................222

11.2. Prerequisite (knowledge, skills, attitudes and values)....................222

11.3. Cross-cutting issues to be addressed:.............................................222

11.4. Guidance on introductory activity ......................................................223

11.5. List of lessons/sub-heading ................................................................224

11.6. Summary of the unit................................................................................236

11.6. Non-current liabilities.............................................................................248

11.7. Additional information for teachers.....................................................249

11.8. End unit assessment..............................................................................250

11.9. Additional activities(Questions and answers)..................................251

UNIT 12: PROCEDURES IN AUDIT OF FINANCIAL STATEMENTS......256

12.1. Key unit competence..............................................................................256

12.2. Prerequisite (knowledge, skills, attitudes and values)....................256

12.3. Cross-cutting issues to be addressed:.............................................256

12.4. Guidance on introductory.....................................................................257

12.5. List of lessons/sub-heading ................................................................258

12.6. Summary of the unit ...............................................................................266

12.7. Addition information ..............................................................................268

12.8. End unit assessment..............................................................................268

UNIT 13: AUDIT JUDGEMENT...................................................................... 289

13.1. Key unit competence..............................................................................289

13.2. Prerequisite (knowledge, skills, attitudes and values)....................289

13.3. Cross-cutting issues to be addressed:.............................................289

13.4. Guidance on introductory activity........................................................290

13.5. List of lessons/sub-heading.................................................................291

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 13.6. Summary of the unit................................................................................295

13.7. Additional information for teachers.....................................................295

13.8. End unit assessment..............................................................................299

13.9. Additional activities (Questions and answers).................................300

UNIT 14: AUDIT REPORT.............................................................................. 303

14.1. Key Unit competence.............................................................................303

14.2. Prerequisite (knowledge, skills, attitudes and values)....................303

14.3. Cross-cutting issues to be addressed:.............................................303

14.4. Guidance on introductory activity ......................................................304

14.5. List of lessons/sub-heading ................................................................305

14.6. Summary of the unit................................................................................310

14.7. Additional information for teachers.....................................................314

14.8. End unit assessment..............................................................................316

14.9. Additional activities (Questions and answers).................................319

References ...................................................................................................... 320

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PART I. GENERAL INTRODUCTION

1.1. The structure of the guide

The teacher’s guide of Auditing is composed of three parts:
The Part I concerns general introduction that discusses methodological
guidance on how best to teach and learn Auditing, developing competences in
teaching and learning, addressing cross-cutting issues in teaching and learning
and Guidance on assessment.
Part II presents a sample lesson plan. This lesson plan serves to guide the
teacher on how to prepare a lesson in Auditing.
The Part III is about the structure of a unit and the structure of a lesson. This
includes information related to the different components of the unit and these
components are the same for all units. This part provides information and
guidelines on how to facilitate students while working on learning activities.
More other, all application activities from the textbook have answers in this part.

1.2. Methodological guidance

1.2.1. Developing competences
Since 2015 Rwanda shifted from a knowledge based to a competence-based
curriculum for pre-primary, primary, secondary education and recently the
curriculum for profession options such as TTC, Associate Nurse and Accounting
programs. This called for changing the way of learning by shifting from teacher
centred to a student-centred approach. Teachers are not only responsible for
knowledge transfer but also for fostering students’ learning achievement and
creating safe and supportive learning environment. It implies also that students
have to demonstrate what they are able to transfer the acquired knowledge,
skills, values and attitudes to new situations.
The competence-based curriculum employs an approach of teaching and
learning based on discrete skills rather than dwelling on only knowledge or the
cognitive domain of learning. It focuses on what student can do rather than
what student knows. Students develop competences through subject unit with
specific learning objectives broken down into knowledge, skills and attitudes/
values through learning activities.
In addition to the competences related to Auditing, students also develop
generic competences which should promote the development of the higher
order thinking skills and professional skills in Auditing teaching. Generic
competences are developed throughout all units of Auditing as follows:

Auditing | Teacher's guide | Senior Six | Experimental version 1

 Generic
Ways of developing generic competences
competences
Critical thinking All activities that require students to calculate, convert,
interpret, analyse, compare and contrast, etc. have a
common factor of developing critical thinking into students
Creativity and All activities that require students to plot a graph of a
innovation given algebraic data, to organize and interpret statistical
data collected and to apply skills in solving problems of
production/ finance/ economic have a common character
of developing creativity into students
Research and All activities that require students to make research and
problem solving apply their knowledge to solve problems from the real-
life situation have a character of developing research and
problem solving into students.
Communication During Auditing class, all activities that require students
to discuss either in groups or in the whole class, present
findings, debate …have a common character of developing
communication skills into students.
Co-operation, All activities that require students to work in pairs or in
interpersonal groups have character of developing cooperation and life
relations and skills among students.
life skills
Lifelong All activities that are connected with research have a
learning common character of developing into students a curiosity
of applying the knowledge learnt in a range of situations.
The purpose of such kind of activities is for enabling
students to become life-long students who can adapt to
the fast-changing world and the uncertain future by taking
initiative to update knowledge and skills with minimum
external support.
Professional Specific instructional activities and procedures that a
skills teacher may use in the class room to facilitate, directly or
indirectly, students to be engaged in learning activities.
These include a range of teaching skills: the skill of
questioning, reinforcement, probing, explaining, stimulus
variation, introducing a lesson; illustrating with examples,
using blackboard, silence and non-verbal cues, using
audio – visual aids, recognizing attending behaviour and
the skill of achieving closure.

2 Auditing | Teacher's guide | Senior Six | Experimental version

The generic competences help students deepen their understanding of Auditing
and apply their knowledge in a range of situations. As students develop generic
competences, they also acquire the set of skills that employers look for in their
employees, and so the generic competences prepare students for the world of
work.

1.2.2. Addressing cross cutting issues

Among the changes brought by the competence-based curriculum is the
integration of cross cutting issues as an integral part of the teaching learning
process-as they relate to and must be considered within all subjects to be
appropriately addressed. The eight cross cutting issues identified in the national
curriculum framework are: Comprehensive Sexuality Education, Environment
and Sustainability, Financial Education, Genocide studies, Gender, Inclusive
Education, Peace and Values Education, and Standardization Culture.
Some cross-cutting issues may seem specific to particular learning areas/
subjects but the teacher need to address all of them whenever an opportunity
arises. In addition, students should always be given an opportunity during the
learning process to address these cross-cutting issues both within and out of
the classroom.

Below are examples of how crosscutting issues can be addressed:

Ways of addressing cross-cutting

Cross-Cutting Issue
issues
Comprehensive Sexuality Using different charts and their
Education: the primary goal of interpretations, Auditing’s teacher
introducing Comprehensive Sexuality should lead students to discuss the
Education program in schools is to following situations: “Alcohol abuse
equip children, adolescents, and and unwanted pregnancies” and
young people with knowledge, skills advise students on how they can
and values in an age appropriate and fight against them.
culturally gender sensitive manner so
as to enable them to make responsible
choices about their sexual and social Some examples can be given
relationships, explain and clarify when learning statistics, powers,
feelings, values and attitudes, and logarithms and the related graphical
promote and sustain risk reducing interpretation.
behaviour.

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 Environment and Sustainability: Using Real life models or students’
integration of Environment, Climate experience, Auditing Teachers should
Change and Sustainability in the lead students to illustrate the situation
curriculum focuses on and advocates of “population growth” and discuss
for the need to balance economic its effects on the environment and
growth, society well-being and sustainability.
ecological systems. Students need
basic knowledge from the natural
sciences, social sciences, and
humanities to understand to interpret
principles of sustainability.
Financial Education:
the integration of Financial Education Through different examples and
into the curriculum is aimed at a calculations on interest (simple and
comprehensive Financial Education compound interests), interest rate
program as a precondition for problems, total revenue functions
achieving financial inclusion targets and total cost functions, supply and
and improving the financial capability demand functions, Auditing Teachers
of Rwandans so that they can make can lead students to discuss how to
appropriate financial decisions that make appropriate financial decisions.
best fit the circumstances of one’s
life.
Gender: at school, gender Auditing Teachers should address
will be understood as family gender as cross-cutting issue
complementarities, gender roles through assigning leading roles in
and responsibilities, the need for the management of groups to both
gender equality and equity, gender girls and boys and providing equal
stereotypes, gender sensitivity, etc. opportunity in the lesson participation
and avoid any gender stereotype
in the whole teaching and learning
process.

4 Auditing | Teacher's guide | Senior Six | Experimental version

Inclusive Education: inclusion is Firstly, Auditing Teachers need to
based on the right of all students to identify/recognize students with
a quality and equitable education special needs. Then by using
that meets their basic learning adapted teaching and learning
needs and understands the diversity resources while conducting a lesson
of backgrounds and abilities as a and setting appropriate tasks to the
learning opportunity. level of students, they can cater for
students with special education
needs. They must create opportunity
where students can discuss how
to cater for students with special
educational needs.
Peace and Values Education: Through a given lesson, a teacher
Peace and Values Education (PVE) is should:
defined as education that promotes • Set a learning objective
social cohesion, positive values, which is addressing positive
including pluralism and personal attitudes and values,
responsibility, empathy, critical • Encourage students to
thinking and action in order to build a develop the culture of
more peaceful society. tolerance during discussion
and to be able to instil it in
colleagues and cohabitants;
• Encourage students to
respect ideas from others.
Standardization Culture: With different word problems related
Standardization Culture in Rwanda to the effective implementation of
will be promoted through formal Standardization, Quality Assurance,
education and plays a vital role in terms Metrology and Testing, students can
of health improvement, economic be motivated to be aware of health
growth, industrialization, trade and improvement, economic growth,
general welfare of the people through industrialization, trade and general
the effective implementation of welfare of the people.
Standardization, Quality Assurance,
Metrology and Testing.

Auditing | Teacher's guide | Senior Six | Experimental version 5

 1.2.3. Guidance on how to help students with special edu-
cation needs in classroom
In the classroom, students learn in different way depending to their learning
pace, needs or any other special problem they might have. However, the
teacher has the responsibility to know how to adopt his/her methodologies and
approaches in order to meet the learning need of each student in the classroom.
Also, teachers need to understand that student with special needs, need to
be taught differently or need some accommodations to enhance the learning
environment. This will be done depending to the subject and the nature of the
lesson.
In order to create a well-rounded learning atmosphere, teachers need to:
• Remember that students learn in different ways so they have to offer a
variety of activities (e.g. role-play, music and singing, word games and
quizzes, and outdoor activities);
• Maintain an organized classroom and limits distraction. This will help
students with special needs to stay on track during lesson and follow
instruction easily;
• Vary the pace of teaching to meet the needs of each student. Some
students process information and learn more slowly than others;
• Break down instructions into smaller, manageable tasks. Students with
special needs often have difficulty understanding long-winded or several
instructions at once. It is better to use simple, concrete sentences in
order to facilitate them understand what you are asking.
• Use clear consistent language to explain the meaning (and demonstrate
or show pictures) if you introduce new words or concepts;
• Make full use of facial expressions, gestures and body language;
• Pair a student who has a disability with a friend. Let them do things
together and learn from each other. Make sure the friend is not over
protective and does not do everything for the one with disability. Both
students will benefit from this strategy;
• Use multi-sensory strategies. As all students learn in different ways, it is
important to make every lesson as multi-sensory as possible. Students
with learning disabilities might have difficulty in one area, while they
might excel in another. For example, use both visual and auditory cues.
• Below are general strategies related to each main category of disabilities
and how to deal with every situation that may arise in the classroom.
However, the list is not exhaustive because each student is unique with
different needs and that should be handled differently.

6 Auditing | Teacher's guide | Senior Six | Experimental version

Strategy to help students with developmental impairment:
• Use simple words and sentences when giving instructions;
• Use real objects that students can feel and handle. Rather than just
working abstractly with pen and paper;
• Break a task down into small steps or learning objectives. The student
should start with an activity that she/he can do already before moving
on to something that is more difficult;
• Gradually give the student less help;
• Let the student with disability work in the same group with those without
disability.

Strategy to help students with visual impairment:

• Help students to use their other senses (hearing, touch, smell and taste)
and carry out activities that will promote their learning and development;
• Use simple, clear and consistent language;
• Use tactile objects to help explain a concept;
• If the student has some sight, ask him/her what he/she can see;
• Make sure the student has a group of friends who are helpful and who
allow him/her to be as independent as possible;
• Plan activities so that students work in pairs or groups whenever
possible.

Strategy to help students with hearing disabilities or communication

difficulties
• Always get the student’s attention before you begin to speak;
• Encourage the student to look at your face;
• Use gestures, body language and facial expressions;
• Use pictures and objects as much as possible.
• Keep background noise to a minimum.

Strategies to help students with physical disabilities or mobility

difficulties:
• Adapt activities so that students, who use wheelchairs or other mobility
aids, can participate.
• Ask parents/caregivers to assist with adapting furniture e.g. the height
of a table may need to be changed to make it easier for a student to
reach it or fit their legs or wheelchair under;
• Encourage peer support when needed;
• Get advice from parents or a health professional about assistive devices
if the student has one.

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Adaptation of assessment strategies:
At the end of each unit, the teacher is advised to provide additional activities
to help students achieve the key unit competence. These assessment activities
are for remedial, consolidation and extension designed to cater for the needs
of all categories of students; slow, average and gifted students respectively.
Therefore, the teacher is expected to do assessment that fits individual students.

Remedial activities After evaluation, slow students are provided

with lower order thinking activities related to
the concepts learnt to facilitate them in their
learning.
These activities can also be given to assist
deepening knowledge acquired through the
learning activities for slow students.
Consolidation activities After introduction of any concept, a range
number of activities can be provided to all
students to enhance/ reinforce learning.
Extended activities After evaluation, gifted and talented students
can be provided with high order thinking
activities related to the concepts learnt to make
them think deeply and critically. These activities
can be assigned to gifted and talented students
to keep them working while other students
are getting up to required level of knowledge
through the learning activity.

1.2.4. Guidance on assessment

Assessment is an integral part of teaching and learning process. The main
purpose of assessment is for improvement of learning outcomes. Assessment
for learning/Continuous/ formative assessment intends to improve students’
learning and teacher’s teaching whereas assessment of learning/summative
assessment intends to improve the entire school’s performance and education
system in general.

Continuous/ formative assessment

It is an on-going process that arises during the teaching and learning process.
It includes lesson evaluation and end of sub unit assessment. This formative
assessment should play a big role in teaching and learning process. The teacher
should encourage individual, pair and group evaluation of the work done in the

8 Auditing | Teacher's guide | Senior Six | Experimental version

classroom and uses appropriate competence-based assessment approaches
and methods.

Formative assessment is used to:

• Determine the extent to which learning objectives are being achieved
and competences are being acquired and to identify which students
need remedial interventions, reinforcement as well as extended
activities. The application activities are developed in the student
• book and they are designed to be given as remedial, reinforcement, end
lesson assessment, homework or assignment
• Motivate students to learn and succeed by encouraging students to
read, or learn more, revise, etc.
• Check effectiveness of teaching methods in terms of variety,
appropriateness, relevance, or need for new approaches and strategies.
Auditing teachers need to consider various aspects of the instructional
process including appropriate language levels, meaningful examples,
suitable methods and teaching aids/ materials, etc.
• Help students to take control of their own learning.
In teaching Auditing, formative or continuous assessment should compare
performance against instructional objectives. Formative assessment should
measure the student’s ability with respect to a criterion or standard. For this
reason, it is used to determine what students can do, rather than how much they
know.

Summative assessment
The assessment can serve as summative and informative depending to its
purpose. The end unit assessment will be considered summative when it is
done at end of unit and want to start a new one.
It will be formative assessment, when it is done in order to give information on
the progress of students and from there decide what adjustments need to be
done.
The assessment done at the end of the term, end of year, is considered as
summative assessment so that the teacher, school and parents are informed of
the achievement of educational objective and think of improvement strategies.
There is also end of level/ cycle assessment in form of national examinations.

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When carrying out assessment?
Assessment should be clearly visible in lesson, unit, term and yearly plans.
• Before learning (diagnostic): at the beginning of a new unit or a section
of work; assessment can be organized to find out what students already
know / can do, and to check whether the students are at the same level.
• During learning (formative/continuous): when students appear to be
having difficulty with some of the work, by using on-going assessment
(continuous). The assessment aims at giving students support and
feedback.
• After learning (summative): at the end of a section of work or a learning
unit, the Auditing Teacher has to assess after the learning. This is also
known as Assessment of Learning to establish and record overall
progress of students towards full achievement. Summative assessment
in Rwandan schools mainly takes the form of written tests at the end
of a learning unit or end of the month, and examinations at the end of a
term, school year or cycle.

Instruments used in assessment.

• Observation: this is where the Auditing teacher gathers information by
watching students interacting, conversing, working, playing, etc. A teacher
can use observations to collect data on behaviours that are difficult to assess
by other methods such as attitudes, values, and generic competences and
intellectual skills. It is very important because it is used before the lesson
begins and throughout the lesson since the teacher has to continue observing
each and every activity.
• Questioning
a) Oral questioning: a process which requires a student to respond verbally
to questions
b) Class activities/ exercise: tasks that are given during the learning/
teaching process
c) Short and informal questions usually asked during a lesson
d) Homework and assignments: tasks assigned to students by their teachers
to be completed outside of class.
Homework assignments, portfolio, project work, interview, debate, science
fair, Auditing’s projects and Auditing competitions are also the different forms/
instruments of assessment.

10 Auditing | Teacher's guide | Senior Six | Experimental version

 1.2.5. Teaching methods and techniques that promote ac-
tive learning
The different learning styles for students can be catered for, if the teacher uses
active learning whereby students are really engaged in the learning process.
The main teaching methods used in Auditing are the following:
• Dogmatic method (the teacher tells the students what to do, what to
observe, how to attempt, how to conclude)
• Inductive-deductive method: Inductive method is to move from
specific examples to generalization and deductive method is to move
from generalization to specific examples.
• Analytic-synthetic method: Analytic method proceeds from unknown
to known, ’Analysis’ means ‘breaking up’ of the problem in hand so that
it ultimately gets connected with something obvious or already known.
Synthetic method is the opposite of the analytic method. Here one
proceeds from known to unknown.
• Skills lab method: Skills lab method is based on the maxim “learning
by doing.” It is a procedure for stimulating the activities of the students
and to encourage them to make discoveries through practical activities.
• Problem solving method, Project method and Seminar Method.
The following are some active techniques to be used in Auditing:
• Group work
• Research
• Probing questions
• Practical activities (drawing, plotting, interpreting graphs)
• Modelling
• Brainstorming
• Quiz Technique
• Discussion Technique
• Scenario building Technique

What is Active learning?

Active learning is a pedagogical approach that engages students in doing things
and thinking about the things they are doing. Students play the key role in the
active learning process. They are not empty vessels to fill but people with ideas,
capacity and skills to build on for effective learning. Thus, in active learning,
students are encouraged to bring their own experience and knowledge into the
learning process.

Auditing | Teacher's guide | Senior Six | Experimental version 11

 The role of the teacher in The role of students in active
active learning learning
–– The teacher engages students A student engaged in active learning:
through active learning –– Communicates and shares relevant
methods such as inquiry information with fellow students
methods, group discussions, through presentations, discussions,
research, investigative group work and other student-
activities, group and individual centred activities (role play, case
work activities. studies, project work, research and
–– He/she encourages investigation);
individual, peer and group –– Actively participates and takes
evaluation of the work done responsibility for his/her own
in the classroom and uses learning;
appropriate competence-based
assessment approaches and –– Develops knowledge and skills in
methods. active ways;
–– He provides supervised –– Carries out research/investigation by
opportunities for students to consulting print/online documents
develop different competences and resourceful people, and
by giving tasks which enhance presents their findings;
critical thinking, problem –– Ensures the effective contribution
solving, research, creativity and of each group member in assigned
innovation, communication and tasks through clear explanation
cooperation. and arguments, critical thinking,
–– Teacher supports and responsibility and confidence in
facilitates the learning public speaking
process by valuing students’ –– Draws conclusions based on the
contributions in the class findings from the learning activities.
activities.

Main steps for a lesson in active learning approach

All the principles and characteristics of the active learning process highlighted
above are reflected in steps of a lesson as displayed below. Generally, the
lesson is divided into three main parts whereby each one is divided into smaller
steps to make sure that students are involved in the learning process. Below are
those main part and their small steps:

12 Auditing | Teacher's guide | Senior Six | Experimental version

1. Introduction

Introduction is a part where the teacher makes connection between the

current and previous lesson through appropriate technique. The teacher opens
short discussions to encourage students to think about the previous learning
experience and connect it with the current instructional objective. The teacher
reviews the prior knowledge, skills and attitudes which have a link with the new
concepts to create good foundation and logical sequencings.

2. Development of the new lesson

The development of a lesson that introduces a new concept will go through the
following small steps: discovery activities, presentation of students’ findings,
exploitation, synthesis/summary and exercises/application activities.
• Discovery activity

Step 1:
–– The teacher discusses convincingly with students to take
responsibility of their learning
–– He/she distributes the task/activity and gives instructions related
to the tasks (working in groups, pairs, or individual to prompt /
instigate collaborative learning, to discover knowledge to be
learned).

Step 2:
–– The teacher let students work collaboratively on the task;
–– During this period the teacher refrains to intervene directly on the
knowledge;
–– He/she then monitors how the students are progressing towards
the knowledge to be learned and boosts those who are still behind
(but without communicating to them the knowledge).
• Presentation of students’ findings/productions
–– In this part, the teacher invites representatives of groups to present
their productions/findings.
–– After three/four or an acceptable number of presentations, the
teacher decides to engage the class into exploitation of students’
productions.
• Exploitation of students’ findings/ productions
–– The teacher asks students to evaluate the productions: which ones
are correct, incomplete or false.

Auditing | Teacher's guide | Senior Six | Experimental version 13

 –– Then the teacher judges the logic of the students’ products,
corrects those which are false, completes those which are
incomplete, and confirms those which are correct.
• Institutionalization or harmonization (summary/conclusion/ and
examples)
–– The teacher summarizes the learned knowledge and gives
examples which illustrate the learned content.
• Application activities
–– Exercises of applying processes and products/objects related to
learned unit/sub-unit
–– Exercises in real life contexts
–– Teacher guides students to make the connection of what they
learnt to real life situations.
–– At this level, the role of teacher is to monitor the fixation of process
and product/object being learned.

3. Assessment

In this step the teacher asks some questions to assess achievement of

instructional objective. During assessment activity, students work individually on
the task/activity. The teacher avoids intervening directly. In fact, results from this
assessment inform the teacher on next steps for the whole class and individuals.
In some cases, the teacher can end with a homework/ assignment. Doing this
will allow students to relay their understanding on the concepts covered that
day. Teacher leads them not to wait until the last minute for doing the homework
as this often results in an incomplete homework set and/or an incomplete
understanding of the concept.

14 Auditing | Teacher's guide | Senior Six | Experimental version

PART II: SAMPLE LESSON PLANS
Term Date Subject Class Unit Lesson Duration Class size
No No
1 23 /09/ Auditing S6 1 3 of 5 80 Min 35
2024
Type of Special Educational Needs to be One student with visual impairment
catered for in this lesson and number of
learners in each category
Unit title Fundamental concepts in audit
Key Unit To be able to explain the fundamental concepts in audit
Competence:
Title of the Types of Audit acconding to the different classification
lesson
Instructional Given a written scenario of types of audit, student will be able to explain
Objective the types of audit according to the form of organisation. The teacher will
read for the student with visual impairment and allow him/her to answer
verbally or use Braille documents.

Plan for this Inside the classroom in a U shape arrangement or outside the classroom
Class (location:
in / outside)
Learning The learning material will depend on what is available (example: scenario,
Materials (for all field visit, etc.)
learners)
References Auditing Senior 6
Timing Description of teaching and learning activity Generic
for competences
each and cross
step cutting issues
Think-pair-share; small group discussion on types of to be addressed
audit according to the form of organisation, gallery + a short
walk, and content harmonization from different group explanation
presentations
Teacher Learner activities
activities

Auditing | Teacher's guide | Senior Six | Experimental version 15

 1. Introduction Revision on the Answer the questions on the Communication:
previous lesson meaning of auditing and form of Through
10 minutes
on the meaning of organization answering
auditing questions and
Correct homework with the
peer discussion.
Explain the form teacher
of organization
Discover the title of today’s
Handle any lesson:
homework or
Types of audit according to the
assignments,
form of organisation
Ensure a
conducive
learning
environment.

Show learners
the relationship
between the
previous lesson
and new lesson

Guide students
to discover the
lesson of the day.

Share the
objectives of the
lesson with the
learners

Ask students to
show the link
between learning
objective and Key
unit competence
2. Development of the lesson : 70min
a) Discovery Ask student Listen carefully to instructions Cooperation,
activity to play Water interpersonal
Forming groups:
Melon Game: management
15 Minutes
Put students into Students arrange themselves in and life
groups & have teams and sit together.
them sit together.

16 Auditing | Teacher's guide | Senior Six | Experimental version

 Ask student to Work individually or in pairs to Skills: Students
look in student explain types of audit according share ideas in
book S6 Auditing to the form of organisation. pairs and in
unit 1. groups.
In their groups, they share
This activity will and agree on the types of Critical thinking:
be done first audit according to the form of
Student
individually, organisation
analyse situation
shared in pairs
of form of
then in a big
organisation in
group according
their community
to students sitting
and come up
arrangement
with types of
Tell students that audit according
this activity will to form of
be done in 35 organization.
minutes and the
Communication:
presentation will
be done using Students
gallery work. discuss
in groups
Teacher moves
and answer
around in groups
questions.
to guide them
as they attempt Research and
to answer the problem solving:
questions.
Through
The teacher pays discussion
a special attention and research,
to student with students explain
disability the types of
audit according
to the form of
organisation

Peace
and values
education:

Auditing | Teacher's guide | Senior Six | Experimental version 17

 Trough games
and group
discussions,
students
socialize and
develop some
values like
sharing, honesty,
cooperation,
respect, team
work, etc.

b) Presentation Invite the student Groups present about the types Inclusive
and to hang their work of audit according to the form of Education:
exploitation on the Present organisation
Taking into
of learner’s Boards.
Each team hangs its answers on account student
productions
Allow students to Present Board. with visual
30 Minutes do gallery work impairment
Each team moves around to read
during gallery
To ask other presentations of other teams
walk and also
groups if they while taking notes and asking for
read for him/her.
agree on what clarification where they do not
other groups have understand. Communication:
presented and
Harmonize their findings and Student
comment on each
come up with types of audit discusses and
presentation.
according to the form of communicates
Invite the organisation. verbally while
representative presenting
of each group to their work and
come with types commenting on
of audit according other groups
to the form of work.
organisation.
Critical thinking:

Learners use
critical thinking
in answering
questions.

18 Auditing | Teacher's guide | Senior Six | Experimental version

c) Summary/ Help the 1. Form of organization Inclusive
conclusion students to a. Audit of a sole Education:
come up with proprietorship
10 Minutes Taking into
a summary on
Audit of the accounts of a private account of
types of audit
individual or sole trader students
according to
with visual
the form of When an auditor is asked to
impairment by
organisation. audit the accounts of a private
reading for them
individual or a sole trader, he
Read the note written
must get clear instructions in
summary loudly on board and
writing from his client as to what
for the student giving more
he is expected to do. His duties,
with visual time to take
nature of work, scope of his work
impairment to note.
etc. will have to be defined in
allow him/her to
agreement.
take notes.
Advantages of audit of the
accounts of sole trader are:
1. Assured that his/her
accounts are properly
kept and no fraud

2. Audited accounts
are helpful in the
determination of death
duty accounts by
administrators

3. Sole trader agents are

kept vigilant (in the case
of consignment)

4. Taxes are assessed and

paid very well

5. Audited accounts are

basis for obtaining bank
loans and public markets

Auditing | Teacher's guide | Senior Six | Experimental version 19

 b. Audit of partnership

Audit conducted for partnership

business. Audit conducted for
partnership business. The scope
and conduct of audit and rights
and duties of the auditors are
determined on the basis of the
agreement between the firm
and auditor. While conducting
audit of partnership firm the
auditor must refer to the Deed of
partnership.

Advantages of audit of
partnership firm are:
1. Avoid any financial
dispute among partners

2. Third parties are assured

that there are no frauds

3. Helps in the valuation

of goodwill of a dead
partner and incoming
partner

4. Expertise of audit
avail profit for better
management and
taxation

c. Audit of limited liability

company

An audit is an examination of
the financial statements of a
company, such as the income
statement, cash flow statement,
and balance sheet. Audits
provide investors and regulators
with confidence in the accuracy
of a corporation’s financial
reporting.

20 Auditing | Teacher's guide | Senior Six | Experimental version

 During the public limited audit,
it is clarified whether the
financial statements are fairly
presented and free from material
misstatements

The auditor’s role is to assess

annual reports of the company
and make sure they are correct
and reliable. The auditor’s role is
not to manage the accounts.
3. Assessment What are the Expected Answers:
Advantages
15 Minutes 1.
of audit of the
accounts of sole • Assured that his/her accounts
trader? are properly kept and no
fraud
Differentiate • Audited accounts are
of audit of helpful in the determination
of death duty accounts by
partnership firm
administrators
and audit of a
• Sole trader agents are
limited company kept vigilant (in the case of
consignment)
• Taxes are assessed and paid
very well
• Audited accounts are basis
for obtaining bank loans and
public markets

2. Audit of partnership

1. Is not compulsory and is

purely voluntary

2. An auditor does need to

be certified unless the
firm requires

3. Scope of audit depends

on agreement between
auditor and firm

4. Rights and duties,

powers and
responsibilities are
contractual

Auditing | Teacher's guide | Senior Six | Experimental version 21

 5. Auditor reports to the Critical thinking:
partners of the firm

6. Extent of work of an
auditor depends on the Students
agreement between
develop critical
auditor and partners of
thinking and
the firm
reasoning skills
Audit of limited liability while answering
company questions from
1. Is compulsory under other groups.
the provisions of the
Research and
company’s act
problem solving
2. An auditor must be a
qualified, practicing
certified accountant.
Imagination and
3. Scope of audit is defined
application of
by companies Act
this lesson to
4. Rights and duties, powers real business

INTRODUCTION
and responsibilities are
statutory world.

5. Auditor reports to the

TO ACCOUNTING shareholders or members
of the firm

6. Extent of work of
an auditor is as per
the provisions of the
Company Act
Teacher self- For example: 3 students need remedial activities (they are given)
evaluation

PART III: UNIT DEVELOPMENT

22 Auditing | Teacher's guide | Senior Six | Experimental version

 UNIT 1 FUNDAMENTAL
CONCEPTS IN AUDITING

1.1. Key unit competence

To be able to explain the fundamental concepts in auditing

1.2. Prerequisite (knowledge, skills, attitudes and values)

Learners were introduced in senior 4 (unit 2 and 3) in financial accounting, the
introduction to books of prime entry and in unit 2 in management accounting they
have studied source documents. The books of prime entry are among important
documents on which the audit is applied and source documents are examined
as evidence of transactions which took place in the organisation. So, with this
INTRODUCTION
prior knowledge, skills, attitudes and values should help them to appreciate the
role of auditing in the development of the country.

TO ACCOUNTING
1.3 Cross-cutting issues to be addressed:
Note: The examples below are just to guide you on how to address cross-
cutting issues throughout the unit but this does not mean that these are the
only ones. You can address and give students opportunities to discuss all the
cross-cutting issues where possible taking consideration of their environment
or community around them.
Environment and sustainability: environment is one of the greatest factors that
can affect both positively or negatively any business activity and one cannot start
up a business without the environment. Therefore, great care for environment
is crucial. Students are to be advised on the importance of environmental
protection
Gender education: emphasis throughout this unit has to be put on how both
males and females have the equal opportunities to understand and explain
the meaning of the fundamental concepts applied in audit. Being citizens of
Rwanda, males and females are encouraged to start businesses; they should
know the importance of audit for them as owners of the business.

Auditing | Teacher's guide | Senior Six | Experimental version 23

Inclusive education: in addition to all having equal opportunities to carry
out business activities, emphasis has to be put on how we all regardless of
our background, economic or social setup have right to develop an ethical
understanding of Rwandan system that do not discriminate.
Peace and Values: you need to emphasize to students the benefit of living in
peace and harmony with others. Students need to appreciate the role played by
auditors in promoting peace and patriotism in the community avoiding activities
that are illegal e.g., frauds, fraudulent manipulations of accounts and make
sure that every business they plan to have is legal and contributes to national
development goals.
Standardization culture: you need to emphasize to students why adhering to
ethics and integrity requirements at workplace and their respective community
is very crucial for a self-reliance national development. This will help them to
abide to international auditing and Assurance Standards Board.

1.4. Guidance on introductory activity

Introductory activity
MUKESHIMANA decided to set up a business for selling flowers after S6
Accounting. She got up early in the morning, visited the market, and then set
up a stall by the side of the road. She started selling different kinds of flowers.
She was able to sell and gain some income from the business. For the first year,
everything went well.
However, MUKESHIMANA thought that she could sell more flowers if she was
able to transport more to the place where she would sell them. She also knew
that there were several other roads nearby where she could sell flowers. To
achieve her ambition of selling more flowers, she needed to buy a van and
recruit more employees to transport flowers to different selling points.
MUKESHIMANA realized the need for more money to expand her business.
Therefore, she requested her rich friend Alex to invest in the business.
Alex found out the potential of MUKESHIMANA’s business and decided to
invest, but he did not want to be involved in the management of the business and
also bear liabilities in case of failure of the business (bankruptcy). He therefore
suggested the following to MUKESHIMANA:
• To establish a limited liability company
• To be major shareholders (over 51%) and be entitled for more dividends
• Mukeshimana to be the managing director of the company

24 Auditing | Teacher's guide | Senior Six | Experimental version

At the end of the first year of trading as a limited liability company, Alex received
a copy of the financial statements. He noticed that the profit of the company
was lower than expected, and this lowered significantly his dividends.
He knew that MUKESHIMANA is paid a salary and might not give much attention
to the performance of the company (making profit for the company).
To have proper understanding of the performance of the business, there was
a strong need of Alex to engage the third parties (auditors) to provide annual
assurance services on financial statements of the company.

Answers for introductory activity (case study)

Note: These responses may be shared or not with the students. They are
specifically to guide you while harmonizing students’ responses during
presentation.
1. The work done by the third person appointed Alex is Audit.
2. There is a difference between the work done by MUKESHIMANA
and which is performed by the third person.
3. Alex gets assurance and he will be sure that the financial statements
presented to him by MUKESHIMANA are true and fair.
4. The difference between work done by MUKESHIMANA and third
person is that MUKESHIMANA performs accounting activity while
the third person performs audit activity.

1.5 .List of lessons/sub-heading

Lesson title/ Number
Headings Learning objectives
sub-headings of periods
1.1. Key terms Introductory activity Arouse the curiosity of 1
applied in students on the content
auditing of unit 1
1 Definition of key Explain the meaning of 2
terms key terms in audit
1.2. Objectives, 1 Objectives of Explain objectives of 1
advantages auditing auditing
and 2 Advantages and Identify the advantages 2
disadvantages disadvantages and disadvantages of
of audit of audit audit

Auditing | Teacher's guide | Senior Six | Experimental version 25

 1.3. Types of 1 Form of Explain the types of audit 1
audits organisation according to the form of
organisation
2 Nature of work Explain the types of audit 1
according to the nature
of work
3 Time factor Explain the types of audit 1
(interval of time) according to the time
factor
4 Methods of Explain the types of 2
approach audit according to the
methods of approach
5 Public sector’s Explain the public sector 2
audit audit
1.4. Investigation 1 Difference Explain the meaning and 2
between audit difference between audit
and investigation and investigation
2 Characteristics Explain characteristics, 2
and reasons of reasons of investigation,
investigation steps of investigation,
report of investigation
1.5. Auditing and 1 Difference Explain the difference 2
acccounting between between auditing and
auditing and accounting
accounting
2 Benefits and Explain the benefits and 1
limitations of an limitations of an audit
audit
End Unit Assessment 1

Total number of periods 21

26 Auditing | Teacher's guide | Senior Six | Experimental version

Lesson 1 Key terms applied in auditing
a) Learning objective
Explain the meaning of key terms in auditing
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books, internet
and projector, case studies, text books, chalks, flipchart, computer resourceful
person and any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
Read the Key unit competence in the syllabus to determine what students will
know and be able to do by the end of the unit. Look at the action verb, concept
and context of learning objective. This will help you see the skills, knowledge
attitudes embedded in the learning objective. Remember the learning objective
link to the key unit competence.
d) Learning activities

Activity 1.1
Exploit and use appropriate learning methods that can foster collaborative
learning (for example small groups or pairs, gallery walk). Provide students with
the activity in the student’s book, and give instructions to the activity to be done.
During grouping or pairing, ensure a balance between boys and girls and learners’
different abilities. During this activity, ensure that students have understood the
instructions, prompt and probe them through question and answer approach to
make sure they are active and their curiosity in learning and discovery is aroused.
Encourage students to work together, value each other’s contributions, share
ideas, etc.
Students present their findings, results, answers through an appropriate method
such as pair-share, small group presentations on the introductory activity.
Encourage different students from the groups to share the group’s work to avoid
just a few students dominating. Also encourage other students to listen and not
disturb when other teams are sharing unless it is a question. Encourage students
to appreciate each other’s work especially the presentation. Appreciate the
teams’ presentations and remind them that this activity was not meant to come
to the very right answers but to help them become aware of what to expect in
the lesson. Answers to the activity will be got as the lesson progresses. You
can support students’ answers by referring to possible answers to the activity
below:

Auditing | Teacher's guide | Senior Six | Experimental version 27

 Answers to Learning Activity 1.1

1. An auditor is a person who conducts an audit

2. The work performed by an auditor is the audit which is an official
independent examination of the books of the accounts (or accounting
systems) of an entity (by an auditor)
3. The main principles of audit are Integrity, Objectivity, Professional
Independence, Professional competence and due care and
Confidentiality

e) Application activity 1.1

Students analyse and discuss about the questions either in groups or in pairs
and come up with possible answers. This activity may be given as a research
question or homework.
Depending on the purpose of the application activity, choose an appropriate
method to assess students’ findings, answers or responses. Depending on the
performance or results, you may decide to give remedial or extension activities.

Answers to application activity 1.1

1. Assurance is one in which a practitioner expresses a conclusion

designed to enhance the degree of confidence of the intended users
other than the responsible party about the outcome of the evaluation
or measurement of a subject matter against criteria.” ‘Assurance’
means confidence. In an assurance, an ‘assurance firm’ is engaged
by one party to give an opinion on a piece of information that has
been prepared by another party.
2. The meaning of integrity and objectivity
a. Integrity: an auditor should be straightforward, honest and
sincere in his/her approach to his/her professional work.
b. Objectivity: is not to allow bias, conflict of interest or undue
influence of others to override professional or business judgments

28 Auditing | Teacher's guide | Senior Six | Experimental version

Lesson 2: Objectives, advantages and disadvantages of auditing

a) Learning objectives
Describe objectives, advantages and disadvantages of auditing
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books, internet
and projector, case studies, text books, chalks, flipchart, computer, resourceful
person and any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson, lesson 1 Students studied for meaning of key terms applied in
auditing that will help to discuss the objectives, advantages and disadvantages
of audit in this lesson.
d) Learning activities

Activity 1.2
• Put students in small groups and give clear instructions about the
activity
• Ask them to observe the pictures in student’s book and answer the
questions provided in the activity.
• Guide students’ discussions and make sure that everyone is participating
• Invite students to share their findings.
• Harmonize their findings or answers, and link the findings to the learning
objectives,
• Help them draw conclusions/summary on objectives, advantages and
disadvantages of auditing.
• Listen all answers to asked questions give solutions to challenges from
the activity.
• Guide them to make notes in referring in their student’s book.

Auditing | Teacher's guide | Senior Six | Experimental version 29

 Answer to Learning Activity 1.2

1. Yes
2. Objectives of audit
• To check/verify the accuracy of financial statements or accounts;
• To prove the true and fair view of the company’s financial state of
affairs;
• To confirm that the proper books of accounts are being kept or not;
• To prepare audit report;
• To confirm the accuracy of final accounts

e) Application activities 1.2

Students can be given an activity to discuss about the questions in groups, give
clear instructions and ensure a balance in the groups. Students are to give a
report of their findings. Monitor the activity to ensure students are on track and
actively participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to application activity 1.2

1. The advantages of audited accounts for the shareholders are:

• Shareholders are assured that directors and management are
acting to the best of their interests;
• They use audited accounts to determine amount to be paid to dead
partner;
• They use audit to admit a new partner by examining his/her business;
• Audit ensures that regulations and statutory requirements are
followed.
2. The primary or main objectives of an audit are:
• To check/verify the accuracy of financial statements or accounts;
• To prove the true and fair view of the company’s financial state of
affairs;
• To confirm that the proper books of accountafe being kept or not;
• To prepare audit report;
• To confirm the exactitude of final accounts.

30 Auditing | Teacher's guide | Senior Six | Experimental version

Lesson 3: Types of audits

a) Learning objectives
Describe the types of audits according to different classifications.
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books, internet
and projector, case studies, text books, chalks, flipchart, computer resourceful
person and any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson 2, Students studied for objectives, advantages and
disadvantages of auditing that will help them to discuss on the types of audits
according to the different classifications in this lesson. Remember the learning
objectives are linked to the key unit competence.
d) Learning activities

Activity 1.3
• Put students in small groups and give clear instructions about the
activity.
• Ask them to show the pictures in student’s book and answer the
questions provided in the activity.
• Guide students’ discussions and make sure that everyone is participating.
• Invite students to share their findings.
• Harmonize their findings or answers, and link the findings to the learning
objectives, and help them to draw conclusions/summary on the various
types of audits according to different classifications.
• Answers are addressed to any questions or challenges that are obtained
from the activity.
• Guide them to make notes in referring to their student book.

Answer to Learning Activity 1.3

• Continuous audit
• Final audit
• Public sector’s audit

Auditing | Teacher's guide | Senior Six | Experimental version 31

e) Application activities 1.3
This activity can be given as a normal individual or group activity, where students
describe various types of audits according to the different classifications and
give advantages and disadvantages of procedural audit. Monitor the activity to
ensure students are on track and actively participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to application activity 1.3

1. a. Final Audit (periodic/Detailed/Complete Audits)

It is conducted at the end of the financial period when accounts
have been balanceloff , and profit and loss account and balance
sheet have been prepared approved.
b. Interim Audit.
Interim audit is conducted to a particular date within the accounting
period.
It is conducted within the accounting period usually half yearly.
It is a kind of audit which is conduted between the two periods or
during transitional period.
It is aimed at assessing the company’s performance in order to pay
interim dividends.
c. Continuous Audit.
It is that audit which involves detailed examination of the books of
accounts at regular intervals of 1, 2 or 3 months.
2. Advantages of procedural audit
• This audit will provide a feedback to the management.
• The audit will reveal which procedures are out of dated and
uneconomical and which calls for replacement.
• It will identify the strength or weakness in ICS.
• It will reveal the management weakness in supervising the
company’s operations.
• It will ensure co-ordination of the company’s operations which may
boost its profitability.
• It will reveal whether procedures in accounting department are
working propely or not.

32 Auditing | Teacher's guide | Senior Six | Experimental version

 Disadvantages of procedural audit
• It may be a very expensive audit.
• It may be frustrated for the management.
• It may mean duplication of effort if the same procedures are
examined in the final audit.
• This type of audit may be tedious in particular if the company has
numeruos procedures.

Lesson 4: Investigation

a) Learning objectives
Describe investigation
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books, internet
and projector, case studies, text books, chalks, flipchart, computer resourceful
person and any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson, lesson3, Students studied for the types of audits that will
help them to discuss the difference between auditing and investigation in this
lesson. Remember the learning objectives are linked to the key unit competence.
d) Learning activities

Activity 1.4
• Put students in small groups and give clear instructions about the
activity
• Ask them to show the pictures in student’s book and answer the
questions provided in the activity
• Guide students’ discussions and make sure that everyone is participating
• Invite students to share their findings
• Harmonize their findings or answers, and link the findings to the learning
objectives, help them draw conclusions/summary on the description of
investigation. Answers addressed to any questions or challenges are
obtained from the activity. Guide them to make notes in referring in their
students’ book.

Auditing | Teacher's guide | Senior Six | Experimental version 33

 Answer to Learning activity 1.4

1. I see two people

2. The first one is a person having the position of an auditor and another
is an official investigator from the Rwanda investigation Bureau (R.I.B)

e) Application activities 1.4

This activity can be given as a normal individual or group activity, where students
describe the concepts of investigation. Monitor the activity to ensure students
are on track and actively participating. Students share their findings to the
large group. Assess their answers depending on the purpose of the application
activity. Refer to the possible answers below as you assess their work.

Answers to Application Activity 1.4

1. The areas in which investigation should be applied are:

a. Financial
b. Economic
c. Business
d. Social
e. Technical
2. The steps of investigation are:
a. Determine the scope/objectives of investigation.
b. Planning the investigation (Formulate investigation program).
c. Establishment of the fields of application (by examining or studying
various records).
d. Analysis and interpretation of findings/results.
e. Preparation of investigation’s report/writing of the report.

34 Auditing | Teacher's guide | Senior Six | Experimental version

Lesson 5: Auditing and acccounting
a) Learning objectives
Explain the difference between audit and accounting, benefits and limitations
of audit.
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, chalks, flipchart, computer
resourceful person and any other trustworthy and reliable resources to enhance
learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson, lesson, Students studied for the difference between audit and
investigation. That will help them to discuss the difference between audit and
accounting, limitation of audit in this lesson. Remember the learning objectives
are linked to the key unit competence.
d) Learning activities

Activity 1.5
• Put students in small groups and give clear instruction about the activity
• Ask them to show the pictures in student book and answer the questions
provided in the activity
• Guide students’ discussion and make sure that everyone is participating
• Invites students to share their findings
• Harmonize their findings or answers, and link the findings to the learning
objective, help them draw conclusions/summary on the difference
between audit and accounting, benefits and limitations. Answers
addressed to any questions or challenges are obtained from the activity.
Guide them to make notes in referring in their students’ book.

Answer to Learning activity 1.5

The picture no 1 illustrates the activities of accounting and the picture no 2

shows the activities of auditing.

Auditing | Teacher's guide | Senior Six | Experimental version 35

e) Application activity 1.5
This activity can be given as a normal individual or group activity, where students
establish the difference between audit and accounting and provide benefits and
limitations of audit.
Monitor the activity to ensure students are on track and actively participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to Application Activity 1.5

1. The benefits of the auditing are the following:

• The shareholders of a company are given an independent opinion
as to the true and fair view of the accounts that have been prepared
by management.
• The use made by third parties such as suppliers and banks adds
confidence in the performance of a company.
• While not responsible for detecting fraud, the very fact that an
auditing is carried out and may uncover evidence of fraud, can help
to mitigate against such risks.

2. The limitations of the auditing are explained as follows:

• Every item is not checked. In fact, only test checks are carried out
by auditors. It would be impractical to examine all items within a
class of transactions or accounts balances. Hence, it is not really
possible to give absolute assurance.
• Auditors depend on representations from management and staff.
Collusion can mitigate some good controls such as division of duties.
There is always the possibility of collusion or misrepresentation for
fraudulent purposes.
• Evidence gathered is persuasive rather than conclusive. It often
indicates what is probable rather than what is certain.
• Auditing is not purely an objective exercise. Judgments have to be
made in a number of areas. The view in financial statements is itself
based on a combination of fact and judgment.
• The timing of an audit.
• An unqualified audit opinion is not a guarantee of a company’s
future viability, the effectiveness and efficiency of management, nor
that fraud has not occurred in the company.

36 Auditing | Teacher's guide | Senior Six | Experimental version

 Skills lab activity 1

Guidance on the skills lab activity:

In conducting this skills lab activity, you can either put students in two learning
groups; one group plays the role of accountant another playing the role of an
auditor then they will exchange the roles and finally students express their views
on similarities between auditing and accounting.
i. Build
Given that students visit the library,
• Remind students on the expected objectives for the library’s attendance
• Help them to be grouped and remember to mix both boys and girls
• Let each team has the representative
• Ensure they have where to keep necessary notes from the findings
• Distribute questions for their research
• Check their understandings of the assignment
• Remind them that everybody’s full participation is mandatory.
ii. Practice
During research on internet, care about the following concerns:
• Guide students on accessing the real audit books and accounting
• Ensure that books are available for all
• Respond to any questions for clarification and support accordingly
For the visit to the library, a concept note is needed to describe what has been
covered during the class lesson and state what are students and teacher’s
expectations.
iii. Present
During the group presentation, the teacher must assess whether the student’s
participation in the skills lab activity was effective by:
• Selecting randomly anyone in all groups to present the report on behalf
of team members.
• Allow students to ask questions to their fellows.
All teams’ members’ presentation is expected to contribute to the plenary by
answering some questions that the presenter is not covering as well as expected

Auditing | Teacher's guide | Senior Six | Experimental version 37

iv. Conclusion
The teacher emphasizes on the objective of the research reminding students
that they were expected to understand and express their views on similarities
between auditing and accounting.

1.6. Summary of the unit

1. Definition of key terms applied in auditing, assurance, Auditor and
Auditing
1.1. Definition of key terms
a. Audit: an audit is an official independent examination of the accounts (or
accounting systems) of an entity (by an auditor).
b. Assurance: the International Standards on Auditing (ISA) give a definition
of an assurance engagement as” one in which a practitioner expresses
a conclusion designed to enhance the degree of confidence of the
intended users other than the responsible party about the outcome of the
evaluation or measurement of a subject matter against criteria.”
c. Auditor: an auditor is a person who conducts an audit
An auditor is a person authorized to examine and verify the books of
accounts of an organization.
d. Auditing: auditing may be defined as the examination of financial
statements covering the transactions over a period and ascertaining the
financial position of an organization on a certain date in order that the
auditor may issue a report on them. It means auditing is the application
of auditing principles and methods as may be considered as necessary
by an auditor.
The main principles and processes of auditing are classified as under:
a. Principles of the auditing.
• Integrity
• Objectivity
• Professional Independence.
• Professional competence and due care.
• Confidentiality
• Professional behavior
b. Processes of the auditing
• Planning
• Detailed audit( audit execution)
• Reporting
• Follow up of audit recommendations

38 Auditing | Teacher's guide | Senior Six | Experimental version

2. Objectives, advantages and disadvantages of auditing

2.1. Objectives of auditing

The objectives of auditing may be classified as under:
–– Primary or principal objectives
–– Secondary or subsidiary objectives
a) Primary or principal objectives of auditing
• To determine the accuracy of financial statements or accounts.
• To prove the true and fair view of the company’s financial state of affairs.
• To confirm that the proper books of account are being kept or not.
• To prepare audit report.
• To confirm the exactitude of final accounts.
b) Secondary or subsidiary objectives of auditing
• To detect errors.
• To detec frauds
• To prevent errors.
• To prevent frauds .
• To assist the client to improve their accounting systems.
• To find out whether the internal control system is working properly or
not.
• To advice the management.

2.2. Advantages and disadvantages of auditing

A. Advantages of auditing

For the shareholders:

a) Shareholders are assured that directors and management are acting to
the best of their interests.
b) They use audited accounts to determine amount to be paid to dead
partner.
c) They use audit to admit a new partner by examining his/her business.
d) Audit ensures that regulations and statutory requirements are followed.

For the employees:

a) Audit keeps accounting staff vigilant and careful in their work.
b) Employees ensure their job security and continuity of good remuneration
by the audited company.

Auditing | Teacher's guide | Senior Six | Experimental version 39

 c) Auditing acts as a detective and preventive measure against errors and
frauds.

For the state:

a) Audited companies ensure the accomplishment of fiscal duties regarding
companies (payment of taxes and social contributions).
b) The government is assured that public funds are being well paid and
used.
c) The government ensures continuity of business for the purpose of general
interest of the people.
d) The state ensures that books of accounts are maintained according to
legal requirements and companies’ Act.

For the management of an enterprise and third parties in general:

a) Audit provides assurance and credibility to the accounts for interested
parties.
b) Third parties not taking active part in the organization are protected.
c) Audited accounts minimize disputes between parties.
d) Audited accounts are acceptable as the basis of ascertaining tax liability.
e) he auditor promotes general management efficiency by advising
management.

B. Disadvantages of audit
a) If the auditor has many clients, planning and personnel problems lead to
inefficient audit leaving errors and frauds undetected. Thus, increasing
auditor’s liability to third parties
b) It is expensive and third parties may not be able to afford it
c) The audit report provides information that may otherwise be confidential
to competitors
d) A qualified report may affect the company’s credibility with third parties
e) An audit can disrupt the client’s (audited company) work
f) Audited figures may be altered (changed) leading to inaccurate opinion
g) May prompt trade unions to demand for higher wages for their employees
e.g. in cases of unreasonable reserves
h) An audit can lead to conflict between the internal auditor and management
in cases where the internal auditor co-operates with the external auditor
i) Revelations of weaknesses in the management letter or letter of
weaknesses may make managers to resign. Thus, leading to apathy in
the organization.

40 Auditing | Teacher's guide | Senior Six | Experimental version

3. Types of audits acconding to the different classifications

3.1. Types of audits according to the forms of organizations

• Audit of a sole proprietor
• Audit of partnership
• Audit of Limited liability company
• Audit of cooperatives
Various types of audits according to nature of work:
• Private audit
• Statutory audit
• Internal audit
• External audit
Various types of audits according to the time factor
• Final audit
• Interim audit
• Continuous audit
Various types of audits according to the method of approach are the following:
• Procedural audit
• Management audit
• Balance sheet audit
• Vouching audit
• Standard audit

Public sector’s audit

Types of public sector’s audit
• Financial audit
• Performance audit
• Compliance audit

4. Investigation

1.The meaning of investigation

Investigation is an enquiry commissioned by a client for some purpose.
Investigation means an inquiry into the accounts of a business for a special
purpose.

Auditing | Teacher's guide | Senior Six | Experimental version 41

Investigating is a kind of special audit with a limited or extended scope according
to the purpose for which it is conducted.

2.Difference between auditing and investigation

a. Characteristics of investigation
• Investigation is an enquiry.
• Investigation implies systematic and critical examination of accounts
and record of a business enterprise for a specific purpose.
• It is conducted for a specific purpose (suspicion in mind).
• Its specific purpose may be evaluated by the state of affairs or
establishment of a fact.
• Conducted for a non-fixed period (any time) and any person (police,
lawyers, consultants, etc.) and describes a fact not an opinion.
b. Reasons of investigation
Investigation is carried out due to the following reasons. These reasons of
investigation become types and are the followings:
• Purchase of a company
• Admission of a new partner
• Fusion of the companies (Acquisition of a Merger).
• Prospecting of the investments (Prospective investment)
• Prospecting of a loan or investigations on request for loans (Prospective
lending)
• Suspicion of fraud or fraud investigation (Fraud)
• Legal or statutory investigation
c. Steps of investigation
• Step1. Determine the scope/objectives of investigation
• Step 2. Planning the investigation (Formulate investigation program)
• Step 3. Establishment of the fields of application (by examining or
studying various records)
• Step 4. Analysis and interpretation of findings/results
• Step 5. Preparation of report/writing of the report
d. Report of investigation.
On the completion of investigation, the report is submitted to concerned parties.
The report submitted in respect of an investigation should cover the following
points:
• Reference to instruction given by the client
• Reference to basic documents covering information obtained

42 Auditing | Teacher's guide | Senior Six | Experimental version

 • General outline of the work done
• Summary of information obtained
• Recommendations in accordance with information obtained.

5. Auditing and acccounting

1.Difference between auditing and accounting

Accounting Auditing
• It is a preparation of books of • 1 It is an independent examination
accounts of books of accounts.
• It is a continuous process during • It is conducted usually at the end of
the financial period. the period or at the end of the year.
• It is not conditionned • It is conditionned on prepared
• It is conducted without vigilance books of accounts.
• In accounting, the work • It is conducted with vigilance.
is conducted without • It is conducted independently
independence. • It is a statutory requirement for all
• It is essential to all businesses limited liablity companies
• It is conducted by an accountant • It is conducted by a qualified auditor.
• It involves a tedious process of • It is conducted in form of final
preparing the accounts. touches to what has been prepared
by the accountant.

2. Benefits and limitations of the auditing

a. Benefits of the auditing
1. The shareholders of a company are given an independent opinion as
to the true and fair view of the accounts that have been prepared by
management.
2. The use made by third parties such as suppliers and banks of the accounts
adds confidence in the performance of a company.
3. While not responsible for detecting fraud, the very fact that an audit
is carried out and may uncover evidence of fraud, can help to mitigate
against such risks.
b. Limitations of the auditing
1. Every item is not checked. In fact, only test checks are carried out by
auditors.
2. Auditors depend on representations from management and staff.

Auditing | Teacher's guide | Senior Six | Experimental version 43

 3. Evidence gathered is persuasive rather than conclusive.
4. Auditing is not purely an objective exercise. Judgments have to be made
in a number of areas.
5. The timing of an audit.
6. An unqualified audit opinion is not a guarantee of a company’s future
viability, the effectiveness and efficiency of management, nor that fraud
has not occurred in the company.

1.7. Additional information for teachers

Reasons of investigation
Investigation is carried out due to the following reasons. These reasons of
investigation become types and are the followings:

1. Purchase of a company
When an individual is interested to purchase a business, he can appoint an
accountant of his choice to carry out investigation in respect of business which
he wants to purchase.
The main purpose of this investigation is to find out the details about this
purchase. If the investigation report is in favour of this business, then it can be
purchased.

2. Admission of a new partner

An investigation may arise, either on behalf of a person intending to bring capital
in order to become a partner, or for the existing proprietors who intend to take
in a partner. If the investigation is arranged by the prospective partner the main
purpose will be to ascertain whether to become a partner is beneficial or not. In
this case, investigation will be similar as in the case of a purchase of a business.

3. Fusion of the companies (Acquisition of a Merger)

Mergers mean to convert two or more business enterprises into one unit. In
this case, one business enterprise can acquire the assets or shares of another
enterprise. The most important term that must be negotiated in a merger
arrangement is the price the acquiring firm will pay for the acquired business.
In mergers or acquisitions a larger firm generally takes over a small one and
assumes all management control.
Before the merger of two or more business enterprises, investigations are carried
out through some accountants by the firm which intends to acquire other firms.

44 Auditing | Teacher's guide | Senior Six | Experimental version

The main purpose of these investigations is to find out the details about financial
position of the other businesses.

4. Prospecting of the investments (Prospective investment)

Some individuals or firms might be interested to make some investments in
the form of shares or debentures of other companies. In order to make their
decisions, they want to know the details about the financial standing of those
companies.
For this purpose, they can arrange some investigations through some
accountants.

5. Prospecting of a loan or investigations on request for loans

(Prospective lending)
Some banks carry out some investigation before advancing loans to some
business enterprises. Similarly, some suppliers need independent investigation
reports before granting credit facilities to their clients.

6. Suspicion of fraud or fraud investigation (Fraud)

Investigations are carried out on the instructions of management to detect fraud
if the behaviour of some employee is suspicious. If the fraud is concerned only
with the a section of the work e.g. the entry of dummy workmen on a wages
sheet by one clerk, the extent of the investigation should be restricted to that
one section.
On the other hand, if misapplication of cash is the result of collusion between
two or more employees then the investigation can be extended to various
sections or departments of the organization.

7. Legal or statutory investigation

Investigation conducted to satisfy some legal requirements. The following cases
indicate when a legal investigation can be conducted:
An investigation by the liquidator of a company where directors are suspected
of fraud regarding the affairs of the company

Auditing | Teacher's guide | Senior Six | Experimental version 45

1.8. End unit assessment
Answers to end unit assessment

1. Write short notes on the following:

a. Statutory audit is that which is conducted under the provisions of
the law of the country.This is an audit performed according to the law
or the companies Act.
b. Private or voluntary audit is that audit which is not legally required.
c. Is conducted according to the agreement between the auditor and
the client (audited company) and are not governed by any particular
law.
d. Interim audit is conducted to a particular date within the accounting
period.
e. It is conducted within the accounting period usually half yearly.
f. It is a kind of audit which is conduted between the two periodical or
finals.
g. Continuous audit it is that audit which involves detailed examination
of the books of accounts at regular intervals of 1, 2 or 3 months.

2. Explain the term ’continuous audit’ and outline its advantages

and the disadvantages

Continuous audit is a kind of audit which involves the detailed examination

of books of accounts at regular intervals such: 1, 2 or 3 months

Advantages of continuous audit

• Easy and quick discovery of errors;
• Quick presentation of accounts
• Moral check on staff;
• Keeps client’s staff regular
• Audit staff can be kept regular
• Efficient audit.

Disdvantages of continuous audit

• Alteration of figures;
• Altered by dishorest clerk;
• Dislocation of client’s work;
• This method is expensive;
• It involves extensive note taking so as to avoid alteration of figures.

46 Auditing | Teacher's guide | Senior Six | Experimental version

3. The types of audits according to the time factor are :
• Final audit
• Interim audit
• Continuous audit

4. Difference between auditing and accounting

Accounting Auditing
• It is a preparation of books of • It is an independent examination
accounts of books of accounts.
• It is a continuous process • It is conducted usually at the end
during the financial period. of the period or the year.
• It is not conditionned • It is conditionned on prepared
• It is conducted without books of accounts.
vigilance • It is conducted with vigilance.
• In accounting the work • It is conducted independently
is conducted without • It is a statutory requirement for all
independence. limited companies
• It is essential to all businesses • It is conducted by a qualified
• It is conducted by an auditor.
accountant • It is conducted in form of final
• It involves a tedious process touches to what has been
of preparing the accounts. prepared by the accountant.

5. Explain the following principles of auditing:

a. Objectivity is to not allow bias, conflict of interest or undue influence
of others to override professional or business judgments
b. Professional Independence
The auditor is an agent/watchdog for the shareholders and must
be independent of directors and management who look after the
interests of shareholders in a company.
The profession requires the auditor to be independent so as to be
able to express a balanced opinion on the accounts presented by the
directors to the shareholders whose company he/she has audited.

Auditing | Teacher's guide | Senior Six | Experimental version 47

 6. The elements of the investigation’s report are the following:
• Reference to instruction given by the client
• Reference to basic documents covering information obtained
• General outline of the work done
• Summary of information obtained
• Recommendations in accordance with information obtained.

1.9. Additional activities (Questions and answers)

1.9.1. Remedial activities (Questions and answers)
Question 1. Define the term Audit
Answer 1. An audit is an official independent examination of the accounts of
an entity by an auditor.
An audit is defined as: the independent examination and expression of opinion
on the financial statements of an entity by an auditor
Question 2. State four (4) Secondary or subsidiary objectives of an audit
Answer 2. Secondary objectives of audit are:
a. To detect errors;
b. To detec frauds;
c. To prevent errors;
d. To prevent frauds ;
e. To assist the client to improve their accounting systems;
f. To find out whether the internal control system is working properly or not;
g. To advice the management.
Question3. What are the types of audits according to the medoth of approach?
Answer3. According to the method of approach ,various types of audit are:
a. Procedural audit
b. Management audit
c. Balance sheet audit
d. Vouching audit
e. Standard audit

48 Auditing | Teacher's guide | Senior Six | Experimental version

 1.9.2. Consolidation activities (Questions and answers)
Question 1.Describe the similarities between statutory and private audits
Answer1. Similarities between statutory and private audits
1. In both audits, the auditor’s duties and scope of work can be increased
by the client.
2. In both audits, the auditor earns the audit fee
3. Both audits are conducted at the end of the year when the records have
been balanced and closed down
4. In both audits, the auditors apply similar techniques and audit tests
5. Both auditors might be the members of RAB (Registration of Accountants
Board)
6. In both audits, valuable advice is provided to the client at the end of audit
7. Both audits are used as basis for decision making
8. Both safeguard company’s fixed assets
9. In both audits the auditors write the report
10. Both audits are concerned with the review of the activities of the company
11. They are concerned with the preventive measures against errors and
frauds
12. They are concerned with the strength of the ICS.
Question 2. Explain the characteristics of an investigation
Answer 2. Characteristics of investigation are:
1. Investigation is an enquiry.
2. Investigation implies systematic and critical examination of accounts and
record of a business enterprise for a specific purpose.
3. It is conducted for a specific purpose (suspicious).
4. Its specific purpose may be evaluated of state of affairs or establishment
of a fact.
5. Conducted for a non- fixed period (any time) and any person (police,
lawyers, consultants, etc.) and describes a fact not an opinion.

Question 3. Explain the types of public sector’s audit

Answer 3. Types of public sector’s audit

Auditing | Teacher's guide | Senior Six | Experimental version 49

a) Financial audit
Focuses on determining whether an entity’s financial information is presented
in accordance with the applicable financial reporting and regulatory framework.
This is accomplished by obtaining sufficient and appropriate audit evidence to
enable the auditor to express an opinion as to whether the financial information
is free from material misstatement due to fraud or error.
b) Performance audit
Focuses on whether interventions, programs and institutions are performing in
accordance with the principles of economy, efficiency and effectiveness and
whether there is room for improvement.
c) Compliance audit
Focuses on whether a particular subject matter is in compliance with authorities
identified as criteria. Compliance auditing is performed by assessing whether
activities, financial transactions and information are, in all material respects, in
compliance with the authorities which govern the audited entity.

1.9.3. Extended activities (Questions and answers)

Question 1. Distinguish Auditing from investigation
Answer1. Difference between auditing and investigation
Auditing Investigation
• It is an examinationof the books • It involves a searching enquiry into
of accounts and vouchers of a the company’s affairs.
business • It may cover more than one financial
• It covers one financial period period.
• It is conducted for the owners of • It may be conducted on behalf
the business(shareholders) of shareholders,but generally it is
• It is usually restricted to the conducted on behalf of outsiders.
books of accounts • It is not limited to any area.
• It is conducted to prove the true • It is conducted to investigate the
and fair view extent of a fraud
• It is conducted by a qualified • It is conducted by any competent
auditor according to the professional e.g. Lawyer,tax
companies Act. assessors.
• It is conducted without suspicion • It is conducted where there is
• It is a legal requirement for all suspicion of a fraud
limited companies • It is not a legal requirement for the
business

50 Auditing | Teacher's guide | Senior Six | Experimental version

Question 2. Explain and distinguish continuous audit from Interim audit
Answer 2. Distinction between continuous audit and Interim audit.
Continuous audit Interim audit
• The work of audit is carried on • The work of audit is up to a definite
up to any date acconding to the date according to the instruction of
convenience of the auditor and the client.
his/her client. • The assets and liabilities are verified
• The verification of assets and when such audit is conducted.
liabilities is done after the balance • The trial balance has to be prepared
sheet has been prepared at the and checked.
end of the accounting period. • The interim audit is conducted with
• No trial balance is prepared . the object of finding the profit or
• The object is not to know the loss.
profit and loss.

Question 3. Explain the advantages and disadvantages of final audit.

Answer 3. Advantages of final Audit

a. Chances of figures being changed are minimal;
b. It is flexible as the auditor can prepare good programme to cover all areas
well;
c. It is very ideal for small business whose transactions are few and can be
audited at one sitting;
d. It is not expensive;
e. This audit does not interrupt the client’s work;
f. It eliminates notes taking which is a phenomenon of other audits.

Disadvantages of Final audit.

a. The delays may occur if there is large volume of work;
b. The frauds and errors are discovered after the close of the year. Sometime,
it is too late to rectify or take preventive measures;
As the financial periods of most of the clients end on the same date , it becomes
difficult for the auditor to deploy audit staff adequately.

Auditing | Teacher's guide | Senior Six | Experimental version 51

 UNIT 2 LEGAL AND PROFESSIONAL
REQUIREMENTS

2.1. Key Unit competence

To be able to describe the legal and professional standards required for an
auditor

2.2. Prerequisite (knowledge, skills, attitudes and values)

Learners were introduced in senior 6 Financial accounting course (unit 1) to the
Regulatory framework and also in auditing (unit 1) to the fundamental auditing
concepts. So, with this prior knowledge, skills, attitudes and values, it should
help them to appreciate the role of international standards in the development
INTRODUCTION
of professional auditors in the country.

2.3. Cross-cutting issues to be addressed

TO ACCOUNTING
Note: The examples below are just to guide you on how to address cross-
cutting issues throughout the unit but this does not mean that these are the
only ones. You can address and give students opportunities to discuss all the
cross-cutting issues where possible taking consideration of their environment
or community around them.
Environment and sustainability: environment is one of the greatest factors that
can affect both positively or negatively any business activity and one cannot start
up a business without the environment. Therefore, great care for environment
is crucial. Students are to be advised on the importance of environmental
protection and the importance of auditors in reducing using printed documents.
Gender education: emphasis throughout this unit has to be put on how both
males and females have the equal opportunities to understand and explain the
legal and professional requirements of an auditor in Rwanda. So that this will
encourage people to take the first step in being professional auditors.
Inclusive education: in addition to all having equal opportunities to carry
out business activities, emphasis has to be put on how we all regardless of
our background, economic or social setup have right to develop an ethical

52 Auditing | Teacher's guide | Senior Six | Experimental version

understanding of Rwandan system that do not discriminate. Students need to
understand that the International Standards on Auditing should not discriminate
but promote inclusiveness of all etc.
Peace and Values: you need to emphasize to learners the need to live in peace
and harmony with others. Students need to appreciate the role of international
standards in promoting peace and patriotism in the community avoiding activities
that are illegal and make sure that every audit’s activities they plan to have is
legal and contributes to national development goals.
Standardization culture: you need to emphasize to students the need for
standard in audit work. This will help them to abide by standards of legal and
professional requirement to an auditor.

2.4 Guidance on introductory activity

Follow the guidance about the introductory activity:
Students in small groups, pairs or individual read and analyse the case study
and identify the necessity of issuing the International Standards on Auditing,
different areas these standards are applied and the exceptional circumstances
INTRODUCTION
of not complying with them.
During the activity, make sure everyone is following and actively participating.
TO ACCOUNTING
Those who are not acting may have to listen attentively without disturbing and
should applaud the actors after.
Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair-share or large group
discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Appreciate the teams’ presentations and remind them that this activity was not
meant come to the very right answers but to help them become aware of what
to expect in the unit. Answers to the activity will be got as the unit progresses.
Guide them to take notes in their books referring to learners’ book.
You can support students’ answers by referring to possible answers to the
introductory activity below:

Auditing | Teacher's guide | Senior Six | Experimental version 53

 Possible answers for introductory activity (case study)

Note: These responses may be shared or not with the students. They are
specifically to guide you while harmonizing students’ responses during
presentation.
1. It is necessary to every business or company to comply with national
and international regulations/standards because the last ones
improve the degree of conformity and uniformity of audit practices.
2. When there is exceptional circumstances, the auditor can depart
from an auditing standard in order to achieve the objective of an
audit.

2.5. List of lessons/sub-heading

Lesson title/ Number of
Heading Learning objectives
sub-heading periods
2.1. Audit Introductory Arouse the curiosity of 1
standards activity students on the content of
unit 2
1 International Identify international 1
standards on standards on
auditing auditing
2 Ethical duties of Explain the ethical 1
auditors according duties of auditors
to international according to
standards on international
auditing standards on
auditing
2.2. Auditor of 1 Duties, obligations Explain duties, 2
the company and rights of an obligations and
auditor rights of an auditor
2 Auditor’s liability Describe auditor’s 1
liability
End Unit Assessment 1
Total number of periods 7

54 Auditing | Teacher's guide | Senior Six | Experimental version

Lesson 1: Audit standards

a) Learning objectives
Explain the audit standards and ethical duties of auditors according to
International Standards on Auditing
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, resourceful person and any
other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In S6, Unit 1 consists of Regulatory framework, students studied the international
standards in accounting. Given this background, learners should be able to
appreciate that recording financial transactions basing on these standards
leads to professional competences. Learners should also realize that there
are different standards they can comply with. In this unit, they will be able to
describe the legal and professional standards required for an auditor which may
encourage them to perform well company activities and they intend to exercise
well auditing activities in their communities.
d) Learning activities

Activity 2.1
Exploit and use appropriate learning methods that can foster collaborative learning
(for example small groups or pairs, gallery walk). Provide students with the activity
in the student’s book, and give instructions to the activity to be done.
During grouping or pairing, ensure a balance between boys and girls and learners’
different abilities. During this activity ensure that students have understood the
instructions, prompt and probe them through question and answer approach to
make sure they are active and their curiosity in learning and discovery is aroused.
Encourage students to work together, value each other’s contributions, share
ideas, etc.
Students present their findings, results, answers through an appropriate method
such as pair-share, small group presentations on the introductory activity.
Encourage different students from the groups to share the group’s work to avoid
just a few students dominating. Also encourage other students to listen and not
disturb when other teams are sharing unless it is a question. Encourage students
to appreciate each other’s work especially the presentation. Appreciate the
team’s presentations and remind them that this activity was not meant to come

Auditing | Teacher's guide | Senior Six | Experimental version 55

to the very right answers but to help them become aware of what to expect in
the lesson. Answers to the activity will be got as the lesson progresses. You
can support students’ answers by referring to possible answers to the activity
below:

Answers to Learning activity 2.1

1. The organisations have in charge to control and evaluate the execution

of International standards/regulations are:
• International Auditing and Assurance or guarantee Standards
Board (IAASB).
• International Ethics Standards Board for Accountants (IESBA).
• International Federation of Accountants (IFAC).
2. Being a member of the above organisations requires to comply with
the following fundamental principles of ethics: integrity, objectivity,
Professional competence and due care, confidentiality and professional
behaviour.

e) Application activity 2.1

Students analyse and discuss about the questions either in groups or in pairs
and come up with possible answers. This activity may be given as a research
question or homework.
Depending on the purpose of the application activity, choose an appropriate
method to assess student’s findings, answers or responses. Depending on the
performance or results, you may decide to give remedial or extension activities.
Answers to application activity 2.1

1. INEZA BAKERY needs the International Standards on Auditing.

Two examples of international standards:

• IAS 230: Deals with the auditor’s responsibility to prepare the
audit documentation for an audit of financial statements
• IAS 300: Planning an audit of financial statements
2. The fundamental principles of ethics that you observe are the
following:

Integrity: to be straightforward and honest in all professional and

business relationships.

56 Auditing | Teacher's guide | Senior Six | Experimental version

 Objectivity: not to compromise professional or business judgments
because of bias, conflict of interest or undue influence of others.

Professional competence and due care:

• To attain and maintain professional knowledge or skill at the level
required to ensure that a client or employing organization receives
competent professional service, based on current technical and
professional standards and relevant legislation.
• To act diligently and in accordance with applicable technical and
professional standards.
Confidentiality: to respect the confidentiality of information acquired as a
result of professional and business relationships.
Professional behaviour: to comply with relevant laws and regulations and
avoid any action that the professional accountant knows or should might
discredit the profession.

Lesson 2: Auditor of the company

a) Learning objectives
• Explain duties, obligations and rights of an auditor
• Describe the auditor’s liability
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, resourceful person and any
other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson, lesson 1 Students studied the meaning of international
standards, fundamental
principles on audit and ethical duties of auditors according to International
standards on auditing.
That will help to discuss about auditor’s duties, obligations and rights in
exercising the audit work learnt in this lesson.

Auditing | Teacher's guide | Senior Six | Experimental version 57

d) Learning activities

Activity 2.2
• Put students in small groups and give clear instructions about the
activity
• Ask them to read careful the case study in student book and answer the
question provided in the activity
• Guide students’ discussion and make sure that everyone is participating
• Invites students to share their findings
• Harmonize their findings or answers, and link the findings to the
learning objective, help them draw conclusions/summary on auditor’s
duties,obligations and rights. Answer or address any questions or
challenges about the activity. Guide them to make notes in referring in
their students’ book.

Answers to Learning activity 2.2

1. An auditor has the following responsibilities or duties:

• Make a report to shareholders or owners as external auditors.
• Make a report to the management as internal auditors.
• Assist in investigation.
• Make income statement.
• Provide clear report and clear evidence.
• Certify that whether loans are properly secured and not at terms
prejudicial to the interest of shareholders.

e) Application activity 2.2

Students can be given an activity to discuss about the questions in groups, give
clear instructions and ensure a balance in the groups. Students are to give a
report of their findings. Monitor the activity to ensure students are on track and
actively participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

58 Auditing | Teacher's guide | Senior Six | Experimental version

 Answers to application activity 2.2

1. The auditor can take the following ways/ steps in order to minimise the
dangers of any claims against him/her for negligence work:
• Gather conclusive evidence and supporting documents before
passing any entries and drawing an opinion.
• Review the risky audit areas before releasing the final audit report
to the shareholders.
• Withdraw his consent and give a public notice to this effect after
registration of prospectus but before allotment of shares.
• Use well trained and experienced staff during the audit who will
carry out their duties completely.
• He should obtain supporting evidence e.g. letters of representation
to prove his competences.
• Withdraw his consent in writing before such a prospectus has
been registered and before it is for public use.

Skills lab activity 2

Guidance on the skills lab activity:

In conducting this skills lab activity, you can arrange for students accompanied to
attend a presentation on the different cases that can lead the auditor to criminal
liabilities and civil liabilities, then visit the computer laboratory and search the
audit books in order to find useful cases. Besides, encourage student to visit
ICPAR website for further research.

i. Build
Given that students visit the ICPAR website,
• Remind students on the expected objective for the computer lab
attendance
• Help them to be grouped and remember to mix both boys and girls
• Let each team have the representative
• Ensure they have notebooks where to keep necessary notes from the
findings
• Distribute questions for their research
• Check their understanding of the assignment
• Remind them that everybody full participation is mandatory.

Auditing | Teacher's guide | Senior Six | Experimental version 59

ii. Practice
During research on internet, care about the following concerns:
• Guide students on accessing the real website
• Ensure that internet is connected for all
• Respond to any questions for clarification and support accordingly
For the internet research, a concept note is needed to describe what has been
covered during the class lesson and state what are students and teacher’s
expectations.

iii. Present
During the group presentation, the teacher must assess whether the student
participation in the skills lab activity was effective by:
• Selecting randomly anyone in all groups to present the report on behalf
of team members.
• Allow students to ask question to their fellows.
All team members being presenting are expected to contribute to the plenary
by answering some questions that the presenter is not covering as well as
expected.

iv. Conclusion
The teacher emphasizes on the objective of the research reminding students
that they were expected to discover and understand all the types of auditor’s
liabilities. After this discovery, students should be able to differentiate criminal
liabilities from civil liabilities to an auditor.

2.6. Summary of the unit

1. Meaning and structure of International Standards on Auditing

Meaning of international standards

International Standards on Auditing are professional standards for the
performance of financial audit of financial statements.

1.1. Structure of International Standards on Auditing

International standards are structured as follows:
• Introduction
• Objective
• Definition

60 Auditing | Teacher's guide | Senior Six | Experimental version

 • Requirements and
• Application and other explanatory material

1.2. Process of setting the standards

The following are the steps of setting the standards:
• Identification of new development
• Appointment of task force to draft a standard
• Consultation
• Consideration of comments by task force and making amendments
Five (5) fundamental principles of ethical duties of auditors are:
• Objectivity,
• Integrity,
• Professional competence and due care,
• confidentiality,
• Professional behaviour.

2. Duties, obligations and rights of an auditor

2.1. Duties of an auditor

• Make a report to shareholders or owners as external auditors
• Make a report to the management as internal auditors
• Assist in investigation
• Make income statement
• Provide clear report and clear evidence
• Certify that whether loans are properly secured and not at terms
prejudicial to the interest of shareholders
• Certify that whether transactions conducted by the company are not
prejudicial to the interest of shareholders
• Certify that whether securities have been sold at a price lower than cost

2.2. The auditor’s obligations are:

• To pass an approved set of professional examinations
• To become a member (and stay member) of a Recognised Supervisory
Body (RSB) e.g. ACCA
• Not to be a director or employee of the company, or of any associated
companies
• Not be an employee or business partner of a director or employee of
the company or of any associated companies.

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2.3. Rights of being an auditor are as follows:
• Access to all records they require (the books of the organisation at any
time)
• Receive information and explanations of all transactions
• Call for information and explanations from employees, managing agents,
company secretaries, etc.
• Attend and receive notice (within 21 days) about general meetings and
they have right to speak at general meetings on relevant matters
• Visit the company’s branches
• Take a legal and technical advice
• Remuneration
• Sign the audit report

3. Auditor’s liability
Difference between civil liability and criminal liability
Civil liability of Auditor for negligence: refers to the liability of auditor to pay
damages while
Criminal liability: refers to the responsibility for any illegal behaviour that causes
harm or damage to someone or something which means open to punishment
for a crime.

2.7. Additional information for teachers

Working procedures of the IAASB

A rigorous due process is followed by the IAASB to ensure that the views of
all those affected by its guidance are taken into account. The following diagram
summarises the process followed in the development of IAASB standards.
Research and consultation
A project task force is established to develop a draft standard or practice
statement

Transparent debate
A proposed standards is discussed at a meeting, open to the public

62 Auditing | Teacher's guide | Senior Six | Experimental version

Exposure for the public comments
Exposure drafts are put on the IAASB’s website and widely distributed for
comment for a minimum of 120 days.

Consideration of comments
Any comments as a result of the exposure draft are considered at an open
meeting of the IAASB, and it is revised as necessary.

Affirmative approval
Approval is made by the affirmative vote of at least 2/3 of IAASB members.

2.8. End unit assessment

Answers to end unit assessment

1. The components of International Standards on Auditing are the

following :
Introduction: includes the purpose, scope and subject matter of the
ISA plus the responsibility of the auditor.
Objective: consists of a clear statement of the ISA’s objective in
relation to the audit area that the ISA addresses.
Definitions: of applicable terms used in the text.
Requirements: clearly stated as ‘the auditor shall…’
Application and other explanatory material: more precise
explanations of what requirements mean or are meant to cover.
2. International Standards on Quality Control and International Auditing
Practice Statements are not engagement standards issued by the
IAASB. The others are all classed as engagement standards.
3. An auditor may be held liable to third party for negligence work in the
following circumstances:
• Where the auditor has been proved negligence and any third party
has suffered a financial loss due to negligence of the auditor.

Auditing | Teacher's guide | Senior Six | Experimental version 63

 • Where the auditor did not attach a disclaim to this report to the
effect that the report was not intended to be relied upon by third
parties.
• Where the auditor was made fully aware that third parties were
going to rely on his/her report.
• Where the third parties can prove that no other external factors
influenced their decision making except the auditor’s report
• Where the auditor owed a duty of care to the third parties.
• Where the auditor gives reference regarding his/her client’s
creditworthiness.
4. In order to hold the auditor criminally liable, the following cases must
be proved:
• That the statement made was false in material facts.
• That the auditor wilfully made such a false statement, and
• That the statement complained of has been made in any return
report, balance sheet, certificate or any other document required to
be made under any provision of the Companies Act.

2.9. Additional activities (Questions and answers)

2.9.1. Remedial activities
1. Write in full words the following abbreviations:
a) IAASB: International Auditing and Assurance or guarantee Standards
Board
b) IAS: International Audit Standards
c) RQB: Recognised Qualifying Body
2. Write down three (3) duties and rights of an auditor.

An auditor has to:

• Make a report to shareholders or owners as external auditors
• Make a report to the management as internal auditors
• Assist in investigation
The auditor’s rights are:
• Access to all records they require (the books of the organisation at any
time)
• Receive information and explanations of all transactions
• Call for information and explanations from employees, managing agents,
company secretaries, etc.

64 Auditing | Teacher's guide | Senior Six | Experimental version

 2.9.2. Consolidation activities
1. Write down the sources of legal liability for an auditor.

Sources of legal liability for an auditor are the following:

• The Legal Liability of Auditors to Third parties
• Unjustified/unfair Lawsuits
• Successful Lawsuits Against Auditors
2. When an auditor can be held liable for negligence of his/her duty?

An auditor can be held liable for negligence of his/her duty if it is proved that:
• Negligence in the performance of his/her duty
• A loss or damage as a result of his/her negligence
• The loss was suffered by his/her client.

2.9.3. Extended activities

a) Extended activities (Questions and answers)

Question
1. Consider whether providing the following additional services to audit, clients
may compromise your independence as an auditor. If they do, consider how
the risk to your independence could be safeguarded.
a. Taxation, preparing a client’s corporation tax computation and negotiating
with the tax authorities
b. Preparing a client’s annual financial statements
c. Attending meetings of a client’s board of directors

Answer
a. Preparing a taxation computation is unlikely to impair auditor independence,
since a company’s tax liability would generally be reviewed as part of the
audit. Routine negotiations with the taxation authorities should not normally
impair independence.
There may however be a problem if a significant tax liability is under dispute,
since the auditor may believe the accounts should disclose details of the
dispute, but the directors may disagree.
In these circumstances, the auditor may find it impossible to act as both
auditor and tax adviser.

Auditing | Teacher's guide | Senior Six | Experimental version 65

 b. The major risk with the auditor preparing the financial statements is that the
auditor may not be objective when he/she reviews the financial statements. In
addition, the audit files may not demonstrate sufficiently how the accounting
work has been used as a source of audit assurance. If the client is a public
interest entity (PIE), the provision of this service would not be allowed the audit
firm can counter the risk to independence by having different staff members
prepare the financial statements and audit them. Alternatively, the audit work
should be reviewed by someone unconnected with the preparation of the
financial statements. Audit firms’ internal guidance can also help, by clearly
demonstrating how much audit assurance can be gained from accounting
work, and what extra work will be required to give sufficient audit assurance.
c. Attendance at meetings of the board of directors imposes a clear threat to
auditor’s independence as the auditor may become involved in management
decisions on which he/she subsequently has to report. Legislation often also
regards as a director anyone who carries out the functions of a director; an
auditor would be exposed to this provision if he/she regularly attended board
meetings and hence would be ineligible under legislation to act as auditor.
The best way to preserve auditor’s independence would be for an auditor only
to attend the board meetings at which the annual accounts are discussed.

INTRODUCTION
TO ACCOUNTING

66 Auditing | Teacher's guide | Senior Six | Experimental version

 UNIT 3 AUDITOR’S APPOINTMENT

3.1. Key unit competence

To be able to describe the procedures for auditor’s appointment.

3.2. Prerequisite (knowledge, skills, attitudes and values)

In Unit2, you have analysed duties, obligations and rights of an auditor under the
legal and professional requirements. This prior knowledge, skills or competences
should help the students to understand duties, obligations and rights of an
auditor as well as the contribution of audit profession to business activities
in their locality and be able to realize their contributions as students towards
INTRODUCTION
business activities.

3.3. Cross-cutting issues to be addressed:

TO ACCOUNTING
Note: The examples below are just to guide you on how to address crosscutting
issues throughout the unit but this does not mean that these are the only ones.
You can address and give students opportunities to discuss all the crosscutting
issues where possible taking consideration of their environment or community
around them.
Genocide studies: genocide studies provide young people with an
understanding of the circumstances leading to the genocide and the remarkable
story of recovery and re-establishing national unity. Genocide studies help
students to comprehend the role of every individual in ensuring nothing of the
sort ever happens again.
Gender education: emphasis throughout this unit has to be put on how both
males and females have same rights and obligations to do business activities
which can generate an income in their local community. So as to promote better
standard of living of business activities and their community in the creation of
business based employment opportunities and the country complying with
appropriate and required audit standards leading to business progress and
socioeconomic development.

Auditing | Teacher's guide | Senior Six | Experimental version 67

Environment and sustainability: the greatest source of business practices
is the environment and the society. Auditing in business or any other business
concept related to business activities cannot be applied without the environment.
Therefore, great care has to be taken for environment and society. Therefore, it
is important to elaborate measures to protect the environment so that it can be
safe from harm.
Inclusive education: in addition to all having equal opportunities to become
businesses, attention will be made on how we all regardless of our background
have right to generate ideas that do not discriminate as our needs are the same.
Students need to understand that business law should not discriminate but
promote inclusiveness of all. Throughout the business activities, students should
be able to evaluate the contribution of auditing in socio-economic development
of the community.
Peace and Values: you need to emphasize on students need to live in peace
and harmony with others. Students need to identify potential contributions of all
aspects towards the promotion of peace and value in the society. Students also
need to develop positive attitudes towards the society, customers, shareholders,
environment, business and government, among others in order to contribute to
the socio-economic development. They need also to know that the security is
important for people to live in high standard of living.
Standardization culture: you need to emphasize to students, the need for
standards even in business activities to ensure that these activities bring in
enough income to the economy and to maintain order in business environment.
Financial education: teacher and students should know that resources and
materials used in teaching and learning activities must not be mismanaged.
This issue will also be addressed when studying practice related to business
activities. Students will learn what is permitted and what is prohibited to manage
learning resources and materials well. They will put in mind that misusing
materials is wasting money.

3.4. Guidance on introductory activity

NOTE: The students won’t be able to answer all the questions at this stage;
they can answer one question. The most important thing is that you want to
challenge students to be expectant and to use their previous knowledge and
background to self-discover during teaching and learning of this unit.
Explain the purpose of the introductory activity of the lesson. This activity is
intended to provide interest and motivation for students to be able to identify
laws related to business activities as opportunity of fighting against illegal
business activities in the community.

68 Auditing | Teacher's guide | Senior Six | Experimental version

The introductory activity will also evoke students’ interests about what to expect
in this unit as they answer the questions that follow in the activity. Students can
build on previous knowledge, skills, values and attitudes to help you assess the
student’s prior knowledge and help link with the new content.
Use an appropriate method such as small groups or pairs and provide students
with Unit 3 introductory activity, give clear instructions to the activity.
They read the case study and discuss what activities may have carried out. They
read a scenario about business in Rwanda and discuss about a professional
name of a person who examines financial statements and other financial
documents on behalf of shareholders, appropriate procedures for appointing an
auditor and things to consider by the auditor before accepting the assignment
of auditing.
During grouping or pairing, mix boys and girls and students with different abilities.
During the discussion, make sure everyone is following and actively participating.
Those who are not acting may have to listen attentively without disturbing and
should applaud/congratulate the actors after.
Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair share or large group
discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Harmonize their findings or answers, and help them draw conclusions/summary
to questions. Answer or address any questions or challenges about the activity.
Guide them to make notes in their books referring to students’ book.
Students present their findings, results, answers through presentations on the
introductory activity.
Appreciate the teams’ presentations and remind them that this activity was not
meant to come to the very right answers but to help them become aware of
what to expect in the unit.
You can support students’ answers by referring to possible answers to the
introductory activity below:

Auditing | Teacher's guide | Senior Six | Experimental version 69

 Answers to introductory activity

1. Auditor
2. Procedures for auditor’s appointment
• Advertising
• Tender
• Practical issues
• submitting an audit proposal
• Use of logos
• Fees
• Evaluating the tender
3. Before accepting the assignment, the auditor should consider the
following:
• Make sure there are no ethical issues which would prevent you from
accepting this assignment.
• Make sure that you are professionally qualified to carry out the work
requested and that your firm has the resources available in terms of
staff, expertise and time.
• Check out references for the directors of the client firm especially if
they are unknown to the audit firm.
• Consult previous auditors as a matter of professional courtesy and
establish from them whether there is anything that you ought to know
about this vacancy.

3.5. List of lessons/sub-heading

Heading Lesson title/sub-heading Learning objectives Number of periods
3.1. Auditor’s Introductory activity Arouse the curiosity 1
appointment of students on the
procedures content of unit 3
1 Appointment of an Explain appointment 2
auditor procedures of an
auditor
2 Acceptance Explain the acceptance 2
procedures procedures
3 Agreeing the terms of Identify the terms of 1
engagement engagement
End Unit Assessment 1
Total number of periods 7

70 Auditing | Teacher's guide | Senior Six | Experimental version

Lesson 1: Auditor’s appointment procedures
a) Learning objectives
Describe auditor’s appointment procedures
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Desks, chalkboard,
chalk, papers, internet, computer, students’ books, internet, case studies and
any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction
In Unit 2 you have analysed duties, obligations and rights of an auditor under the
legal and professional requirements. This prior knowledge, skills or competences
should help the students to understand auditor’s appointment procedures as
well as the contribution of audit profession to business activities in their locality
and be able to realize their contribution as students towards business activities.
d) Learning activities
• Invite students to read individually the question in the student’s book
and work in pairs to share with the classmates.
• Have some pairs and make the presentations
• Provide constructive feedback in terms of supplements

Answers to Learning activity 3.1

1. The ICPAR code of ethics lays out the fundamental principles of ethics as
follows:
• Integrity: a member should be straightforward and honest in all
professional and business relationships.
• Objectivity: a member should not allow bias, conflict of interest
or undue influence of others to override professional or business
judgements.
• Professional competence and due care: a member has a continuing
duty to maintain professional knowledge and skills at the level required
to ensure that a client or employer receives competent professional
service.
• Confidentiality: a member should respect the confidentiality of
information acquired as a result of professional and business
relationships and should not disclose any such information to third
parties without proper and specific authority unless there is a legal or
professional right or duty to disclose. Any information acquired should
not be used for the personal advantage of the member or third parties.

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 • Professional behaviour: a member should comply with relevant
laws and regulations and should avoid any action that discredits the
profession.
2. Rights of an auditor
• Right to access to the books of accounts of the organization at all times.
• Right to call for information and explanations.
• Right to receive a notice of 21 days to attend the Annual General
Meeting .
• Right to make a statement at the Annual General Meeting.
• Right to be indemnified.
• Right to visit the company’s branches.
• Rights to take legal and technical advice.
• Right to Remuneration.
• Right to sign the audit report.
• Right to receive notices of meetings.
During his/her removal, he/she has the following rights:
• Right to speak at the every meeting discussing his/her removal.
• Right to send his/her representations to the company this will then be
circulated to all shareholders.
• Right to receive notice of the Annual General Meeting that will discuss
the auditor’s removal (28 days’ notice)
• Right to read the representations in the annual general meeting in the
case they were not sent in a reasonable time to shareholders.
• His/her is removal is reserved to shareholders. Thus he/she has the
right to withstand other forms of removals.
3. Auditor’s liabilities
• The client to whom he/she owes the primary duty of care.
• Third parties who have not privacy of contract but have relied on his/her
opinion to arrive at a decision.
In general, the auditor’s liability may arise due to:
• His/her failure to detect fraud
• His/her failure to detect errors in the accounts
• Carelessness or dishonesty
The liability of an auditor may arise in the following capacities:
• In his/her capacity as an auditor in private audits.
• In his/her capacity as an auditor as a statutory audit

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e) Application activities 3.1:
Invite students to read the application activities in student’s book and answer
them.

Answers to Application Activity 3.1

1. Matters to be considered:
• Identity and business reputation of owners, key management and
those charged with governance.
• Nature of the client’s operations and its business practices.
• Attitude of the owners, key management and those charged with
governance towards matters such as aggressive interpretation of
accounting standards and the internal control environment.
• Client’s attitude to fees.
• Indications of inappropriate limitation in the scope of work.
• Indications that client may be involved in money laundering or other
criminal activities.
• Reasons given for non-reappointment of previous auditors.

Skills lab activity 3

Through the search in audit books from the library, make a summary to be
presented in the class on the procedures of recruiting an auditor in order to
make sure that you have understood the whole process.
Guidance on the skills lab activity.
In conducting this skills lab activity, you can either accompany the students to
the library to make a search on the auditor’s recruitment. Facilitate them to make
presentation of findings in the class.

i. Build
Given that students make search about auditor’s recruitment
• Remind students on the expected objective for recruiting an auditor
• Help them to be grouped and remember to mix both boys and girls
• Let each team have the representative
• Ensure they have where to keep necessary notes from the findings
• Distribute questions for their research

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ii. Practice
• Guide students on accessing the real materials
• Ensure that books in the library are available for all
• Respond to any questions for clarification and support accordingly

iii. Present
• Choose randomly any two teams to present their findings
• Allow students to ask question to their fellows

iv. Conclusion
The teacher emphasizes on the objective of the research reminding students
that they have to follow those identified procedures to recruit an auditor.
The following are key areas for reference:
Requirements for appointing an auditor:
How to appoint an auditor?

3.6. Summary of the unit

3. Auditor’s appointment procedures

3.1. Appointment of an auditor

Procedures for appointing an auditor

A. Advertising
B. Tendering
C. Acceptance

3.2. Acceptance procedures

Conditions before accepting the assignment

• Make sure there are no ethical issues which would prevent you from
accepting this assignment.
• Make sure that you are professionally qualified to carry out the work
requested and that your firm has the resources available in terms of
staff, expertise and time.
• Check out references for the directors of the client firm especially if
they are unknown to the audit firm.

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 • Consult previous auditors as a matter of professional courtesy and
establish from them whether there is anything that you ought to know
about this vacancy.

Conditions after accepting the assignment

• Make sure the resignation of the previous auditors has been properly
carried out and that the new appointment is valid. A resolution by
shareholders of the company is required.
• Submit a letter of engagement to the directors of the client company and
ensure it is accepted and signed before any audit work is carried out.

Integrity of the client

Competence of the audit firm

3.3. Agreeing the terms of engagement

ISA 210: terms of audit engagements

Other points to be included:

• Arrangements regarding the planning and performance of the audit.
• The expectation of receiving from management written confirmation
regarding
• Representations made in connection with the audit.
• Request for the client to confirm in writing the terms of the letter.
• The fee to be charged and the credit terms.
• The form of any reports or other communication of results of the
engagement.
• On recurring audits, the auditor should consider whether circumstances
require the terms of the engagement to be revised and whether there
is a need to remind the client of the existing terms of the engagement.
• An auditor who, before the completion of the engagement, is requested
to change the engagement to one which provides a lower level of
assurance, should consider the appropriateness of doing so. Where
the terms are changed, both parties should agree on the new terms.

Books and documents

ISQC1 states that the firm should establish policies and procedures for the
retention of engagement documentation for a period sufficient to meet the
needs of the firm or as required by law or regulation.

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Unless otherwise specified by law or regulation, engagement documentation is
the property of the audit firm. The firm may, at its discretion, make portions of,
or extracts from, engagement documentation available to clients, provided such
disclosure does not undermine the validity of the work performed, or, in the case
of assurance engagements, the independence of the firm or its personnel.
Audit working papers belong to the auditor and cannot be taken over by another
set of auditors taking over the audit assignment. In practice, the previous auditors
provide the new auditors with enough carry over information such as the lead
schedules behind the makeup of the financial statements.

There are strict conditions when this can be enforced:

• The books and documents must actually belong to the client
• The auditor must have got them by proper means
• The actual work must have been done and a fee note raised and given
to the client
• The fee must relate to the held documents. Financial statements and tax
compliance work belong to the client, even if the auditor/ accountant
has prepared them.
Change in auditors
Companies do actually change their auditors. It is important that auditors
understand why a company may seek to change their auditor in a bid to prevent
this from happening to them.

Audit firm may not seek re-election

Problems related to the size of the company

• The company may be growing at such a rate that the audit firm no
longer has the necessary resources, staff, time, and expertise, to allow
it to retain the audit.
• It is important to apply the principle of professional competence and
due care.
• Alternatively, the company may be constricting and it now finds that it
can avail of the
• Audit exemption specified under relevant jurisdiction regulations.
• There is very little that the auditor can do in each of these cases.
• With small companies, the audit is almost a personal service.
• As part of the safeguards against the threats to independence, audit
rotation was put forward. This is where the audit moves to another firm
although in the previous point, rotating to another engagement partner
within the same firm will mean the same thing.

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3.4. Additional information for the teacher

Other factors relating to the tender

Practical issues
It is important that the auditor also considers a number of other issues: • Can
the audit assignment be fitted in to the audit firm current work plan?
• Is there suitable audit staff available?
• Will any specialist skills be required?
• What are the future plans for the company?
• Is there any training required for current staff and what will be the cost
of that training?
• What work does the client actually want? Audit and/or tax.
• Is this the first time the company has been audited.
• Whether the client is seeking to change its auditors and if so what is
the reason behind it.

Submitting an audit proposal

There is no set format. In fact, the client may dictate the format whether it be
a written submission or a presentation to the board of directors. Whatever the
form of the tender submission, the following matters should be included in the
proposal:
• The audit fee and the basis for its calculation
• An assessment of the needs of the client
• How the firm means to meet the needs of the client
• Any assumptions made to support the proposal
• The audit approach to be adopted by the firm
• A brief outline of the firm • Details and background of the key audit staff
on the proposed engagement.

Evaluating the tender

Different clients will have different ways of evaluating a tender. Some of the
more general points are listed below. It is important to bear these in mind when
preparing a proposal:
• Fee. This can be the most vital point. Some clients go straight to this
figure and don’t even bother with the rest of the document.
• Professionalism. Auditors are expected to be professional. Remember,
the audit team and the tender documents are often the first factors on
which a prospective client forms an impression.

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 • Proposed audit approach. Clients are always looking for the least
amount of disruption to their already busy schedules, so the shortest
number of days on-site may be the key to winning a tender.
• Personal service. Fostering relationships is vital. Client should always
feel he is getting value for money.

3.7. End unit assessment

Answers to end unit assessment activities

1. Auditor’s appointment procedures are the following:

• Advertising
• Tender
• Practical issues
• submitting an audit proposal
• Use of logos
• Fees
• Evaluating the tender
2. The main terms of engagement as per ISA 210 are the following:
• Agreeing the terms of an engagement with the client and;
• The auditor’s response to a request by a client to change those terms
to one that provides a lower level of assurance.
3. The conditions for setting the remuneration of the auditor are the following:
• If appointed by directors, they will fix his fees and expenses.
• If appointed by the Registrar, he fixes his remuneration in liaison with
Directors.
• If appointed by shareholders, the same fix his fees or can delegate the
powers to the Directors.
• A retiring auditor who is automatically re-appointed at the AGM,
unless a resolution is passes re-fixing his fees is entitled the same
remuneration as in the previous periods.
• If the auditor is required to do any other work other than his normal
work, e.g. to prepare tax return, he is entitled to extra remuneration for
that.
• If an auditor is removed in the way prejudicial to his interest, e.g.
unlawfully, he is entitled to a full year fees.
• Any sum paid in respect of expenses to the auditor is part of his
remuneration and should be reflected in the P&L Account

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4. Conditions for accepting the audit assignments are the following:
a. Conditions before accepting the assignment
• Make sure there are no ethical issues which would prevent you from
accepting this assignment.
• Make sure that you are professionally qualified to carry out the work
requested and that your firm has the resources available in terms of
staff, expertise and time.
• Check out references for the directors of the client firm especially if
they are unknown to the audit firm.
Consult previous auditors as a matter of professional courtesy and establish
from them whether there is anything that you ought to know about this
vacancy
b. Conditions after accepting the assignment
• Make sure the resignation of the previous auditors has been properly
carried out and that the new appointment is valid. A resolution by
shareholders of the company is required.
• Submit a letter of engagement to the directors of the client company
and ensure it is accepted and signed before any audit work is carried
out.
ISQC1 states that a firm should establish policies and procedures for
the acceptance and continuance of client relationships and specific
engagements, designed to provide it with reasonable assurance that it will
only undertake or continue relationships and engagements where it:
• Has considered the integrity of the client and does not have any
information that would lead it to conclude that the client lacks integrity,
• Is competent to perform the engagement and has the capabilities,
time and resources to do so and
• Can comply with the ethical requirements.
5. The following conditions of engagement client must respect:
• Confirmation of the auditor’s acceptance of the appointment.
• The auditor is responsible for reporting on the accounts to the
shareholders
• The directors of the company have a statutory duty to maintain the
books of the company and are responsible for the preparation of the
financial statements.
• The directors are responsible for the prevention and detection of
fraud.

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 • The fact that because of the test nature and other inherent limitations of
an audit, there is the unavoidable risk that some material misstatements
may remain undiscovered.
• The scope of the audit including reference to appropriate legislation
and standards.
• There should be unrestricted access to whatever books and records
the auditor needs in the performance of his duties.
6. The main points to be clarified in the letter of engagement would include:
• Confirmation of the auditor’s acceptance of the appointment.
• The auditor is responsible for reporting on the accounts to the
shareholders
• The directors of the company have a statutory duty to maintain the
books of the company and are responsible for the preparation of the
financial statements.
• The directors are responsible for the prevention and detection of
fraud.
• The fact that because of the test nature and other inherent limitations of
an audit, there is the unavoidable risk that some material misstatements
may remain undiscovered.
• The scope of the audit including reference to appropriate legislation
and standards.
• There should be unrestricted access to whatever books and records
the auditor needs in the performance of his duties.

3.7. 1. Consolidation activities (Questions and answers)

Questions:
1. Describe the process of appointing an auditor
2. Answers:

A. Advertising
Auditors are like anyone else in business and in business it is necessary to
advertise. But this advertising should be aimed at informing the public in an
objective manner and should be in good taste.

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B. Tendering
Client companies can change auditors. In this regard a firm may be approached
to submit a tender for an audit. When approached to tender, an audit firm must
consider whether they want to do the work and they must have regard for the
ethical considerations, such as independence and professional competence. In
addition, they need to consider fees and some other practical issues.

C. Acceptance
You have submitted a tender. You have been successful and the client has
offered you the audit. Before you accept and commence the audit you should
carry out a number of procedures in order to comply with the provisions in
ISQC1 quality control.
Question 2: Describe the conditions required on behalf of the auditor before
accepting assignments.
Answer: Before he accepts assignments the auditor should be sure about the
following:
• Make sure there are no ethical issues which would prevent you from
accepting this assignment.
• Make sure that you are professionally qualified to carry out the work
requested and that your firm has the resources available in terms of
staff, expertise and time.
• Check out references for the directors of the client firm especially if
they are unknown to the audit firm.
• Consult previous auditors as a matter of professional courtesy and
establish from them whether there is anything that you ought to know
about this vacancy.

3.7.2. Extended activities (Questions and answers)

Question:
1. Describe the competence matters related to the audit firm.

Answer:
1. Matters to be considered:
• Has the firm got sufficient knowledge of the relevant industry and the
relevant regulatory environment?
• Are there sufficient personnel within the firm having the necessary
capabilities and competence and are experts/specialists available
when needed?

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 • Are competent individuals available to perform engagement quality
control reviews?
• Will the firm be able to complete the engagement within the reporting
deadline?
• Where a potential conflict of interest is identified, the firm should
consider whether it is appropriate to accept the engagement.
• Need to consider any significant matters that may have arisen during
the current or previous engagements of whatever description.
• ISQC1 goes on to state that where the firm obtains information that
would have caused it to decline an engagement if that information had
been available earlier, policies and procedures (on the continuance
of the engagement and the client relationship) should include
consideration of: The professional and legal responsibilities that apply
to the circumstances, including whether there is a requirement for the
firm to report to the person or persons who made the appointment or, in
some cases, to regulatory authorities, and can comply with the ethical
requirement.
• The possibility of withdrawing from the engagement or from both the
engagement and the client relationship.

3.8. Additional activities (Questions and answers)

3.8.1. Remedial questions (Questions and answers)
Question1: Among the appointment procedures mention two of them.
Answer1: Advertising, Tendering, Acceptance
Question2: What do you understand by the term acceptance in the process of
audit appointment?
Answer2: You have submitted a tender. You have been successful and the
client has offered you the audit. Before you accept and commence the audit you
should carry out a number of procedures in order to comply with the provisions
in ISQC1 quality control.
Question 3: Elements to be clarified in the letter of engagement.
Answer3: Elements to include in the engagement letter are:
• Confirmation of the auditor’s acceptance of the appointment.
• The auditor is responsible for reporting on the accounts to the
shareholders.

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 • The directors of the company have a statutory duty to maintain the
books of the company and are responsible for the preparation of the
financial statements.
• The directors are responsible for the prevention and detection of
fraud.
• The fact that because of the test nature and other inherent limitations
of an audit, there is the unavoidable risk that some material
misstatements may remain undiscovered.
• The scope of the audit including reference to appropriate legislation
and standards.
• There should be unrestricted access to whatever books and records
the auditor needs in the performance of his duties.

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 UNIT 4 AUDITORS
REQUIREMENTS

4.1. Key unit competence

To be able to describe the auditor’s requirements

4.2. Prerequisite (knowledge, skills, attitudes and values)

Learners were introduced in unit 2 the legal and professional requirements of an
auditor on his second lesson, and in unit 5 the legal responsibilities and duties
of an auditor on his lesson one in which they have learnt legal responsibilities,
duties, obligation and rights of an auditor. So, with this prior knowledge, skills,
attitudes and values it should help them to appreciate the auditor requirement.
INTRODUCTION
4.3. Cross-cutting issues to be addressed:

TO ACCOUNTING
Note: The examples below are just to guide you on how to address cross-
cutting issues throughout the unit but this does not mean that these are the
only ones. You can address and give students opportunities to discuss all the
cross-cutting issues where possible taking consideration of their environment
or community around them.
Environment and sustainability: Environment is one of the greatest factors
that can affect both positively or negatively any business activity and one
cannot start up a business without the environment. Therefore, great care
for environment is crucial. Students are to be advised on the importance of
environmental protection and the importance of audit procedures in reducing
errors and frauds while promoting other environmentally friendly businesses e.g.
use of renewable energies (solar energy).
Gender education: Emphasis throughout this unit has to be put on how both
males and females have the equal opportunities to understand and explain the
process of auditing procedures. So that this will encourage student to take the
first step in understanding the requirements of an auditor.

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Inclusive education: all students need to realize that universal laws do not
discriminate as they do apply to all regardless of social, economic, political,
physical background. Emphasis should be put on how we all have the same
rights. During auditor requirement unit, student may discuss and appreciate
need to qualification, disqualification, rights, and duties of an auditor during the
audit work.
Peace and Values: right before the lesson begins; there are quite a lot of
opportunities for the teacher to promote peace and values. Being punctual
for activities (time management), involvement in various activities (team work),
keeping their school environment clean (responsibility), greeting one another
are among such opportunities (empathy).
Standardization culture: in every lesson take an opportunity to share with
learners that standards should be respected since they are part and parcel of
our lives. From school uniform, to class size, to lesson duration, language of
instruction, among others. So always, create opportunities to discuss about the
standards with learners during their everyday and audit activities.

4.4. Guidance on introductory activity

INTRODUCTION
NOTE: Follow the guidance about the introductory activity:

TO ACCOUNTING
Students in small groups, pairs or individual observe and analyse the image and
identify the major qualifications, disqualification, rights, and duties of an auditor.
During the activity, make sure everyone is following and actively participating.
Those who are not acting may have to listen attentively without disturbing and
should applaud the actors after.
Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair-share or large group
discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Appreciate the team’s presentations and remind them that this activity was not
meant come to the very right answers but to help them become aware of what
to expect in the unit. Answers to the activity will be got as the unit progresses.
Guide them to take notes in their books referring to learners’ book.
You can support student’s answers by referring to possible answers to the
introductory activity below:

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 Possible answers for introductory activity

Note: These responses may be shared or not with the students. They are
specifically to guide you while harmonizing students’ responses during
presentation.
1. Auditors must have certain rights to enable them to carry out their
duties effectively.
2. He/she can be removed
3. They are called qualifications of an auditor.
4. They are called disqualifications of an auditor.

4.5. List of lessons/sub-heading

Lesson title/ Learning Number of
Heading
sub-heading objectives periods
4.1 Qualification and Introductory activity Arouse the 1
disqualification of curiosity of
an auditor students on the
content of unit 4
1 Qualification of Explain the 1
an auditor qualification of an
auditor
Disqualification Explain the reasons 1
of an auditor for disqualifition of
2
an auditor.
4.2 Rights and Rights and Identify the rights 4
removal of an duties of an and duties of an
1
auditor auditor auditor.
Resignation and Explain the 3
removal of an procedures of
2
auditor resignation and
removal of an
auditor
End Unit Assessment 1
Total number of periods 11

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Lesson 1: Qualifications and disqualifications of an auditor
a) Learning objective
Describe the auditor’s qualification and disqualification
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
teacher guide, internet, computer, projector, text books, chalk or marker pen,
resourceful person and any other trustworthy and reliable resources to enhance
learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
Read the Key unit competence in the syllabus to determine what students will
know and be able to do by the end of the unit. Look at the action verb, concept
and context of learning objective. This will help you see the skills, knowledge
attitudes embedded in the learning objective. Remember the learning objective
link to the key unit competence.
d) Learning activities
Activity 4.1
Exploit and use appropriate learning methods that can foster collaborative
learning for (example small groups or pairs, gallery walk). Provide students with
the activity in the student’s book, and give instructions to the activity to be done.
During grouping or pairing, ensure a balance between boys and girls and learners’
different abilities. During this activity ensure that students have understood the
instructions, prompt and probe them through question and answer approach to
make sure they are active and their curiosity in learning and discovery is aroused.
Encourage students to work together, value each other’s contributions, share
ideas, etc.
Students present their findings, results, answers through an appropriate method
such as pair-share, small group presentations on the introductory activity.
Encourage different students from the groups to share the group’s work to avoid
just a few students dominating. Also encourage other students to listen and not
disturb when other teams are sharing unless it is a question. Encourage students
to appreciate each other’s work especially the presentation. Appreciate the
team’s presentations and remind them that this activity was not meant to come
to the very right answers but to help them become aware of what to expect in
the lesson. Answers to the activity will be got as the lesson progresses. You
can support students’ answers by referring to possible answers to the activity
below:

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 Answers to Learning Activity 4.1

1. They are discussing about candidates who applied to be auditors.

2. No, because being a wife of the manager is one of auditor’s
disqualification.
3. If the manager’s wife is selected as an auditor, she can’t work
independently, she may issue an appropriate audit opinion.
4. Yes.

e) Application activities 4.1

Students analyse and discuss about the scenario either in groups or in pairs
and come up with possible answers. This activity may be given as a research
question or homework.
Depending on the purpose of the application activity, choose an appropriate
method to assess student’s findings, answers or responses. Depending on the
performance or results, you may decide to give remedial or extension activities.

Answers to application activity 4.1

This refers to the question of who cannot be an auditor. The nephew

(TOTO) is a relative of the manager of KBC Ltd, and this can’t allow him to
work independently. The prescription about the disqualification says that
“The spouse or any other relative of a director of the company are
disqualified to be auditors of the company”.

Lesson 2: Rights and removal of an auditor

a) Learning objective
Describe the rights of an auditor, and the process of his removal
b) Teaching resource basic materials for a class/ lesson to be
conducted:
Students books, teacher guide internet, computer, projector, chalk or marker
pen, case studies, text books, resourceful person and any other trustworthy and
reliable resources to enhance learning.

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c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson, lesson 1 Students studied for meaning of taxation , tax and
duty
That will help to discuss current legislation and tax period relating to taxation
in Rwanda
Leant in this lesson.
d) Learning activities

Activity 4.2
• Put students in small groups and give clear instruction about the activity.
• Ask them to observe the pictures in student book and answer the
questions provided in the activity.
• Guide students’ discussion and make sure that everyone is participating
• Invites students to share their findings.
• Harmonize their findings or answers, and link the findings to the learning
objective, help them draw conclusions/summary on when to discuss
rights, duties, resign and removal of an auditor according to the company
act. Answers or address any questions or challenges about the activity.
Guide them to make notes in referring in their students’ book.

Answer to Learning Activity 4.2

1. Yes, because his/her rights bind him/her to his duties.

2. The auditor can declare the lack of independence to the person who
appointed him/her, and the companies act make it an offense for a
company’s officer knowingly or reckless to make a statement in any
form to an auditor which:
• Conveys or purports to convey any information or explanation
required by the auditor, and
• Is misleading, false or deceptive in a material particular.
3. He can be removed.

e) Application activities 4.2

This activity can be given as a normal individual activity, where students can
answer questions by write the letter corresponding to the right answer only.
Monitor the activity to ensure students are not collaborating.

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Students share their findings to the teacher. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to Application Activity 4.2

1. A
2. D
3. D
4. C

Skills lab activity 4

Guidance on the skills lab activity.

To do this skills lab activity, students can either visit library or request students
to make a research on the internet where need be.

i. Build
Given that students visit the required website,
• Remind students on the expected objective for the computer lab
attendance
• Help them to be grouped and remember to mix both boys and girls
• Let each team have the representative
• Ensure they have where to keep necessary notes from the findings
• Distribute questions for their research

ii. Practice
Guide students on accessing the real website
Ensure that internet is connected for all
Respond to any questions for clarification and support accordingly

iii. Present
Choose randomly any two teams to present their findings
Allow students to ask question to their fellows

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iv. Conclusion
The teacher emphasizes on the objective of the research reminding students
that they have to follow those rights auditor has.
The following are key areas for reference:
Rights of auditor

4.6. Summary of the unit

Qualification and disqualification of an auditor
• Qualification of an auditor
• Disqualification of an auditor

Rights, duties and removal of an auditor

Rights, and duties of an auditor

Right to sign the Auditor Report
Right to Remuneration
Rights to take legal and technical advice
Right to visit the company’s branches
Right to be indemnified
Rights to make a statement at the Annual General Meeting
Right to receive a notice of 21 days to attend the Annual General Meeting
Rights to call for information and explanation
Rights of access to the books of accounts of the organization at all times

Duties of an auditor
Duties to make a report
Duty to state the following in the report:
Duty to call for information as to:
Duty to assist in investigations
To certify statutory report
Duty to certify profit and loss Account in prospectus

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Duty to certify profit and loss account when Managing Agents resign

Resignation and removal of an auditor

Steps of auditors’ resignation

Resignation procedures
Notice of resignation
Statement of circumstances
Convening of general meeting
Statement prior to general meeting
Other rights of auditor during resignation

Steps of auditors’removal
Notice of removal
Representations
Notification of regulatory authority
Deposit of statement of circumsatnces
Auditors rifgts during removal

4.7. Additional information for the teachers

Beyond the basic education requirement, all auditors are expected to exhibit a
positive professional behaviour, demonstrate good communication skills and
possess the ability to work well with people.
The auditor’s office is exempt from the state’s merit system administered by
the department of administrative services. Therefore, it is not necessary for
candidates to complete the certification process that is required for state offices
under the merit system.

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4.8. End unit assessment
Answers to end unit assessment activities

1. The auditor is entitled to access, at all times to the books of accounts

including all statutory records such as minute books, fixed assets
register, etc.
2. The auditor has the following rights under the company’s Act:

Right to access to the books of accounts of the organization at all times

Right to request necessary information
Right to receive a notice of 21 days to attend the Annual General
Meeting
Right to make a statement at the Annual General Meeting
Right to be indemnified
Right to Remuneration
Right to sign the Auditor Report
Right to written resolutions
Right to be heard at any general meeting

4.9. Additional activities (Questions and answers)

4.9.1. Remedial activities (Questions and answers)
1. Who among the following can be appointed as an auditor of a company:

A. A partner or a director of the company

B. A person of unsound mind
C. Mr GAGA who owe a large amount of money to the company
D. Mr Z the holder of C.A certificate
E. All of the above

Answer: D

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2. The retiring auditor does not have right to:
A. Make written representations
B. Get his representation circulated
C. Be heard at the meeting
D. Speak as a member of the company
E. No one of the above
Answer: D
3. Which of the following statement is not correct regarding removal of
first auditor before expiry of the term?
A. He is removed at a general meeting
B. The shareholders are authorized to do so
C. The approval of the central government is required for such removal
D. The board of directors is authorized
E. A and C are correct answers
F. No one of the above
Answer: C
4. A remuneration of a company auditor is fixed by the:
A. Shareholders
B. Board of directors
C. Central government
D. Appointing authority
E. All of the above
Answer: D
5. Which one of the following is not a duty of an auditor:
A. Duty to report company’s banker
B. Duty to report to the member
C. Duty to sign the audit report
D. Duty to report on any violation of law
E. No one of the above
Answer: A

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 4.9.2. Consolidation activities (Questions and answers)
1. The Vacancy caused by resignation of an auditor is filled by:

A. Board of directors
B. At the general meeting of shareholders
C. By the central government
D. By the company low board
E. A and B are correct answers
F. All of the above

Answer: B
2. If at an annual general meeting, no auditors are appointed or
reappointed:

A. The board of directors appoint a person to fill the vacancy

B. The union government appoints an auditor
C. The managing director appoint an auditor
D. An extra-ordinary meeting is called
E. No auditor will work for the whole year
F. All of the above

Answer: A
3. According to the company act an auditor has a right to attend any
general meeting:

A. By himself or through his authorized representative who is not qualified

to be an auditor
B. By him self
C. Auditor has no duty to attend any general meeting
D. By himself or through his authorized representative who is qualified to
be an auditor.
E. All of the above

Answer: D

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4. Which of the following persons is qualified to be a company auditor?
A. An employee of the company
B. A body corporate
C. A person who is indebted to the company for a large amount of money
D. A practicing chartered accountant
E. No one of the above.
Answer: D
5. What makes a person ineligible for appointment as a company auditor?

A. An officer or employee of the company

B. A partner or employee of such a person
C. A partnership in which such a person is a partner
D. The person who is indebted to the company quite large sum of money,
etc.

INTRODUCTION
E. A and D are correct answers
F. All of the above.
TO ACCOUNTING
Answer: E

4.9.3. Extended activities (Questions and answers)

1. Mr. KARARA, a chartered accountant, was appointed as an auditor of ABC
Ltd. In the 12th Annual general meeting of the company in September, 2019.
In June 2020 the company removed him through a resolution in general
meeting and appointed GAGA as its auditor.

Required:
Specify the provisions about removal of auditor before the expiry of the term.

Answer:
• Auditor may be removed from his office before the expiry of his term, by
the company only in a general meeting plus prior central government
approval (except for removal of first auditor).
• Since prior approval of the central government has not been obtained,
the removal of KARARA is not valid and, therefore, KARARA continues
to be the auditor. The appointment of GAGA in his place is void because
it is not follow rules and regulations.

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 UNIT 5 AUDITOR
RESPONSIBILITIES

5.1. Key Unit competence

To be able to exhibit the auditor’s responsibilities

5.2. Prerequisite (knowledge, skills, attitudes and values)

In unit have taught the in Unit 2 you have analysed duties, obligations and rights of
an auditor under the legal and professional requirements. This prior knowledge,
skills or competences should help the students to understand duties, obligations
and rights of an auditor as well as contribution of audit profession to business
activities in their locality and be able to realize their contribution as students
INTRODUCTION
towards business activities.

5.3. Cross-cutting issues to be addressed:

TO ACCOUNTING
Note: The examples below are just to guide you on how to address crosscutting
issues throughout the unit but this does not mean that these are the only ones.
You can address and give students opportunities to discuss all the crosscutting
issues where possible taking consideration of their environment or community
around them.
Genocide Studies: Genocide Studies provides young people with an
understanding of the circumstances leading to the genocide and the remarkable
story of recovery and re-establishing national unity. Genocide Studies helps
student to comprehend the role of every individual in ensuring nothing of the
sort ever happens again.
Gender education: Emphasis throughout this unit has to be put on how both
males and females have same rights and obligations to do business activities
which can generate an income in their local community. So as to promote better
standard of living of business activities and their community in the creation of
business based employment opportunities and the country complying with
appropriate and required audit standards leading to business progress and
socioeconomic development.

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Environment and sustainability: The greatest source of business practices
is the environment and the society. Auditing in Business or any other business
concept related to business activities cannot be applied without the environment.
Therefore, great care has to be taken for environment and society. Therefore, it
is important to elaborate measures to protect the environment so that it can be
safe from harm.
Inclusive education: In addition to all having equal opportunities to become
businesses, attention will be made on how we all regardless of our background
have right to generate ideas that do not discriminate as our needs are the same.
Students need to understand that business law should not discriminate but
promote inclusiveness of all. Throughout the business activities students should
be able to evaluate the contribution of auditing in socio-economic development
of the community.
Peace and Values: You need to emphasize on students need to live in peace
and harmony with others. Students need to identify potential contributions of all
aspects towards the promotion of peace and value in the society. Students also
need to develop positive attitude towards the society, customers, shareholders,
environment, business and government, among others in order to contribute to
the socio-economic development. They need also to know that the security is
important for people to live in high standard of living.
Standardization culture: You need to emphasize to students, the need for
standards even in business activities to ensure that these activities bring in
enough income to the economy and to maintain order in business environment.
Financial education: Teacher and students should know that resources and
materials used in teaching and learning activities must not be mismanaged.
This issue will also be addressed when studying practice related to business
activities. Students will learn what is permitted and what is prohibited to manage
learning resources and materials well. They will put in mind that misusing
materials is wasting money.

5.4. Guidance on introductory activity

NOTE: The students won’t be able to answer all the questions at this stage;
they can answer one question. The most important thing is that you want to
challenge students to be expectant and to use their previous knowledge and
background to self-discover during teaching and learning of this unit.
Explain the purpose of the introductory activity of the lesson. This activity is
intended to provide interest and motivation for students to be able to identify
laws related to business activities as opportunity of fighting against illegal
business activities in the community.

98 Auditing | Teacher's guide | Senior Six | Experimental version

The introductory activity will also evoke students’ interests about what to expect
in this unit as they answer the questions that follow in the activity. Students can
build on previous knowledge, skills, values and attitudes to help you assess the
student’s prior knowledge and help link with the new content.
Use an appropriate method such as small groups or pairs and provide students
with Unit 3 introductory activity, give clear instructions to the activity.
They read the case study and discuss what activities may have carried out. They
read a scenario about business in Rwanda and discuss about a professional
name of a person who examines financial statements and other financial
documents on behalf of shareholders, appropriate procedures for appointing an
auditor and things to consider by the auditor before accepting the assignment
of auditing.
During grouping or pairing, mix boys and girls and students with different abilities.
During the discussion, make sure everyone is following and actively participating.
Those who are not acting may have to listen attentively without disturbing and
should applaud/congratulate the actors after.
Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair share or large group
discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Harmonize their findings or answers, and help them draw conclusions/summary
to questions. Answer or address any questions or challenges about the activity.
Guide them to make notes in their books referring to students’ book.
Students present their findings, results, answers through presentations on the
introductory activity.
Appreciate the team’s presentations and remind them that this activity was not
meant to come to the very right answers but to help them become aware of
what to expect in the unit.
You can support student’s answers by referring to possible answers to the
introductory activity below:

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 Answers to the introductory activity

1. Duties of an auditor
• Duty to make a report to shareholders or owners.
• Duty to call for information
• Duty to assist in investigations especially in audited area.
2. In general the auditor’s liability may rise due to:
• His failure to detect fraud
• His failure to detect errors in the accounts
• Carelessness or dishonesty
3. Liabilities to third parties are under the following conditions:
• Where the party has suffered a financial loss as a result or by relying
on the report made by the auditor.
• Where it can be proved that the auditor did not use his/her
professional skills and judgement during the audits.
• Where the auditor made report when he or she is aware that such
a report should be used by the third parties to make investment
decisions.
• Where the auditor didn’t attach the disclaimer on his report that
such a report was not included to be relied upon by third parties.
• Where it can be proved that the third parties relied on the report.
• Where the parties can prove that no external factors whatever
influenced their decision but just the audit report
• Where the third parties were not warned not to rely on the audit
report

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5.5. List of lessons/sub-heading
Lesson title/sub- Learning Number
Heading
heading objectives of periods
5.1. Legal Introductory activity Arouse the curiosity 1
responsibilities of students on the
and duties of an content of unit 5
auditor 1 Legal Explain legal 3
responsibilities of responsibilities of
an auditor an auditor
2 Duties of an Explain the duties of 4
auditor an auditor
5.2. Error and fraud 1 Types of errors Describe the types 4
and frauds of errors and frauds

2 Auditor’s Identify the auditor’s 4

responsibilities in responsibilities in
relation to fraud relation to fraud
End Unit Assessment 1
Total number of periods 17

Lesson 1: Legal responsibilities and duties of an auditor

i..Learning objective
Explain legal responsibilities and duties of an auditor

ii. Teaching resources

Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, resourceful person and any
other trustworthy and reliable resources to enhance learning.

iii. Prerequisites/Revision/Introduction (Guidance on how to start the

lesson)
In Unit 3 you have analysed the auditor’s appointment. This prior knowledge,
skills or competences should help the students to understand the auditor’s
responsibilities as well as the contribution of audit profession to business
activities in their locality and be able to realize their contribution as students
towards business activities.

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 iv. Learning activities

Activity 5.1
Exploit and use appropriate learning methods that can foster collaborative
learning for (example small groups or pairs, gallery walk). Provide students with
the activity in the student’s book, and give instructions to the activity to be done.
During grouping or pairing, ensure a balance between boys and girls and
students’ different abilities. During this activity ensure that students have
understood the instructions, prompt and probe them through question-and-
answer approach to make sure they are active and their curiosity in learning and
discovery is aroused. Encourage students to work together, value each other’s
contributions, share ideas, etc.
Students present their findings, results, answers through an appropriate method
such as pair-share, small group presentations on the learning activity. Encourage
different students from the groups to share the group’s work to avoid just a few
students dominating. Also encourage other students to listen and not disturb
when other teams are sharing unless it is a question. Encourage students to
appreciate each other’s work especially the presentation. Appreciate the team’s
presentations and remind them that this activity was not meant to come to the
very right answers but to help them become aware of what to expect in the
lesson. Answers to the activity will be got as the lesson progresses. You can
support students’ answers by referring to possible answers to the activity below:

Answers to learning activity 5.1

1. Auditor’s duties:
a) Duty to make a report to shareholders or owners and duty to state the
following in his/her report:
• Whether in his/her opinion, he/she has received all information and
explanations necessary for his/her opinion.
• Whether in his/her opinion, the trading, profit and loss account
exhibits the true and fair view of the profit or loss of the period.
• Whether in his/her opinion, the balance sheet is properly drawn and
exhibits a true and fair view of the company’s financial position.
• Whether proper books of accounts have been kept properly or not.
b) Duty to call for information:
• Whether loans have been properly secured except lands and
building.
• Whether securities have been sold below the purchase price.

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 • Whether personal expenses have been debited to the profit and loss
account and if so to debit the personal accounts of the employees
concerned.
c) Duty to assist in investigations .
2. In general, the auditor’s liabilities may rise due to:
• His failure to detect fraud.
• His failure to detect errors in the accounts.
• Carelessness or dishonesty.

v. Application activities 5.1

Students analyse and discuss about the questions either in groups or in pairs
and come up with possible answers. This activity may be given as a research
question or homework.
Depending on the purpose of the application activity, choose an appropriate
method to assess student’s findings, answers or responses. Depending on the
performance or results, you may decide to give remedial or extension activities.

Answers to application activity 5.1

1. In order to minimize his/her liabilities, the auditor must:

• Be diligent and honest to reduce negligence.
• Use disclaimers on his/her report to minimize liabilities resulting
from his/her report.
2. A guideline showing how the auditor’s liabilities should be assessed
under private audit:
• That he/she was actually negligent with reference to the agreement.
• That out of negligence the client suffered loss.
• That a person who has explicit contractual obligation with him has/
her suffered the loss defined by the contract.

Lesson 2: Error and fraud

i. Learning objective
Describe the types of errors, frauds and the auditor’s responsibilities in relation
to fraud

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 ii. Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, resourceful person and any
other trustworthy and reliable resources to enhance learning.

iii. Prerequisites/Revision/Introduction (Guidance on how to start the

lesson)
In previous lesson, lesson 1 Students discussed the legal responsibilities and
duties of an auditor. This will help them to understand the auditor’s responsibilities
in relation to fraud.

iv. Learning activities

Activity 5.2
• Put students in small groups and give clear instruction about the activity
• Ask them to read carefully the questions and answer them
• Guide students’ discussions and make sure that everyone is participating
• Invites students to share their findings
• Harmonize their findings or answers, and link the findings to the learning
objective, help them draw conclusions/summary. Answer or address
any questions or challenges about the activity. Guide them to make
notes in referring in their students’ book.

Answers to learning activity 5.2

1. a) Errors detected/disclosed by the Trial Balance

• Single entry.
• Overcast (over debit or over credit of accounts) or under cast (under
credit or under debit of accounts).
• Two credits or two debits on the same side.
• Transfiguration or transposition.
• summation error

b) Errors not detected/disclosed by the trial balance

• Errors of original entry.
• Errors of Omission.
• Errors of commission.
• Errors of Principle.
• Compensating errors.

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 • Errors of complete reversal of entries.
• Material error.
• Immaterial error.

2. Procedures to discover errors and fraud

• Control of source documents and its likely (documentation).
• Physical observation.
• Direct confirmation.
• Analytical examination.
• Examination of the annual accounts.

v. Application activities 5.2

Students can be given an activity to discuss about the questions in groups,
give clear instructions and ensure a balance in the groups for both gender and
capability. Students are to give a report of their findings. Monitor the activity to
ensure students are on track and actively participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answer below as
you assess their work.

Answers to Application Activity 5.2

1. Measures an organisation should use in order to prevent errors are the

following:
• Employ a strong internal control system and efficient internal check
system.
• Award employees reasonable salaries according to their qualifications
and experiences to reduce chances of committing errors and raise
their morale to work.
• Employment of qualified staff to prevent errors of principle.
• Institute an internal audit department where possible.
• Encourage clerks/staff to take their annual leave periodically so that
their work performance can be assessed in their absence and any
errors they had made revealed.
• Encourage inter-department transfers and rotation of duties at a
surprise moment so as to cut down the continuity of an error.

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 • There should be a close supervision of duties, particularly in sensitive
areas of the business e.g. cash receipts and payments.
• Use specific reviews of what has taken place in any one given area.
• Use machines to record transactions e.g. adding machines, check
writing machines, etc.
• Management should insist on referees when engaging employees
especially the accounting staff.
2. In order to hold the auditor liable, the following should be proved:
• That the auditor made a statement that proved false in material facts.
• That the auditor wilfully made a statement, which was actually false
knowing it.
• That the statement made was in any report, prospectus, balance
sheet, certificate or any other document, which under the company’s
Act, the auditor is required to authenticate.
• That the auditor made a statement as a statutory officer of the
company.
In general, an auditor can be held liable under the companies Act for criminal
acts under the following circumstances:
• If he/she fails to disclose material facts in the financial statements,
knowing that they are material and that such non-disclosure will
make the statement misleading.
• If the auditor does not use reasonable care and skills during the
course of his/her audit.
• If the auditor wilfully contravenes any provisions of the act which
under normal circumstances is supposed to follow during the
course of his/her auditing e.g. If he/she fails to request returns from
the branches.
• If he/she destroys secrets mutilates vouchers, documents, books
of accounts, certificates with the aim to destroy someone’s opinion.
• If he/she falsifies or is privy to falsification of any document,
prospectus, books of accounts or vouchers of the company with to
deceive or defraud.
• If he/she knows that a material has been omitted in the report or
financial statements and does not reveal such fact.

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 Skills lab activity 5

Guidance on the skills lab activity:

In conducting this skills lab activity, you give to students accounting documents
containing errors, ask them to make corrections and discuss how to prevent
them.

i. Build
Given that students work on correction of errors,
• Remind students on the expected objective for correcting errors
• Help them to be grouped and remember to mix both boys and girls
• Let each team have the representative
• Ensure they have where to keep necessary notes from the findings
• Distribute questions for their research
• Check their understanding of the assignment
• Remind them that everybody full participation is mandatory.

ii. Practice
During the work in the learning group, care about the following concerns:
• Guide students on accessing the real documents
• Ensure that documents are available for all
• Respond to any questions for clarification and support accordingly
To facilitate the presenter to prepare his presentation, send him a concept note
describing what has been covered during the class lesson and state what are
students and teacher’s expectations.

iii. Present
During the group presentation, the teacher must assess whether the student
participation in the skills lab activity was effective by:
• Selecting randomly anyone in all groups to present the report on behalf
of team members.
• Allowing students to ask question to their fellows.
All team members being presenting are expected to contribute to the plenary
by answering some questions that the presenter is not covering as well as
expected.

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 iv. Conclusion
The teacher emphasizes on the objective of the research reminding students
that they were expected to be able to describe errors, fraud and the auditor’s
responsibilities in relation to fraud.

5.6. Summary of the unit

1. Legal responsibilities and duties of an auditor

1.1. Legal responsibilities of an auditor

Under the company’s act, an auditor may be liable to the following parties:
1. The client to whom he owes the primary duty of care.
2. Third parties who have not privacy of contract but have relied on his opinion
to arrive at a
a. Liabilities of an Auditor under Private Audits
In such audits, the auditor’s liabilities depend on the agreement between
the auditor and the client. It is for that reason that an auditor insists that the
agreement be in writing clearly defining his duties, powers and responsibilities.
In order to minimize his liabilities, the auditor must:
• Be diligent and honest to reduce negligence
• Should never sign a balance sheet he doesn’t believe to be correct
• Use disclaimers on his report to minimize liabilities resulting from his
report
In assessing the auditor’s liabilities under private audit the following should be
assessed:
• That he was actually negligent with reference to the agreement
• That out of negligence the client suffered loss
• That a person who has explicit contractual obligation with him has
suffered the loss defined by the contract.
b. Liabilities of an Auditor under Statutory Audits (Company’s Act)
Under the Company’s Act, auditors’ liabilities cannot be limited by any agreement.
The act defines his duties, powers and responsibilities. Under the Company’s
Act, the auditors’ liabilities can arise out of:
• Civil law
• Criminal law

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Civil liability of the Auditor
These are liabilities that arise out of negligence. Under civil law the auditor has
the duty to care about the following:
1. The client (in contract)
2. Third parties whether he has contractual obligations or not.

1.2. Duties of an auditor

1. Duty to make a report to shareholders or owners and duty to state the
following in his report
2. Duty to call for information
3. Duty to assist in investigations
4. To certify statutory report in order to assure the owners about the number
of shares allocated to promoters and whether such issue was conducted
properly.
5. Duty to certify the profit and loss account in the prospectus.
6. Duty to certify the profit and loss accounts when managing agents resign,
balance sheet and funds flow statement.
7. Other duties:
• Whether loans are properly secured and not at terms prejudicial to the
interest of the shareholders
• Whether transactions conducted by the company are not prejudicial to
the interest of the shareholders.
• Whether securities have been sold at the price lower than cost

2. Errors and frauds

2.1. Types of errors and frauds

Types of errors
a) Errors detected/ disclosed by the Trial Balance
The purpose of the T/B is to check the accuracy and validity of the books. It
specifically detects the following errors:
• Single entry
• Overcast
• Two credits or two debits on the same side

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 • Transfiguration or transposition
• Summation or addition error
b) Errors not detected/disclosed by the trial balance
When a T/B balances or agrees, it is not a guarantee that no errors were
committed. Errors which cannot be detected by the T/B include
• Errors of original entry
• Errors of Omission
• Errors of commission
• Errors of Principle
• Compensating errors
• Errors of complete reversal entries
• Material error: to help you decide whether a particular item/transaction
is material, you may consider looking at the following:
• The percentage of the possible error.
• Recurring or non-recurring error.
• Statutory requirement

Immaterial error.
Measurements of prevention of the errors
Methods of detection of errors
1. Trial balance checking
2. Short cut method
3. Extensive checking

Measures to prevent errors

• Employ a strong internal control system and efficient internal check
system
• Award employees’ reasonable salaries according to their qualifications
and experience to reduce chance of errors and raise their morale to
work
• Employment of qualified staff to prevent errors of principle
• Institute an internal audit department where possible
• Encourage clerks/staff to take their annual leave periodically so that
their work performance can be assessed in their absence and any
errors they had made revealed.

110 Auditing | Teacher's guide | Senior Six | Experimental version

 • Encourage inter-department transfers and rotation of duties at a
surprise moment so as to cut down the continuity of an error.
• There should a close supervision of duties; particularly in sensitive
areas of the business e.g. cash receipts and payments.
• Use specific reviews of what has taken place in any one given area.
• Use machines to record transactions e.g. adding machines, check
writing machines, etc.
• Management should insist on referees when engaging employees
especially the accounting staff.
Fraud
Definition of fraud: fraud is an intentional misrepresentation of financial
information by one or more individual among the management, employees or
third party collaboration in order to defraud the business of financial resources
and assets. Example:

Types of the frauds

• Embezzlement of cash
• Misappropriation of goods
• Fraudulent manipulation of accounts

Difference between error and fraud

Errors Frauds
• These are unintentional. • These are intentional.
• It is easier to detect errors by • It is difficult to detect frauds because
checking the posting. they cross all the posting.
• Errors are committed by lower • Frauds are committed by the
level staff. management staff.

• Procedure of detecting errors and fraud

1. Control of source documents and its likely (documentation):
a) Types of Documents: internal and external Examination of documents that
support a recorded transaction or amount.
• The direction of testing must be from the recorded item to the
supporting document.
• Tests existence or occurrence
Documents
b) Document Vouching (from recorded item to supporting document)
c) Document Tracing (from supporting document to recorded item)

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 2. Physical observation
3. Direct confirmation
4. Analytical examination
5. Examination of the annual accounts.

2.2. Auditor’s responsibilities in relation to fraud

The auditor can relieve himself of such liabilities under the following:
i) If he/she withdraws his/her consent in writing before such prospectus
has been registered and circulated for the public use.
ii) That after registration of prospectus and before the allotment of shares,
he on knowing the misleading statement in the prospectus, withdrawn
his consent and give a public notice to this effect.
iii) That it was important to give such statement and that he has reasonable
grounds which he can substantiate e.g. letters of representation for
proving that the statement was true.
In general, the auditor’s liabilities to the third parties and client give rise to claims
against the auditor on such grounds as:
i) Failure to detect embezzlement by employees.
ii) Negligence on the part of the auditor or his staff.
iii) Improper accounts procedures, which may lead to fraud.
iv) Errors in the financial statement he is reporting on.
In order to minimize his liabilities to the third parties and the client while compiling
his report, an auditor should:
i. Enter into agreement with his client that another person should not use
his report
ii. Include a disclaimer in his report to the effect that any party to make any
decision should not.

5.7. Additional information for the teacher

Change in auditors
Companies do actually change their auditors. It is important that auditors
understand why a company may seek to change their auditor in a bid to prevent
this from happening to them.
The following sets out the reasons why this can happen:

112 Auditing | Teacher's guide | Senior Six | Experimental version

Audit fee
• Many companies perceive that an audit has very little value. In turn this
makes the audit fee a very sensitive issue.
• The fee may be perceived to be too high. Remember, a lot of audit work
may be done off site and the hours charged at the firms office will belong
to the managers and partners, so the client might not understand why
the fee is so high.
• It may not be seen as good value for money. For example, a client may
have important tax work carried out for him. The fee charged may be
way lower than that of the audit, probably due to the time involved, yet
the client might see the value of this work far greater than that of the
audit.
• The current fee might not appear to be very competitive. Other similar
firms may be getting audit services for less.
• The client may put the audit out to tender to see whether the price is
actually negotiable, even though he may have no intention of changing
his auditor.
• The audit fee may breach the recommended level of overall practice
fees as laid down by ethics and auditor may have no other alternative
but to resign.

5.8. End unit assessment

Answers to end unit assessment activities

1. a) Definition of fraud: a fraud is an intentional act by one or more individuals

among management, those charged with governance, employees, or
third parties, involving the use of deception to obtain an unjust or illegal
advantage.
Definition of error: an error is an unintentional misstatement in the
financial statements, including the omission of an amount or a disclosure.
2. The auditor’s liabilities towards the third parties:
He/she can be liable to the third parties under the following conditions:
• Where the party has suffered a financial loss as a result or by relying
on the report made by the auditor.
• Where it can be proved that the auditor did not use his/her
professional skills and judgement during the audits.
• Where the auditor made report aware that such a report should be
used by the third parties to make investment decisions

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 • Where the auditor didn’t attach the disclaimer on his/her report that
such a report was not included to be relied upon by third parties.
• Where it can be proved that actually the third parties relied on the
report.
• Where the parties can prove that no external factors whatever
influenced their decision but just the audit report
• Where the third parties were not warned not to rely on the audit
report.
However, for any action to succeed against the auditor, the auditor must
prove the following:
• The auditor was negligent
• Due to negligence the third party suffered loss
• The auditor knew or ought to have known that third parties could
rely upon the account.

3. Description of five (5) types of errors in audit:

a) Errors detected/ disclose by the Trial Balance
The purpose of the T/B is to check the accuracy and validity of the books.
It specifically detects the following errors:
• Single entry i.e. failing to complete double entry. E.g. cash sales
where sales A/C is credited but cash A/C not posted.
• Overcast (over debit or over credit of accounts) or under cast (under
credit or under debit of accounts).
• Two credits or two debits on the same side without the corresponding
entries.
• Transfiguration or transposition i.e. changing figures by mistakes
when posting e.g. RWF 58, 000 as RWF 85,000.
• Arithmetical error e.g. if the total is RWF 40 000 and you total RWF
50 000.
b) Errors not detected/disclosed by the trial balance
When a T/B balances or agrees, it is not a guarantee that no errors were
committed. Errors which cannot be detected by the T/B include:
• Errors of original entry
These errors originate from source documents e.g. invoices, vouchers,
receipts, bank paying sleep etc. These errors are carried throughout the
accounting process i.e. from the journal to the ledger to the trial balance and
eventually to the final accounts.

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For example: goods were sold on credit for RWF 95,000, but was recorded
in the sales invoice as RWF 59,000 and the same figure is journalized.
• Errors of Omission
These are errors of omitting transactions from all books of accounts. If a
transaction occurs and is not recorded anywhere, the T/B cannot detect
such an error. If for example goods were bought for cash FRW 65,000 and
entries were not made in the cash and purchases account.
• Errors of commission
These errors are committed when an entry is made on wrong person’s
account or account title but the double entry properly effected. For instance,
goods worth FRW 400,000 were sold to Jane on credit but Joan’s account
was debited instead of the correct account of Jane. The sales account being
properly credited.
• Errors of Principle
These are making entries on wrong classes or types of accounts. For instance,
if a capital expenditure for say purchase of a motor vehicle is made, and it
is debited to the purchases account instead of the correct motor vehicle
account. Or if an old fixed asset was disposed off and the proceeds from this
disposal or sale is entered in the sales account
• Compensating errors
These are errors that cancel out in the trial balance. They get cancelled
because the error on one side of the T/B is compensated by a similar error
on the other side of the trial balance. For instance, if an item that appears on
the debit side of the T/B
E.g. Purchases is overcast by FRW 280 000 and by coincidence another
account that appear on the credit side of the trial balance says the sales
account was also overcast by FRW 280 000. These errors will neutralize
each other and the TB will agree as if no error was made.
• Errors of complete reversal entries
These are committed when entries are made on wrong sides of the accounts.
For instance, if wages totalling FRW 3 500 000 were paid cash and the
bookkeeper debits the cash account and credits the wages account
• Material error is an error which has a big effect on the accounting
transactions and has effect on the financial statements of a business.
To help you decide whether a particular item/transaction is material, you may
consider looking at the following:

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 The effect on an individual financial statement as well as the whole set of
financial statements.
The percentage of the possible error: for profit and loss account items, we
usually calculate the percentage with reference to the profit before interest
and tax figure. For Balance Sheet items, we usually calculate the percentage
with reference to the total share capital and reserves or the total fixed assets.
As a general rule, an error less than 5% would be regarded as immaterial.
Recurring or non-recurring error: recurring errors must be investigated no
matter how small the percentage is. Recurring errors imply that there is a
problem with the accounting system, which should be followed up.
Statutory requirement: In general, if an error does not seriously affect the
accounts users’ decisions, we do not worry about this minor mistake.
However, in the context of law, sometimes there is no room for the materiality
concept. For example, if the Companies Act requires that a particular item
must be disclosed in financial statements, it must be done even if the amount
is only FRW 1.
• Immaterial error
Immaterial error is when an item is immaterial, we do not need to worry about
it for both qualitative and quantitative aspects.
4. Auditor’s duties:
a) Duty to make a report to shareholders or owners and duty to state the
following in his/her report:
• Whether in his/her opinion, he has received all information and
explanations necessary for his opinion.
• Whether in his opinion the trading, profit and loss account exhibits the
true and fair view of the profits or loss of the period.
• Whether in his opinion the balance sheet is properly drawn and
exhibits a true and fair view of the company’s financial position.
• Whether proper books of accounts have been kept properly by the
company and returns received from company’s branches not visited
by him.
b). Duty to call for information:
• Whether loans have been properly secured except lands and building
• Whether security have been sold below the purchase price
• Whether personal expenses have been debited to the profit and loss
account and if so to debit the personal accounts of the employees
concerned

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c). Duty to assist in investigations, he should give support to the investigators
but only if financial matters and to provide his working purpose.

5. Types of frauds:
• Embezzlement of cash.
• Misappropriation of goods.
• Fraudulent manipulation of accounts.

6. Auditor’s responsibilities in relation to fraud:

With the prospectus, an auditor has to be extra careful in approving any
kind of information because if there is a misleading information which can
cause the loss to the company and third parties, they can hold him liable
for damages. The auditor can relieve himself of such liabilities under the
following:
i) If he/she withdraws his/her consent in writing before such prospectus
has been registered and circulated for the public use.
ii) That after registration of prospectus and before the allotment of
shares, he/she is knowing the misleading statement in the prospectus,
withdrawn his/her consent and give a public notice to this effect.
iii) That it was important to give such statement and that he/she has
reasonable grounds which he/she can substantiate e.g. letters of
representation for proving that the statement was true.
In general, the auditor’s liabilities to the third parties and client give rise to
claims against the auditor on such grounds as:
• Failure to detect embezzlement by employees.
• Negligence on the part of the auditor or his/her staff.
• Improper accounts procedures, which may lead to fraud.
• Errors in the financial statement he/she is reporting on.
• In order to minimize his/her liabilities to the third parties and the
client while compiling his/her report, an auditor should:
• Enter into agreement with his/her client that another person should
not use his/her report.
• Include a disclaimer in his/her report to the effect that any party to
make any decision should not.

7. Measures to prevent errors are the following:

• Employ a strong internal control system and efficient internal check
system

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 • Award employees’ reasonable salaries according to their
qualifications and experience to reduce chance of errors and raise
their morale to work
• Employment of qualified staff to prevent errors of principle
• Institute an internal audit department where possible
• Encourage clerks/staff to take their annual leave periodically so that
their work performance can be assessed in their absence and any
errors they had made revealed.
• Encourage inter-department transfers and rotation of duties at a
surprise moment so as to cut down the continuity of an error.
• There should a close supervision of duties; particularly in sensitive
areas of the business e.g. cash receipts and payments.
• Use specific reviews of what has taken place in any one given area.
• Use machines to record transactions e.g. adding machines, check
writing machines, etc.
• Management should insist on referees when engaging employees
especially the accounting staff.

8. Procedure of detecting errors and fraud are:

• Control of source documents and its likely (documentation):
a) Types of Documents: internal and external documents
b) Document Vouching (from recorded item to supporting document)
• Examination of documents that support a recorded transaction or
amount.
• The direction of testing must be from the recorded item to the
supporting document.
• Tests existence or occurrence
c) Document Tracing (from supporting document to recorded item)
• Primary test for unrecorded items and therefore tests the
completeness assertion.
• The direction of testing must be from the supporting document to
the recorded item.
• Physical observation:
• Auditor witnesses the physical activities of the client.
• Differs from physical examination because physical examination
counts assets, while observation focuses on client activities.

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 Direct confirmation:
The receipt of a written or oral response from an independent third party
Auditor has client request that the third party respond directly to the auditor.
Positive Confirmations asks for response even if balance is correct. Negative
Confirmations asks for a response only if balance is incorrect. Examples:
Banks – Confirm checking account and loan balances
• Analytical examination:
Audits studies relationships among data. Unusual fluctuations occur when
significant difference are not expected but do exist or when significant
differences are expected but do not exist. Analytical examination is required
during the planning and completion phases on all audits.
• Examination of the annual accounts

5.9. Additional activities (Questions and answers)

5.9.1. Remedial activities (Questions and answers)
Questions:
1. Differentiate error from fraud.

Answers:
Definition of fraud: a fraud is an intentional act by one or more individuals
among management, those charged with governance, employees, or third
parties, involving the use of deception to obtain an unjust or illegal advantage.
Definition of error: an error is an unintentional misstatement in the financial
statements, including the omission of an amount or a disclosure.

Questions:
2. What are conditions for the client to sue the auditor?

Answer:
The client must prove the following:
• To prove that the auditor was negligence
• To prove that the auditor’s negligence caused the client to suffer a
financial loss
• Proving that the financial loss is qualified and material

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 5.7.2. Consolidation activities (Questions and answers)
Question:
1. What are auditor’s responsibilities in relation to fraud?

Answers:
1. Auditor’s responsibilities in relation to fraud
With the prospectus, an auditor has to be extra careful in approving any kind
of information because if there is a misleading information which can cause the
loss to the company and third parties, they can hold him liable for damages. The
auditor can relieve himself of such liabilities under the following:
• If he/she withdraws his/her consent in writing before such prospectus
has been registered and circulated for the public use.
• That after registration of prospectus and before the allotment of shares,
he on knowing the misleading statement in the prospectus, withdrawn
his consent and give a public notice to this effect.
• That it was important to give such statement and that he has reasonable
grounds which he can substantiate e.g. letters of representation for
proving that the statement was true.
In general, the auditor’s liabilities to the third parties and client give rise to claims
against the auditor on such grounds as:
• Failure to detect embezzlement by employees.
• Negligence on the part of the auditor or his staff.
• Improper accounts procedures, which may lead to fraud.
• Errors in the financial statement he is reporting on.
In order to minimize his liabilities to the third parties and the client while compiling
his report, an auditor should:
• Enter into agreement with his client that another person should not use
his report
• Include a disclaimer in his report to the effect that any party to make any
decision should not

Question:
2. Give and explain the auditor’s duties.
Answer: Auditor’s duties
a) Duty to make a report to shareholders or owners and duty to state the
following in his report:

120 Auditing | Teacher's guide | Senior Six | Experimental version

 • Whether in his opinion, he has received all information and explanations
necessary for his opinion.
• Whether in his opinion the trading, profit and loss account exhibits the
true and fair view of the profits or loss of the period.
• Whether in his opinion the balance sheet is properly drawn and exhibits
a true and fair view of the company’s financial position.
• Whether proper books of accounts have been kept properly by the
company and returns received from company’s branches not visited by
him.
b) Duty to call for information:
• Whether loans have been properly secured except lands and building
• Whether security have been sold below the purchase price
• Whether personal expenses have been debited to the profit and loss
account and if so to debit the personal accounts of the employees
concerned
c) Duty to assist in investigations, he should give support to the investigators
but only if financial matters and to provide his working purpose.

5.7.3. Extended activities (Questions and answers)

Questions:
1. What kinds of measures are to be put in place to prevent errors?

Answers:
1. Measures to prevent errors
• Employ a strong internal control system and efficient internal check
system
• Award employees’ reasonable salaries according to their qualifications
and experience to reduce chance of errors and raise their morale to
work
• Employment of qualified staff to prevent errors of principle
• Institute an internal audit department where possible
• Encourage clerks/staff to take their annual leave periodically so that
their work performance can be assessed in their absence and any
errors they had made revealed.
• Encourage inter-department transfers and rotation of duties at a
surprise moment so as to cut down the continuity of an error.
• There should a close supervision of duties; particularly in sensitive
areas of the business e.g. cash receipts and payments.

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 • Use specific reviews of what has taken place in any one given area.
• Use machines to record transactions e.g. adding machines, check
writing machines, etc.
• Management should insist on referees when engaging employees
especially the accounting staff.

Question:
1. Describe procedures which can be used to detect errors and fraud?
Answer: Procedure of detecting errors and fraud
• Control of source documents and its likely (documentation):
• Physical observation
• Direct confirmation
• Analytical examination
• Examination of the annual accounts

INTRODUCTION
TO ACCOUNTING

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 UNIT 6 AUDITOR REGULATION
AND ETHICS

6.1. Key unit competence

To be able to comply with auditor’s regulation and professional ethics

6.2. Prerequisite (knowledge, skills, attitudes and values)

Learners were introduced in senior 6 (unit 2) to the legal and professional
requirements. So, with this prior knowledge, skills, attitudes and values it should
help them to comply with auditor’s regulation and professional ethics.

6.3. Cross-cutting issues to be addressed:

INTRODUCTION
Note: The examples below are just to guide you on how to address cross-
cutting issues throughout the unit but this does not mean that these are the
TO ACCOUNTING
only ones. You can address and give students opportunities to discuss all the
cross-cutting issues where possible taking consideration of their environment
or community around them.
Environment and sustainability: environment is one of the greatest factors that
can affect both positively or negatively any business activity and one cannot start
up a business without the environment. Therefore, great care for environment
is crucial. Students are to be advised on the importance of environmental
protection according to international standards.
Gender education: emphasis throughout this unit has to be put on how both
males and females have the equal opportunities to understand and explain the
auditing standards. So that this will encourage people to take of international
standards in their duties.
Inclusive education: in addition to all having equal opportunities to carry
out business activities, emphasis has to be put on how we all regardless of
our background, economic or social setup have right to develop an ethical
understanding of Rwandan system that do not discriminate. Students need to
understand that the customs procedures should not discriminate but promote
inclusiveness of all etc.

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 Peace and Values: you need to emphasize to learners the need to live in peace
and harmony with others. Students need to comply auditor’s regulation and
professional ethics in promoting peace and patriotism in the community avoiding
activities that are illegal e.g. unethical behaviour like fraud.
Standardization culture: you need to emphasize to students need for standard
in auditing. This will help them to abide by standards of auditing as legal aspects

6.4. Guidance on introductory activity

Follow the guidance about the introductory activity:
Students in small groups, pairs or individual read and analyse the case study
and identify the major changes expected by people especially accountant and
auditor because help to comply the auditor’s regulation and professional ethics
needed by an auditor.
During the activity, make sure everyone is following and actively participating.
Those who are not acting may have to listen attentively without disturbing and
should applaud the actors after.
Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair-share or large group
discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Appreciate the teams’ presentations and remind them that this activity was not
meant come to the very right answers but to help them become aware of what
to expect in the unit. Answers to the activity will be got as the unit progresses.
Guide them to take notes in their books referring to learners’ book.
You can support student’s answers by referring to possible answers to the
introductory activity below:

Possible answers for introductory activity (case study)

Note: These responses may be shared or not with the students. They are
specifically to guide you while harmonizing students’ responses during
presentation.
Overall objectives of the independent auditor and the conduct of an audit
in accordance with International Standards on Auditing (ISA200), Agreeing
the terms of audit engagements (ISA 210), Audit documentation (ISA 230),
The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements (ISA 240), Analytical procedures (ISA 520), Audit sampling (ISA
530), Forming an opinion and reporting on financial statements (ISA 700).

124 Auditing | Teacher's guide | Senior Six | Experimental version

6.5. List of lessons/sub-heading
Lesson title/sub- Number
Heading Learning objectives
heading of periods
6.1. International Introductory activity Arouse the curiosity 1
Auditing and of students on the
Assurance content of unit 6
Standards 1 The role of Identify the role of 1
International Auditing International Auditing
and Assurance and Assurance
Standards Board Standards Board
2 International Describe 3
Standards on International
Auditing (ISA) Standards on
Auditing (ISA)
3 The regulation of Explain the 2
auditors regulation of auditors
6.2. The fundermental 1 IESBA (International Explain fundamental 3
principles of Ethics Standards principles of auditing
auditing Board for as per IESBA
Accountant)
code of ethics
(the fundermental
principles of auditing)
2 The professional duty Explain The 3
of confidentiality professional duty of
confidentiality
End Unit Assessment 1
Total number of periods 14

Lesson 1: International Auditing and Assurance Standards

a) Learning objective
Describe International Standards on Auditing (ISA)
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, resourceful person and any
other trustworthy and reliable resources to enhance learning.

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 c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
Read the Key unit competence in the syllabus to determine what students will
know and be able to do by the end of the unit. Look at the action verb, concept
and context of learning objective. This will help you see the skills, knowledge
attitudes embedded in the learning objective. Remember the learning objective
link to the key unit competence.
d) Learning activities

Activity 6.1
Exploit and use appropriate learning methods that can foster collaborative
learning for (example small groups or pairs, gallery walk). Provide students with
the activity in the student’s book, and give instructions to the activity to be done.
During grouping or pairing, ensure a balance between boys and girls and learners’
different abilities. During this activity ensure that students have understood the
instructions, prompt and probe them through question and answer approach to
make sure they are active and their curiosity in learning and discovery is aroused.
Encourage students to work together, value each other’s contributions, share
ideas, etc.
Students present their findings, results, answers through an appropriate method
such as pair-share, small group presentations on the learning activity. Encourage
different students from the groups to share the group’s work to avoid just a few
students dominating. Also encourage other students to listen and not disturb
when other teams are sharing unless it is a question. Encourage students to
appreciate each other’s work especially the presentation. Appreciate the team’s
presentations and remind them that this activity was not meant to come to the
very right answers but to help them become aware of what to expect in the
lesson. Answers to the activity will be got as the lesson progresses. You can
support students’ answers by referring to possible answers to the activity below:

Answers to learning activity 6.1

1. Auditing and other elements

2. Independent, statements, planning, etc.

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e) Application activities 6.1
Students analyse and discuss about the questions either in groups or in pairs
and come up with possible answers. This activity may be given as a research
question or homework.
Depending on the purpose of the application activity, choose an appropriate
method to assess student’s findings, answers or responses. Depending on the
performance or results, you may decide to give remedial or extension activities.

Answers to application activity 6.1

1. International Federation of Accountants (IFAC).

2. Respective responsibilities, Audit planning, Internal control, Audit
evidence, Using work of other experts, Audit conclusions and audit
report
3. 500: is about audit evidence and 570: is about Going concern

Lesson 2: The fundermental principles of auditing

a) Learning objective
Explain fundamental principles of auditing as per IESBA
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, resourceful person and any
other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson, lesson 1 Students studied international auditing and
assurance standards. That will help to comply fundamental principles of auditing
as per IESBA Leant in this lesson.
d) Learning activities

Activity 6.2
• Put students in small groups and give clear instruction about the activity
• Ask them to observe the pictures in student book and answer the
questions provided in the activity

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 • Guide students’ discussion and make sure that everyone is participating
• Invites students to share their findings
• Harmonize their findings or answers, and link the findings to the learning
objective, help them draw conclusions/summary on when to discuss on
fundamental principles of auditing as per IESBA.Answers or address
any questions or challenges about the activity. Guide them to make
notes in referring in their students’ book.

Answers to learning activity 6.2

1. The above persons are performing the auditing activities.

2. In a previous role, we worked on a project which required the team to
use multiple tools and software packages. My manager provided the
required software, but I noticed an issue with one of them immediately
after I installed it.
After researching the software application provider, I found we had a
pirated version. I struggled with the dilemma of embarrassing or upsetting
my employer, but I couldn’t stand to use a software package that was
illegally pirated. So I reached out to my manager and explained my
findings. Since the company couldn’t afford the licensed application, I
recommended a cheaper alternative for the ongoing project.

e) Application activities 6.2

Students can be given an activity to discuss about the questions in groups, give
clear instructions and ensure a balance in the groups. Students are to give a
report of their findings. Monitor the activity to ensure students are on track and
actively participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to application activity 6.2

1. Integrity implies not only just honesty but also fair dealing and
truthfulness.
2. If an auditor discovers or suspects that client has committed money-
laundering, or terrorist offences, he/she is obliged to disclose all
the information at his/her disposal to a competent authority.

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 Skills lab activity 6

Guidance on the skills lab activity.

To do this skills lab activity, students can either visit library or request students
to make a research on the internet where need be.

i. Build
Given that students visit the required website,
• Remind students on the expected objective for the computer lab
attendance
• Help them to be grouped and remember to mix both boys and girls
• Let each team have the representative
• Ensure they have where to keep necessary notes from the findings
• Distribute questions for their research

ii. Practice
Guide students on accessing the real website
Ensure that internet is connected for all
Respond to any questions for clarification and support accordingly

iii. Present
Choose randomly any two teams to present their findings
Allow students to ask question to their fellows

iv. Conclusion
The teacher emphasizes on the objective of the research reminding students
that they have to follow those international auditing standards.
The following are key areas for reference:
International Standards on Auditing (ISA)
fundamental principles of auditing as per IESBA

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 6.6. Summary of the unit
1. International Auditing Standards (ISA)

1.1. The role of International Auditing and Assurance Standards Board

The IAASB, is there to serve the public interest by setting high-quality
international standards for auditing, quality control, review, other assurance,
and related services, and by facilitating the convergence of international and
national standards

1.2. International Standards on Auditing (ISA)

International Standards on Auditing (ISAs) are set by the International Auditing
and Assurance Standards Board (IAASB), a technical committee of the
International Federation of Accountants (IFAC). ISAs are produced by IAASB, a
technical committee of IFAC. IAASB also produces other items of international
guidance, such as the international standard on quality control (ISQC).

The key standards issued by the ISA include:

Respective responsibilities, Audit planning, Internal control, Audit evidence,
Using work of other experts, Audit conclusions and audit report

1.3. The regulation of auditors

International regulation, however, can play a major part by:
• Setting minimum standards and requirements for auditors
• Providing guidance for those countries without a well-developed
national regulatory framework
• Aiding intra-country recognition of professional accountancy
qualifications

The audit regulation are:

1. Statutory regulation
2. Licensing of auditors
3. Delegated regulation by professional bodies within a legal framework
(not self- regulation)

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2. The fundamental principles of auditing

2.1. The fundamental principles of auditing as per IESBA

The IESBA Code of Ethics provides ethical guidance. The five fundamental
principles of integrity, objectivity, professional competence and due care,
confidentiality and professional behaviour.

2.2. The professional duty of confidentiality

Confidentiality requires auditors to refrain from disclosing information acquired
in the course of professional work except where:
• Consent has been obtained from the client, employer or other proper
source, or
• There is a public duty to disclose, or
• There is a legal or professional right or duty to disclose
The auditor agrees to serve a client in a professional capacity both the auditor
and the client should be aware that it is an implied term of that agreement that
the auditor will not disclose the client’s affairs to any other person save with the
client’s consent or within the terms of certain recognised exceptions, which fall
under obligatory and voluntary disclosures.

6.7. Additional information for teachers

Additional Information

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 6.8. End unit assessment
Answers to end unit assessment activities

1. Objectivity: means that the auditor must not to allow bias, conflict
of interest or the undue influence of others to override professional
or business judgments. For external auditors, objectivity is usually
hallmarked by ‘independence’. The auditor must be, and be seen to be,
independent. The IESBA provides a number of guidelines as to how an
auditor should maintain his/her independence.
Threats to objectivity
The following are all threats to objectivity:
• Personal interest (for example, fear of losing fees or a good
relationship with a client).
• Review of own work (for example, if an auditor audits financial
statements he/she has compiled).
• Disputes (for example, with a client, or where an audit firm advocates
for its client).
• Long association or undue sympathy (for example, through close
personal relationships).
• Intimidation (this is linked to self-interest, for example, fear of losing
a client, fear of audit fee being withheld).
2. The principle of objectivity is: “Not to compromise professional or
business judgments because of bias, conflict of interest or undue
influence of others.”
3. Firms should have a review of machinery, including an annual review to
ensure they are acting as auditors in accordance with the IESBA Code
of Ethics, to identify situations where independence may be at risk and
where the appropriate safeguards should be applied.

4. a. An auditor is obliged to disclose a client’s affairs to an appropriate

authority if he/she knows or suspects treason, terrorism or money
laundering, for example: where disclosure is compelled by process of
law.
b. An auditor may disclose a client’s affairs:
i. Where it is permitted by law.
ii. To protect his/her interests.
iii. Where there is a duty to disclose in the public interest.

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5. There must either be permission or a legal duty or, in exceptional
circumstances, a public duty.
6. Independence is an important issue a natural consequence of the
fundamental principles of integrity and objectivity but not a stated
fundamental principle of professional ethics in itself.
a. There are a number of different issues to be considered here. Where
the previous auditor has fees still owing by the client, the new auditor
needs not decline appointment solely for this reason. He/she should
decide how far he/she may go in aiding the former auditor to obtain
his/her fees but should avoid entanglement in any dispute, otherwise
he/she may be asked to give an opinion on whether the fees are
reasonable or the work was ‘up to standard’.
However, the fact that the previous auditors are in dispute over fees
may indicate that there could be future problems over charges, and
hence lead the prospective auditors to question whether on commercial
grounds they should accept the assignment.
Secondly, it is not the place of A B & Co, nor is it within their power,
to give professional clearance to their successors. They are merely
required, after obtaining the client’s permission and on request from
the new auditor, to discuss freely with him/her all matters relevant to
the appointment of which he/she should be aware and disclose all
information which appears to them to be relevant to the client. They
cannot refuse to do this because they are owed fees.
b. There is no objection in principle to a practice providing a client with
services in addition to the audit. However, care must be taken not to
perform management functions or to make management decisions.
For audit clients that are not public interest entities, services related to
the preparation of accounting records and financial statements may be
provided as long as the services are of a routine or mechanical nature
(i.e. they require little or no professional judgment) and any self-review
threat created is reduced to an acceptable level. It is also important
that the auditors obtain from the directors an acknowledgement of
their responsibilities for presenting a set of accounts that give a true
and fair view, and maintaining accounting records that comply with
the law.
In the case of a listed company, however, the auditor should not participate
in the preparation of the company’s accounts and accounting records.

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 6.9. Additional activities (Questions and answers)
6.9.1. Remedial activities (Questions and answers)
Questions:
1. Who set international standards on auditing (ISAs)?
2. What is IAASB in full word?

Answers:
1. International Auditing and Assurance Standards Board
2. International Auditing and Assurance Standards Board

6.9.2. Consolidation activities

Questions:
1. Identify the role of International Auditing and Assurance Board.
2. Describe the functions of international regulation of auditors.
3. Identify the fundamental principles of ethics as per IESBA.

Answers:
1. It is to serve the public interest by setting high-quality international
standards for auditing, quality control, review, other assurance, and
related services, and by facilitating the convergence of international and
national standards.
2. The functions of international regulations of auditors are :
• Setting minimum standards and requirements for auditors.
• Providing guidance for those countries without a well-developed
national regulatory framework
• Aiding intra-country recognition of professional accountancy
qualifications
3. Integrity, objectivity, professional competence and due care, confidentiality
and professional behaviour.

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 6.9.3. Extended activities
Questions:
1. It is very important that the auditor is impartial, and independent of
management, so that he can give an objective view on the financial
statements of an entity. This opinion is true? Discuss

Answers:
1. Yes. Because, the fundamental principles require that auditors behave
with integrity in all professional and business relationships and they strive
for objectivity in all their professional and business judgments. Objectivity
is a state of mind but in certain roles the preservation of objectivity has
to be shown by the maintenance of independence from those influences
which could impair objectivity.

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 UNIT 7 AUDITING PLANNING

7.1. Key unit competence

To be able to execute audit planning and risk assessment

7.2. Prerequisite (knowledge, skills, attitudes and values)

Learners were introduced in unit 6 the international auditing standards in his
lesson one (1), in which they described the following international standards:
• Planning an audit of financial statement (ISA:300),
• Materiality in planning and performing an audit (ISA: 320),
• Identifying and assessing the risk of material misstatement through
INTRODUCTION
understanding the entity and its environment (ISA:315),
• The auditor’s response to assessed risks (ISA: 330), and
TO ACCOUNTING
• Evaluation of misstatement identified during the audit (ISA: 450).
So, with this prior knowledge, skills, attitudes and values it should help them to
appreciate the role of audit planning in the before starting the audit work.

7.3. Cross-cutting issues to be addressed:

Note: The examples below are just to guide you on how to address cross-
cutting issues throughout the unit but this does not mean that these are the
only ones. You can address and give students opportunities to discuss all the
cross-cutting issues where possible taking consideration of their environment
or community around them.
Environment and sustainability: environment is one of the greatest factors that
can affect both positively or negatively any business activity and one cannot start
up a business without the environment. Therefore, great care for environment is
crucial. Students are to be advised on the importance of environmental protection
and the importance of audit planning in reducing material misstatement and
audit risks, while promoting other environmentally friendly businesses e.g. use
of renewable energies (solar energy).

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Gender education: emphasis throughout this unit has to be put on how females
have the right of perform the same task as male, and tells them that both males
and females have the equal opportunities to be auditors in their community when
they can understand, explain, and perform audit planning. E.g. identifying and
assessing the risk of material misstatement through understanding the entity
and its environment during the audit planning. This can be taken as the source
of equality and equity between both males and females in the community.
Inclusive education: in addition to all having equal opportunities to carry out audit
activities, emphasis has to be put on how we all regardless of our background,
economic or social setup have right to develop an ethical understanding of
Rwandan system that do not discriminate. Students need to understand that
audit activities should not discriminate but promote inclusiveness of all etc.
Peace and Values: you need to emphasize to learners the need to live in peace
and harmony with others. Students need to appreciate the role of audit planning
in promoting peace in the company by avoiding activities that can lead them to
the risk of material misstatement and audit risk.
Standardization culture: In every lesson take an opportunity to share with

INTRODUCTION
learners that standards should be respected since they are part and parcel of
our lives. From school uniform, to class size, to lesson duration, language of
instruction, among others. So always, create opportunities to discuss about the
TO ACCOUNTING
standards with learners during their everyday and audit activities.

7.4. Guidance on introductory activity

NOTE: Follow the guidance about the introductory activity:
Students in small groups, pairs or individual observe and analyse the image
then discuss about audit planning then identify the major activities done in audit
planning.
During the activity, make sure everyone is following and actively participating.
Those who are not acting may have to listen attentively without disturbing and
should applaud the actors after.
Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair-share or large group
discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Appreciate the team’s presentations and remind them that this activity was not
meant come to the very right answers but to help them become aware of what
to expect in the unit. Answers to the activity will be got as the unit progresses.

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 Guide them to take notes in their books referring to learners’ book.
You can support student’s answers by referring to possible answers to the
introductory activity below:

Possible answers for introductory activity

Note: These responses may be shared or not with the students. They are
specifically to guide you while harmonizing students’ responses during
presentation.
1. Audit planning means developing a general strategy and a detailed
approach for the expected nature, timing and extent of the audit.
2. The activities around audit planning are the : planning strategies,risk
assessment,understand the entity and materiality assessment.

7.5. List of lessons/sub-heading

Lesson title/sub- Number
Heading Learning objectives
heading of periods
7.1. Audit Introductory activity Arouse the curiosity 1
planning of students on the
content of unit 7
1 Meaning and objectives Describe the audit 2
of audit planning planning
2 Audit planning strategy Explain audit 3
strategies
3 Limitations of audit Explain the 2
planning limitations of audit
planning
7.2. Materiality in 1 Meaning and methods Describe materiality 4
auditing of calculating materiality in auditing
2 Difference between Explain the 2
materiality in difference between
government auditing materiality in
and in private sector government auditing
and in private sector
3 Role of materiality in Explain the role of 1
auditing materiality in auditing
7.3. The entity 1 Understanding the entity Describe the entity 2
and its and its environment and its environment
environment

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7.4. Audit risk 1 Meaning and types of Describe audit risk 3
audit risks
2 Model and calculation of Explain model and 4
audit risk calculation of audit
risk
3 Assessing the risk of Explain how to 3
material misstatement assess and to
and responding to risk respond to risk
assessment assessed
End Unit Assessment 1
Total number of periods 28

Lesson 1: Audit planning

a) Learning objective
Describe the audit planning
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
teacher guide, computer, internet, projector, image, text books, chalk or marker
pen, chalk board or white board, resourceful person and any other trustworthy
and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
Read the Key unit competence in the syllabus to determine what students will
know and be able to do by the end of the unit. Look at the action verb, concept
and context of learning objective. This will help you see the skills, knowledge
attitudes embedded in the learning objective. Remember the learning objective
link to the key unit competence.
d) Learning activities

Activity 7.1
Exploit and use appropriate learning methods that can foster collaborative
learning for (example small groups or pairs, gallery walk). Provide students with
the activity in the student’s book, and give instructions to the activity to be done.
During grouping or pairing, ensure a balance between boys and girls and learners’
different abilities. During this activity ensure that students have understood the
instructions, prompt and probe them through question and answer approach to

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 make sure they are active and their curiosity in learning and discovery is aroused.
Encourage students to work together, value each other’s contributions, share
ideas, etc.
Students present their findings, results, answers through an appropriate method
such as pair-share, small group presentations on the introductory activity.
Encourage different students from the groups to share the group’s work to avoid
just a few students dominating. Also encourage other students to listen and not
disturb when other teams are sharing unless it is a question. Encourage students
to appreciate each other’s work especially the presentation. Appreciate the
team’s presentations and remind them that this activity was not meant to come
to the very right answers but to help them become aware of what to expect in
the lesson. Answers to the activity will be got as the lesson progresses. You
can support students’ answers by referring to possible answers to the activity
below:

Answers to learning activity 7.1

1. Importance of audit planning are:

• Help the auditor devote appropriate attention to important areas of
the audit.
• Help the auditor identify and resolve potential problems on a timely
basis.
• Help the auditor properly organise and manage the audit so it is
performed in an effective manner.
• Assist in the selection of appropriate team members and assignment
of work to them.
• Facilitate the direction, supervision and review of work.
• Assist in coordination of work done by auditors of components and
experts.
2. Audit strategy is the document sets out in general terms how the audit
is to be conducted and sets the scope, timing and direction of the audit.
The audit strategy then guides the development of the audit plan, which
contains the detaailed response to the auditor’srisk assessment.
3. When setting audit startegy the following areas are considered:
• The timetable for reporting, key dates and statutory obligations.
• Reporting framework and scope of the audit.
• Initial materiality levels.
• Preliminary risk assessment.

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 • Audit team members and skills required.
• Arrangements fot directing, supervising and reviewing the work of
audit team members.Consider the need for the service of experts.
• Location of client premises and travel/accommodation requirements.

e) Application activities 7.1

Students analyse questions individually and come up with possible answers.
This activity may be given as a research question or homework.
Depending on the purpose of the application activity, choose an appropriate
method to assess student’s findings, answers or responses. Depending on the
performance or results, you may decide to give remedial or extension activities.

Answers to application activity 7.1

1. The audit strategy is a document that outlines the general strategy of the
audit. It sets the direction of the audit, describe the expected scope and
conduct of the audit and provides guidance for the development of the
audit plan.

The audit plan is a more detailed document than the audit strategy and
includes instructions to the audit team that set out the audit procedures
the auditors intend to adopt. The audit plan may also contain references
to other matters such as audit objectives, timing, sample sizes and the
basis of selection for each account areas. It also serves as a means to
control and record the proper execution of the audit work.
2. Key contents of an audit strategy document are:
• Timetable for reporting, key dates and statutory obligations.
• Section on understanding the company’s environment.
• Section on understanding the company’s accounting and internal
system.
• Initial materiality levels.
• Preliminary risk assessment.
• Audit team members and skills required.
• Arrangements for directing, supervising and reviewing the work of
audit team members.
• Consider the need for the services of experts.

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 Lesson 2: Materiality in auditing

a) Learning objective
Describe materiality in auditing
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
teacher guide, computer, internet, projector, image, text books, chalk or marker
pen, chalk board or white board, resourceful person and any other trustworthy
and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson, lesson 1 Students studied the meaning of audit planning,
the importance of audit planning and audit planning strategies. That will help to
discuss about materiality in audit planning.
d) Learning activities

Activity 7.2
–– Put students in small groups and give clear instruction about the activity
–– Ask them to observe the pictures in student book and answer the
questions provided in the activity
–– Guide students’ discussion and make sure that everyone is participating
–– Invites students to share their findings
–– Harmonize their findings or answers, and link the findings to the learning
objective, help them draw conclusions/summary on the difference
between the overall materiality and the performance materiality.
Answers or address any questions or challenges about the activity.
Guide them to make notes in referring in their students’ book.

Answers to learning activity 7.2

1. Information is material if its omission or misstatement could reasonably

be expected to influence the economic decisions of users taken on the
basis of the financial statements. Materiality depends on the size of the
item or error judged in the particular circumstances of its omission or
misstatement. Materiality provides a threshold or cut-off point rather than
being a primary qualitative characteristic which information must have to
be useful.

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 2. a) Overall materiality is based on the auditor’s professional judgment as
to the maximum amount of misstatements that if not correct in the
financial statements will not affect the economic decisions taken by
a financial statement users.

b) Performance materiality is an amount less than materiality for the

financial statements as a whole (i.e. planning materiality) to reduce
to an appropriately low level the probability that the aggregate of
uncorrected and unedetected misstatements exceeds materiality
for the financial statements as a whole.

e) application activities 7.2

Students can be given an activity to discuss about the questions in groups, give
clear instructions and ensure a balance in the groups. Students are to give a
report of their findings. Monitor the activity to ensure students are on track and
actively participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to application activities 7.2

1. a) Because the business is stable, auditors are likely to base overall

materiality on a percentage of revenue or total assets, or possibly an
average of both. Profit before tax is unlikely to be used overall as its
fluctuation does not appear to be significant. However, a different
materiality level may be set when considering the one-off expense,
since it may be particularly significant to readers of the accounts.
b) Auditors are likely here to pay some attention to the level of profit
when setting materiality, because the outside members regard
profit as significant. However, the auditors are also likely to take into
account total and net assets. Low profits will be of less significance
if the business has a strong asset base, but more significance if the
business is in long-term financial difficulty.
2. Bank interest is less than 5% of profit before tax and so it is likely to be
immaterial. Although the director’s bonus is also immaterial by value, it is
material by nature, and so is likely to be tested in detail.

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 Lesson 3: The entity and its environment

a) Learning objective
Describe the entity and its environment
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
teacher guide, computer, internet, projector, image, text books, chalk or marker
pen, chalk board or white board, resourceful person and any other trustworthy
and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson (materiality in auditing) Student studied the meaning of
material misstatement in auditing, and the methods of calculatingl materiality,
and the importance of materiality in audit planning. That will help to discuss
about how to know the entity and its environment.
d) Learning activities

Activity 7.3
–– Put students in small groups and give clear instruction about the
activity
–– Ask them to observe the pictures in student book and answer the
questions provided in the activity
–– Guide students’ discussion and make sure that everyone is
participating
–– Invites students to share their findings
Harmonize their findings or answers, and link the findings to the learning
objective, help them draw conclusions/summary on the necessary information
the auditor needs to generate about the client’s company that can help him to
conduct the audit work without any risks of material misstatement. Answers or
address any questions or challenges about the activity. Guide them to make
notes in referring in their students’ book.

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 Answers to learning activity 7.3

1. The above image show different questions the Auditor asks himself/
herself to generate information that can allow him/her to understand the
client’s company and its environment.
2. Why: The reasons the auditor is to obtain the understanding of the entity
and its environment are very much bound up with assessing risks and
exercising audit judgment. We shall look at these aspects more in the
next two topics of this Unit.

Why:
• To identify and assess the risks of material misstatement in the
financial statements.
• To enable the auditor to design and perform further audit procedures.
• To provide a frame of reference for exercising audit judgment, for
example, when setting audit materiality.
What:
• Industry, regulatory and other external factors, including the
applicable financial reporting framework.
• Nature of the entity, including operations, ownership and governance,
investments, structure and financing.
• Entity’s selection and application of accounting policies.
• Objectives and strategies and related business risks that might
cause material misstatement in the financial statements.
• Measurement and review of the entity’s financial performance.
• Internal control framework.
How:
• Inquiries of management and others within the entity.
• Analytical procedures.
• Observation and inspection.
• Prior period knowledge.
• Client acceptance or continuance process.
• Discussion by the audit team of the susceptibility of the financial
statements to material misstatement.
• Information from other engagements undertaken for the entity.

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 e) Application activities 7.3
This activity can be given as a normal individual work, where students use the
acquired knowledge to provide answers to the given questions. Monitor the
activity to ensure students are on track and actively participating.
Students share their findings to the teacher. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to application activities 7.3

1. The auditor must obtain a sufficient understanding of the entity and its
environment, including its internal control, to assess the risk of material
misstatement of the financial statement whether due to error or fraud, and
to design the nature, timing, and extent of further audit procedure.
2. More specifically, the international standards on auditing requires that an
auditor understand the company’s objectives and strategies and those
related business risks that might reasonably be expected to result in risk
of material mistatement.
3. An auditor must understand each component of the client’s financial
reporting controls. This includes the control environment, risk assessment
process, information system, control activities that relate to the audit, and
the client’s monitoring of the controls.
4. The main duty of an auditor is to determine whether financial statement
follow generally accepted accounting principles. The securities and
exchange commission requires all public companies to conduct
regular reviews by external auditors, in compliance with official auditing
procedures.

Lesson 4: Audit risk

a) Learning objective
Describe audit risk
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books, teacher
guide, computer, internet, projector, image, text books, chalk of marker pen,
chalk board or white board, and resourceful person and any other trustworthy
and reliable resources to enhance learning.

146 Auditing | Teacher's guide | Senior Six | Experimental version

c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
Read the learning objective to determine what students will know and be able
to do by the end of the lesson. This will help you see the skills, knowledge
attitudes embedded in the learning objective. Remember the learning objectives
are linked to the key unit competence.
d) Learning activities

Activity 7.4
–– Put students in small groups and give clear instruction about the
activity
–– Ask them to observe the image in the student book and answer the
questions provided in the activity
–– Guide students’ discussion and make sure that everyone is
participating
–– Invites students to share their findings
–– Harmonize their findings or answers, and link the findings to the
learning objective, help them draw conclusions/summary on audit risk,
and say if it is possible for an auditor to draw an inappropriate audit
report on financial statement. Answers or address any questions or
challenges about the activity. Guide them to make notes in referring in
their students’ book.

Answers to learning activity 7.4

1. Yes, it is possible.
2. It is called audit risk

e) Application activities 7.4

This activity can be given as a normal individual or group activity, where students
read and discuss about the scenario in the student book, then they may outline
the potential materiality of the risk and discuss factors in the likelihood of the
risk arising. Monitor the activity to ensure students are on track and actively
participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

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 Answers to application activities 7.4

• The key risk arising from the above information is that trade accounts
receivable will not be carried at the appropriate value in the financial
statements, as some may be irrecoverable. Where receipts are not
matched against invoices in the ledger, the balance on the ledger may
include old invoices that the customer has no intention of paying.
• It is difficult to assess at this stage whether this is likely to be material.
Trade accounts receivable is likely to be a material balance in the
financial statements, but the number of irrecoverable balances may
not be material. Analytical procedures, for example, to see if the level
of accounts receivable has risen year-on-year, in a manner that is not
explained by price rises or levels of production, might help to assess this.
• A key factor that affects the likelihood of the material misstatement
arising is the poor controls over the receivables ledger. The fact that
invoices are not matched against receipts increases the chance of old
invoices not having been paid and not noticed by Kigali Solutions Ltd. It
appears reasonably likely that the trade accounts receivable balance is
overstated in this instance.

Skills lab activity 7

Guidance on the skills lab activity.

To do this skills lab activity, students can either visit the school bursar or the
cashier. The trainer can request students to take accounting documents of their
choice.

i. Build
• Remind students on the expected objective for the attendance
• Help them to be grouped and remember to mix both boys and girls
• Let each team have the representative
• Ensure they have where to keep necessary notes from the findings
• Distribute questions for their research

ii. Practice
Guide students on accessing the real accounting documents
Ensure that all needed documents are available
Respond to any questions for clarification and support accordingly

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iii. Present
Choose randomly any two teams to present their findings
Allow students to ask question to their fellows

iv. Conclusion
The teacher emphasizes on the objective of the activity reminding students that
they have to follow the same sampling procedures and know the effect of each
sampling factor on the sample size.
The following are key areas for reference:
Sampling procedures
Factor affecting the sample size.

7.6. Summary of the unit

1. Audit planning

1.1. Meaning and importance of audit planning

a. Meaning of audit planning

Audit planning means developing a general strategy and a detailed approach
for the expected nature, timing and extent of the audit. The auditor plans to
perform the audit in an efficient and timely manner. In simple words, developing
an overall strategy for the effective conduct and scope of the examination.

b. The importance of audit planning

An effective and efficient audit relies on proper planning procedures. The
planning process is covered in general terms by ISA 300 Planning an audit of
financial statements which states that the auditor shall plan the audit so that the
engagement is performed in an effective manner.

2. planning strategies
Audit strategy set the scope, timing and the direction of the audit, and guides
the development of the more detailed audit plan.
The audit strategy is the key planning document. It considers general areas of
planning such as:
• The timetable for reporting, key dates and statutory obligations
• Reporting framework and scope of the audit

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 • Initial materiality levels
• Preliminary risk assessment
• Audit team members and skills required
• Arrangements fot directing, supervising and reviewing the work of audit
team members
• Consider the need for the service of experts
• Location of client premises and travel/accommodation requirements

2. Materiality in uditing

2.1. Meaning and methods of calculating materiality

a. Meaning of materiality
b. Determining materiality for the financial statements as a whole
c. determining performance materiality

2.2. Difference between materiality in government and in private

sector.
Materiality in governmental audit is different from materiality in private sector
auditing for several reasons.
Most importantly, due to the format of state and local government financial
statements under GAAP (general accepted accounting principles), the AICPA
(American institute of certified public accountant) audit guide for state and
local governments requires auditors to consider materiality by “opinion unit”
rather than for the financial statements taken as a whole.

1. Role of materiality in auditing

• It influnces the auditor’s time budget on specific items
• It indicates the auditor’s plan
• It influences the auditor’s plan
• It determines the amount of audit evidence to be gathered.
• It is required by the professional body ICPAR ( institute of certified
public accountants of Rwanda) as an incidental objective.

3. The entity and its environment

1. the entity and its environment

The auditor is required to obtain an understanding of the entity and its environment
in order to be able to assess the risks of material misstatement and direct his
audit approach accordingly.

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ISA 315 (ISA 315: para. 5) states that ‘the auditor shall perform risk assessment
procedures to provide a basis for the identification and assessment of risks of
material misstatement at the financial statement and assertion levels.

4. Audit risk

1. Meaning and types of audit risk

Meaning of audit risk

Audit risk is the risk that the auditors give an inappropriate audit opinion when
the financial statements are materially misstated. It has two elements: the risk
that the financial statements contain a material misstatement (inherent risk
and control risk) and the risk that the auditors will fail to detect any material
misstatements (detection risk).

2. Model and calculation of audit risk

Looking at audit risk as a whole, we can see it can be represented by the audit
risk model as:
Audit risk (AR) = Inherent risk (IR) * Control risk (CR) * Detection risk (DR)

3. Assessing the risk of material misstatement and responding to risk

assessment
a. Assessing the risk of material misstatement
Steps of assessing the risk of material misstatement:
• Identify risks throughout the process of obtaining an understanding of
the entity
• Relate the risks to what can go wrong at the assertion level
• Consider whether the risks are of a magnitude that could result in a
material misstatement
• Consider the likelihood of the risks causing a material misstatement
b. responding to risk assessment
The auditors must formulate an approach to the identified risks of material
misstatement. They must formulate overall responses and detailed further audit
procedures, which will comprise tests of controls and substantive procedures
or substantive procedures only.

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 1. Overall responses
Overall responses to risks of material misstatement will be changes to the
general audit strategy or re-affirmations to staff of the general audit strategy.
• Emphasizing to audit staff the need to maintain professional skepticism
• Assigning additional or more experienced staff to the audit team
• Using experts
• Providing more supervision on the audit
• Incorporating more unpredictability into the audit procedures
• Making general changes to the nature, timing and extent of audit
procedures

2. Responses to the risks of material misstatement at the assertion

level

The ISA says that ‘the auditor shall design and perform further audit procedures
whose nature, timing and extent are based upon and are responsive to the
assessed risks of material misstatement at the assertion level. Nature refers
to the purpose and the type of test that is carried out. ISA 330 requires that
auditors should carry out tests of controls and substantive procedures.

7.7. Additional information for the teacher

This section provides guidance on the auditor’s consideration of audit risk and
materiality when planning and performing an audit of financial statements in
accordance with generally accepted auditing standards. Audit risk and materiality
affect the application of generally accepted auditing standards, especially the
standards of field work and reporting, and are reflected in the auditor’s standard
report.
Audit risk and materiality, among other matters, need to be considered together
in determining the nature, timing, and extent of auditing procedures and in
evaluating the results of those procedures.
The auditor should consider audit risk and materiality both in:
a) Planning the audit and designing audit procedures, and
b) Evaluating whether the financial statements taken as a whole are
presented fairly in all material respects, in conformity with generally
accepted accounting principle.
The auditor should consider audit risk and materiality in the first circumstance to
obtain sufficient competent evidential matter, on which to properly evaluate the
financial statements in the second circumstance.

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7.8. End unit assessment
Answers to end unit assessment activities

1. B
2. B, This illustrate detection risk.
3. No. A partner cannot delegate responsibility for the audit opinion. He/
she can however delegate aspects of the detailed audit work.
4. Inquiry, analytical procedures, observation and insection.
5. An audit plan usually contains:
• Audit tests.
• Test objectives.
• Timing of the tests.
• Sample sizes.
• Basis of sample selection.
6. 10%= 60*60*DR

0.10= 0.6*0.6*DR
0.10= 0.36*DR
0.10/0.36= DR
DR= 0.277777778=28%
If inherent risk and control risk are assumed to be 60% each, detection
risk has to be set at 27.8% in order to prevent the overall audit risk from
exceeding 10%.

7.9. Additional activities (Questions and answers)

7.9.1 Remedial activities (Questions and answers)
1. What is audit risk?

Answer: Audit risk is the risk that auditors may give an inappropriate opinion
when the annual financial statements are materially misstated.
2. What are the components of audit risk?

Answer: The three components of audit risk are inherent, control risk and
detection risk.

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 3. Which one is not the level of audit materiality:
A. Immaterial.
B. Material.
C. Material detection.
D. Very material
E. No of the above
Answer: C
4. The first phase in planning an audit and sesigning an audit approach is to:

A. Accept the client and perform initial audit planning

B. Set the preliminary judgement of materiality
C. Understand the client’s business and industry
D. Perform preliminary audit procedures
E. All of the above
Answer: A
5. …………….. is the risk that the financial statements contain amaterial
misstatement due to fraud or error to the audit. (choose one from the
choices bellow):
A. Inherent risk
B. Client business risk
C. Acceptable audit risk
D. Risk of material misstattement
Answer: D
6. Initial audit planning involves four matters. Which of the following is not one
of them?
A. Develop an overall audit strategy
B. Request that bank balances be confirmed
C. Schedule engagement staff and audit specialists
D. Identify the client’s reason for the audit.
Answer: B

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7. Materiality does not depend on the decisions of users who rely on the
statements to make the decisions. (answer by true or false)
Answer: False

7.9.2. Consolidation activities (Questions and answers)

1. Give examples of figures used as a basis for setting materiality

Answer: Commonly materiality is set using one or more of the following figure:
• Profit before tax
• Total assets
• Revenue
• Less frequently the following figures are used:
• Gross profit
• Profit after tax
• Net asset
2. What are the key tasks that should be performed when work is delegeted
to assistant?

Answer:
The audit ngagement partner has responsibility for the quality of the audit
performed
• He must ensure that the audit staff approach the job in the correct
manner and have proper communication both between themselves and
with the client.
• The engagement partner is also responsible for ensuring that the
work of other members of the audit team is directed, supervised and
reviewed.
3. Explain what you understand by the term audit risk, making reference to:
a) Inherent risk
b) Control risk
c) Detection risk
Answer: Audit risk is the risk that auditors may give an inappropriate opinion
when the financial statements are materially misstated. Audit risk is the product
of two components: the risk of material misstatement in the financial statements
(inherent and control risks) and the risk that the auditor will fail to discover
material misstatements (detection risk).

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 Inherent risk
Inherent risk is the likelihood that a specific item in the accounts will be
misstated due to characteristics of that item or of the organization as a whole
before consideration of related controls. Organizational factors include the
nature of its business or whether the directors are under pressure to produce
favorable results. Factors affecting individual items include the complexities of
the accounting involved, such as whether a significant degree of estimation is
involved.

Control risk
Control risk is the risk that an organization’s internal controls fail to prevent, or
detect and correct material misstatements. Control risk depends on whether
the controls that have been designed are appropriate for the business, and
whether the controls in place are operating properly.

Detection risk
Detection risk is the risk that audit procedures fail to identify material
misstatements. Sampling risk, the risk that the auditors’ conclusion differs
from what would be the conclusion if the whole population was tested, is a
component of detection risk. Other elements of detection risk are the risk that
auditors might use inappropriate procedures or fail to recognize a misstatement.
4. List three potential overall responses to assessed risks

Answer: Any of:

• Emphasizing the need for professional sceptism
• Assigning additional/more experienced staff
• Using experts
• Providing more suppervision
• Incorporating more unprectability
5. Which one is not a preliminary judgement about audit audit material?

A. Determining the nature, timing, and extent of risk assessment

procedures
B. Identify and assessing the risk of material misstatement
C. Determining the nature, timing and extent of further audit procedures
D. The nature of business entity
Answer: D

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6. Materiality does depend on the decisions of users who rely on the statements
to make the decision (answer by true or false)
Answer: True
7. If an auditor establishes a relatively high level for materiality, then the auditor
will:

A. Accumulate more evidence than if a lower level had been set

B. Accumulate less evidence than if a lower level had been set
C. Accumulate proximately the same evidence as would be the case
were materiality lowe
D. Accumulate an undetermined amount of evidence
E. All of the above
Answer: B

7.9.3. Extended activities (Questions and answers)

1. The audit partner has set the overall level of audit risk for a client as 5%.
Your risk assessment of the client has indicated that inherent risk is 90%
and control risk is 50%.What level of detection risk should be prescribed
for this client?

Answer
AR= 0.05
IR= 90%
CR= 50%
DR= ?
AR= IR*CR*DR
DR= AR/ IR*CR
DR= 0.05/ 0.9*0.5
DR= 0.05/ 0.45
DR= 0.11111111*100= 11.1%
2. ISA 320 materiality in planning and performing an audit provides guidance
on the concept of materiality in planning and perform an audit.

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 Required:
Define materiality and determine how the level of materiality is assessed.

Answer:
• Materiality for thefinancial statements as a whole (referred to from
now on as’overall materiality’)and performance materiality must be
determined for all audits.
• In the context of the financial statements, a matter is material if its
omission or misstatement would reasonably influence the economic
decision of users taken on the basis of the financial statements.
• Perforamance materiality is a materiality level set by the auditor for
paricular transactions, account balances and disclosures.
• Ultimately, both overall and performance materiality are determined
using the auditor’s judgment as to how the users will be affected
by misstatements for a prtiicular area. However it is useful to use
benchmarks as a starting point, such as 5% of profit before tax, or 1%
of total assets.
When setting performance materiality,the possibility of a number of misstatements

INTRODUCTION
with a low value aggregating to high overall value must be considered. This
result is being lower than overall materiali

TO ACCOUNTING

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 UNIT 8 AUDIT EVIDENCE AND
SAMPLING

8.1 Key unit competence

To be able to explain the audit procedures in sampling and gathering audit
evidence

8.2. Prerequisite (knowledge, skills, attitudes and values)

Learners were introduced in unit 6 international auditing standards, and different
standards regarding audit evidence and audit sampling were introduced.
E.g.
• Audit evidence (ISA: 500)
INTRODUCTION
• Audit evidence-specific considerations for selected items (ISA: 501);
• External confirmation (ISA: 505);

TO ACCOUNTING
• Analytical procedures (ISA: 520);
• Audit sampling (ISA: 530);
In unit 7 they were also introducing some audit procedures that can be used to
search information about the entity and its environment.
So, with this prior knowledge, skills, attitudes and values it should help them to
develop audit evidence and sampling.

8.3. Cross-cutting issues to be addressed:

Note: The examples below are just to guide you on how to address cross-
cutting issues throughout the unit but this does not mean that these are the
only ones. You can address and give students opportunities to discuss all the
cross-cutting issues where possible taking consideration of their environment
or community around them.
Environment and sustainability: environment is one of the greatest factors that
can affect both positively or negatively any business activity and one cannot start
up a business without the environment. Therefore, great care for environment
is crucial. Students are to be advised on the importance of environmental
protection and the importance of evidence and sampling procedures in reducing
risk of material misstatement during execution of the audit work.

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 Gender education: emphasis throughout this unit has to be put on how females
have the right of perform the same task as male, and tells them that both males
and females have the equal opportunities to be auditors in their community when
they can understand, explain, and perform audit planning. e.g. identifying and
assessing the risk of material misstatement through applying audit evidence,
and sampling procedures during execution of the audit work. This can be taken
as the source of equality and equity between both males and females in the
community.
Inclusive education: in addition to all having equal opportunities to carry out audit
activities, emphasis has to be put on how we all regardless of our background,
economic or social setup have right to develop an ethical understanding of
Rwandan system that do not discriminate. Students need to understand that
audit activities should not discriminate but promote inclusiveness of all etc.
Peace and Values: you need to emphasize to learners the need to live in
peace and harmony with others. Students need to appreciate the role of audit
execution procedure in promoting peace in the company by avoiding activities
that can lead them to the risk of material misstatement and audit risk.
Standardization culture: In every lesson take an opportunity to share with
learners that standards should be respected since they are part and parcel of
our lives. From school uniform, to class size, to lesson duration, language of
instruction, among others. So always, create opportunities to discuss about the
standards with learners during their everyday and audit activities.

8.4. Guidance on introductory activity

NOTE: Follow the guidance about the introductory activity:
Students in small groups, pairs or individual observe and analyse the image
provided in the student book, then ask them to provide answers.
During the activity, make sure everyone is following and actively participating.
Those who are not acting may have to listen attentively without disturbing and
should applaud the actors after.
Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair-share or large group
discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Appreciate the team’s presentations and remind them that this activity was not
meant come to the very right answers but to help them become aware of what
to expect in the unit. Answers to the activity will be got as the unit progresses.

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Guide them to take notes in their books referring to learners’ book.
You can support student’s answers by referring to possible answers to the
introductory activity below:

Possible answers for introductory activity

Note: These responses may be shared or not with the students. They are
specifically to guide you while harmonizing students’ responses during
presentation.
1. The auditor is looking for information that can help him/her to generate
audit evidence.
2. No, it is not possible. He/she must select the sample documents that
his/her opinion will based on.
3. He/she can use different audit procedures to obtain needed
information.
4. Yes, he/she can apply Computer-Assisted Auditing Techniques
(CAATs) (audit software and test data).

8.5. List of lessons/sub-heading

Lesson title/sub- Number
Heading Learning objectives
heading of periods
8.1. Audit Introductory activity Arouse the curiosity of 1
execution and students on the content
procedures of unit 8
1 Meaning and steps Describe audit execution 2
of audit execution and its steps
2 Audit procedures Explain the audit 3
procedures
8.2. Audit 1 Meaning of audit Explain the audit 1
evidence evidence evidence
2 Qualities of audit Explain the qualities of 1
evidence audit evidence
3 Types of audit Explain the techniques of 2
evidence gathering audit evidence
4 Techniques of Explain the techniques of 2
audit evidence gathering audit evidence

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 8.3. Audit 1 Meaning of audit Describe audit sampling 2
sampling sampling
2 Sample size Explain sampling risk and 4
non-sampling risk
3 Techniques of Explain techniques of 2
audit sampling audit sampling
4 Factors affecting Explain factors affecting 2
sample size sample size
8.4. Audit in IT 1 Computer Explain the computer- 2
environment assisted audit assisted audit
techniques(CAATs) techniques
2 Advantages and Identify the advantages 1
disadvantages of and disadvantages of
CAATS CAATs
3 Meaning of Desrcibe the audit 1
audit software, software
its benefits and
difficulties
4 Test data Explain test data 1
End Unit Assessment 1
Total number of periods 28

Lesson 1: Audit execution and procedures

a) Learning objective
Explain audit execution, its steps and audit procedures
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
teacher guide, computer, internet, projector, image, text books, chalk or marker
pen, chalk board or white board, resourceful person and any other trustworthy
and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
Read the Key unit competence in the syllabus to determine what students will
know and be able to do by the end of the unit. Look at the action verb, concept
and context of learning objective. This will help you see the skills, knowledge
attitudes embedded in the learning objective. Remember the learning objective
link to the key unit competence.

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d) Learning activities

Activity 8.1
Exploit and use appropriate learning methods that can foster collaborative
learning for (example small groups or pairs, gallery walk). Provide students with
the activity in the student’s book, and give instructions to the activity to be done.
During grouping or pairing, ensure a balance between boys and girls and learners’
different abilities. During this activity ensure that students have understood the
instructions, prompt and probe them through question and answer approach to
make sure they are active and their curiosity in learning and discovery is aroused.
Encourage students to work together, value each other’s contributions, share
ideas, etc.
Students present their findings, results, answers through an appropriate method
such as pair-share, small group presentations on the introductory activity.
Encourage different students from the groups to share the group’s work to avoid
just a few students dominating. Also encourage other students to listen and not
disturb when other teams are sharing unless it is a question. Encourage students
to appreciate each other’s work especially the presentation. Appreciate the
team’s presentations and remind them that this activity was not meant to come
to the very right answers but to help them become aware of what to expect in
the lesson. Answers to the activity will be got as the lesson progresses. You
can support students’ answers by referring to possible answers to the activity
below:

Answers to learning activity 8.1

1. The terms in small circles are called audit procedures/audit techniques.

2. They surround the big circle named audit execution because the audit
work is executed through the use of these audit procedures/techniques.

e) Application activity 8.1

Students individually analyse the questions and come up with possible answers.
This activity may be given as a homework.
Depending on the purpose of the application activity, choose an appropriate
method to assess student’s findings, answers or responses. Depending on the
performance or results, you may decide to give remedial or extension activities.

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 Answers to application activity 8.1

1. C
2. The difference is given as follows: substantive procedures: are audit
procedures designed to detect material misstatements at the assertion
level while

Analytical procedures: are pair financial data with non-financial data and
determine the correlation between them. Comparison of previous trends
versus current trends, as well as evaluation of the difference between the
client’s record and the substantive evidence, are also considered analytical
procedures.

Lesson 2: Audit evidence

a) Learning objective
Describe the audit evidence
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books, teacher
guide, computer, internet, projector, scenario, text books, chalk or marker pen,
chalk board or white board, resourceful person and any other trustworthy and
reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In unit 6, lesson 1 Students studied standards regarding audit evidence. That
will help to discuss the meaning of audit evidence, the quality of audit evidence
and the procedure for generating audit evidence.
d) Learning activities

Activity 8.2
–– Put students in small groups and give clear instruction about the
activity
–– Ask them to read the scenario in student book and answer the
questions provided in the activity
–– Guide students’ discussion and make sure that everyone is
participating
–– Invites students to share their findings

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 –– Harmonize their findings or answers, and link the findings to the
learning objective, help them draw conclusions/summary on when
to discuss audit evidence, qualities of audit evidence, and qualities
of audit evidence. Answers or address any questions or challenges
about the activity. Guide them to make notes in referring in their
students’ book.

Answers to learning activity 8.2

1. The technical term used for the information found by Mr GAKIRE is audit
evidence.
2. The means used by Mr GAKIRE when searching information are called
audit procedures. He has used external confirmation procedure.
3. No, because he was supposed to accept the evidence that fulfils all
qualities of a good audit evidence.

e) Application activity 8.2

This activity can be given as a normal individual activity, where students must
write the letter corresponding to the correct answer from question 1 to 3 and
give open answers to question 4 and 5. Monitor the activity to ensure students
are on track and actively participating.
Students share their findings to the teacher. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to application activity 8.2

1. B and c are correct.

2. b, c and d are correct.
3. B
4. Sources of audit evidence are:
• Accounting records.
• Audit procedures performed to test accounting records.
• Information obtained during the audit of previous years.
• Audit firm’s quality control procedures for acceptance of audit.
• Work of management’s expert.
• Confirmation from third parties.

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 • Comparable data of other companies engaged in the same industry.
• Written representations from management to support other
evidences obtained during the audit.

Lesson 3: Audit sampling

a) Learning objective
Describe audit sampling
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
teacher guide, computer, internet, projector, image, text books, chalk or marker
pen, chalk board or white board, resourceful person and any other trustworthy
and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In unit 6, lesson 1 Students studied standards regarding audit sampling. That
will help to discuss the meaning of audit sampling, the sample size and the
techniques of audit sampling.

Activity 8.3
–– Put students in small groups and give clear instruction about the
activity
–– Show the pictures in student book and ask student to observe and
analyze it then provide answers to asked questions provided in the
activity.
–– Guide students’ discussion and make sure that everyone is
participating
–– Invites students to share their findings
–– Harmonize their findings or answers, and link the findings to the
learning objective, help them draw conclusions/summary on when
to discuss audit sampling, sample size, and techniques of audit
sampling. Answers or address any questions or challenges about the
activity. Guide them to make notes in referring in their students’ book.

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 Answers to learning activity 8.3

1. In auditing, the people in the big circle is called population.

2. In auditing the people in the small circle are called the sample
3. The people in the small circle may be selected based on the different
factors to be considered when selecting the sample.

e) Application activities 8.3

This activity can be an individual activity, where students provide answers to
asked question through acquired knowledge. Monitor the activity to ensure
students are on track and actively participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to Application Activity 8.3

1. Random sampling, systematic sampling, haphazard sampling, block

sampling, and monetary unit sampling.
2. The difference between sampling risk and non-sampling risk is given
below:
• Sampling risk is the risk that the auditor’s conclusion, based on a
sample of a certain size, may be different from the conclusion that
would be reached if the entire population were subjected to the
same audit procedure.
• Non-sampling risk is the risk that the auditor might reach an
erroneous conclusion for any reason not related to sampling risk. For
example, most audit evidence is persuasive rather than conclusive,
the auditor might use inappropriate procedures, or the auditor
might misinterpret evidence and fail to recognize a misstatement or
deviation.
3. The importance of audit sampling enable the auditor to obtain and
evaluate audit evidence about some characteristic of the items selected
in order to provide the auditor with reasonable basis on which to draw
conclusions about the entire population. Audit sampling can be applied
using either statistical or non-statistical approaches.

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 4. Testing procedures do not involve sampling are:
• Testing 100% of items in a population, and
• Testing all items with certain characteristics as selection is not
representative.
5. In designing the audit sampling, the auditor applies judgment in
considering:
• Audit objective
• Population
• Sampling unit
• Risk and assurance
• Tolerable misstatement
• Expected error in the population, and
• Stratification

Lesson 4: Audit in IT environment

a) Learning objective
Explain the computer-assisted audit techniques
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
teacher guide, computer, internet, projector, image, text books, chalk or marker
pen, chalk board or white board, resourceful person and any other trustworthy
and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In ICT learners were introduced some accounting software; such as sage, quick
book and other information technology skills related to accounting that can help
them to understand computer-assisted audit techniques.
d) Learning activities

Activity 8.4
–– Put students in small groups and give clear instruction about the
activity
–– Ask them to observe and analyze the image in student book and

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 answer the questions provided in the activity
–– Guide students’ discussion and make sure that everyone is
participating
–– Invites students to share their findings
–– Harmonize their findings or answers, and link the findings to the
learning objective, help them draw conclusions/summary on
computer-assisted audit software. Answers or address any questions
or challenges about the activity. Guide them to make notes in referring
in their students’ book.

Answers to learning activity 8.4

1. Applications of auditing procedures to be applied using the

computer as an audit tool are called Computer-Assisted Auditing
Techniques(CAATs).
2. These application are called audit software and test data.

e) Application activities 8.4

This activity can be given as a normal individual activity, where students provide
answers on asked questions. Monitor the activity to ensure students are on
track and actively participating.
Students share their findings to the teacher. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to Application Activity 8.4

1. Two (2) types of CAATs are: audit software and test data.
2. CAATs may be used in performing various auditing procedures, including
the following:
• Tests of details of transactions and balances.
• Analytical review procedures.
• Tests of computer information system controls.
3. The examples of use of audit software are:
• Access the client’s data files and obtain information without the
need to ask the client for information.

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 • Perform calculations and comparisons in analytical procedures.
• Sampling programs to extract data for audit testing, e.g. select a
sample of receivables for confirmation.
• Scan a file to ensure that all documents in a series have been
accounted for or to search for large and unusual items.
• Compare data elements in different files for agreement (e.g. prices
on sales invoices to authorized prices in master file).
• Re-perform calculations, e.g. totalling receivables ledger.
• Prepare documents and reports, e.g. Produce receivables’
confirmation letters and monthly statements.
4. Two(2) benefits of using test data are:
• Test data provides evidence that the software or computer system
used by the client are working effectively by testing the program
controls and in some cases there may be no other way to test some
program controls.
• Once the basic test data have been designed, the level of ongoing
time needed and costs incurred is likely to be relatively low until the
client’s systems change.
5. Test data has two aspect as shown below:
• Data representing valid transactions. Here the auditor is looking
to confirm that the system produces the required documentation
such as sales invoices and updates the accounting records.
• Data that is invalid for any reason. Here the auditors are reviewing
controls that prevent processing of data that is clearly wrong,
negative amounts or non-existent customers for example, or which
breaches limits set down by the company (for example transactions
which take credit customers over their credit limit). Auditors are
interested in seeing not only that the system rejects the transaction,
but also that breaches are reported (by means of exception reports).
6. Procedures for gathering audit evidence are:
• Inspection (of an item).
• Observation (of a procedure).
• Inquiry.
• External confirmation.
• Recalculation.
• Re-performance.
• Analytical procedures.

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 Skills lab activity 8

Guidance on the skills lab activity.

To do this skills lab activity, students can either visit the school bursar or the
cashier. The trainer can request students to take accounting documents of their
choice.

i. Build
• Remind students on the expected objective for the attendance
• Help them to be grouped and remember to mix both boys and girls
• Let each team have the representative
• Ensure they have where to keep necessary notes from the findings
• Distribute questions for their research

ii. Practice
Guide students on accessing the real accounting documents
Ensure that all needed documents are available
Respond to any questions for clarification and support accordingly

iii. Present
Choose randomly any two teams to present their findings
Allow students to ask question to their fellows

iv. Conclusion
The teacher emphasizes on the objective of the activity reminding students that
they have to follow the same sampling procedures and know the effect of each
sampling factor on the sample size.
The following are key areas for reference:
Sampling procedures
Factor affecting the sample size.

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 8.6. Summary of the unit
1. Audit execution and procedures

1.1. Meaning and steps of audit execution

a. Meaning
Audit execution is where the auditing take place. Before starting, the auditor is
presented with all relevant information regarding the audit. The audit forms are
connected to the system and updated in real time.
The audit execution consists mainly on the assessment and valuation of the
questions on the basis of the replies in the audit, the determination of the audit
result and the degree of fulfilment, and the rating of the audit. The lead auditor
prepares the execution of an audit.

b. steps of audit execution

• Appointment of the auditor
• Communication with the previous auditor
• Letter of engagement sent to the client
• Investigate relevant internal control and accounting systems
• Evaluate operation of internal control and accounting systems by
applying relevant tests
• Ensure the correctness of accounting records and final accounts
• Carry out final review
• Prepare and submit the report

1.2. Audit procedures

a. Meaning
Audit procedures are the techniques, processes, and methods that auditors use
to obtain reliable audit evidence, which enable them to gain a sound judgment
about an organization’s financial status. Audit procedures are conducted to
help determine whether or not a company’s financial statement is credible and
factual.
1. Tests of controls
2. Substantive procedures
• Analytical procedures
• Tests of details

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b. Types of audit procedure
• Inquiry
• External confirmation
• Observation
• Inspection of documents
• Inspection of physical assets
• Recalculation
• Re-performance
• Ticking (Pointing)
• Casting (Checking of summation)
• Calling-over (Stepping)
• Vouching
• Tracing (verification)

2. Audit evidence

2.1. Meaning of audit evidence

Audit evidence is all the information, whether obtained from audit procedures
or other sources that is used by the auditor in arriving at the conclusion on
which the auditor’s opinion is based. The auditor obtains evidence from several
sources.
Some of significant source of audit evidence are:
• Accounting records
• Audit procedures performed to test accounting records
• Information obtained during the audit of previous years
• Audit firm’s quality control procedures for acceptance of audit
• Work of management’s expert
• Confirmation from third parties
• Comparable data of other companies engaged in the same industry
• Written representations from management to support other evidences
obtained during the audit.

2.2. Qualities of audit evidence

• Sufficiency
• Relevance
• Reliability

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 2.3. Types of Audit evidence
• Primary audit evidence
• Secondary audit evidence
• Circumstantial Audit evidence
• Hearsay evidence
2.4. Procedures for generating audit evidence
• A number of audit testing procedures are available to the auditor as a
means of generating audit evidence.
• Inspection (of an item)
• Observation (of a procedure)
• Inquiry
• External confirmation
• Recalculation
• Re-performance
• Analytical procedures
3. Audit sampling

3.1. Meaning of audit sampling

1. Meaning
Audit sampling is the application of audit procedures to less than 100% of
items with a population of audit relevance such that all sampling units have a
chance of selection.
Auditors do not normally examine all the information available to them as it would
be impractical to do so and using audit sampling will produce valid conclusion.
ISA 530 Audit sampling provides guidance to auditors.

2. Sample size
a. Sampling risk
Sampling risk
Non-sampling risk
b. Risk and sample size
If you recall, in the previous unit we illustrated how the prescribed level of
detection risk is affected by inherent risk and control risk, given a desired
level of audit risk. This relationship is described by the audit risk model: AR =
IR*CR*DR.

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 3. Techniques of audit sampling
Statistical sampling is an approach to sampling that involves random selection
of the sample items, and the use of probability theory to evaluate sample results,
including measurement of sampling risk.
Non-statistical sampling is a sampling approach that does not have these
characteristics.
a) Random selection
b) Systematic selection
c) Haphazard selection
d) Sequence or block selection
e) Monetary unit sampling
4. Factors affecting the sample size
• Audit objective
• Population
• Sampling unit
• Risk and assurance
• Tolerable misstatement
• Expected error in the population, and
• Stratification
4. Audit in IT environment
1. Computer assisted audit techniques
a. Meaning of CAATs
Computer-assisted audit techniques (CAATs) are commonly used by
auditors. They consist of audit software and test data.
b. Auditing around the computer
c. Auditing through the computer
d. Auditing with the computer
Auditing with the computer refers to the use of CAATs to assist in auditing work.
CAATs consist of audit software and test data which we will look at in detail
below.

2. Advantages and disadvantages of CAATs

a. The advantages of using CAATs are:

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 Advantages of CAATs
• Auditors can test program controls as well as general computer controls
• A greater number of items can be tested more quickly and accurately
• Transactions can be tested, rather than paper records that could be
incorrect
• CAATs are cost-effective in the long term if the client does not change
its systems
• Results can be compared to results from traditional testing and if
correlation exists, overall confidence is increased.
b. The challenges associated with using CAATs include:

Challenges of using CAATs are:

• Setting up the software needed for CAATs can be time consuming and
expensive.
• Audit staff will need to be trained so they have a sufficient level of IT
knowledge to apply CAATs.
• Not all client systems will be compatible with the software used with
CAATs.
• There is a risk that live client data is corrupted and lost during the use
of CAATs.
• Information in real-time systems is constantly changing.
• Testing can be limited by the data held on the system.
• There is a risk of over-reliance on ‘infallible’ computerization of audit
procedures.
• Auditor judgment must still be applied throughout the testing process

3. Audit software
a. Meaning
Audit software are computer programs used by the auditor to interrogate a
client’s computer files. Audit software consists of computer programs used
by the auditors, as part of their auditing procedures, to process data of audit
significance from the entity’s accounting system. It may consist of generalized
audit software or custom audit software. Audit software is used for substantive
procedures.
b. Audit software: Example of use
• Access the client’s data files and obtain information without the need to
ask the client for information.
• Perform calculations and comparisons in analytical procedures.

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c. Benefits and difficulties of using audit software
• Benefits of using audit software
• Difficulties of using audit software

4. Test data
a. Meaning
Test data is data submitted by the auditor for processing by the client’s computer
system, to test that the system processes the data as expected.
Test data techniques are used in conducting audit procedures by entering data
(e.g. a sample of transactions) into an entity’s computer system, and comparing
the results obtained with pre-determined results. Test data is used for tests of
controls.
Test data has two aspects:
1. Data representing valid transactions.
2. Data that is invalid for any reason.
b. Benefits and problems of using test data
• Benefits of using test data
• Problems with using test data

8.7. Additional information for the teacher

1. Sources of audit evidence
Some audit evidence is obtained by performing audit procedures to test the
accounting records, for example, through analysis and rewiew, performing
procedures followed in the financial reporting process, and reconciling related
types and applications of the same information. Through the performance of
such audit procedure, the auditor may determine that the acounting records are
internally consistent and agree to the financial statements.
More assurance is ordinarily obtained from consistent audit evidence obtained
from different sources or of a different nature than from items of audit evidence
considered individually. For example, corroborating information obtained from a
source independent of the entity may increase the assurance the auditor obtains
from audit evidence that is generated internally, such as evidence existing within
the accounting record, minutes of meetings, or a management representation.
Information from sources independent of the entity that the auditor may use as
audit evidence may include confirmations from third parties, analysts’ reports,
and comparable data about competitors (benchmarking data).

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 2. Audit sampling procedure
The application of sampling techniques in substantive procedures, illustrated
below, involves the following steps:
a. Designing the sample
b. Selecting a sample
c. Performing the audit procedures
d. Evaluating results of the tests
e. Summarizing the result.

8.8. End unit assessment

Answers to end unit assessment activities

1. Challenges of using CAATs are:

• Setting up the software needed for CAATs can be time consuming
and expensive.
• Audit staff will need to be trained so they have a sufficient level of IT
knowledge to apply CAATs.
• Not all client systems will be compatible with the software used with
CAATs.
• There is a risk that live client data is corrupted and lost during the
use of CAATs.
• Information in real-time systems is constantly changing.
• Testing can be limited by the data held on the system.
• There is a risk of over-reliance on ‘infallible’ computerization of audit
procedures.
• Auditor judgment must still be applied throughout the testing
process
2. Audit software are computer programs used by the auditor to interrogate
a client’s computer files. Audit software consists of computer programs
used by the auditors, as part of their auditing procedures, to process
data of audit significance from the entity’s accounting system. It may
consist of generalized audit software or custom audit software. Audit
software is used for substantive procedures

Test data is data submitted by the auditor for processing by the client’s
computer system, to test that the system processes the data as expected.

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Test data techniques are used in conducting audit procedures by entering
data (e.g. a sample of transactions) into an entity’s computer system, and
comparing the results obtained with pre-determined results. Test data is
used for tests of controls.

Advantages of CAATs
• Auditors can test program controls as well as general computer
controls
• A greater number of items can be tested more quickly and accurately
• Transactions can be tested, rather than paper records that could be
incorrect
• CAATs are cost-effective in the long term if the client does not
change its systems
3. The qualities of audit evidence are:

a. Sufficiency
It means that audit evidence should be complete and adequate to prove any
material fact. For example, complete physical counting of items of stock is
sufficient to verify the value of stock.
The auditor must assess whether the evidence is sufficient to allow him/her
to reach the opinion that the financial statements give a true and fair view.
If the auditor decides that the evidence obtained is insufficient to reach this
opinion (or any other opinion) he/she may take any other action depending
on the circumstances that can allow him/her to obtain more evidence by
means of tests of controls and substantive procedures.

b. Relevance
Audit evidence should be relevant to the purpose for which it is required. For
example, checking of physical existence of assets in accordance with the
schedule of assets is relevant for audit purposes.

c. Reliability
Evidence is reliable if it is considered correct and accurate. For example, if
the auditor receives a certificate of stock valuation from an outsider expert
instead of an official of the company then it is more reliable. Similarly,
documentary evidence instead of oral evidence is more reliable. A physical
inspection by the auditor himself/herself is more reliable than evidence
obtained from others.

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 4. Audit sampling can be done using either statistical sampling or non-
statistical sampling methods.

Statistical sampling is sampling method involving random selection of the

sample items, and the use of probability theory to evaluate sample results,
including measurement of sampling risk.
Non-statistical sampling is another sampling method that does not have
these characteristics.

8.9. Additional activities (Questions and answers)

8.9.1. Remedial activities (Questions and answers)
1. Which of the following would have the least effect on a sample size? :

A. Increase in the required confidence level

B. Increase in number of invoices in population
C. Increase in tolerable misstatement
D. Increase in assessed risk
Answer: C

2. To what does ‘sufficiency’ of audit evidence relate?

A. Reliability
B. Quality
C. Relevance
D. Quantity
Answer: D

3. What will increase the reliability of evidence

A. Confirmation
B. Amount of information
C. Effective control

Answer: C

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4. The most reliable form of audit evidence is:
A. Analytical procedures
B. Visual observation of a transaction or event by the auditor
C. Written document
D. Oral representation of the third parties.
Answer: D
5. Which of the following statements regarding analytical procedures is not
correct?
A. Analytical tests emphasize a comparison of client internal control to
GAAP.
B. Analytical procedures are required on all audits
C. Analytical procedures can be used as substantive tests.
D. For certain accounts with small balances, analytical procedures alone
may be sufficient evidence
Answer: A

8.9.2. Consolidation activities (Questions and answers)

1. Summarize the factors that affect sample sizes for substantive tests.

Answer:
Factors that affect the sample sizes of substantive tests are:
a. Inherent risk
b. Control risk
c. Detection risk
d. Tolerable misstatement rate
e. Expected misstatement rate
f. Population value
g. Number of items (in small population)
Stratification may also lead to smaller sample sizes
2. What is the difference between random and haphazard selection?

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 Answer:

Random selection uses random number tables or computerized generator to

select the sample.
For example, the auditors might tell a computer program there are 450 receivables
numbered 1–450 and they want a sample of 30. The computer would randomly
select 30 numbers between 1 and 450 to be the sampled items.
Haphazard selection is where an auditor himself selects items ‘at random’. It
may be an alternative to random selection provided auditors are satisfied that
the sample is representative of the entire population. This method requires care
to guard against making a selection which is biased, for example towards items
which are easily located, as they may not be representative. It should not be
used if auditors are carrying out statistical sampling
3. Explain the terms ‘audit software’ and ‘test data’ and list the advantages of
using CAATs in an audit.

‘Audit software’ consists of computer programs used by auditors to process

data of audit significance from the client’s accounting system. It may comprise
generalized audit software or custom audit software. It is used for substantive
procedures.
‘Test data’ involves entering data such as a sample of transactions into the
client’s accounting system and comparing the results obtained with pre-
determined results. Test data is used for tests of controls.
4. Explain the reason why the auditor should communicate the previous auditor
before accepting the appointment.
Answer:
If the auditor has been appointed in place of another auditor, he should enquire
from the retiring auditor, the reasons for his removal as an auditor. If the retiring
auditor discloses some information due to which the new auditor would not be
able to work independently or in accordance with the professional ethics then
he should not accept the appointment.
5. The one of the following is an example of vouching:
A. trace inventory purchases from the acquisitions journal to supporting
invoices
B. trace selected sales invoice to the sales journal
C. trace details of employees pay checks to the payroll journal
D. all of the above are example of vouching
Answer: A

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 8.9.3. Extended activities (Questions and answers)
1. The results of tests of detail on a sample of receivable balances recorded
as FRW 2,000,000 indicate that the correct balances should be
Frw1,950,000. The total of balances for similar items has been recorded
as Frw10,000,000

Required:

Explain:
a) What the auditor might conclude about the projected misstatement in the
population of trade receivables.
b) The relevance of the concept of tolerable misstatement in this situation.

Answer:
• The misstatement in the sample is FRW 50,000 (FRW 2,000,000 –
FRW 1,950,000).
• The misstatement rate in the sample is 2.5% (50,000/2,000,000).
Extrapolating this over the population is a whole, the projected
misstatement is that total trade receivables contain errors of FRW
250,000(10,000,000*2.5%) and trade receivables should therefore be
stated at FRW 9,750,000 (FRW 10,000,000-FRW 250,000).
• The auditor will compare the projected misstatement in the population
to his pre-set tolerable misstatement. If the tolerable misstatement in
the population was, say, FRW 300,000 then the error is, in effect, not
material and could be ignored.

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 UNIT 9 AUDIT DOCUMENTATION

9.1. Key unit competence

To be able to evaluate the form, content and extent of audit documentation

9.2. Prerequisite (knowledge, skills, attitudes and values)

In senior 4 Unit 2 in management accounting and unit 2 in financial accounting you
analyzed source documents used. This prior knowledge, skills or competences
should help the students to be able to apply that knowledge related to business
activities in their locality and be able to realize their contribution as students
towards business activities.
INTRODUCTION
9.3. Cross-cutting issues to be addressed:

TO ACCOUNTING
Note: The examples below are just to guide you on how to address crosscutting
issues throughout the unit but this does not mean that these are the only ones.
You can address and give students opportunities to discuss all the crosscutting
issues where possible taking consideration of their environment or community
around them.
Gender education: Emphasis throughout this unit has to be put on how both
males and females have the equal opportunities to understand and explain the
meaning of audit report, its basic elements. Being citizens of Rwanda, males
and females are encouraged to start business, they should know the importance
of audit report for them as owners of the business.
Inclusive education: In addition to all having equal opportunities to carry
out business activities, emphasis has to be put on how we all regardless of
our background, economic or social setup have right to develop an ethical
understanding of Rwandan education system that do not discriminate.

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Peace and Values: You need to emphasize to students the benefit of living in
peace and harmony with others. Students need to appreciate the role played by
auditors in promoting peace and patriotism in the community avoiding activities
that are illegal e.g., frauds, fraudulent manipulations of accounts, falsification of
accounting documents and make sure that every business they plan to have is
legal and contributes to national development goals.
Standardization culture: You need to emphasize to students why adhering to
ethics and integrity requirements at workplace and their respective community
is very crucial for a self-reliance national development. This will help them to
abide by international auditing and Assurance Standards Board.
Financial education: Teacher and students should know that resources and
materials used in teaching and learning activities must not be mismanaged. This
issue will also be addressed when studying auditing. Students will learn what
is permitted and what is prohibited to manage learning resources and materials
well. They will put in mind that misusing materials is wasting money.

9.4. Guidance on introductory activity

NOTE: The students won’t be able to answer all the questions at this stage;
INTRODUCTION
they can answer one question. The most important thing is that you want to
challenge students to be expectant and to use their previous knowledge and
TO ACCOUNTING
background to self-discover during teaching and learning of this unit.
Explain the purpose of the introductory activity of the lesson. This activity is
intended to provide interest and motivation for students to be able to describe
the audit documentation.
The introductory activity will also evoke students’ interests about what to expect
in this unit as they answer the questions that follow in the activity. Students can
build on previous knowledge, skills, values and attitudes to help you assess the
student’s prior knowledge and help link with the new content.
Use an appropriate method such as small groups or pairs and provide students
with Unit 9 introductory activity, give clear instructions to the activity.
They observe photo and discuss what activities may have carried out. They
read a scenario about audit documentation and discuss about documents to
be gathered.
During grouping or pairing, mix boys and girls and students with different abilities.
During the discussion, make sure everyone is following and actively participating.
Those who are not acting may have to listen attentively without disturbing and
should applaud/congratulate the actors after.

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 Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair share or large group
discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Harmonize their findings or answers, and help them draw conclusions/summary
to questions. Answer or address any questions or challenges about the activity.
Guide them to make notes in their books referring to students’ book.

Possible answers for introductory activity

1. The documents gathered by the auditor are called audit documentation

and include:
• Audit working papers
• Audit file
• Audit Note Book
2. The purpose or objectives of gathering those documents are the
following:
• It provides evidence of the auditor’s basis for a conclusion about the
achievement of the overall objective.
• It provides evidence that the audit was planned and performed in
accordance with ISAs and other legal and regulatory requirements.
• It assists the engagement team to plan and perform the audit.
• It assists team members responsible for supervision to direct,
supervise and review audit work.
• It enables the team to be accountable for its work
• It allows a record of matters of continuing significance to be retained.
• It enables the conduct of quality control reviews and inspections
(both internal and external).

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9.5. List of lessons/sub-heading
Lesson title/ Learning Number of
Heading
sub-heading objectives periods
9.1. Components Introductory activity Arouse the 1
of audit curiosity of
documentation students on the
content of unit 9
1 Meaning and Explain the 3
objectives of audit meaning and
documentation objectives of audit
documentation.
2 Audit working Explain the form 3
papers and the content
of audit working
papers
3 Audit file Explain the 3
permanent and
current audit file
4 Audit note book Explain the auditor 3
note book and its
content
End Unit Assessment 1
Total number of periods 14

Lesson 1: Components of audit documentation

a) Learning objective
Describe the components of audit documentation
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Desks, chalkboard,
chalk, papers, internet, computer, students’ books, internet, case studies and
any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction
Students are familiar with term documents referring to documentation studied in
financial accounting (unit 2 and 3) and management accounting (unit 2) senior
four. Again, they live in society where financial documents are applied.

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 d) Learning activities 9.1
• Invite students to read individually the questions in the student book
and work in pairs to share with the classmates.
• Have some pairs makes the presentations.
• Provide constructive feedback in terms of supplements.
Answers to learning activity 9.1

1. Documents identified on the picture are:

• Permanent audit file.
• Current audit file.
• Audit working papers.
• Audit note book.
2. The documents observed from the pictures are called audit
documentation.

e) Application activities 9.1

Invite students to read the application activities in student book and answer
them.
Answers to Application Activity 9.1

1.
• Audit documentation is the principal record of auditing procedures
applied, evidence obtained, and conclusions reached by the auditor
in the engagement.
• Audit documentation is the written record of the basis for the auditor’s
conclusions that provides the support for the auditor’s representations,
whether those representations are contained in the auditor’s report or
otherwise.
• Audit Note Book is a register maintained by the audit staff to record
important points, observed, errors, doubtful queries, explanations, and
clarifications to be received from the clients. An Audit Note Book is
used during the course of an audit to note down necessary points so
that s/he does not forget them.
Audit Note Book. It is an essential book used to note important points
that shall be included in the Auditor’s report. It is a complete record
of doubts and their clarification. It helps the auditor in his subsequent
audits. It is also used as a guide to the other audit clerks.

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 2. The types of audit file are:
• Permanent audit file.
• Current audit file.

Skills lab activity 9

Guidance on the skills lab activity

In conducting this skills lab activity, you can facilitate students in their learning
groups to design appropriate working papers showing all necessary information
required by international audit standards.

i. Build
Given that students are facilitated by the teacher,
–– Remind students on the expected objective of designing working
papers.
–– Help them to be grouped and remember to mix both boys and girls
–– Let each team have the representative
–– Ensure they have where to keep necessary notes from the findings
–– Distribute questions for their research
–– Check their understanding of the assignment
–– Remind them that everybody full participation is mandatory.

ii. Practice
–– Guide students on accessing the real materials
–– Ensure that the source of materials is accessible for all
–– Respond to any questions for clarification and support accordingly

iii. Present
–– Choose randomly any two teams to present their findings
–– Allow students to ask question to their fellows

iv. Conclusion
The teacher emphasizes on the objective of the research reminding students
that they have to follow the design of audit documentation.

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 The following are key areas for reference:
Audit documentation
How to design working papers

9.6. Summary of the unit

Lesson 1: Components of audit documentation

1. Meaning and objectives of audit documentation

a. Meaning of audit documentation
Audit documentation refers to the records or documentation of procedures that
auditors performs, the audit evidence that they obtained and the conclusion that
makes by them based on the evidence obtained.
b. Objectives of audit documentation
Here the summary of objectives of audit documentation:
c. It provides evidence of the auditor’s basis for a conclusion about the
achievement of the overall objective.
d. It provides evidence that the audit was planned and performed in accordance
with ISAs and other legal and regulatory requirements
e. It assists the engagement team to plan and perform the audit.
f. It assists team members responsible for supervision to direct, supervise and
review audit work.
g. It enables the team to be accountable for its work
h. It allows a record of matters of continuing significance to be retained.
i. It enables the conduct of quality control reviews and inspections (both
internal and external)

1.2. Audit working paper

a. Definition
Audit working papers are documents which contain all information gathered
from the company audited and show all evidences to help the auditor to prepare
the final report and to form his opinion.
b. The form and content of working papers
c. Features of good working papers
d. Advantages (Reasons) of collecting working papers
e. How Audit working Papers are gathered
f. Ownership of working papers

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Working papers are the property of the auditor. The auditor may, at his discretion,
make portions of or extracts from his working papers available to his client. They
should not, however, be a substitute for the client’s accounting records.

1.3. Audit file

The auditor maintains two audit files for each client. These two files are known
as:
–– Permanent audit file
–– Current audit file
Permanent audit file
a. Definition
Permanent audit file is a file which containt all documents that are required by
the auditor as long as he remains the auditor of this particular company.
Permanent audit file is a file which contains informations of continuing importance
/ nature to the auditor i.e.that informations which the auditor will use beyond
one financial period.
N.B. In preparing this file, the auditor should bear in mind the following points:
1. That the objective of the file is to maintain a permanent record of
information of permanent importance to the auditor.
2. This file must be updated at each annual audit.
b. The contents of permanent audit file.

Current audit file

a. Definition
It contains informations which will be used by the auditor for the current year
under audit only. A current audit file contains information regarding audit
conducted for the current period
This file contains documents in respect of one specific year.
b. Contents of current audit file.

1.4. Audit Note Book

a. Definition
Audit Note Book is a register maintained by the audit staff to record important
points, observed, errors, doubtful queries, explanations, and clarifications to be
received from the clients. An Audit Note Book is used during the course of
an audit to note down necessary points so that s/he does not forget them.

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 b. Purpose of audit Note Book
The purpose is to note down various points which need to be either clarified
with the client or the chief auditor. Audit Note Book is also used for recording
important points to be included in the Auditor’s Report. It is a complete record
of doubts and their clarification.

c. Importance of Audit Note Book

1. Audit note book shall be taken as reliable evidence even by the Court of
law in case of dispute or if the auditor is charged with negligence.
2. It is useful for drawing the audit program.

d. Advantages of Audit Note Book

Some the advantages of audit note book are given below:
1. Audit note book enables the auditor to record important points, which
arise during the course of his audit; otherwise he might forget these
points.
2. An auditor can produce this book as documentary evidence in a suit filed
against him for negligence or misfeasance
3. It facilitates the preparation of the audit report.
4. If the assistant in charge is changed before the completion of a particular
work, it acts as a guide and makes the completion of balance work easier.
5. It can help in making an assessment of the work of audit clerks.
6. It provides a key to evaluate the efficiency of the audit staff.

e. Disadvantages of Audit Note Book

There are, however, certain disadvantages of audit note book. They are as
follows:
1. Very often, it creates misunderstanding between the client staff and the
audit staff.
2. If it is not properly and carefully prepared it cannot be used as evidence
against the auditor for negligence.
3. Audit staff has to depend too much upon the client’s staff for its
preparation.

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a. Contents of an Audit Note Book
a. A list of books of accounts maitained by the client.
b. The technical term used in the business.
c. The names of the principal officers their powers, duties and responsibilities.
d. The points which requires further explanations and clarification.
e. The mistakes and errors discovered .
f. The total or balance of certain books of accounts, bank reconciliation
statemant.
g. Accounting methods followed in the business.
h. The points which have to be incorporated in the audit report.
i. Any matters which require discussion with the senior or with the auditor.
j. Date of commencement and completion of the audit.

9.7. Additional information for teachers

The form and content of working papers
The form and content of working papers are affected by matters such as:
a. The size and complexity of the entity
b. The nature of the audit procedures to be performed
c. The identified risks of material misstatement
d. The significance of the audit evidence obtained
e. The nature and extent of exceptions identified
f. The audit methodology and tools used

How Audit working Papers are gathered

1. By taking photocopies of the client’s statements.
2. By taking notes relating to areas of weak internal control system, material
errors and frauds.
3. By filing up evidence from third parties.
4. Auditor’s own judgment which is put on record and filed.
5. Important documents from the company.

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 9.8. End unit assessment
Answers to end unit assessment activities

1. The objectives of audit documentation are:

a. It provides evidence of the auditor’s basis for a conclusion about the
achievement of the overall objective.
b. It provides evidence that the audit was planned and performed in
accordance with ISAs and other legal and regulatory requirements.
c. It assists the engagement team to plan and perform the audit.
d. It assists team members responsible for supervision to direct,
supervise and review audit work.
e. It enables the team to be accountable for its work
f. It allows a record of matters of continuing significance to be retained.
g. It enables the conduct of quality control reviews and inspections (both
internal and external).
2. An audit note book is defined as a register kept by an audit team to
record crucial/important points observed during the audit.

The purpose is to note down various points which need to be either

clarified with the client or the chief auditor. Audit Note Book is also used
for recording important points to be included in the Auditor’s Report. It
is a complete record of doubts and their clarification.
3. Difference between permanent audit file and current audit file

Permanent audit file Current audit file

• Permanent audit file is a file • Current audit file is that file
which contains all documents which contains information
that are required by the which related primarily to the
auditor as long as he/she set of accounts being audited
remains the auditor of this i.e. It contains informations
particular company. which will be used by the
• Permanent audit file is a file auditor for the current year
which contains informations under audit only.
of continuing importance /
nature to the auditor i.e.that
informations which the auditor
will use beyond one financial
period.

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 4. The features of good working papers are:
a. They should be properly headed.
b. They should indicate the period covered by them or when they were
collected or recorded.
c. They should be as complete as possible so that they do not call for
further explanation.
d. They should be sufficiently detailed.
e. They should be kept safely as a safeguard from misuse or destruction.
f. Symbols used should be explained.
7. a. Audit working papers

b. Audit documentation

9.9. Additional activities (Questions and answers)

9.9.1. Remedial activities (Questions and answers)
Questin1. What are the types of audit file?
Answer1. The types of audit file are:
• Permanent audit file
• Current audit file
Question 2: Give three advantages of collecting Audit working papers

Answer 2
a. They are used as a basis for planning the current year’s audit.
b. They are used as a means of controlling the current year’s audit through
their review.
c. They enable the auditor to form an opinion.
Question3: What is the importance of Audit Note Book?

Answer 3
1. Audit note book shall be taken as reliable evidence even by the Court of
law in case of dispute or if the auditor is charged with negligence.
2. It is useful for drawing the audit program.

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 9.9.2. Consolidation activities (Questions and answers)
Question1: Define Audit Note Book and give its content.
Answer 1 Audit Note Book is a register maintained by the audit staff to
record important points, observed, errors, doubtful queries, explanations, and
clarifications to be received from the clients. An Audit Note Book is used during
the course of an audit to note down necessary points so that s/he does not
forget them.

Contents of an Audit Note Book

a. A list of books of accounts maitained by the client.
b. The technical term used in the business.
c. The names of the principal officers their powers, duties and responsibilities.
d. The points which requires further explanations and clarification.
e. The mistakes and errors discovered .
f. The total or balance of certain books of accounts, bank reconciliation
statemant.
g. Accounting methods followed in the business.
h. The points which have to be incorporated in the audit report.
i. Any matters which require discussion with the senior or with the auditor.
j. Date of commencement and completion of the audit.
Question2.Outline the form and content of audit working papers

Answer 2:
The form and content of working papers are affected by matters such as:
a. The size and complexity of the entity
b. The nature of the audit procedures to be performed
c. The identified risks of material misstatement
d. The significance of the audit evidence obtained
e. The nature and extent of exceptions identified
f. The audit methodology and tools used

9.9.3. Extended activities (Questions and answers)

Question1: State whether the working papers are the property of the client or
auditor. Whether the client can demand custody of such working papers?
Answer1: – Working papers are the record of various audit procedures
performed, audit evidence obtained, allocation of work between audit team

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members etc. Audit working papers are the documents and evidence that
an auditor collects and retains with himself during the audit. Thus, the audit
working papers are the property of auditor and not of the client. No, client cannot
demand custody of such working papers. The auditor may on his discretion
make portions of or extracts of working papers available to his client. But the
client cannot ask the auditor for the custody of working papers.
Question2: Differentiate permanent audit file from current Audit file based on
their contents.

Answer 2
Permanent file Current file
• Statutory or legal documents like • A copy of the final accounts of the
Memorandum of association and respective year.
Articles of association. • Completed internal control
• Details relating to the nature of the questionnaires.
business, its operations • Audit programme
• Organization plan and chart • Audit time table
showing the duties and authorities • All relevant list e.g. list of fixed
of various officials of the company. asset, a list of debtors, a list of
• Details of accountig systems and creditors etc.
internal control in operation. • Correspondence with the client
• Copies of important agreements in respect of the current audit.
and minutes of important meetings
of board of Directors.
• List of accounting books or record
maintained by the company.
• Copies of previous years financial
statement.

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 UNIT 10 INTERNAL CONTROL
SYSTEM

10.1. Key unit competence

To be able to evaluate internal control system (ICS)

10.2. Prerequisite (knowledge, skills, attitudes and values)

Learners were introduced in Unit five entitled auditor responsibility where
students learnt that the auditor has the responsibility of strengthen the internal
control system of the organisation. So, with this prior knowledge, skills, attitudes
and values it should help them to appreciate the usefulness of internal control

INTRODUCTION
system and understand how it contributes to the protection of resources of an
organization.

TO ACCOUNTING
10.3. Cross-cutting issues to be addressed:
Note: The examples below are just to guide you on how to address cross-
cutting issues throughout the unit but this does not mean that these are the
only ones. You can address and give students opportunities to discuss all the
cross-cutting issues where possible taking consideration of their environment
or community around them.
Environment and sustainability: environment is one of the greatest factors that
can affect both positively or negatively any business activity and one cannot start
up a business without the environment. Therefore, great care for environment
is crucial. Students are to be advised on the importance of environmental
protection.
Gender education: emphasis throughout this unit has to be put on how both
males and females have the equal opportunities to understand and explain the
process of internal control system in the company. So that this will encourage
people to take the first step to comply with internal control practices in the
organisation.

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Inclusive education: in addition to all having equal opportunities to carry
out business activities, emphasis has to be put on how we all regardless of
our background, economic or social setup have right to develop an ethical
understanding of Rwandan system that do not discriminate. Students need to
understand internal control procedures and the management of the organisation
should not discriminate but promote inclusiveness of all.
Peace and Values: you need to emphasize to learners the need to live in peace
and harmony with others. Students need to appreciate the role of audit in
promoting peace and patriotism in the community avoiding activities that are
illegal e.g. fraud, nepotism, embezzlement and make sure that every economic
activity they plan to have is legal and contributes to national development goals.
Standardization culture: you need to emphasize to students the need for standard
in a business legal aspect. This will help them to abide by auditing standards
and understand how these standards contributed to business development as
well as the economic development.

10.4. Guidance on introductory activity

NOTE: The students won’t be able to answer all the questions at this stage;
INTRODUCTION
they can answer one question. The most important thing is that you want to
challenge students to be expectant and to use their previous knowledge and
TO ACCOUNTING
background to self-discover during teaching and learning of this unit.
Explain the purpose of the introductory activity of the lesson. This activity is
intended to provide interest and motivation for students to be able to identify
auditing practices related to business activities as opportunity of fighting against
malpractices and mismanagement of business resources.
The introductory activity will also evoke students’ interests about what to expect
in this unit as they answer the questions in the activity. Students can build on
previous knowledge, skills, values and attitudes to help you assess the student’s
prior knowledge and help link with the new content.
Use an appropriate method such as small groups or pairs and provide students
with Unit 10 introductory activity, give clear instructions to the activity.
They read the case study and discuss what activities may have carried out.
They read a scenario on how the management can be advised on matters
relating to employee management, how the management should do to make the
organisation more productive and strategies to be used by the management to
protect organisational assets. During grouping or pairing, mix boys and girls and
students with different abilities.

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 During the discussion, make sure everyone is following and actively participating.
Those who are not acting may have to listen attentively without disturbing and
should applaud/congratulate the actors after.
Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair share or large group
discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Harmonize their findings or answers, and help them draw conclusions/summary
to questions. Answer or address any questions or challenges about the activity.
Guide them to make notes in their books referring to students’ book.
Students present their findings, results, answers through presentations on the
introductory activity.
Appreciate the team’s presentations and remind them that this activity was not
meant to come to the very right answers but to help them become aware of
what to expect in the unit.
You can support student’s answers by referring to possible answers to the
introductory activity below:

Answers for introductory activity (case study)

Note: These responses may be shared or not with the students. They are
specifically to guide you while harmonizing students’ responses during
presentation.
• Lack of segregation of duties
• Failure to comply with the human resource policies
• Lack of documentation of petty cash management

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10.5. List of lessons/sub-heading
Lesson title/ Learning Number of
Heading
sub-heading objectives periods
10.1. Features of Introductory activity Arouse the curiosity 1
internal control of students on the
system content of unit 10
1 Meaning and Explain the meaning 3
features of and features of
internal conttrol internal control
system system
2 Elements of Explain the 3
internal control elements of internal
system control system
10.2. Assessment 1 Assessment Explain how to 3
and recording of information assess information
of information system and systems and
systems internal control internal control
2 Recording the Explain methods 3
information used to record or
system and evaluate accounting
internal control and internal control
system
10.3. Communication 1 Communication Explain 2
and control with the communication with
activities management the management
during the audit
2 Control activities Explain control 3
of internal activities, limitations
control and benefits of
internal control
3 Benefits and Explain benefits 1
limitation of and limitations of
internal control internal control
system system
End Unit Assessment 2

Total number of periods 21

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 Lesson 1: Features of internal control system

a) Learning objective
Explain the meaning, features and elements of internal control system
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, chalks, marker pen, flipchart,
computer, resourceful person and any other trustworthy and reliable resources
to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
Learners were introduced in Unit five entitled auditor responsibility where students
learnt that the auditor has the duty of checking on policies and procedures used
by the organisation. So, with this prior knowledge, skills, attitudes and values
it should help them to appreciate the usefulness of internal control system and
understand how it contributes to the protection of resources of an organization.
d) Learning activities

Activity 10.1
Students present their findings, results, answers through an appropriate method
such as pair-share, small group presentations on the introductory activity.
Encourage different students from the groups to share the group’s work to avoid
just a few students dominating. Also encourage other students to listen and not
disturb when other teams are sharing unless it is a question. Encourage students
to appreciate each other’s work especially the presentation. Appreciate the
team’s presentations and remind them that this activity was not meant to come
to the very right answers but to help them become aware of what to expect in
the lesson. Answers to the activity will be got as the lesson progresses. You
can support students’ answers by referring to possible answers to the activity
below:
Exploit and use appropriate learning methods that can foster collaborative
learning for (example small groups or pairs, gallery walk). Provide students with
the activity in the student’s book, and give instructions to the activity to be done.
During grouping or pairing, ensure a balance between boys and girls and learners’
different abilities. During this activity ensure that students have understood the
instructions, prompt and probe them through question and answer approach to
make sure they are active and their curiosity in learning and discovery is aroused.

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Encourage students to work together, value each other’s contributions, share
ideas, etc.

Answers to learning activity 10.1

1. To observe the internal control elements and ensure that they are well
implemented
2. Elements of internal control system are:
• The control environment.
• The entity’s risk assessment process.
• The information system relevant to financial reporting.
• Control activities.
• Monitoring of controls.

Application activities 10.1

Students analyse and discuss about the questions either in groups or in pairs
and come up with possible answers. This activity may be given as a research
question or homework.
Depending on the purpose of the application activity, choose an appropriate
method to assess student’s findings, answers or responses. Depending on the
performance or results, you may decide to give remedial or extension activities.

Answers to application activity 10.1

1. The following are the requirements to achieve the overall objectives of

application controls:
• Completeness, accuracy and authorisation of input
• Completeness and accuracy of processing
• Maintenance of master files and standing data files contained
therein (Standing data is data that will be used over and over again,
for example, staff grades or rates of pay. Master files use data and
store an accumulation of transactions.)
2. Ways through which segregation of duties should be carried out
• Segregation of function. The key functions that should be segregated
are the carrying out of a transaction, recording that transaction in
the accounting records and maintaining custody of assets that arise
from the transaction.

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 • The various steps in carrying out the transaction should also be
segregated.
• The carrying out of various accounting operations should be
segregated. For example, the same staff should not record
transactions and carry out the reconciliations at the period-end. To
emphasise the distinction between control objectives and control
activities, the table below illustrates some examples of control
objectives and their related control activities.

Lesson 2: Assessment and recording of information systems

a) Learning objective
Explain how to assess information system, methods used to record or evaluate
accounting and control system
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, chalks, marker pen, flipchart,
computer, resourceful person and any other trustworthy and reliable resources
to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In Unit 3 where students studied the appointment of an auditor as a part of
people who monitor the internal control system of the organization. In unit five
students have also studied auditor’s responsibilities which explains duties
which contribute to strengthen the internal control system. So, with this prior
knowledge, skills, attitudes and values it should help them to appreciate the
usefulness of internal control system and understand how it contributes to the
protection of resources of an organization.
d) Learning activities

Activity 10.2
–– Put students in small groups and give clear instruction about the
activity
–– Ask them to read and analyze the scenario in the student book and
answer the questions provided in the activity

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 –– Guide students’ discussion and make sure that everyone is
participating
–– Invites students to share their findings
–– Harmonize their findings or answers, and link the findings to the
learning objective, help them draw conclusions/summary on how
to assess information system, methods used to record or evaluate
accounting and control system. Answers or address any questions or
challenges about the activity. Guide them to make notes in referring in
their students’ book.

Answers to learning activity 10.2

1. In order to assess the accounting system, the auditor should do the

following:
• Assess the adequacy of the accounting system as a basis for
preparing the financial statements.
• Identify the types of potential misstatements that could occur in the
financial statements.
• Consider factors that affect the risk of misstatements.
• Design appropriate audit procedures.
2. The auditor will test controls of the internal control system of the
company as under:
• Inspection of documents supporting controls or events to gain audit
evidence that internal controls have operated properly: e.g. verifying
that a transaction has been authorised.
• Inquiries about internal controls which leave no audit trail: e.g.
determining who actually performs each function not merely who is
supposed to perform it.
• Re-performance of control procedures: e.g. reconciliation of bank
accounts, to ensure they were correctly performed by the entity.
• Examination of evidence of management views: e.g. minutes of
management meetings.
• Testing of internal controls operating on computerised systems
or over the overall information technology function: e.g. access
controls.
• Observation of controls. Auditors will consider the manner in which
the control is being operated.

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 3. Several techniques for recording the assessment of control risk are the
following:
• Narrative notes.
• Questionnaires.
• Flowcharts.
• Checklists.

e) Application activities 10.2

Students can be given an activity to discuss about the questions in groups, give
clear instructions and ensure a balance in the groups. Students are to give a
report of their findings. Monitor the activity to ensure students are on track and
actively participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to application activity 10.2

1. The major question is the following: ‘How good is the system of

controls?’
2. In order to obtain the audit evidence about the effectiveness of the
internal control system, the auditor should consider the following:
• How controls were applied
• The consistency with which they were applied during the period
• By whom they were applied

Lesson 3: Communication and control activities

a) Learning objective
Explain communication with the management during the audit, control activities,
limitations and benefits of internal control.
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, chalks, marker pen, flipchart,
computer, resourceful person and any other trustworthy and reliable resources
to enhance learning.

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c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In unit five students have studied auditor’s responsibilities relating to duties of
communicating to the management about the strength and weakness of the
internal control system. So, with this prior knowledge, skills, attitudes and values
should help them to appreciate the usefulness of internal control system and
understand how it contributes to the protection of resources of an organization.
d) Learning activities

Activity 10.3
–– Put students in small groups and give clear instruction about the
activity
–– Ask them to read the scenario in student book and answer the
questions provided in the activity
–– Guide students’ discussion and make sure that everyone is
participating
–– Invites students to share their findings
–– Harmonize their findings or answers, and link the findings to the
learning objective, help them draw conclusions/summary on when to
use communication with the management during the audit, control
activities, limitations and benefits of internal control. . Answers or
address any questions or challenges about the activity. Guide them to
make notes in referring in their students’ book.

Answers to learning activity 10.3

1. Ways in which auditors communicate findings on the internal control

system to the organisation:
a) The Communication of Significant deficiencies in internal controls
shall be communicated in writing to those charged with governance
in a report to management.
b) Communicating of deficiencies in internal control is reported to
those charged with governance and management. This implies that
the objective of the auditor is to communicate appropriately to those
charged with governance and management.
c) Sufficient information to enable those charged with governance and
management to understand the context of the communication, in
particular that:
• The purpose of the audit was for the auditor to express an opinion
on the financial statements.

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 • The audit included consideration of internal control relevant to the
preparation of the financial statements in order to design audit
procedures appropriate in the circumstances, but not to express an
opinion on the effectiveness of internal control.
• The matters being reported are limited to those deficiencies
identified during the audit and which the auditor has concluded are
sufficiently important to merit being reported to those charged with
governance.
2. Five statements reflecting the deficiencies in the internal control system
of an organisation are:
• The susceptibility to loss or fraud of the related asset or liability
• The subjectivity and complexity of determining estimated amounts
• The amounts exposed to the deficiencies
• The volume of activity that has occurred or could occur
• The importance of the controls to the financial reporting process

e) Application activities 10.3

This activity can be given as a normal individual or group activity, where students
assess information system, methods used to record or evaluate accounting and
control system. Monitor the activity to ensure students are on track and actively
participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

Answers to Application Activity 10.3

1. Auditors shall:
• Assess the adequacy of the accounting system as a basis for
preparing the accounts
• Identify the types of potential misstatements that could occur in the
accounts
• Consider factors that affect the risk of misstatements
• Design appropriate audit procedures

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 2. When setting up the internal controls in the accounting system, the
management of an entity assesses the following:
• Transactions are executed in accordance with proper authorisation.
• All transactions and other events are promptly recorded at the
correct amount, in the appropriate accounts and in the proper
accounting period.
• Access to assets is permitted only in accordance with proper
authorisation.
• Recorded assets are compared with the existing assets at
reasonable intervals and appropriate action is taken with regard to
any differences.

Skills lab activity 10

Guidance on the skills lab activity:

In conducting this skills lab activity, under the supervision of teacher, students in
their learning teams, role playing the communications with management, where
one group play as management another as auditor.

i. Build
Given that students play the role of the management and others play the one of
the auditor;
• Remind students on the expected objective relating to internal control
system
• Help them to be grouped and remember to mix both boys and girls
• Let each team have the representative
• Ensure they have where to keep necessary notes from the findings
• Distribute questions for their research
• Check their understanding of the assignment
• Remind them that everybody full participation is mandatory.

ii. Practice
During research on internet, care about the following concerns:
• Guide students on accessing the real website
• Ensure that internet is connected for all
• Respond to any questions for clarification and support accordingly

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 iii. Present
During the group presentation, the teacher must assess whether the student
participation in the skills lab activity was effective by:
• Selecting randomly anyone in all groups to present the report on behalf
of team members.
• Allow students to ask question to their fellows.
All team members being presenting are expected to contribute to the plenary
by answering some questions that the presenter is not covering as well as
expected.

iv. Conclusion
The teacher emphasizes on the objective of the research reminding students
that they were expected to discover and understand Explain the meaning,
features and elements of internal control system.

10.6. Summary of the unit

a. features of internal control system
b. Meaning and features of internal control system
c. Meaning of internal control system
d. Features of internal control system
• Organization plan
• Segregation of functions
• Control of access to assets
• Authorization system and procedure

1.2. Elements of internal control system

Internal control has five elements:
• The control environment
• The entity’s risk assessment process
• The information system relevant to financial reporting
• Control activities
• Monitoring of controls

a. The control environment

• Components of the control environment
• Communication and enforcement of integrity and ethical values
• Commitment to competence
• Participation by those charged with governance

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 • Management’s philosophy and operating style
• Organizational structure
• Assignment of authority and responsibility
• Human resource policies and practices
• Entity risk assessment process

b. Information system relevant to financial reporting

c. Control activities

Examples of control activities

• Activities relating to authorization,
• Performance reviews,
• Information processing,
• Physical controls and segregation of duties.

Components of control activities

• Approval and control of documents
• Controls over computerized applications
• Checking the arithmetical accuracy of records
• Maintaining and reviewing control accounts and trial balances
• Reconciliations of accounts balances such as bank account.
• Comparing the results of cash, security and inventory counts with
accounting records
• Comparing internal data with external sources of information
• Limiting physical access to assets and records
• Segregation of duties

d. Monitoring of controls
Small companies – the problem of control

Controls in a computer environment

2. Assessment and recording of information systems

2.1. Assessment of information systems and internal control

Auditors should assume control risk is high, unless it is assessed as low, and
the assessment confirmed by tests of controls.
a) Accounting systems and the control environment
b) Tests of controls

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 c) Questionnaires
• Internal Control Questionnaires (ICQs)
• Internal Control Evaluation Questionnaires (ICEQs)
• Internal Control Questionnaires (ICQs)

Areas to apply questionnaires:

• Goods inward
• The sales (revenue) cycle
• The purchases (expenditure) cycle
• Wages and salaries
• Inventories
• Non-current assets
• Management information and general controls

2.2. Recording the information system and internal control

The auditor must keep a record of client’s systems which must be updated each
year. This can be confirming understanding:

3. Communication and control activities

3.1 Communication with the management

a. meaning of communication with the management
b. The meaning of deficiency in the internal control of the organization
c. information that the auditor should communicate to the management

3.2 Control activities of internal control

a. Meaning of control activities
b. Examples of control activities

4. Benefits and limitations of internal control system

4.1. Benefits of internal control system
4.2. Limitations of internal control system

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10.7. Additional information for teachers
Components of COSO framework:
Control environment. The control environment seeks to make sure that all
business processes are based on the use of industry-standard practices. This
can help ensure that the business is run in a responsible way. It may also reduce an
organization›s legal exposure if the organization is able to prove that its business
processes are all based around industry standard practices. Additionally, the
control environment can help with making sure that an organization is adhering
to regulatory compliance requirements.
Risk assessment and management. Risk assessment and management
which is sometimes referred to as enterprise is based on the idea that risk is
an inherent part of doing business. However, those same risks can sometimes
cause a business to suffer adverse consequences. As such, organizations
commonly adopt risk management plans that help them to identify risks and
either reduce or eliminate risks deemed to pose a threat to the organization›s
well-being.
Control activities. Control activities are also tied to the risk management.
They are essentially internal controls that are put into place to make sure that
business processes are performed in a way that helps an organization to meet
its business objectives without introducing unnecessary risks into the process.
Information and communications. Communications rules are put in place
to make sure that both internal and external communications adhere to legal
requirements, ethical values and standard industry practices. For example,
private sector organizations commonly adopt privacy policies establishing how
customer data can be used.
Monitoring. At a minimum, monitoring is performed by an internal auditor
who makes sure that employees are adhering to established internal controls.
However, in the case of public companies, it is relatively common for an outside
auditor to evaluate the organization›s regulatory compliance. In either case, the
audit results are usually reported to the board of directors

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 10.8. End unit assessment
Answers to end unit assessment activities

1. Internal control is the process designed and affected by those charged

with governance, management, and other personnel to provide
reasonable assurance about the achievement of the entities objectives
with regard to reliability of financial reporting, effectiveness and efficiency
of operations and compliance with applicable laws and regulations.
2. Features of internal control are explained as under:

Effective internal control depends on good organization. Reducing the

level of errors and irregularities helps to ensure that the objectives of
the control system are achieved effectively. Learn the characteristics of
a good internal control system here.

Organization plan
The first feature of an internal control system is the organization plan. In order
for it to be effective, it must be simple and flexible. This plan should clearly
outline the functions of each unit and its staff members.

Segregation of functions
Structural independence of an organization means separating the functions
of each area of the company. This is essential for an effective internal control
system, as it ensures that one person is not responsible for all stages of an
operation.

Control of access to assets

Effective internal control depends to a large extent on the security of the
processes. An organization achieves an adequate degree of security when
access to assets or accounting records is limited. This involves restricting
physical or remote access to assets or the preparation of documents for
authorizing access thereto.

Authorization system and procedure

Effective internal control includes methods to monitor the records of
operations and transactions. The procedures involved in an activity must
include periodic audits and reviews, as well as obtaining control information.

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Records that report the outcome of a particular activity should be produced
by independent sources so that they can be compared to those in the area
performing the task. In the event of a discrepancy, this will show a failure in
the transaction log.

3. Elements of internal control system are the following:

A. The control environment: The control environment is the framework
within which controls operate. The control environment is very much
determined by the management of the business.
B. Entity risk assessment process: An auditor must obtain an understanding
of whether the entity has a process for: identifying business risks relevant
to financial reporting objectives, estimating the significance of the risks,
assessing the likelihood of their occurrence, deciding upon actions to
address those risks.

C. Information system relevant to financial reporting

The information system relevant to financial reporting is a component of
internal control that includes the financial reporting system, and consists
of the procedures and records established to initiate, record, process and
report entity transactions and to maintain accountability for the related
assets, liabilities and equity.
D. Control activities: Control activities are those policies and procedures
that help ensure that management directives are carried out.
E: Monitoring of controls: Monitoring of controls is a process to assess
the effectiveness of internal control performance over time. It includes
assessing the design and operation of controls on a timely basis and
taking necessary corrective actions.
4. a) Segregation of function. The key functions that should be segregated
are the carrying out of a transaction, recording that transaction in the
accounting records and maintaining custody of assets that arise from the
transaction.
b) The various steps in carrying out the transaction should also be segregated.
c) The carrying out of various accounting operations should be segregated.
For example the same staff should not record transactions and carry out the
reconciliations at the period-end. To emphasise the distinction between
control objectives and control activities, the table below illustrates some
examples of control objectives and their related control activities.

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 5. a. Definition: Control activities: Control activities are those policies and
procedures that help ensure that management directives are carried
out.
b. Examples of control activities
Approval and control of documents
Controls over computerised applications
Checking the arithmetical accuracy of records
Maintaining and reviewing control accounts and trial balances
Reconciliations
6. Table illustrating control objectives and control activities
Examples of control
Examples of control activities
objectives
(Sales and receivables) To ensure Referring any new credit customer
that goods and services supplied to the credit control department
on credit are only supplied to which performs credit checks on
customers with good credit the customer before their order is
ratings. accepted. Only accepting orders
from customers who have no credit
problems.
(Purchases and payables) To Authorizing purchase orders at the
ensure that goods and services correct level of authority before the
purchased are ordered under orders are placed.
proper authority and using proper
procedures.
(Wages and salaries) To ensure Using clock cards to record the hours
that employees are only paid for worked by staff who are paid on an
work they have done. hourly rate. Ensure overtime worked is
authorized by a manager or supervisor.
(Inventories) To ensure that Recording and confirming all
inventory records are up to date movements of inventory inwards and
and accurately maintained, and outwards.
are supported by regular physical
inventory counts.
(Non-current assets) To ensure Maintaining a register of non-current
that all non-current assets are assets for all non-current assets, and
correctly recorded, adequately containing details of the cost of the
secured and properly maintained. asset.

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 7. Problems relating to internal control system and application of controls
in small companies
• Auditors can have difficulties not because there is a general lack of
controls but because the evidence available as to their operation
and the completeness of the records is insufficient.
• Segregation of duties will often appear inadequate in enterprises
having a small number of staff.
• Similarly, because of the scale of the operation, organisation and
management controls are likely to be rudimentary at best.
• The onus is on the proprietor, by virtue of his day-to-day involvement,
to compensate for this lack.
• Where the manager of a small business is not himself the owner, he
may not possess the same degree of commitment to the running of
it as an owner-manager would.
8. a. Definition: tests of controls are audit procedures ‘designed to evaluate
the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.
b. Table illustrating how tests controls are applied in internal control
system:
Tests of controls
Inspection of documents supporting controls or events to gain audit
evidence that internal controls have operated properly: e.g. verifying
that a transaction has been authorized
Inquiries about internal controls which leave no audit trail: e.g.
determining who actually performs each function not merely who is
supposed to perform it
Re-performance of control procedures: e.g. reconciliation of bank
accounts, to ensure they were correctly performed by the entity
Examination of evidence of management views: e.g. minutes of
management meetings
Testing of internal controls operating on computerized systems or
over the overall information technology function: e.g. access controls
Observation of controls. Auditors will consider the manner in which
the control is being operated

9. Matters to consider when determining whether a deficiency in internal

control is significant:

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 • The likelihood of the deficiencies resulting in material misstatements
in the financial statements in the future.
• The susceptibility to loss or fraud of the related asset or liability.
• The subjectivity and complexity of determining estimated amounts.
• The amounts exposed to the deficiencies.
• The volume of activity that has occurred or could occur.
• The importance of the controls to the financial reporting process.
• The cause and frequency of the exceptions identified as a result of
the deficiencies.
• The interaction of the deficiency with other deficiencies in internal
control.
10. Limitations of internal control system are under:
• The potential for human error: These include the fact that human
judgement in decision-making can be faulty or produce simple errors
and mistakes.
• The possibility of controls being by-passed or over-ridden:
Controls can be circumvented by the collusion of two or more people
or management may inappropriately override controls.
• Collusion among employees: In any organisation collusion exist
among employees due to different conflicting circumstances.
• The costs of controls outweighing their benefits: smaller entities
often have fewer employees which may limit the extent to which
segregation of duties is practicable. It would not make commercial
sense to employ additional staff purely for the purposes of achieving
greater segregation of duties.
• Controls tending to be designed to cope with routine and not
non-routine transactions Non-routine transactions are by their very
nature unusual. As a result, it will be difficult to predict what these
might be and therefore is less likely that a system will have been
devised to deal with these effectively.
11. Benefits of internal control are the following:
• Assess the adequacy of the accounting system as a basis for
preparing the accounts.
• Identify the types of potential misstatements that could occur in the
accounts.
• Consider factors that affect the risk of misstatements.
• Design appropriate audit procedures.
• The assessment of the controls of an entity will have an impact on
that risk assessment.

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10.9. Additional activities (Questions and answers)
10.9.1. Remedial activities (Questions and answers)
Question1. What do you understand by Internal Control System?
Answer1. Internal control is the process designed and affected by those charged
with governance, management, and other personnel to provide reasonable
assurance about the achievement of the entities objectives with regard to
reliability of financial reporting, effectiveness and efficiency of operations and
compliance with applicable laws and regulations.
Question2. What does control environment mean?
Answer2.The control environment: The control environment is the framework
within which controls operate. The control environment is very much determined
by the management of the business. The control environment includes the
governance and management functions and the attitudes, awareness and
actions of those charged with governance and management concerning the
entity’s internal control and its importance in the entity.
Question3. Among the features of internal control system explain the concept
“organisation plan”
Answer3. The first feature of an internal control system is the organization plan.
In order for it to be effective, it must be simple and flexible. This plan should
clearly outline the functions of each unit and its staff members.

10.9.2. Consolidation activities (Questions and answers)

Question1. Describe limitations of internal control system.

Answer1.
• The potential for human error: These include the fact that human
judgement in decision-making can be faulty or produce simple errors
and mistakes.
• The possibility of controls being by-passed or over-ridden:
Controls can be circumvented by the collusion of two or more people
or management may inappropriately override controls.
• Collusion among employees: In any organisation collusion exist
among employees due to different conflicting circumstances.

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 • The costs of controls outweighing their benefits: Smaller entities
often have fewer employees which may limit the extent to which
segregation of duties is practicable. It would not make commercial
sense to employ additional staff purely for the purposes of achieving
greater segregation of duties.
• Controls tending to be designed to cope with routine and not non-
routine transactions: Non-routine transactions are by their very nature
unusual. As a result, it will be difficult to predict what these might be
and therefore is less likely that a system will have been devised to deal
with these effectively.
Question2. Describe benefits of internal control system
Answer2.
• Assess the adequacy of the accounting system as a basis for preparing
the accounts
• Identify the types of potential misstatements that could occur in the
accounts
• Consider factors that affect the risk of misstatements
• Design appropriate audit procedures

10.9.3. Extended activities (Questions and answers)

Question1. Design a table which reflects differences between control
objectives and control activities using examples.
Answer1.
Table illustrating control objectives and control activities
Examples of control
Examples of control activities
objectives
(Sales and receivables) To ensure Referring any new credit customer to the
that goods and services supplied credit control department which performs
on credit are only supplied to credit checks on the customer before
customers with good credit their order is accepted. Only accepting
ratings. orders from customers who have no
credit problems.
(Purchases and payables) To Authorizing purchase orders at the
ensure that goods and services correct level of authority before the orders
purchased are ordered under are placed.
proper authority and using proper
procedures.

220 Auditing | Teacher's guide | Senior Six | Experimental version

(Wages and salaries) To ensure Using clock cards to record the hours
that employees are only paid for worked by staff who are paid on an
work they have done. hourly rate. Ensure overtime worked is
authorized by a manager or supervisor.
(Inventories) To ensure that Recording and confirming all movements
inventory records are up to date of inventory inwards and outwards.
and accurately maintained, and
are supported by regular physical
inventory counts.
(Non-current assets) To ensure Maintaining a register of non-current
that all non-current assets are assets for all non-current assets, and
correctly recorded, adequately containing details of the cost of the asset.
secured and properly maintained.

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 UNIT 11 TEST OF CONTROL

11.1. Key unit competence

To be able to describe the characteristics of effective accounting systems

11.2. Prerequisite (knowledge, skills, attitudes and values)

In senior 4 Unit 1 in financial accounting you analysed asset, liability, while in
senior 4 unit 6 you analysed different types and methods used in inventory
management. This prior knowledge, skills or competences should help the
students to be able to describe the characteristics of effective accounting
systems and be able to realize their contribution as students towards business
INTRODUCTION
activities.

11.3. Cross-cutting issues to be addressed:

TO ACCOUNTING
Note: The examples below are just to guide you on how to address crosscutting
issues throughout the unit but this does not mean that these are the only ones.
You can address and give students opportunities to discuss all the crosscutting
issues where possible taking consideration of their environment or community
around them.
Gender education: emphasis throughout this unit has to be put on how both
males and females have same rights and obligations to do auditing activities
which can generate a true and fair view of financial statement. So as to promote
better standard of auditing activities as well as the community.
Environment and sustainability: the greatest source of accounting system
is the environment and the society. The effective accounting system cannot
be applied without the environment. Therefore, great care has to be taken for
environment and society. Therefore, test of control the only way through which
the environment can be safe from harm but only done appropriately.
Peace and Values: you need to emphasize on students need to live in peace
and harmony with others. Students need to identify potential contributions of
effective accounting system towards society and promoting peace.

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Standardization culture: you need to emphasize to students, the need for
standards even in business activities to ensure that these activities bring in
enough income to the economy and to maintain order in business environment.
Financial education: teacher and students should know that resources and
materials used in teaching and learning activities must not be mismanaged. This
issue will also be addressed when studying test of control. Students will learn
what is permitted and what is prohibited to manage learning resources and
materials well. They will put in mind that misusing materials is wasting money.

11.4. Guidance on introductory activity

NOTE: The students won’t be able to answer all the questions at this stage; they
can answer one question. The most important thing is that you want to challenge
students to be expect and to use their previous knowledge and background to
self-discover during teaching and learning of this unit.
Explain the purpose of the introductory activity of the lesson. This activity is
intended to provide interest and motivation for students to be able to describe
the characteristics of effective accounting systems as opportunity of fighting
against illegal accounting records.
INTRODUCTION
The introductory activity will also evoke students’ interests about what to expect

TO ACCOUNTING
in this unit as they answer the questions that follow in the activity. Students can
build on previous knowledge, skills, values and attitudes to help you assess the
student’s prior knowledge and help link with the new content.
Use an appropriate method such as small groups or pairs and provide students
with Unit 11 introductory activity, give clear instructions to the activity. They
observe image and discuss the relationship between small circles and big
circle. During grouping or pairing, mix boys and girls and students with different
abilities.
During the discussion, make sure everyone is following and actively participating.
Those who are not acting may have to listen attentively without disturbing and
should applaud/congratulate the actors after.
Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair share or large group
discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Harmonize their findings or answers, and help them draw conclusions/summary
to questions. Answer or address any questions or challenges about the activity.
Guide them to make notes in their books referring to students’ book.

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 Possible Answers for introductory activity

Auditors must ascertain the accounting system and internal control system.
If auditors decide to rely on controls, they must test them.
Means that the small circles show accounting systems and big circle shows
its test.

11.5. List of lessons/sub-heading

Lesson title/ Number of
Headings Learning objectives
sub-heading periods
11.1. Sales system Introductory Arouse the curiosity of 1
activity students on the content
of unit 11
1 Control Identify the control 1
objectives objectives of sales
system
2 Control Explain the control 3
activities activities of sales
system
3 Tests of Explain test controls of 1
controls sales system
11.2. Purchases 1 Control Identify the control 1
system objectives objectives of purchase
system
2 Control Explain the control 3
activities activities of purchase
system
3 Tests of Explain tests of controls 1
controls of purchase system
11. 3. Payroll 1 Control Identify the control 1
system objectives objectives of payroll
system
2 Control Explain the control 2
activities activities of payroll
system
3 Tests of Explain tests controls of 1
controls payroll system

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11.4. Inventory 1 Control Identify the control 1
system objectives objectives of inventory
system
2 Control Explain the control 2
activities activities of inventory
system
3 Tests Explain tests controls of 1
controls inventory system
11.5. Non- current 1 Control Identify the control 1
assets objectives objectives of non-
current asset system
2 Control Explain the control 2
activities activities of non-current
asset system
3 Tests Explain tests controls 1
controls of non- current asset
system
11.6. Non– current 1 Control Explain the control 2
liabilities objectives, objectives, control
Control activities and test of
activities, control of non-current
Tests liabilities system
controls
11.7. Management 1 Control Explain the control 1
information objectives, objectives, control
Control activities, tests of
activities, controls of management
Tests information system
controls
End Unit Assessment 2
Total number of periods 28

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 Lesson 1: Sales system

a) Learning objectivew
Explain the control objectives, control activities and test controls of sales system
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Desks, chalkboard,
chalk, papers, internet, computer, students’ books, internet, case studies and
any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction
Students are familiar with term sales from entrepreneurship S1, S2, S3 and
from S4, S5 Accounting. Again, they live in society where sales system applied.
So they refer to their community to explain sales system.
d) Learning activities
• Invite student teachers to read individually the question in the student
book and work in pairs to share with the classmates.
• Have some pairs make the presentations?
• Provide constructive feedback in terms of supplements

Answers to learning activity 11.1

• Different circles containing the following: customer, dispatch, invoice,

credit control, order.
• All elements are used in the sales system: customer, dispatch, invoice,
credit control, order.

e) Application activities 11.1:

Students can be given an activity to discuss about the questions in groups, give
clear instructions and ensure a balance in the groups. Students are to give a
report of their findings. Monitor the activity to ensure students are on track and
actively participating.
Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answers below
as you assess their work.

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 Answers to Application Activity 11.1

1. Procedures for the preparation of invoices and credit notes including

the following:
• Authorisation of selling prices/use of price lists
• Authorisation of credit notes
• Verification of prices, quantities, extensions and totals on invoices
and credit notes
2. References are obtained for new customers

Lesson 2: Purchases system

a) Learning objective
Explain the control objectives, control activities and test controls of purchase
system
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Desks, chalkboard,
chalk, papers, internet, computer, students’ books, internet, case studies and
any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction
Students are familiar with term purchase from entrepreneurship S1, S2, S3
and from S4, S5 Accounting. Again, they live in society where purchase system
applied. So they refer to their community to explain purchase system.
• Learning activities
• Invite students to observe individually the image in the student book
and work in pairs to share with the classmates the activities do.
• Some pairs make the presentations
• Provide constructive feedback from the findings

Answers to learning activity 11.2

Supplies, purchase order, contract, negotiation, quotes, acquisition

d) Application activity 11.2:

• Invite students to read, discuss in pairs the application activities in
student book
• Have some pairs to present their findings

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 • Ask other pairs to supplement
• Give constructive feedback

Answers to Application Activity 11.2

1. Orders should only be raised in response to an authorized purchase

requisition
2. The most important objectives of internal control relating to suppliers and
purchases are:
Ordering
To ensure that:
• All orders for, and expenditure on, goods and services are properly
authorised, and are for goods and services that are actually received
and are for the company.
• Orders are only made to authorized suppliers.
• Orders are made at competitive prices.
Receipt and invoices
To ensure that:
• Goods and services received are used for the organization’s purposes
and not private purposes.
• Goods and services are only accepted if they have been ordered, and
the order has been authorized.
• All goods and services received are accurately recorded.
• Liabilities are recognized for all goods and services that have been
received.
• All credits to which the organization is due are claimed.
• Receipt of goods and services is necessary to establish a liability.
Accounting
To ensure that:
• All expenditure is authorized and is for goods that are actually received.
• All expenditure that is made is recorded correctly in the general
(nominal) and payables (purchase) ledgers.
• All credit notes that are received are recorded in the general and
payables ledgers.
• All entries in the payables ledger are made to the correct payables
ledger accounts.
• Cut-off is applied correctly to the payables ledger.

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Lesson 3: The payroll system

a) Learning objective
Explain the control objectives, control activities and test controls of payroll
system
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Desks, chalkboard,
chalk, papers, internet, computer, students’ books, internet, case studies and
any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction
Students are familiar with term payroll from management accounting S4, unit 1
and S4 financial accounting unit 2.
d) Learning activities
• Put students in groups ask them to analyse the image in student book.
• Guide student’s discussions towards the question
• Invite students to share their findings

Answers to learning activity 11.3

The following such as: basic salary, allowances, gross salary, deductions
and net salary are the components of payroll and the remaining contents in
the small circles illustrate the record of all employees and the related report
about the payroll for the whole organization.

e) Application activities 11.3:

Invite students to read the application activities in student book and answer
individually accordingly.

Answers to Application Activity 11.3

1. The true answer is ‘d’ and gives evidence that the correct payments
have been made to the tax authorities.
2. Auditors should confirm that wages have been paid at the correct rate
by agreeing the calculation of gross pay to:
a) Authorized rates of pay.
b) Production records.
c) Clock cards, time sheets or other evidence of hours worked

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 Lesson 4: The inventory system
a) Learning objective
Explain the control objectives, control activities and test controls of inventory
system
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Desks, chalkboard,
chalk, papers, internet, computer, students’ books, internet, case studies and
any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction
Students are familiar with inventory from S4 management accounting Unit
6. Again, they can refer to their community and analyse different types and
methods used in inventory management.
d) Learning activities
• Put students in groups ask them to analyse picture in student book.
• Guide student’s discussions towards the questions.
• Invite students to share their findings

Answers to learning activity 11.4

1. The activities carried out from the above pictures are the following:
storing items, dispatch, data recording, and transport.
2. The elements used in the inventory system are the following: stock/
store/warehouse, delivery, data recording etc.

e) Application activities 11.4:

Invite students to read the application activities in student book and answer
individually accordingly.

Answers to Application Activity 11.4

1. Controls over inventory levels may be done by:

• Maximum inventory limits.
• Minimum inventory limits.
• Re-order quantities and levels.
• Arrangements for dealing with returnable containers
2. (b) and (c) are the appropriate tests of controls in the audit of inventory.

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Lesson 5: Non-current assets
a) Learning objective
Explain the control objectives, control activities and test controls of non- current
asset
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Desks, chalkboard,
chalk, papers, internet, computer, students’ books, internet, case studies and
any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction
Students are familiar with term non- current asset from entrepreneurship S3
and from S4, S5 Accounting. Again, they live in society where non- current
asset are located. So they refer to their community to identify non- current asset.
d) Learning activities
• Put students in groups ask them to analyse the picture in student book.
• Guide student’s discussions towards the question.
• Invite students to share their findings

Answers to learning activity 11.5

All items/things are non- current assets or fixed assets.

e) Application activities 11.5

• Invite students to read, discuss in pairs the application activities in
student book
• Have some pairs to present their findings
• Ask other pairs to supplement
• Give constructive feedback

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 Answers to Application Activity 11.5

1. Auditors should normally test that:

a) Non-current assets purchases have been authorised.
b) The purchase price can be confirmed to supporting documentation.
c) The asset has been recorded in the cash book and non-current
asset register.
d) An appropriate depreciation rate has been chosen and has been
applied correctly to the asset.
2. ‘d’ is not a test of controls over non-current assets but it is a test of
valuation

Lesson 6: Non-current liabilities

a) Learning objective
Explain the control objectives, control activities and test controls of Non-current
liabilities
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Desks, chalkboard,
chalk, papers, internet, computer, students’ books, internet, case studies and
any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction
Students are familiar with term non- current liabilities from entrepreneurship
S3 and from S4, S5 Accounting. Again, they live in society where there are
non- current liabilities. So they refer to their community to identify non- current
liabilities.
d) Learning activities
• Put students in groups ask them to analyse image in student book.
• Guide student’s discussions towards the questions.
• Invite students to share their findings

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 Answers to learning activity 11.6

1. The non-current liabilities are: payable after one year, arises from long-
term funding, long-term loans (debentures).
2. The most important objectives of internal control relating to non-current
liabilities are to ensure:

Authorization: that loans and any other long-term borrowings are

properly authorized.
Completeness: that all non-current liabilities have been recognized and
disclosed.
Accuracy: that the value of the liability has been correctly recorded, and
that interest payable has been calculated correctly and included in the
correct accounting period.
Classification and understandability: that long-term loans and interest
on loans have been correctly disclosed in the financial statements.

e) Application activities 11.6:

• Invite students to read, discuss in pairs the application activities in
student book
• Have some pairs to present their findings
• Ask other pairs to supplement
• Give constructive feedback

Answers to Application Activity 11.6

The control activities will be:

• Maintenance of appropriate accounting records (including
distinction between current and non-current liabilities).
• Statements from loan or lease providers should be reconciled with
the relevant ledger accounts on a regular basis.

Lesson 7: Management information

a) Learning objective
Explain the control objectives, control activities and test controls of management
information

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 b) Teaching resources
Basic materials for a class/ lesson to be conducted: Desks, chalkboard,
chalk, papers, internet, computer, students’ books, internet, case studies and
any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction
Students are familiar with term management information from entrepreneurship
S3 and from S4, S5 Accounting.
d) Learning activities
• Put students in groups ask them to read the image in student book.
• Guide student’s discussions towards the question.
• Invite students to share their findings

Answers to learning activity 11.7

All of the following: people, computer software, computer hardware,

procedure and network are the components of information system.

e) Application activities 11.7:

• Invite students to read, discuss in pairs the application activities in
student book
• Have some pairs to present their findings
• Ask other pairs to supplement
• Give constructive feedback

Answers to Application Activity 11.7

There should be controls in place to ensure budgets are regularly set, and
reports and information are provided on time to the specified degree of
accuracy and detail.
As well as the control aspects, auditors will be concerned with the
management information system’s ability to provide useful data for analytical
procedures.
And finally, auditors will review the contents of internal management
accounting reports, and confirm in particular that budgets are being set and
that actual results are being compared with budgeted figures.

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 Skills lab activity 11

Guidance on the skills lab activity.

In doing this skills lab activity, you can visit school bursar or request students to
make a research on the internet where need be.

i. Build
Given that students visit the required place,
–– Remind students on the expected objective for the visit attendance
–– Help them to be grouped and remember to mix both boys and girls
–– Let each team have the representative
–– Ensure they have where to keep necessary notes from the findings
–– Distribute questions for their research

ii. Practice
Guide students on accessing the real information
Ensure that all students are understood
Respond to any questions for clarification and support accordingly

iii. Present
Choose randomly any two teams to present their findings
Allow students to ask question to their fellows

iv. Conclusion
The teacher emphasizes on the objective of the visit reminding students that
they have to follow those accounting system.
The following are key areas for reference:
• Purchase system
• Payroll system
• Inventory system

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 11.6. Summary of the unit
It is best to examine controls in terms of the various components of the
accounting system. Most commonly these will be: sales, purchases, wages
and other systems such as inventory, non-current assets and management
information.

1. Sales system
Control objectives and Control activities
Control objectives Control activities
Goods and services are only • Segregation of duties; credit control,
supplied to customers with invoicing and inventory dispatch
good credit ratings and who • Authorization of credit terms to
are within approved credit customers
limits. • Credit limits confirmed before new
orders are accepted
Customers pay promptly. • Authorization of credit terms to
customers
• Credit limits confirmed before new
orders are accepted
• Balance statements sent regularly to
customers
Orders are recorded correctly. Sequential numbering of blank order
documents. The sequence of orders
processed is accounted for.
Orders are fulfilled. • Matching of customer orders with
production orders and dispatch notes
• Regular review for orders which have
not yet been delivered
All dispatches of goods are • Authorization of dispatch of goods
recorded. • Examination of goods outwards as to
quantity, quality and condition
• Recording of goods outwards on a
timely basis
• Pre-numbering of dispatch notes and
delivery notes and regular checks on
sequence

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All goods and services sold are • Agreement of goods outwards records
correctly invoiced. to customer orders, dispatch notes and
invoices
• Preparation of invoices
All invoices raised relate to • Agreement of goods outwards records
goods and services that have to customer orders, dispatch notes and
been supplied by the business. invoices
• Signature of delivery notes by customers
• Matching of sales invoices with dispatch
and delivery notes and sales orders
Credit notes are only given for • Condition of returns reviewed
valid reasons. • Recording of goods returned on goods
returned notes
• Management approves credit notes
issued
All sales that have been invoiced • Segregation of duties: recording sales,
are recorded in the general and maintaining customer accounts and
receivables ledgers. preparing statements
• Regular reconciliation of receivables
ledger control account
All credit notes that have • Segregation of duties: recording sales,
been issued are recorded in maintaining customer accounts and
the general and receivables preparing statements
ledgers. • Separate recording of sales returns,
price adjustments etc.
All entries in the receivables • Retention of customer remittance
ledger are made to the correct advices
receivables ledger accounts. • Regular preparation of receivables’
statements
• Review of receivables’ statements
Cut-off is applied correctly to • Cut-off procedures to ensure goods
the receivables ledger. dispatched and not invoiced (or vice
versa) are properly dealt with in the
correct period
Potentially irrecoverable debts • Timely review and follow-up of overdue
are identified. accounts
• Authorization of writing off of
irrecoverable debts

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 Tests of controls
The precise nature of the tests of controls performed by the auditor would
depend on the way in which the control is being operated by the audit client.
Procedures however would typically include the following.
Review the organisation chart and verify that references are being obtained.
Verify that a sample of new accounts on the sales ledger have been authorised
by senior staff. Examine computer application controls for credit limits. For a
sample of customer orders obtain evidence that they have been matched with
production orders and despatch notes. Verify that price lists and terms of trade
are properly documented, authorised and communicated. Obtain evidence of
authorisation of goods despatched e.g. signature of despatch note. Review
and test the entity’s procedures for accounting for numerical sequences of
despatch notes and inspect despatch notes to confirm that they are sequentially
numbered. Examine delivery notes for evidence of confirmation of receipt of
goods by customers e.g. customer signature. Obtain evidence that procedures
relating to the accuracy of invoices have been performed. Review and test the
entity’s procedures for accounting for numerical sequences of invoices and
inspect invoices to confirm that they are sequentially numbered. Review and
observe procedures for matching of invoices to despatch notes and re-perform
a sample. Obtain evidence of authorisation of credit notes. Evaluate procedures
for the preparation of customer statements. Review supplier statement
reconciliations produced by the audit client. Re-perform a sample of supplier
statement reconciliations produced by the audit client to determine whether
they have been performed accurately. Review control account reconciliations to
the receivables ledger produced by the client. Re-perform a sample of control
account reconciliations to the receivables ledger to determine whether they have
been performed accurately. Confirm authorisation of irrecoverable receivables
allowances/write offs.

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2. The purchases system
Control objectives and Control activities
Control objectives Control activities
All orders for, and • Order forms prepared only when a purchase
expenditure on, goods requisition has been received
and services are properly • Authorization of order forms (in accordance
authorized, and are for with pre-defined authority levels)
goods and services that • All orders made on official company documents,
are actually received and and showing suppliers’ name, quantity order
are for the company. and price
• Review of orders not received
Orders are only made to • Central policy for choice of suppliers, and list
authorized suppliers. of approved suppliers maintained
• Supplier master file data periodically reviewed
by management to ensure approved suppliers
remain suitable/appropriate
Orders are made at • Monitoring of supplier prices in relation to other
competitive prices. potential alternative suppliers
• Monitoring of supplier terms and taking
advantage of favorable conditions (bulk order,
discount)
Goods and services • Evidence required of requirements for purchase
received are used for the before purchase authorized (re-order quantities
organization’s purposes and re-order levels)
and not private purposes.
Goods and services are • Authorization of order forms (in accordance
only accepted if they with pre-defined authority levels)
have been ordered, • Safeguarding of blank order forms
and the order has been
authorized.
All goods and services • Examination of goods inwards
received are accurately • Recording arrival and acceptance of goods
recorded. • Comparison of goods received notes with
purchase orders

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 Liabilities are recognized • Recording arrival and acceptance of goods
for all goods and services • Comparison of goods received notes with
that have been received. purchase orders
• Prompt recording of purchases and purchase
returns in day books and ledgers
• Referencing of supplier invoices; numerical
sequence and supplier reference
All credits to which the • Recording return of goods (pre-numbered
organization is due are goods returned notes)
claimed. • Procedures for obtaining credit notes from
suppliers
Receipt of goods and • Recording arrival and acceptance of goods
services is necessary to (pre-numbered goods received notes)
establish a liability. • Comparison of goods received notes with
purchase orders
• Referencing of supplier invoices; numerical
sequence and supplier reference
• Confirmation of suppliers’ invoices – Prices,
quantities, accuracy of calculation
All expenditure is • Authorization of payments, in accordance with:
authorized and is for –– Authority limits
goods that are actually
received. –– Confirmation that goods have been
received, accord with purchase
order, and are properly priced and
invoiced
All expenditure that • Segregation of duties: accounting and
is made is recorded verification functions
correctly in the general • Prompt recording of purchases and purchase
and payables ledgers. returns in day books and ledgers
• Regular maintenance of payables ledger
• Comparison of supplier statements with
payables ledger balances on a regular basis
• Reconciliation of payables ledger control
account to total of payables ledger balances
• Invoices properly allocated to general ledger
accounts; invoices coded with expenditure
codes, signed off by responsible company
official

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 All credit notes that are • Comparison of supplier statements with
received are recorded in payables ledger balances
the general and payables
ledgers.
All entries in the payables • Comparison of supplier statements with
ledger are made to the payables ledger balances
correct payables ledger • Regular maintenance of payables ledger
accounts.
Cut-off is applied • Cut-off accrual of unmatched goods received
correctly to the payables notes at year end
ledger.

Tests of controls
A most important test of controls is for auditors to confirm that all purchases have
been authorised. The officials who approve the invoices should be operating
within laid-down authority limits. Procedures however would typically include
the following.
Observe the processing of purchase orders throughout the purchasing cycle
and evaluate whether proper segregation of duties is operating. Examine
application controls for re-order levels. Verify that authorised supplier lists exist
and have been communicated. Obtain evidence of regular management reviews
of supplier terms. Examine a sample of purchase orders for evidence that
they have been authorised. Observe procedures for receipt of goods to verify
that the goods actually received are matched to the purchase order. Review
entity’s procedures for accounting for pre-numbered documents and inspect a
sample of goods received notes for evidence of sequential numbering. Review
a sample of goods received notes for evidence of matching to purchase orders.
Examine supporting documentation for evidence that purchase invoices are
matched to goods received notes and orders. Review a sample of purchase
invoices for evidence that their accuracy has been verified (e.g. signature or
initials) and re-perform the procedures. Review evidence of approval of invoice
coding to relevant expenditure account by responsible staff member. Test
application controls relating to the input of purchase invoices and credit notes.
For example, perform a batch reconciliation to determine whether purchase
invoices have been entered accurately and a sequence check to determine
whether all credit notes have been recorded. Review procedures for reconciling
supplier statements to payables ledger accounts and re-perform a sample of
reconciliations. Review reconciliations of the payables ledger accounts and
payables ledger control account. Re-perform a sample of reconciliations of the

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 payables ledger accounts and the payables ledger to ensure that they have
been performed accurately.

3. The payroll system

Control objectives and Control activities

Control objectives Control activities
Employees are only paid for • Staffing and segregation of duties
work that they have done. • Authorization for engagement and discharge
of employees (new staff are correctly added
to the payroll system, and leavers are
removed)
• Recording of hours worked by timesheets,
clocking in and out arrangements
• Review of hours worked
• Salary and hourly payroll reports are reviewed
and approved for payment by management
Gross pay has been • Maintenance of personnel records and
calculated correctly and regular comparison of wages and salaries to
authorized. details in personnel records
• Authorization for:
–– Changes in pay rates
–– Overtime
–– Non-statutory deductions (for example
pension contributions)
–– Advances of pay
• Recording of changes in personnel and pay
rates
• Recording of hours worked by timesheets,
clocking in and out arrangements
• Review of hours worked
• Recording of advances of pay
• Holiday pay arrangements
• Review of wages against budget
Gross and net pay and • Bases for compilation of payroll
deductions are accurately • Preparation, review and approval of payroll
recorded on the payroll.

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Wages and salaries paid • Bases for compilation of payroll
are recorded correctly in • Preparation, review and approval of payroll
the bank and cash records.
Wages and salaries are • Preparation, review and approval of payroll
correctly recorded in the • Review of wages against budget
general ledger.
The correct employees are • Segregation of duties
paid. • Authorization of wage cheque
• Verification of identity
• Recording of distribution; employees sign
for cash wages received
• Preparation and signing of cheques and
bank transfer lists
• Comparison of cheques and bank transfer
list with payroll
• Maintenance and reconciliation of wages
and salaries bank account
Wages and salaries are only • Payroll master file is periodically reviewed for
paid to valid employees. accuracy (e.g. to confirm leavers have been
removed)
• Preparation and signing of cheques and
bank transfer lists
• Maintenance and reconciliation of wages
and salaries bank account
Statutory and non-statutory • Maintenance of separate employees’ records,
deductions have been with which pay lists may be compared as
calculated correctly and necessary
are authorized. • Reconciliation of total pay and deductions
between one pay day and the next
• Payroll deductions table data is periodically
reviewed by management for accuracy and
compliance with current taxation rates
• Comparison of actual pay totals with
budget estimates or standard costs and the
investigation of variances

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 The correct amounts • Comparison of actual pay totals with
are paid to the taxation budget estimates or standard costs and the
authorities. investigation of variances
• Agreement of gross earnings and total tax
deducted with the returns submitted to the
taxation authorities

Tests of controls
The precise nature of the tests of controls performed by the auditor would
depend on the specific control activities operated by the entity. However, they
would typically include the following:
Review payroll and HR job descriptions and company policies on the payroll
process, to evaluate whether proper segregation of duties is in place.
Review a sample of starters and leavers in the year and verify that the correct
documentation is in place e.g. personnel files. Review the entity’s procedures
for reporting changes (e.g. wage increases) to the payroll department. Obtain
evidence of authorisation of standing data in payroll system. Review and test
authorisation procedures for hiring staff, wage rates, overtime etc. Observe
employees’ use of clocking-in procedures. Inspect a sample of clock-cards/
timesheets for evidence of approval by the appropriate level of management.
Review documentary evidence that a sample of payroll calculations have been
independently re-performed by entity staff e.g. review of spreadsheet printout.
Test operation of computerised controls e.g. range checks. Inspect documentary
evidence of management’s review of agreement of gross earnings and total
tax deducted to taxation returns. Examine paid cheques or a certified copy of
the bank list for evidence of proper authorisation. Where wages are paid in
cash attend the pay-out and observe procedures. Review payroll budgeting
procedures adopted by the client. Review reconciliation of the payroll master
file to the wages and salaries account in the general ledger. Review procedures
for classifying payroll costs to ensure that costs are not incorrectly capitalised.

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4. The inventory system

Control objectives and Control activities

Control objectives Control activities
All inventory movements • Segregation of duties; custody and recording
are authorized and of inventories
recorded. • Receipt, review and recording of goods
inwards (all deliveries of goods from suppliers
should pass through a goods inwards section
to the stores, and be recorded and confirmed
as received)
• Issues of inventory supported by appropriate
documentation
• Issues of inventory should only be made on
basis of properly authorized requisitions
• Maintenance of inventory records
Inventory records only • Receipt, review and recording of goods
include items that belong inwards (all deliveries of goods from suppliers
to the entity. should pass through a goods inwards section
to the stores, and be recorded and confirmed
as received)
• Procedures in place to include inventory held
at third parties and to exclude inventory held
on consignment for third parties
• Inventories received should be compared to
purchase orders to confirm ownership
Inventory records include • Segregation of duties; custody and recording
inventory that exists and of inventories
is held by the entity. • Receipt, review and recording of goods
inwards (all deliveries of goods from suppliers
should pass through a goods inwards section
to the stores, and be recorded and confirmed
as received)
• Maintenance of inventory record
• Physical safeguards in place to ensure
inventory is not stolen
• Inventory counted regularly

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 Inventory quantities have • Segregation of duties; custody and recording
been recorded correctly. of inventories
• Receipt, review and recording of goods
inwards
• Inventory issues supported by appropriate
documentation
• Maintenance of inventory record
• Reconciliations of accounting record with
physical inventory levels (inventory counts)
Cut-off procedures • All dispatch documents processed daily to
are properly applied to record the dispatch of finished goods
inventory. • All goods inwards reports processed daily to
record the receipt of inventory
• Reconciliation of inventory counts to book
record and control accounts
Inventory is safeguarded • Precautions against theft, misuse and
against loss, pilferage or deterioration
damage. • Security over inventory held by third parties,
and third party inventory held by entity
• Inventory counts
The costing system • Computation of inventory valuation
values inventory correctly. • Review of condition of inventory
Allowance is made for • Computation of inventory valuation
slow-moving, obsolete or • Inventory managers regularly review condition
damaged inventory. of inventory
• Control of inventory levels
• Arrangements for dealing with returnable
containers

Tests of controls
To confirm this, tests must be carried out on how inventory movements are
recorded and how inventory is secured.
Select a sample of inventory movement’s records and re-perform matching to
goods received and goods despatched notes. Confirm that movements have
been authorised as appropriate. Select a sample of goods received and goods
despatched notes and agree to inventory movement records. Re-perform a
sample of reconciliations of inventory records with the general ledger to confirm

246 Auditing | Teacher's guide | Senior Six | Experimental version

that they are performed and reviewed. Examine evidence of sequence of
inventory records. If the company uses perpetual inventory counting (i.e. it counts
inventory on a regular basis throughout the year, rather than at the year-end
alone). Observe security arrangements for inventories. Consider environment
in which inventories are held. Review procedures for counting inventory and
attend the count.

5. Non-current assets

Control objectives and Control activities

Control objectives Control activities
Non-current assets are • Segregation of duties; authorization,
properly accounted for and custody and recording of assets
recorded. • Maintenance of appropriate accounting
record (including distinction between
capital and revenue expenditure)
• Maintenance of non-current asset register
Security arrangements over • Maintenance of non-current asset register
non-current assets are • Physical inspection of non
sufficient. • -current assets
• Precautions against theft or misuse
Physical safeguards in place to ensure
assets are not stolen or damaged
Where necessary, access is restricted to
authorized personnel only
• Portable assets (e.g. laptops) should be
tagged and movements in and out of the
entity’s premises recorded
Non-current assets are • Physical inspection of non-current assets
maintained properly. • Precautions against theft or misuse
• Assets should be regularly inspected and
maintained
Non-current asset • Authorization of capital expenditure
acquisitions are authorized. • Annual capital expenditure budgets should
be approved by the board
Non-current asset disposals • Authorization of sales, scrapping or transfer
are authorized and proceeds of non-current assets
of disposals are accounted • Proceeds from disposal recorded, and
for. related to disposal

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 Depreciation rates are • Authorization of depreciation rates
reasonable. • Calculation and confirmation of
depreciation rates
All income from income • Identification of income-producing assets
yielding non-current assets
is collected.

Tests of controls
A key concern of auditors will be proper controls over movements (acquisitions
and disposals) during the year.
Confirm maintenance of a non-current asset register. Review annual capital
budgets produced by the board and confirm that they are authorised. For a
sample of acquisitions and disposals recorded in the non-current asset register
confirm authorisation (and board approval if necessary). Inspect invoices to
confirm that they have been appropriately approved. Review reconciliations of
the non-current assets register to the general ledger accounts and confirm that
discrepancies are followed up. Re-perform a sample of reconciliations. Verify
that depreciation rates are authorised and are in line with company policy.
Review evidence of arithmetical accuracy of depreciation and re-perform a
sample of calculations. Review evidence of calculations of profits or losses on
disposal and re-perform a sample of calculations. Review adequacy of physical
security measures.

11.6. Non-current liabilities

Control objectives Control activities
Non-current liabilities have • Maintenance of appropriate
been properly accounted for accounting record (including
and recorded. distinction between current and non-
current liabilities)
• Statements from loan or lease providers
should be reconciled with the relevant
ledger accounts on a regular basis
Non-current liabilities are • Authorization of new loans, mortgages
authorized. etc. should be submitted to the board
for approval
Interest charges are • The calculation of interest charges
reasonable. should be checked for accuracy

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Management information
The management information system is an important aspect of the control
environment, since timely and accurate information helps management supervise
operations. There should be controls in place to ensure budgets are regularly
set, and reports and information are provided on time to the specified degree of
accuracy and detail.
As well as the control aspects, auditors will be concerned with the management
information system’s ability to provide useful data for analytical procedures.
As well as testing based on individual components of the accounting system,
the auditor will also perform some general tests, including the following.
• Test postings from books of prime entry to the general ledger.
• Confirm that the general ledger is regularly balanced.
• Test vouch a sample of journal entries to original documentation.

11.7. Additional information for teachers

A significant number of auditor suggested substantive procedures such as
‘recalculating gross and net pay calculations’, rather than a test of control which
might be to ‘review evidence of the recalculation of payroll’. Auditor need to
review their understanding of these different types of audit procedures and
ensure that they appreciate that substantive tests focus on the number within the
financial statements whereas test of controls are verifying if client procedures are
operating. A substantive procedure provides evidence regarding an assertion,
whilst a test of control provides evidence regarding the effectiveness of controls
operated by the entity.

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 11.8. End unit assessment
Answers to end unit assessment activities

1. A company can ensure goods ordered do not exceed requirements by

setting re-order quantities and re-order limits.
2. Invoices from suppliers should be reviewed for correctness of prices
and quantities and accuracy of calculation. They should be compared
with purchase orders and goods received notes.
3. C Assets being sold at a profit suggests an error may have been made
in depreciation (as value of asset is supposed to be written down over
its useful life to the company).
4.
a) Inherent risk
Reasons for high inherent risk associated with Mpundu Ltd.’s
inventory
Finished goods warehouse
The warehouse is located five miles away from the factory.
This increases the risk of there being goods not included in the count
because they are in transit or loaded onto a lorry and forgotten about.
Work-in-progress
The company has work-in-progress.
This can be difficult to value correctly, as the value often depends on
judgmental issues, such as degree of completion or apportionment
of overheads.
Inventory held at retail stores
There is a significant amount of inventory maintained at various third
party premises, which may be spread around the country.
The inventory at the retailers may come from various sources and
they may not give an accurate return of the inventory that belongs to
Mpundu Ltd.
This also increases the risk that inventory will not be included in the
count.

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 Three-month returns
There is a policy that unsold inventory is returned to Mpundu Ltd after
three months when the price is then heavily discounted.
This has two risks attached to it. The first is that goods will be in
transit on the date of the count and will therefore not be included. The
second is that the valuation may become complex if the discounted
price drops below cost, as inventory must be valued at the lower of
cost and NRV.
b) Tasks to undertake at the inventory count
• Assess whether the staff are following inventory count instructions
by attending count and observing how it is carried out in order to
assess the inventory count’s reliability as a source of evidence.
• Perform test counts, matching from the records to the physical
inventory and vice versa to determine the accuracy of the counts
being performed.
• Observe whether procedures for identifying damaged or obsolete
inventory are working properly.
• Ask management how inventory held at third parties is accounted
for and confirm that there are returns from all retail outlets to ensure
that all inventory owned is included.
• Observe whether there are appropriate controls in place over the
movement of inventory during the inventory count, and make note
of details of last goods in and out. This is to ensure that cut-off is
appropriate.
• Conclude whether the inventory count has been carried out properly
and is reliable.

11.9. Additional activities(Questions and answers)

11.9.1. Remedial activities (Questions and answers)

Questions:
1. What are the key elements in authorization of credit terms to customers?
2. What procedures should auditors carry out on credit notes received?
3. If the client has a system of perpetual or continuous inventory counts,
what are the most important features this system should have?

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 Answers:
1. References and credit checks should be obtained before customers are
given credit. Credit limits should be authorized by senior staff and should
be regularly reviewed.
2. Auditors should:

Verify the correctness of credit notes with previous correspondence.

Confirm by reviewing inventory records and records of returns that
goods have been returned.
Assess whether credit notes have been correctly accounted for by
reconciling entries in the purchase day book and purchase ledger.
3.
a) The inventory counts should be carried out regularly.
b) All inventory should be counted at least once a year.
c) Counts should be carried out by staff independent of the inventory/
stores function.
d) The results of the inventory counts should be properly recorded, and
take account of goods in transit.
e) The results of the inventory counts should be reconciled to book
inventory records.
f) Records should be updated immediately for discrepancies noted.

11.9.2. Consolidation activities

Questions:
1. What are the most important authorization controls over amounts to be
paid to employees?
2. To ensure that goods and services are only supplied to customers with
good credit ratings’. This statement describes a:

A. Risk
B. Control objective
C. Control activity
D. Test of controls

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Answers:
1. The most important authorization controls over wages and salaries are
controls over:
A. Engagement and discharge of employees
B. Changes in pay rates
C. Overtime
D. Non-statutory deductions
E. Advances of pay
2. B Confirming the credit ratings of potential customers is a control. The
objective of this control is to ensure that goods and services are only
provided to customers with good credit ratings.

11.9.3. Extended activities

Questions:
1. Nzubaka Ltd is a construction company (building houses, offices and
hotels) employing a large number of workers on various construction
sites. The internal audit department of Nzubaka Ltd is currently reviewing
cash wages systems within the company.

The following information is available concerning the wages systems:

• Hours worked are recorded using a clocking in/out system. On arriving
for work and at the end of each day’s work, each worker enters their
unique employee number on a keypad.
• Workers on each site are controlled by a foreman. The foreman has a
record of all employee numbers and can issue temporary numbers for
new employees.
• Any overtime is calculated by the computerised wages system and
added to the standard pay.
• The two staff in the wages department make amendments to the
computerised wages system in respect of employee holidays, illness,
as well as setting up and maintaining all employee records.
• The computerised wages system calculates deductions from gross
pay, such as employee taxes, and net pay. Finally, a list of net cash
payments for each employee is produced.
• Cash is delivered to the wages office by secure courier.
• The two staff place cash into wages packets for each employee
along with a handwritten note of gross pay, deductions and net pay.
The packets are given to the foreman for distribution to the individual
employees.

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 Required
I. Identify and explain four deficiencies in Nzubaka Ltd’s system of internal
control over the wages system that could lead to misstatements in the
financial statements.
II. For each deficiency, suggest an internal control to overcome that deficiency.

Answers:
1. You need to identify the control deficiencies and suggest controls to
overcome them. The best way to present your answer is in a columnar format
because this allows you to link each deficiency with a recommendation.
Make sure you explain the deficiencies you have identified fully, as required
by the question. Go through the scenario carefully, noting down potential
deficiencies as you do so. Six deficiencies are listed below for your
reference, but only four are required.

Wages system – deficiencies and recommended controls

Deficiency Internal control recommendation
The foreman is in a position to set up The issue of new employee numbers
fictitious employees onto the wages should be authorized by a manager
system as he has authority to issue and supported by employee contract
temporary employee numbers. This letters etc.
would allow him to collect cash
wages for such bogus employees.
The two wages clerks are The list of personnel should be
responsible for the set up and matched with the payroll by a manager
maintenance of all employee and all new employee records should
records. They could therefore, in be authorized before being set up on
collusion, set up bogus employees the system.
and collect cash wages from them.
The wages clerks are responsible Any amendments to standing data on
for making amendments to holidays the wages system should be done
and illness etc. They could make by an authorized manager so that
unauthorized amendments which unauthorized amendments are not
affect individual staff members’ pay. made. A log of amendments should be
regularly reviewed.

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The computer system calculates A pay-in slip should be generated by
gross pay and any deductions but the computer system and included in
these are hand-written by the wages the wage packet to reduce the chance
clerks for the staff pay packets, so of errors in deductions and gross pay
errors could be made and incorrect being made.
wages issued.
The computer automatically One of the wages clerks should verify
calculates gross pay and the gross pay and deductions for a
deductions, however there is no sample of employees to gain assurance
procedure to ensure the calculations that the computer is calculating
are accurate. amounts correctly.
The foreman distributes cash The distribution of wages should be
wages to the employees. He could overseen by another manager. Any
therefore misappropriate any wages unclaimed wages should be noted
not claimed. on a form and returned to the wages
department.

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 12
PROCEDURES IN
UNIT AUDIT OF FINANCIAL
STATEMENTS

12.1. Key unit competence

To be able to demonstrate working knowledge in respect of performance of
audit procedures

12.2. Prerequisite (knowledge, skills, attitudes and values)

Learners were introduced in senior 4 in the course of financial accounting unit
10 about the preparation of the financial statements of a sole trader, also in
senior 6 in the course of auditing in unit 1 and 8, learners covered key concepts
in auditing and evidence gathering respectively. Therefore, the learners are
INTRODUCTION
with prior knowledge, skills, attitudes and values that will help them to easily
understand and perform the audit procedures in auditing of the financial

TO ACCOUNTING
statements.

12.3. Cross-cutting issues to be addressed:

Environment and sustainability: Environment is one of the factors in every
human activity. Students should also be taught about environment concerns in
relation to their work related activities. Should be unlighted on environmental
concerns especially in use of papers and how best can reduce the use of
papers in printing working papers and audit report during when they are in
their professional practice/work. This is in the framework of maintaining the
world green by reducing the number of trees used in making papers and related
materials for human use.
Gender education: teachers should always consider to have gender balance
in their teaching practices. Both male and female students should accord
those equal opportunities while responding to questions raised and other tasks
organized in class environment and outside class environment. This will enable
both female and male students to acquire the expected skills and knowledge
thus contributing to the development of the country.

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Inclusive education: in addition to all having equal opportunities to students.
The learners with disabilities should be facilitated to equally learn like their
colleagues. The teacher should monitor his or her students well, for students
with disabilities and similar tendencies should be also given support and ensure
that they are able to learn well. Therefore, teachers should plan the reasons
accordingly and ensure that students with such disabilities are catered for.
Peace and Values: the teacher should emphasis the relevant of peace and
values in an individual’s life. Students should be unlighted on the purpose of
creating peaceful environment, its advantages and disadvantages. Students
should also be shared of purpose of respecting cultural values. The teachers
should endeavour to point out the relevance of peace and cultural values in
relation to the profession of auditing and accounting.
Standardization culture: the students should be shared on importance of
performing substantive audit procedures. Students should also be shared on
the purpose of collecting audit evidences. The teacher should focus more on
the relevance and reliability of audit evidences.

12.4. Guidance on introductory

INTRODUCTION
Students should be helped to pass through the case and ensure that they
are able interpret it. The teacher should ask questions to inspire and attract

TO ACCOUNTING
the attention of the students. The teacher should listen carefully the students’
responses and thereafter link the students’ responses to lesson going to be
taught.
The teacher creates a conductive environment in the class where every students
is free to respond and accord attention to subject matter.
You can support students’ answers by referring to possible answers to the
introductory activity below:

Possible answers for introductory activity (case study)

Note: These responses may be shared or not with the students. They are
specifically meant to guide him while listening to students’ responses.
1. Purposes of audit are the following:
• To ascertain whether the financial statements are prepared in all
material respect and free from material misstatement due to errors
and frauds
• To review/ carry out an assessment on the internal control.
• To issue the audit report on financial statements and on internal
controls (Management letter).

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 2. The elements to audit are the following:
• Financial statements of the company.
• Preparation of financial statements in all material respect and free
from material misstatement due to errors and frauds
• Assessment on internal control

12.5. List of lessons/sub-heading

Lesson title/sub- Learning Number
Headings
heading objectives of periods
12.1. Substantive Introductory activity Arouse the curiosity 1
procedures of students on the
content of unit 12
1 The nature of Explain the nature 1
substantive of substantive
procedures procedures
2 Financial statement Explain the financial 1
assertions statement assertions
3 Methods of Explain the methods 1
obtaining audit of obtaining audit
evidence evidence
12.2. Analytical 1 Using analytical Explain the 1
procedures procedures using analytical
procedures
2 The nature Explain the nature 1
of analytical of analytical
procedures procedures
3 Analytical Develop the 1
procedures in analytical
substantive testing procedures in
substantive testing
4 Investigation of Explain investigation 1
fluctuations and about unexpected
relationships variation

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 12.3. Audit 1 Inventory Explain audit 1
procedures procedures for
for some inventory
elements 2 Non- current assets Explain audit 1
of financial procedures for non-
statements current assets
3 Account receivable, Explain audit 1
Cash and bank procedures for
balances account receivable,
cash and bank
balances
4 Liabilities Explain audit 1
procedures for
Liabilities
5 Expenses and Explain audit 1
Revenues procedures for
expenses and
revenues
End Unit Assessment 1
Total number of periods 14

Lesson 1: Substantive procedures

a) Learning objective
To the learners will be able to explain the the nature of substantive audit
procedures, audit assertions and the different methods of collecting audit
evidences.
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Reference text books,
Students text book, internet, case studies, Marker, Black Board, Chalk and any
other trustworthy and reliable resources to enhance learning.

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 c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
Students should be briefed on previous unit where the students covered test of
controls. The teacher should emphasis more on tests of controls and how they
are performed. Therefore, after, students should be introduced to other tests
that can be performed by auditor other than test controls. Here, the teacher
should proceed with the lessons in this unit.
d) Learning activities
• Put students in small groups and give clear instruction about the activity
• Ask them to interpret the picture in students’ book and answer the
questions provided in the activity
• Guide students’ make sure that everyone is participating
• Invites students to present to their answers
• Give them the appropriate answers to the question asked.

Answers to learning activity 12.1

1. He is performing /doing substantive audit/audit procedures/tests in

details.
2. His main role/task is to collect/gather audit evidences
3. He is using the following materials: papers, files, and the pen..

e) Application activity 12.1.

Students will be put in small groups
• Each group will be given an exercise to perform
• Students will be monitored and supervised by the teacher to ensure
their active participative in performing the exercises
• Each group will be requested to present the work done
• Each student will give opportunity to present the piece of work done
• The teacher will give feedback to each individual group on work done
• Including response to concerns raised by the students.

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 Answers to application activity 12.1

Question 1
• To give reasonable assurances on a company’s financial statements.
• To provide an independent opinion of the financial statements.
• To provide the assurance to users of the financial statements.
• An audit is the examination of the financial report of an entity.
Question 2
The following are the auditable elements of financial statements:
• Expenses
• Revenues
• Gain
• Losses
• Assets
• Investments
• Liabilities
• Equity
• Distribution to owners(dividends)

Lesson 2: Analytical procedures

a) Learning objective
To explain the nature of analytical substantive audi procedures,and perform an
investigation about unexpected variation. Develop the analytical procedures in
substantive testing
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Reference text
books, Students text book, internet, case studies, Marker, Black Board, Chalk
and calculator and any other trustworthy and reliable resources to enhance
learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson one, students learnt about the nature of substantive procedures
and how audit evidences are collected. The teachers will introduce the lesson
to students by referring them to previous substantive procedures covered. This
will help students to easily understand substantive analytical procedures.
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 d) Learning activities 12.2

Activity 12.2
• Put students in small groups and give clear instruction about the activity
• Ask them to interpret the picture in students’ book and answer the
questions provided in the activity
• Guide students’ make sure that everyone is participating
• Invites students to present to their answers
• Give them the appropriate answers to the question asked.

Answers to learning activity 12.2

1. The material shown on the picture above are: a computer, calculators,

piece of papers, pen and note books
2. Their purposes are to be used in collecting more reliable audit evidences.

e) Application activity 12.2

• Students will be put in small groups
• Each group will be given an exercise to perform
• Students will be monitored and supervised by the teacher to ensure
their active participative in performing the exercises
• Each group will be requested to present the work done
• Each student will give opportunity to present the piece of work done
• The teacher will give feedback to each individual group on work done
• Including response to concerns raised by the students.

Answers to application activity 12.2

The following are some of the tasks/audit procedures that should performed;
• Obtain the payrolls for twelve months for the period under audit, and
check whether similar number of staff has been consistently at BC
Ltd Company the year accounting period.
• Perform the analytical review by establishing the expected amount
and agree with reported amount included in the financial statements

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 Total monthly
Number of Monthly pay in FRW per
Staff category staff per pay in category
category(A) FRW ( B)
C=( A*B)
Ordinary staff( officers) 275 650,000 178,750,000
Middle managers 30 1,450,000 43,500,000
Senior manager 15 3,000,000 5,000,000
Total pay for all staff per
267,250,000
month(A)
Salary for all 12 months (
B)= (A*12) 3,207,000,000
Amount disclosed in the
3,100,000,000
financial statements( C)
Difference observed D =
107,000,000
(B-C)

• Seek explanations from the management of BC Ltd regarding the

difference of FRW 107,000,000 ( shown in the table below)
• In case of disagreement, asses its materiality
• In case qualifies to be material, the issue will be reported.

Lesson 3: Audit procedures for some elements of financial

statements

a) Learning objective
To explain audit procedures( substantive procedures) for different elements of
financial staments
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Reference text books,
Students text book, internet, case studies, Marker, Black Board, Chalk and
calculator and any other trustworthy and reliable resources to enhance learning.

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 c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
Students will be referenced to previous lessons learnt under unit 12. Students
should be introduced to key elements covered in previous lessons learnt that
related to the new to lesson. Some of the key elements that will be covered
include the nature of substantive procedure, methods of collecting evidences
and different assertions applied on certain financial statements.
d) Learning activities

Activity 12.3
• Put students in small groups and give clear instruction about the activity
• Ask them to show the pictures in student book and answer the questions
provided in the activity
• Guide students’ discussion and make sure that everyone is participating
• Invites students to share their findings or answers.
• Harmonize their findings or answers, and link the findings to the learning
objective, help them draw conclusions.

Answers to learning activity 12.3

1. The person in picture is looking careful at the financial statements

elements / information at the time of audit.
2. The tool represents any item that can be used during the analysis of the
financial information.

e) Application activity 12.3

• Students will be put in small groups
• Each group will be given an exercise to perform
• Students will be monitored and supervised by the teacher to ensure
their active participative in performing the exercises
• Each group will be requested to present the work done
• Each student will give opportunity to present the piece of work done
• The teacher will give feedback to each individual group on work done
• Including response to concerns raised by the students.

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 Answers to Application Activity 12.3

For each of the balances/class of transactions, the audit should perform

some of the substantive audit procedures shown below:
• Inventory of FRW 10,000,000
i. Obtain a copy of the inventory listing and agree the totals to the general
ledger.
ii. Cast the inventory listing to ensure it is mathematically correct.
iii. Vouch a sample of inventory items to suppliers’ invoices to ensure it is
correctly valued.
iv. Confirm that any inventory held at third-party locations is included in
the year-end inventory figure by reviewing the inventory listing.
• Property plant and Equipment(PPE) of FRW 50,000,000
• Compare non-current assets in the general ledger with the non-
current assets register and obtain explanations for differences.
• For a sample of assets which physically exist, check if they are
recorded in the non-current asset register.
• If a non-current asset register is not kept, obtain a schedule showing
the original costs and present depreciated value of major non-
current assets, ensure that the assets’ value and their depreciation
amounts were accurately determined.
• Reconcile the schedule of non-current assets with the general
ledger.
• Receivables FRW 50,000 ,000

i. Agree the balance from individual receivables ledger accounts to

receivables’ listing and vice versa.
ii. Match the total of the receivables’ listing to the sales ledger control
account
iii. Cast and cross cast the trial balance before selecting any samples to
test.
iv. For sampled receivables balances, issue debtors circularization
(request for confirmation)
• Revenue FRW 100,000,000
• Compare the total revenue with that reported in previous years and
the revenue budgeted, and investigate any significant fluctuations.

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 • For a sample of customer orders, trace the details to the related
despatch notes and sales invoices and ensure there is a sale
recorded in respect of each (to test the completeness of revenue).
• Select a sample of despatch notes in the month immediately before
and month immediately after the year end. Trace these through to
the related sales invoices and resultant accounting entries to ensure
each sale was recorded in the appropriate period.
• Select a sample of credit notes issued after the year end and trace
these through to the related sales invoices to ensure sales returns
were recorded in the proper period.

12.6. Summary of the unit

The unit embarks on the following:
The unit covers mainly substantive audit procedures. Substantive audit
procedure is the execution stage of the audit. At this stage of the audit the
auditor has to design the appropriate tests/ audit procedures that would enable
the auditor to detect any material misstate arising from errors or fraud. In this
regard, the auditor performs both substantive audit procedures and analytical
audit procedures.
Note that the analytical procedures used where the auditor can easily develop
his expectation and conclude the audit of the amount or balances shown in the
financial statements. In this case the audit, the auditor can opt to use analytical
procedures to develop his expectation and reconcile with the amount shown
in the financial statements under audit. The analytical can be applied mainly on
audit of salaries and revenue.
During the audit, the auditor has to carry out the audit of different classes of
transactions and balances disclosed in the financial statements. The financial
statement elements required to be audited include assets, liabilities, expenses
and revenue and their disclosures. Thus forming audit opinion on audited
financial statements
During the course of the audit financial statements elements, the auditor has
to ensure that the audit objectives are addressed by designing the appropriate
audit procedures. It should be noted that the audit procedures are always a
lined to the audit objectives and audit assertions.
The auditor has to design the audit procedures and ensure that the following
audit assertions are verified/ checked.

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a) Income statement assertions
• Occurrence: The auditor to check whether the transactions recognized
in the financial statements occurred.
• Completeness: the audit has to check whether all transactions should
have recognized in financial statements have been recognized.
• Accuracy: The auditor should ensure that transactions have been
accurately reflected in financial statements at the appropriate amounts.
• Cut-off: The auditor has to check whether the transactions have been
recognized in the correct and relevant accounting time periods.
• Classification: The auditor has to check whether the transactions have
classified properly and fairly presented in the financial statements.
• Presentation: The auditor has to ensure that the transactions are
appropriately aggregated or disaggregated and are clearly described.
b) Financial position statement assertions
• Existence: the auditor has to confirm the whether Assets, liabilities
and equity interests exist disclosed in the financial statements exist.
• Rights and obligations: the auditor hat to confirm whether the entity
controls the rights to assets, and liabilities are the obligations of the
entity.
• Completeness: the auditor need to ensure whether all assets, liabilities
and equity interests that should have been recorded have been
recorded, and all related disclosures that should have been included in
the financial statements have been included.
• Accuracy, valuation and allocation: The auditor has to ensure that
the assets, liabilities and equity interests have been included in the
financial statements at appropriate amounts and any resulting valuation
or allocation adjustments have been appropriately recorded.
• Classification: the auditor has to ensure that the assets, liabilities and
equity interests have been recorded in the proper accounts.
• Presentation: The auditor has also to ensure that the assets, liabilities
and equity interests are appropriately aggregated or disaggregated
and clearly described.
The audit also covers different tests performed on some of financial statements
elements indicated above.
It should however be noted that during performance of the substantive audit
procedures (tests of detail) the auditor has to collect the audit evidences. Below
are different methods of collecting audit evidences:

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 • Inspection: the auditor has to inspect documents/records and
physical assets Observation: Here, the auditor has look at a process
or procedure being performed by others.
• External confirmation: An external confirmation represents audit
evidence obtained by the auditor as a direct written response to the
auditor from a third party.
• Recalculation: The auditor has to check the mathematical accuracy of
documents or records.
• Re-performance: This involves the auditor’s execution of procedures
or controls.
• Analytical procedures: The auditor has to make evaluations of financial
information through analysis of plausible relationships among both
financial and non-financial data.

12.7. Addition information

The teacher should also able to explain more about on sufficiency and
appropriateness of audit evidences and this should be done with ranking of the
audit evidences.
The teacher may help students to design the appropriate substantive audit
procedures for other financial statements’ components not covered in students’
text book.

12.8. End unit assessment

Answers to end unit assessment activities

1. Substantive procedures (or substantive tests) are those activities/ tests

performed by the auditor to detect any material misstatement due error
or fraud.
2. Analytical procedures are used on information where the audit can
establish his/her expectations and relate to recorded /disclosed
information. Substantive procedures are used where the auditor cannot
easily establish expectations on account balances or class of transactions.

Analytical procedures are more applicable to large volumes of transactions

that tend to be more predictable over time and can be used at different
stages of audit of audit process. Substantive audit procedures can be
used only substantive stage of audit/ execution level.

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3. In accordance with ISA 500, the auditor should collect audit the evidences
through use of the methods shown below:
• Inspection.
• Observation.
• Inquiry.
• Re-performance.
• Recalculation.
• Analytical procedures.
• External confirmation.
4. The main purpose of audit evidence is to be used by the auditor in issuing
his/her audit opinion in the audit report.
5. The key audit procedures on the following financial statements:

Cash and Bank balances

The auditor should to perform the following substantive procedures on cash
balances:
• Count all cash balances and agree to petty cash book or other
record kept.
• Count all cash at same time and ensure all work is done in presence
of staff.
• Obtain a certificate of cash in hand from staff member.
• Enquire about IOUs or cheques cashed.
• Confirm balances are in agreement with the accounts.
• In addition, check whether the IOUs and un-cashed cheques have
subsequently been cleared timely.
The auditor should to perform the following substantive procedures on bank
balances:
• Obtain standard bank confirmations from each bank with which the
client conducted business during the audit period.
• Re-perform arithmetic of bank reconciliation.
• Trace cheques shown as outstanding from the bank reconciliation
to the cash book prior to the year end and to the after-date bank
statements and obtain explanations for any large or unusual items
not cleared at the time of the audit.
• Compare cash book(s) and bank statements in detail for the last
month of the year, and match items outstanding at the reconciliation
date to bank statements.

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 • Review bank reconciliation previous to the year-end bank reconciliation
and test whether all items are cleared in the last period or taken
forward to the year-end bank reconciliation.
• Obtain satisfactory explanations for all items in the cash book for
which there are no corresponding entries in the bank statement and
vice versa by discussion with finance staff.
• Verify contra items appearing in the cash books or bank statements
with original entry.
• Verify by inspecting paying-in slips that uncleared bankings are paid
in prior to the year end.
• Examine all lodgements in respect of which payment has been
refused by the bank; ensure that they are cleared on representation
or that other appropriate steps have been taken to effect recovery of
the amount due.
• Verify balances per the cash book according to the bank reconciliation
by inspecting cash book, bank statements and general ledger.
• Verify the bank balances with reply to standard bank letter and with
the bank statements.
• Inspect the cash book and bank statements before and after the year
end for exceptional entries or transfers which have a material effect on
the balance shown to be in-hand.
• Identify whether any accounts are secured on the assets of the
company by discussion with management.
• Consider whether there is a legal right of set-off of overdrafts against
positive bank balances.
• Determine whether the bank accounts are subject to any restrictions
by enquiries with management.
• Review draft accounts to ensure that disclosures for bank are complete
and accurate and in accordance with accounting standards.

Property Plant and Equipment (PPE)

Obtain or prepare a summary of tangible non-current assets showing how
the following reconcile with the opening position.
• Gross book value
• Accumulated depreciation
• Net book value
–– Compare non-current assets in the general ledger with the
non-current assets register and obtain explanations for
differences.

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 –– For a sample of assets which physically exist, agree that they are
recorded in the non-current asset register.
–– If a non-current asset register is not kept, obtain a schedule
showing the original costs and present depreciated value of
major non-current assets. Reconcile the schedule of non-
current assets with the general ledger.
–– Confirm that the company physically inspects all items in the
non-current asset register each year.
–– Inspect assets, concentrating on high value items and additions
in-year. Confirm that items inspected:
• Exist
• Are in use
• Are in good condition
• Have correct serial numbers/codes
–– Review records of income-yielding assets.
–– Reconcile opening and closing vehicles by numbers as well as
amounts.
–– Reperform calculation of revaluation surplus.
–– Confirm whether valuations of all assets that have been revalued
have been updated regularly (full valuation every five years and
an interim valuation in year three generally) by asking the Finance
Director and inspecting the previous financial statements.
–– Inspect draft accounts to check that client has recognised
revaluation losses in the statement of profit or loss unless there is
a credit balance in respect of that asset in equity, in which case
it should be debited to equity to cancel the credit. All revaluation
gains should be credited to equity.
–– Review insurance policies in force for all categories of tangible
non-current assets and consider the adequacy of their insured
values and check expiry dates.
–– Review depreciation rates applied in relation to:
• Asset lives
• Residual values
• Replacement policy
• Past experience of gains and losses on disposal
• Consistency with prior years and accounting policy

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 • Possible obsolescence
–– Review non-current assets register to ensure that depreciation
has been charged on all assets with a limited useful life.
–– For revalued assets, ensure that the charge for depreciation
is based on the revalued amount by recalculating it for a sample
of revalued assets.
–– Reperform calculation of depreciation rates to ensure it is
correct.
–– Compare ratios of depreciation to non-current assets (by
category) with:
• Previous years
• Depreciation policy rates
–– Scrutinise draft accounts to ensure that depreciation policies
and rates are disclosed in the accounts.
–– Verify title to land and buildings by inspection of:
• Title deeds
• Land registry certificates
• Leases
–– Obtain a certificate from solicitors/bankers:
• Stating purpose for which the deeds are being held (custody only)
• Stating deeds are free from mortgage or lien
–– Inspect registration documents for vehicles held, confirming
that they are in client’s name.
–– Confirm all vehicles are used for the client’s business.
–– Examine documents of title for other assets (including
purchase invoices, architects’ certificates, contracts, hire
purchase or lease agreements).
–– Review for evidence of charges in statutory books and by
company search.
–– Review leases of leasehold properties to ensure that company
has fulfilled covenants therein.
–– Examine invoices received after year end, orders and
minutes for evidence of capital commitments.

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These tests are to confirm rights and obligations, valuation and
completeness.
–– Verify additions by inspection of architects’ certificates,
solicitors’ completion statements, suppliers’ invoices etc.
–– Review capitalisation of expenditure by examining for non-
current assets additions and items in relevant expense
categories (repairs, motor expenses, sundry expenses) to
ensure that:
• Capital/revenue distinction is correctly drawn
• Capitalisation is in line with consistently applied company policy
–– Inspect non-current asset accounts for a sample of purchases
to ensure they have been properly allocated.
–– Ensure that appropriate claims have been made for grants,
and grants received and receivable have been received, by
inspecting claims documentations and bank statements.
–– Verify that additions have been recorded by scrutinising the
non-current asset register and general ledger.
These tests are to confirm the assertions of valuation and completeness.
–– Verify material and labour costs and overheads to invoices,
wage records etc.
–– Ensure expenditure has been analysed correctly and properly
charged to capital.
–– Expenditure should be capitalised if it:
• Enhances the economic benefits of the asset in excess of its
previously assessed standard of performance
• Replaces or restores a component of the asset that has been
treated separately for depreciation purposes, and depreciated over
its useful economic life
• Relates to a major inspection or overhaul that restores the economic
benefits of the asset that have been consumed by the entity, and have
already been reflected in depreciation
–– Review costs to ensure that no profit element has been
included.
–– Review accounts to ensure that finance costs have been
capitalised or not capitalised on a consistent basis, and costs
capitalised in period do not exceed total finance costs for
period.

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 These tests are to confirm rights and obligations, completeness,
occurrence and accuracy.
–– Verify disposals with supporting documentation, checking
transfer of title, sales price and dates of completion and
payment.
–– Recalculate profit or loss on disposal.
–– Consider whether proceeds are reasonable.
If the asset was used as security, ensure release from security has been
correctly made.
Review non-current asset disclosures in the financial statements to ensure
they meet IAS 16 criteria.
–– For a sample of fully depreciated assets, inspect the register
to ensure no further depreciation is charged.

Revenue
The following are some of substantive audit procedures that should be
executed the auditor during the audit of revenue;
• Compare the total revenue with that reported in previous years and
the revenue budgeted, and investigate any significant fluctuations.
• For a sample of customer orders, trace the details to the related
despatch notes and sales invoices and ensure there is a sale
recorded in respect of each (to test the completeness of revenue).
• For a sample of sales invoices for larger customers, recalculate the
discounts allowed to ensure that these are accurate.
• Select a sample of despatch notes in the month immediately before
and month immediately after the year end. Trace these through to
the related sales invoices and resultant accounting entries to ensure
each sale was recorded in the appropriate period.
• Obtain an analysis of sales by major categories of toys manufactured
and compare this to the prior year breakdown and discuss any
unusual movements with management.
• Calculate the gross profit margin for the year and compare this
to the previous year and expectations. Investigate any significant
fluctuations.
• Recalculate the sales tax for a sample of invoices and ensure that
the sales tax has been correctly applied to the sales invoice.

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 • Select a sample of credit notes issued after the year end and trace
these through to the related sales invoices to ensure sales returns
were recorded in the proper period.

Expense
The following are some of the substantive procedures for expenses;
• For transactions sample, obtain their relevant supporting documents
such as invoice, goods received note and payment advice note and
perform the following procedures:
• Review the supporting documents and check whether the
transactions occurred and relate to the entity
• Check whether all expenses were recorded in the books of accounts
at the correct amounts by agreeing the recorded amounts with their
relevant supporting documents such as invoices, good delivered
note and good received note and invoice register, verify the accuracy
of the amounts shown on the invoices by reconciling the invoices
with good received note and payment advice.
• Ensure that the transactions were recorded in the correct accounts
following the entity’s chart of accounts by agreeing the entries
passed with the entity’s chart of account
• Confirm whether the expenses relate to the correct period( accounting
period) by comparing when services has been consumed/benefited(
in accrual basis of accounting) and the period of accounting for the
expenses.

12.9. Additional activities (Questions and answers)

12.9.1. Remedial Activities (Questions and answers)
Highlight the three assertions you know.
• Accuracy
• Completeness
• Existence
• Cut off
What is the purpose of the audit assertions?
Assertions play a key role in determining what is true and fair when auditing
financial records. They are also helpful in evidence gathering through verifying
different financial/audit assertions.

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 Explain the different three methods of evidence gathering
International standards on auditing (ISA 500) provides different methods of
evidences gathering. The following are three methods of evidences gathering:
External confirmation: Confirmation is a written request addressed to third
parties. An external confirmation represents audit evidence obtained by
the auditor as a direct written response to the auditor from a third party (the
confirming Party).
Inspection: Inspection involves examining records or documents, whether
internal or external, in paper form, electronic form, or other media, or a physical
examination of an asset.
Analytical Procedures: Analytical procedures consist of evaluations of financial
information through analysis of plausible relationships among both financial and
non-financial data.
Explain the different types of substantive audit procedures
Analytical audit procedures: Analytical procedures consist of evaluations of
financial information through analysis of plausible relationships among both
financial and non-financial data.

12.9.2. Consolidation activities

1. Explain where analytical audit procedures are used in audit.
Analytical procedures are used throughout the audit process. They are used
mainly in the following:
Risk assessment: to direct attention to higher risk areas in determining the
nature, timing, and extent of audit procedures
Substantive testing: to obtain audit evidence of accuracy or to identify potential
misstatements/errors as a substitute for tests of details
Overall conclusion: to assist in assessing the propriety of audit conclusions
reached and in evaluating the overall opinion.
1. An auditor wishes to:
a. Test that the plant and equipment recorded in the financial statements
of the client does actually exist
b. Confirm the accuracy of the figure for the directors’ bonuses
c. Understand the nature of an unusual payment recorded in the cash
book

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Required:
State which one of the audit testing procedure would be most useful to the
auditor in each of the above contexts?

Answer:
a) (Physical) inspection. The best way of getting the evidence of non-current
assets is to go and look at them.
b) Recalculation. The figure for bonuses computed by the client can be
checked by recalculating what they should be.
c) Inquiry (of management) the auditor should ask management to explain
the nature of the unusual item, and should expect a satisfactory answer
which can be corroborated by other evidence.

12.9.3. Extended activities

Question 1
Introduction
YX Ltd assembles specialist motor vehicles such as Lorries, buses and trucks.
The company owns four assembly plants to which parts are delivered and
assembled into the motor vehicles.
The motor vehicles are assembled using a mix of robot and manual production
lines. The ‘human’ workers normally work a standard eight-hour day, although this
is supplemented by overtime on a regular basis as YX Ltd has a full order book.
There is one shift per day; mass production and around the clock working are
not possible due to the specialist nature of the motor vehicles being assembled.

Wages system shift workers

Shift-workers arrive for work at about 7.00 am and ‘clock in’ using an electronic
identification card. The card is scanned by the time recording system and each
production shift-worker’s identification number is read from their card by the
scanner. The worker is then logged in as being at work. Shift-workers are paid
from the time of logging in. The logging in process is not monitored as it is
assumed that shift-workers would not work without first logging in on the time
recording system. Shift-workers are split into groups of about 25 employees,
with each group under the supervision of a shift foreman. Each day, each group
of shift-workers is allocated a specific vehicle to manufacture. At least 400
vehicles have to be manufactured each day by each work group.
If necessary, overtime is worked to complete the day’s quota of vehicles. The shift

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 foreman is not required to monitor the extent of any overtime working although
the foreman does ensure workers are not taking unnecessary or prolonged
breaks which would automatically increase the amount of overtime worked.
Shift-workers log off at the end of each shift by re-scanning their identification
card.
Payment of wages
Details of hours worked each week are sent electronically to the payroll
department, where hours worked are allocated by the computerised wages
system to each employee’s wages records. Staff in the payroll department
compare hours worked from the time recording system to the computerised
wages system, and enter a code word to confirm the accuracy of transfer. The
code word also acts as authorisation to calculate net wages. The code word is
the name of a domestic cat belonging to the department head and is therefore
generally known around the department.
Each week the computerised wages system calculates:
i) Gross wages, using the standard rate and overtime rates per hour for
each employee,
ii) Statutory deductions from wages, and
iii) Net pay.
The list of net pay for each employee is sent over XY’s internal network to the
accounts department. In the accounts department, an accounts clerk ensures
that employee bank details are on file. The clerk then authorises and makes
payment to those employees using XY’s online banking systems. Every few
weeks the financial accountant reviews the total amount of wages made to
ensure that the management accounts are accurate.

Termination of employees
Occasionally, employees leave Blake. When this happens, the personnel
department sends an email to the payroll department detailing the employee’s
termination date and any unclaimed holiday pay. The receipt of the email by the
payroll department is not monitored by the personnel department.

Salaries system shift managers

All shift managers are paid an annual salary; there are no overtime payments.
Salaries were increased in July by 3% and an annual bonus of 5% of salary was
paid in November.

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Required
a) List FOUR control objectives of a wages system.
b) As the external auditors of YX Ltd, write a management letter to the directors
in respect of the shift workers wages recording and payment systems which:
i) Identifies and explains FOUR deficiencies in that system;
ii) Explains the possible effect of each deficiency;
iii) Provides a recommendation to alleviate each deficiency.
d) List THREE substantive analytical procedures you should perform on the
shift managers’ salary system. For each procedure, state your expectation of
the result of that procedure.
e) Audit evidence can be obtained using various audit procedures, such as
inspection. APART FROM THIS PROCEDURE, in respect of testing the
accuracy of the time recording system at YX Ltd, explain FOUR procedures
used in collecting audit evidence and discuss whether the auditor will benefit
from using each procedure.

Question 2:
Auditors must obtain sufficient appropriate audit evidence to issue an audit
opinion on the financial statements. In order to gain that evidence, auditors may
use a combination of tests of controls and substantive procedures.
Required
a) Explain what is meant by:
i. A test of control
ii. A substantive procedure and give one example of each that may be
used when auditing the completeness of revenue
Your firm is the auditor of BKL Nurseries, a company operating three large garden
centres which sell plants, shrubs and trees, garden furniture and gardening
equipment (sprinklers) to the public.
Non-current assets
You are involved in the audit of the company’s non-current assets for the year
ended 31 December 20X8. The main categories of non-current assets are as
follows:
i. Land and buildings (all of which are owned outright by the company, none
of which are leased)
ii. Computers (on which an integrated inventory control and sales system is
operated)

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 iii. A number of large and small motor vehicles, mostly used for the delivery
of inventory to customers
iv. Equipment for packaging and pricing products.
The depreciation rates used are as follows:
v. Buildings 5% each year on cost
vi. Computers and motor vehicles 20% each year on the reducing balance
basis
vii. Equipment 15% each year on cost
Year-end inventory
Although an inventory control system is operated and up-to-date inventory
records are maintained, the year-end inventory quantities that are used in
determining the year-end inventory value are arrived at by carrying out full
inventory counts at each of the garden centres. The same set of inventory count
instructions are provided at each centre and an extract from these is shown
below:
1) The inventory count will be supervised by the inventory controller for the
site and will take place on 1 January 20X9. The count will commence
at 6:00am. The centre will be closed on the day of the count. No sales
of inventory will take place on 1 January 20X9, but transfer of inventory
between garden centres is permitted in order to distribute it to where it
will be needed most when the centres are re-opened.
2) Staff allocated to the count (one member of staff per count area) will
be provided with inventory counting sheets that are produced by the
computerised system showing the quantity per the system. These will
be distributed and re-collected by the site inventory controller. Where
the amount observed is different to the amount on the sheet, it should
be crossed out and the new quantity written down.
3) The inventory controller will then carry out one test count in each area
that has been counted. Where an error is found, the area will be re-
counted.
4) The quantity for any inventory that looks damaged or unsaleable should
be crossed out and allocated a quantity of zero.
5) Once all the sheets have been collected up and test counts completed,
the inventory controller will manually update the computerised system
to reflect the counted quantities. Once the system is updated the count
sheets can be discarded.

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Required
b) List and explain the main financial statements assertions tested for in the
audit of non-current assets.
c) List the sources of evidence available to you to verify the ownership and cost
of the land and buildings.
d) Describe the audit procedures you would perform to check the
appropriateness of the depreciation rates on each of the three categories of
non-current asset.
e) Identify and explain seven (7) deficiencies in the inventory counting system
highlighted by the extract from BKL’s instructions for inventory counting. For
each deficiency suggest how it could be overcome.

Answers:

Question 1.
a)
• To ensure that employees are only paid for work they have done
• To ensure that pay and deductions have been calculated correctly and
authorised
• To ensure that recorded payroll expenses include all expenses incurred
• To ensure that the correct employees are paid
• To ensure that transactions are recorded in the correct period
• To ensure that wages are correctly recorded in the ledger
• To ensure that the correct amounts have been paid over to the taxation
authorities
b) Wages system management letter
DPK Certified Auditors
Kigali, Rwanda,
18 February 2020
To The Board of Directors
XY Ltd
Street 6 Kigali, Rwanda
Members of the board,

Deficiencies in internal control

We set out in this letter deficiencies in the wages system which arose as a

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 result of our review of the accounting systems and procedures operated by your
company during our recent audit. The matters dealt with in this letter came to our
notice during the conduct of our normal audit procedures which are designed
primarily for the purpose of expressing our opinion on the financial statements.
Consequence of
Deficiency Recommendation
deficiency
Shift workers Workers can be paid The shift manager should
can log in and even if they are not agree the number of
out just by using working because the workers with the computer
their electronic time recording system records at the start and
identification cards. logs them in and out end of the shift.
when their cards are
scanned and they are
paid from and to this
time.
The shift manager Workers could be All requests for overtime
should agree the paid at overtime rates must be authorized by the
number of workers when they are not shift manager. Overtime
with the computer actually working and costs should also be
records at the start could collude with monitored regularly.
and end of the the shift foreman for
shift. extra overtime without
actually working it.
The code word for Unauthorized individuals The code word should be
the time recording could log onto the changed immediately to
system is generally system and enter extra one containing random
known within the hours so that they are letters and numbers. The
department. paid more than they system should be set up
should be. Fictitious so that the code word has
employees could also to be changed on a regular
be set up on the system. basis, such as every six
weeks.

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 Payments into unauthorized payments The payroll should be
workers’ bank into workers’ and authorized by the Finance
accounts are made fictitious bank accounts Director or another senior
by one member could be made. manager prior to payments
of accounts being made.
staff, without any
authorization.
Review of wages There is no regular The Finance Director
payments is done monitoring of wages by should review payroll costs
every few weeks senior management. on a weekly basis so that
by the financial he can assess whether
accountant, they are reasonable and
seemingly on an ad any unusual amounts can
hoc basis. be investigated.

This letter has been produced for the sole use of your company. It must not be
disclosed to a third party, or quoted or referred to, without our written consent.
No responsibility is assumed by us to any other person. We should like to take
this opportunity of thanking your staff for their co-operation and assistance
during the course of our audit.
Yours faithfully
DPK Certified auditors
c) Substantive analytical procedures
i. Perform a proof in total of the salaries charge for the year using the prior
year charge and increasing it for the pay increase and taking account of
any starters or leavers in the period. The figures should be comparable
with the exception of the salary increase and any starters or leavers in
the year.
ii. Perform a comparison of the annual charge to the prior year and to the
budgeted figure. Where the variance is significant, investigate further to
ascertain why. The figures should be comparable with the exception of
the salary increase of 3%.
iii. Review monthly salaries month by month. The figures should be about
the same each month, except for July and November when the pay rise
and annual bonus were paid respectively. Any starters or leavers would
also be reflected in the relevant month.

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 d) Observation: Observation consists of looking at a process or procedure
being performed by others. It could be used here to observe employees
scanning their cards when they start and finish a particular shift. However, its
use is limited because it only provides evidence that the process happened
at the time of observation. It should be used in conjunction with other audit
procedures.
Inquiry: Inquiry consists of seeking information of knowledgeable
individuals, both financial and non-financial, throughout the entity or outside
the entity. This can be used to find out how the time recording system
works by interviewing relevant staff so would be a good procedure to use.
Recalculation: Recalculation consists of checking the mathematical
accuracy of documents or records. It could be used to calculate the
hours worked according to the information on the time recording system.
Reperformance: Reperformance is the auditor’s independent execution
of procedures or controls that were originally performed as part of the
entity’s internal control, either manually or using computer-assisted audit
techniques. The auditor could test the controls in place within the time
recording system using CAATs.
Analytical procedures: Analytical procedures consist of evaluations
of financial information by studying plausible relationships among both
financial and non-financial data. They can be used in this case to compare
the time recorded per the system to the standard hours per employee plus
any overtime worked.

Answers:

Question 2
a) Procedures
i. Tests of controls
Tests of controls are performed to obtain audit evidence about the operating
effectiveness of controls preventing, or detecting and correcting, material
misstatements at the assertion level.
A test of control that may be carried out when auditing completeness of revenue
is observing or verifying the process of matching of goods despatch notes
(GDNs) to invoices. The auditor should also enquire how unmatched GDNs are
investigated to ensure related sales are recorded where necessary.

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 ii. Substantive procedures
Substantive procedures are audit procedures performed to detect material
misstatements at the assertion level. They are generally of two types:
• Substantive analytical procedures
• Tests of detail of classes of transactions, account balances and
disclosures
An example of a substantive procedure is comparing monthly revenue with
prior years, budgets and expectations (e.g. for expected seasonal peaks) and
investigating any significant deviations.
b) Financial statement assertions for non-current assets

Completeness
The amounts stated in the statement of financial position for non-current assets
must represent all non-current assets used in the operations of the entity.
Significant omissions could have a material effect on the financial statements.
Where an entity has lots of small capital items, recording and tracking these can
be an issue so good controls are important.

Existence
Recorded assets must represent productive assets that are in use at the
reporting date. Where assets have been disposed, they must not be included in
the statement of financial position. Items that are susceptible to misappropriation
can also present issues.

Accuracy, valuation and allocation

Non-current assets must be stated at cost or valuation less accumulated
depreciation. Whether an entity has a policy or not of revaluing certain
categories of its non-current assets can have a material effect on its financial
statements. The depreciation policy in place must be suitable as this can also
have a significant bearing on asset values on buildings and larges items of plant
and equipment.

Rights and obligations

This is a key assertion for non-current assets because the entity must own or
have rights to all the recorded non-current assets at the reporting date. For
example, where an asset is leased by the entity, it may not have substantially
all the risks and rewards associated with ownership and therefore should not
recognise the asset on its statement of financial position.

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 Classification
Tangible assets should be recorded in the correct accounts, and expenses
which are not of a capital nature are taken to profit or loss.

Presentation
Non-current assets must be disclosed correctly in the financial statements. This
applies to cost or valuation, depreciation policies and assets held under finance
leases.
c) Evidence available

Asset Ownership cost

Land and Title deeds. These may be The cost of the land and
Buildings held at the bank or the client’s building can be traced to
solicitors. original invoices.
It may be possible to obtain The company may also
confirmation of ownership from have retained the original
the central land registry office. completion documents from
the solicitor on the purchase
The insurance policy should be
of the land.
reviewed to see whom the cover
is in favor of.

d) Procedures for depreciation

The purpose of depreciation is to write off the cost of the asset over the period
of its useful economic life
i. Buildings
To assess the appropriateness of the depreciation rate of 5%, the auditor should:
• Consider the physical condition of the building and whether the
remaining useful life assumption is
• Review the minutes of board meetings to ensure there are no relocation
plans
• Consider the budgets and ensure that they account for the appropriate
amount of depreciation. If they do not, they may give an indication of
management’s future plans.

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 ii. Computers and motor vehicles
The reducing balance basis seems reasonable, given that computers and their
software are updated frequently and therefore do wear faster early on in life,
however the auditor should consider whether 20% is an appropriate rate given
the speed at which technology develops.
The auditor should enquire and observe whether the assets are still in use. The
auditor should review the board minutes to ascertain whether there are any
plans to upgrade the system.
The auditor should estimate the average age of the motor vehicles according
to their registration plates and consider whether the life is reasonable in light of
average age and recent purchases. Given that a number of vehicles are delivery
vehicles and likely to heavily used, the auditor should look at recent profits and
losses on disposals to see if large losses on disposal give an indication the 20%
rate might be too low.
The auditor should ask management what the replacement policy of the assets
is.
iii. Equipment
The equipment is depreciated at 15% per year, or over 6–7 years. The auditor
should consider whether this is reasonable for all the categories of equipment,
or whether there are some assets for which the technology advances more
quickly than others. Such assets may require a higher rate of depreciation.
e)

Deficiency and explanation Possible solution

There is a lack of segregation of duties. An alternative senior member of
The site inventory controller is also the staff should be made the inventory
supervisor and count checker. The supervisor. Alternatively, inventory
controller is therefore responsible for the controllers could be rotated
physical assets as well as maintaining so they supervise the count of
the book records. The site inventory the garden Centre they are not
controller is a position to cover up his or responsible for.
her own errors or theft of inventory.
Transfer of inventory is permitted between Movement of inventory between
centers, increasing the risk of double garden centers should not be
counting inventory. Also inventory may permitted until all inventory has
not be counted at it all if it is in transit been counted.
during the count.

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 Counters will be working on their own Counts should be performed by
as there is only one allocated per area. pairs of counters, one counting
This means the risk of error is increased and one checking.
compared to the normal situation where
two counters are assigned.
Counters are provided with printed Staff should be given sheets with
sheets with quantities already showing a items listed but no quantities.
quantity from the computer system and The staff should need to fill
are only changed if found to be different in the quantities as the count
from actual quantities. This may lead progresses.
counters into the temptation of choosing
to rely on the system and as a result
failing to count all inventory lines.
Only one test count is carried out in each A larger sample should be
area by the inventory controller. This is test counted by the inventory
unlikely to deter counters from being controller. This could be
careless and the probability of errors determined statistically based on
being detected by the test count is low. the estimated levels of inventory

INTRODUCTION
Damaged or old inventory quantities are
for each area per the system.
Damaged or old inventory

TO ACCOUNTING
crossed out and those items are given
a nil quantity. This means all record of
quantities should be maintained.
They may be highlighted on the
these items is lost and they may still have list. However, an appropriate
a value – they need to be assessed by independent senior staff member
more senior staff members. should carry out a separate review
for damaged or old items and
identify those which may need to
be included as part of an inventory
provision.
Count sheets are to be discarded Count sheets should be retained
once the inventory system is updated. and, for a sample of inventory
This means there will be no audit trail items, an independent person
for inventory quantities and no way to should verify that the quantities
verify how accurately the data has been on the count sheets have been
entered. entered correctly.

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 UNIT
13 AUDIT JUDGEMENT

13.1. Key unit competence

To be able to form an audit judgement

13.2. Prerequisite (knowledge, skills, attitudes and values)

In senior 6 the previous units you analysed the fundamental concepts in
audit, legal and professional requirements, auditor’s appointment, auditors
requirements, auditor responsibilities, auditor regulations and ethics, audit
planning, audit evidence and sampling, audit documentation, internal control,
accounting system and audit procedures of financial statements. This prior
INTRODUCTION
knowledge, skills or competences should help the students to be able to use and
form an audit judgement in their locality and be able to realize their contribution

TO ACCOUNTING
as students towards business.

13.3. Cross-cutting issues to be addressed:

Note: The examples below are just to guide you on how to address crosscutting
issues throughout the unit but this does not mean that these are the only ones.
You can address and give students opportunities to discuss all the crosscutting
issues where possible taking consideration of their environment or community
around them.
Gender education: emphasis throughout this unit has to be put on how both
males and females have same rights and obligations to do business activities
which can generate an income in their local community. So as to promote better
standard of living of business activities and their community in the creation of
business based employment opportunities and the country by making an audit
opinion/judgement leading to socio-economic development.
Environment and sustainability: the greatest source of audit is the environment
and the society. Audit judgement cannot be applied without the environment.
Therefore, great care has to be taken for environment and society. Making
an audit opinion is a way of managing public income used by government in
protecting environment from harm.

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 Inclusive education: in addition to all having equal opportunities to become
businesses, attention will be made on how we all regardless of our background
have right to generate ideas that do not discriminate as our needs are the same.
Students need to understand that audit should not discriminate but promote
inclusiveness of all. Throughout the study of audit judgement, students should
be able to evaluate the contribution of auditing in socio-economic development
of the community.
Financial education: teacher and students should know that resources and
materials used in teaching and learning activities must not be mismanaged. This
issue will also be addressed when studying auditing. Students will learn what
is permitted and what is prohibited to manage learning resources and materials
well. They will put in mind that misusing materials is wasting money.

13.4. Guidance on introductory activity

NOTE: The students won’t be able to answer all the questions at this stage;
they can answer one question. The most important thing is that you want to
challenge students to be expectant and to use their previous knowledge and
background to self-discover during teaching and learning of this unit.
Explain the purpose of the introductory activity of the lesson. This activity is
intended to provide interest and motivation for students to be able to use and
interpret the audit judgement as opportunity of fighting against uncorrected
misstatements of financial statements in the community.
The introductory activity will also evoke students’ interests about what to expect
in this unit as they answer the questions that follow in the activity. Students can
build on previous knowledge, skills, values and attitudes to help you assess the
student’s prior knowledge and help link with the new content.
Use an appropriate method such as small groups or pairs and provide students
with Unit 13 introductory activity, give clear instructions to the activity.
They read the case study and discuss what activities may have carried out. They
discuss also about what could be done by auditing financial statements in order
to resolve some problems happen in business activities.
During grouping or pairing, mix boys and girls and students with different abilities.
During the discussion, make sure everyone is following and actively participating.
Those who are not acting may have to listen attentively without disturbing and
should applaud/congratulate the actors after.
Students share their findings, responses or answers to the activity using an
appropriate method such as group presentation, pair share or large group

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discussion. Ensure all students are given an opportunity to give their views and
should be respected.
Harmonize their findings or answers, and help them draw conclusions/summary
to questions. Answer or address any questions or challenges about the activity.
Guide them to make notes in their books referring to students’ book.

Possible Answers for introductory activity

Audit judgement can be defined as any decision or evaluation made by an

auditor, which influences or governs the process and outcome of an audit of
financial statements.
Circumstances in which the auditor can make judgement are the following:
1. to review financial statements before reaching an opinion.
2. to review all findings before drawing the opinion.
3. Review of accounting policies.
4. Review for consistency and reasonableness.

13.5. List of lessons/sub-heading

Lesson title/sub- Number of
Headings Learning objectives
heading periods
13.1. Form Introductory activity Arouse the curiosity of 1
an audit students on the content
judgement of unit 13
1 Overall review of Describe overall review 2
financial statement of financial statement
2 Events after Explain the events 2
reporting period occurring after the end
of reporting period
3 Going concern Explain going concern 1
concept
4 Written Explain written 2
representations representations
5 Completion Explain completion 1
End Unit Assessment 1
Total number of periods 10

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 Lesson 1: Form an audit judgement

a) Learning objectives
• Describe overall review of financial statements
• Explain the events occurring after the end of reporting period, going
concern concept, written representations and the cumulative effect of
uncorrected misstatement
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Desks, chalkboard,
chalk, papers, internet, computer, students’ books, pictures, case studies and
any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction
Read the key unit competence in the syllabus to determine what students will
know and be able to do by the end of the unit. Look at the action verb, concept
and context of learning objective. This will help you see the skills, knowledge
attitudes embedded in the learning objective. Remember the learning objective
link to the key unit competence. Students are familiar with terms audit, auditing,
auditor, audit appointment, audit responsibilities and audit opinion from the
previous units. Again, they live in society where audit and audit judgement
applied.
d) Learning activities
• Invite students to read and analyse the scenario after that each student
reads individually the question in the student book and work in pairs to
share with the classmates.
• Have some pairs and make the presentations
• Provide constructive feedback in terms of supplements

Answers to learning activity 13.1

1. On the above image there is a person (an auditor) who is thinking about
the audit opinion.
2. An auditor needs audit judgement when he/she completes his/her work
within a limited time period and it is needed because an auditor has to
make decision about how an audit is resourced and allocation of tasks.

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e) Application activities 13.1:
Invite students to read, the application activities in student book and answer
them.

Answers to Application Activity 13.1

1. When reviewing financial statements for consistency and reasonableness

auditors should consider:
• Whether the financial statements reflect the information and
explanations and the conclusions reached during the audit.
• Whether the review reveals any new factors which may affect the
presentation and disclosure of the financial statements.
• The results of analytical procedures at the end of the audit.
• Whether the presentation of the financial statements may have been
unduly influenced by the directors.
• The effect of the aggregate of uncorrected misstatements.
2. If the management refuses to provide the representation, the auditor
should:
• Discuss the matters with management.
• Re-evaluate the integrity of management and evaluate the effect that
this may have on the reliability of representations and audit evidence
in general, and
• Take appropriate actions, including determining the possible effect
on the opinion in the auditor’s report.

Skills lab activity 13

Guidance on the skills lab activity:

In conducting this skills lab activity, you can arrange for students accompanied
to attend a presentation on the different cases that can lead the auditor to an
audit judgement, then visit the computer laboratory and search the audit books
in order to find useful cases. Besides, encourage student to visit Rwandan
company website for further research.

i. Build
Given that students visit the Rwandan company website,
• Remind students on the expected objective for the computer lab
attendance

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 • Help them to be grouped and remember to mix both boys and girls
• Let each team have the representative
• Ensure they have notebooks where to keep necessary notes from the
findings
• Distribute questions for their research
• Check their understanding of the assignment
• Remind them that everybody full participation is mandatory.

ii. Practice
During research on internet, care about the following concerns:
• Guide students on accessing the real website
• Ensure that internet is connected for all
• Respond to any questions for clarification and support accordingly
For the internet research, a concept note is needed to describe what has been
covered during the class lesson and state what are students and teacher’s
expectations.

iii. Present
During the group presentation, the teacher must assess whether the student
participation in the skills lab activity was effective by:
• Selecting randomly anyone in all groups to present the report on behalf
of team members.
• Allow students to ask question to their fellows.
All team members being presenting are expected to contribute to the plenary
by answering some questions that the presenter is not covering as well as
expected.

iv. Conclusion
The teacher emphasizes on the objective of the research reminding students that
they were expected to discover and understand all the components/contents an
audit judgement. After this discovery, students should be able to form an audit
judgement of any company/institution.

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13.6. Summary of the unit
Overall review of financial statements
Overall review of financial statements is conducted into two aspects:
General review
At a general level, the review will check that a clear conclusion has been reached
and documented on each of the financial statement areas. Analytical procedures
may be used as a final check that the information contained in the draft financial
statements ‘makes sense’.

Specific review
More specifically, the overall review will cover the following matters:
• Compliance by the client with the relevant accounting framework
(national legislation and relevant accounting standards).
• A review of the accounting policies adopted by the entity, to assess
whether they are acceptable (and comply with accounting standards
and industry practice).
• A review of the financial statements for adequate disclosure of relevant
information.
• An assessment of whether the information contained in the financial
statements is consistent with known business facts.

The objectives of the auditor when requesting the written representation

from management are to:
• Obtain written representations from management that it has fulfilled its
responsibilities in respect of the financial statements and the audit
• Obtain written representations as appropriate to support other audit
evidence
• Respond appropriately to written representations provided by
management or if management refuse to provide the written
representations requested.

13.7. Additional information for teachers

The contents of representation letter
The written representation letter may include the following statements:
• The written representation letter relates to the audit of the client
company.

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 • The management of the entity have fulfilled their responsibilities for the
preparation of the financial statements, and the financial statements
give a true and fair view and are free from material misstatement.
• The assumptions made by management to make accounting estimates
and reach fair values are reasonable.
• Related party relationships and transactions have been disclosed.
• All events after the reporting period have been either adjusted or
disclosed.
• The effect of any uncorrected misstatements (a list of which should be
attached to the letter) is immaterial.
• The auditors have been provided with all relevant material, including
the books of account, and unrestricted access to individuals within the
entity.
• All transactions have been recorded and are included in the financial
statements.
• Management have disclosed to the auditors all information that is
relevant to fraud or suspected fraud.
• Management have disclosed all known instances of non-compliance
with laws or regulations that are relevant to the preparation of the
financial statements.
• Representations may also be included that refer to specific assertions
in the financial statements, if the auditors require that such assertions
should be made.

Examples
The following example of a letter of representation shows the minimum contents
of such a letter. However, remember that the auditor may also need to request
management to provide written representations about specific assertions in the
financial statements.

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Example of a letter of representation
(Entity Letterhead)
(To Auditor)
(Date)
This representation letter is provided in connection with your audit of the
financial statements of ABC Ltd for the year ended 31 December 31 20X1 for
the purpose of expressing an opinion as to whether the financial statements
are presented fairly, in all material respects, (or give a true and fair view) in
accordance with International Financial Reporting Standards.
We confirm that (to the best of our knowledge and belief, having made such
inquiries as we considered necessary for the purpose of appropriately
informing ourselves):
Financial statements
We have fulfilled our responsibilities for the preparation and presentation
of the financial statements as set out in the terms of the audit engagement
dated….. and, in particular, the financial statements are fairly presented (or
give a true and fair view) in accordance with International Financial Reporting
Standards.
Significant assumptions used by us in making accounting estimates, including
those measured at fair value, are reasonable. (ISA 540)
Related party relationships and transactions have been appropriately
accounted for and disclosed in accordance with the requirements of
International Financial Reporting Standards. (ISA 550)
All events subsequent to the date of the financial statements and for which
International Financial Reporting Standards require adjustment or disclosure
have been adjusted or disclosed. (ISA 560)
The effects of uncorrected misstatements are immaterial, both individually
and in the aggregate, to the financial statements as a whole. A list of the
uncorrected misstatements is attached to the representation letter. (ISA 450

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 Information provided
We have provided you with:
• all information, such as records and documentation, and other
matters that are relevant to the preparation and presentation of the
financial statements
• additional information that you have requested from us; and
• Unrestricted access to those within the entity.
All transactions have been recorded in the accounting records and are
reflected in the financial statements.
We have disclosed to you the results of our assessment of the risk that the
financial statements may be materially misstated as a result of fraud. (ISA
240)
We have disclosed to you all information in relation to fraud or suspected
fraud
that we are aware of and that affects the entity and involves:
• management
• employees who have significant roles in internal control; or
• Others where the fraud could have a material effect on the financial
statements. (ISA 240)
We have disclosed to you all information in relation to allegations of fraud, or
suspected fraud, affecting the entity’s financial statements communicated by
employees, former employees, analysts, regulators or others. (ISA 240)
We have disclosed to you all known instances of non-compliance or
suspected non-compliance with laws and regulations whose effects should
be considered when preparing financial statements. (ISA 250)
We have disclosed to you the identity of the entity’s related parties and all the
related party relationships and transactions of which we are aware. (ISA 550)

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13.8. End unit assessment
Answers to end unit assessment activities

1. The purpose of a representation letter is to obtain evidence about matters

which are critical to the audit where that evidence is not available by
other means.

The fundamental weakness of representations is that they are not a

substitute for stronger, independent evidence. Therefore, representations
will be insufficient if other stronger evidence is expected to be available.
If other evidence would not be expected to be available, auditors will
consider the following:
• The fact that making misleading representations to auditors is often
illegal.
• Whether other evidence that auditors have sought to corroborate
the representations, does do so.
• Whether the representations are consistent with other evidence
obtained during the course of audit.
• Whether those making the representations are able to do so
knowledgeably.
2. When examining accounting policies, auditors should consider:
• Policies commonly adopted in particular industries
• Policies for which there is substantial authoritative support
• Whether any departures from applicable accounting standards are
necessary for the financial statements to give a true and fair view
• Whether the financial statements reflect the substance of the
underlying transactions and not merely their form
3. Subsequent events include:
• Event of ending of the reporting period
• Event of the date of the auditor’s report
4. If the going concern basis of accounting is not appropriate, the entity may
not be able to recover the amounts recorded in respect of assets, and
there may be changes in the amounts and dates of maturity of liabilities.
5. (d) The representation letter must contain a list of all material adjustments
to the final financial statements.

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 13.9. Additional activities (Questions and answers)
13.9.1. Remedial activities
Questions
1. Differentiate adjusting events from non-adjusting events.
2. Identify the elements of representation letter.

Answers
1. Adjusting events: are those that provide further evidence of conditions that
existed at the end of reporting period while

Non-adjusting events: are those that are indicative of conditions that arose
after the end of the report period.
2. Representation letter should:
• Be addressed to the auditors
• Contain specified information
• Be appropriately dated and signed by that specific relevant knowledge.
It would ordinarily be dated the same date as the auditor’s report.

13.9.2. Consolidation activities

Questions
1. Explain how the auditors can reduce the risk caused by the aggregate
uncorrected misstate
2. Why a written representation is ordinarily more reliable audit evidence than
an oral representation?

Answers
1. The auditors should reduce the risk caused by uncorrected misstatements
by:
–– Performing additional audit procedures;
–– Requesting management to adjust the financial statements for identified
misstatements
2. A written representation is ordinarily more reliable audit evidence than an
oral representation because it can take the form of:
• A representation letter from management,

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 • A letter from the auditor outlining the auditor’s understanding of
management’s representations, duly acknowledged and confirmed by
management,
• Relevant minutes of meetings of the board of directors or similar body
or a signed copy of the financial statements.

13.9.3. Extended activities

Question
List five (5) factors which may cast doubt about a company’s ability to trade as
a going concern and describe reasons why these factors may indicate that a
company may not be a going concern.

Answer
There are many factors which could indicate that a particular company was not
a going concern, of which some of the most important are as follows:
• Failure to generate sufficient profits. Obviously any company which
proves unable to operate at a profit will not be a going concern since the
losses which it makes serve to drain existing capital from the business.
However, where a previously successful company begins to trade at a
loss this may be a symptom of other problems.
• Reductions in liquidity, as shown by increasing overdraft levels,
worsening gearing and current asset ratios and a growing level of
payables. If payables exceed inventories, this could suggest that a
company must sell its goods before it can pay for them. As with trading
losses, liquidity problems are likely to be a symptom of going concern
difficulties as much as they are their cause.
• Loss of important customers. If these had previously accounted for
a major part of turnover, there could be serious implications unless
alternative outlets are found. The company will have insufficient revenue
while fixed costs will remain the same. A manufacturing company may
continue to produce goods which cannot be sold.
• Shortage of materials essential to a company’s manufacturing
process. This could happen through the failure of a major supplier or
simply because of a general shortage of raw materials in the industry.
Clearly if a company cannot produce the goods it needs to sell its
future must be in doubt.

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 • Taking of extended credit by customers. The most likely cause of
this would be poor credit control on the part of the company. Excess
credit would reduce working capital and might have a ‘knock on’ effect
if the company found itself unable to meet its own bills as they fell due.
In these circumstances, the company could be at risk of being put into
receivership or going into liquidation.
• Overtrading by the company. If sales are increasing too rapidly,
the company may encounter an equally rapid increase in the amount
invested in inventory and receivables. A manufacturing company may
also find itself buying more plant and equipment in an effort to meet
demand. All these factors will have the effect of draining liquid funds
from the company, with the result that it may be unable to pay for the
goods and services it requires to carry on.
• Redemption of loan capital. This may originally have been part of
long-term borrowings and redemption is at a time when a company is
unable to finance this from its own resources. If alternative sources of
finance are not readily available, the company may come under quite
severe financial pressure.
• Replacement of non-current assets which are nearing the end of

INTRODUCTION
their useful lives might be necessary at a time when finance is tight.
This may have a serious impact upon the company’s ability to maintain
capacity levels or even to continue in business at all.
TO ACCOUNTING
• Adverse movements in exchange rates. These would affect
companies with substantial imports where the national currency was
weak against other currencies and would affect exporting companies
where the national currency was strong against other currencies.
• Reductions in research and development expenditure. Liquidity
problems may encourage a company to cut back on its research and
development expenditure. However, the savings are likely to be very
short term. In the longer term, the company may become less and less
competitive as it fails to produce new products to meet changes in
demand.
• Changes in policy, such as a decision to lease rather than buy new
non-current assets. These may indicate going concern difficulties,
particularly where, as is frequently the case, the finance charges for
such lease arrangements are higher than they would have been using
a conventional bank loan.

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 UNIT
14 AUDIT REPORT

14.1. Key Unit competence

Prepare an appropriate audit report

14.2. Prerequisite (knowledge, skills, attitudes and values)

In auditing unit 9 on audit documentation, the prior knowledge, skills, attitudes
and values from this unit should help students to understand how to prepare an
appropriate audit report.

14.3. Cross-cutting issues to be addressed:

INTRODUCTION
Note: The examples below are just to guide you on how to address cross-

TO ACCOUNTING
cutting issues throughout the unit but this does not mean that these are the
only ones. You can address and give students opportunities to discuss all the
cross-cutting issues where possible taking consideration of their environment
or business activity industry.
Gender education: Emphasis throughout this unit has to be put on how both
males and females have the equal opportunities to understand and explain the
meaning of audit report, its basic elements. Being citizens of Rwanda, males
and females are encouraged to start business and be accountable to audit
practice; they should know the importance of audit report for them as owners
of the business.
Inclusive education: In addition to all having equal opportunities to carry
out business activities, emphasis has to be put on how we all regardless of
our background, economic or social setup have right to develop an ethical
understanding of Rwandan system that do not discriminate.
Peace and Values: You need to emphasize to students the benefit of living in
peace and harmony with others. Students need to appreciate the role played by
auditors in promoting peace and patriotism in the community avoiding activities
that are illegal e.g., frauds, fraudulent manipulations of accounts and make
sure that every business they plan to have is legal and contributes to national
development goals.
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 Standardization culture: You need to emphasize to students why adhering to
ethics and integrity requirements at workplace and their respective community
is very crucial for a self-reliance national development. This will help them to
abide by international auditing and Assurance Standards Board.

14.4. Guidance on introductory activity

NOTE: The students won’t be able to answer all the questions at this stage.
The most important thing is that you want to challenge students to be expectant
and to use their previous knowledge and background to self-discover during
teaching and learning of this unit.
Explain the purpose of the introductory activity of the lesson. This activity is
intended to provide capability for students to prepare an appropriate audit
report.
The introductory activity will also arouse students’ interests about what to expect
in this unit as they answer the questions that follow in the activity.
Students can build on previous knowledge, skills, values and attitudes to help
you assess the student’s prior knowledge and help link with the new content.
Exploit and use engaging methods that can foster team work like small groups,
pairs or gallery walk. Provide students with the introductory activity in the
student’s book, and explain in details what is expected from the activity to be
done. During grouping or pairing, ensure an acceptable balance between boys
and girls and students’ different abilities.
Through question-and-answer approach, check the students’ understanding of
the instructions to make sure they are going to deliver a good report. Encourage
students to work together, value each other’s contributions, share ideas, etc.
Ensure all students are given an opportunity to give their views and should be
respected. Request them to take notes in their books referring to student’s
book.
Students present their findings, results, answers through presentations on the
introductory activity.
Appreciate the team’s presentations and remind them that this activity was not
meant to come to the very right answers but to help them become aware of
what to expect in the unit 14.
You can support student’s answers by referring to possible answers to the
introductory activity below:

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 Answers to the introductory activity

The document prepared by the auditor at the end of audit process which
contains his conclusion, opinion and recommendation is called audit report.

14.5. List of lessons/sub-heading

Lesson title/sub- Learning Number of
Headings
heading objectives periods
14.1. Auditor’s report Introductory activity Arouse the curiosity 1
of students on the
content of unit 14
1 Meaning of Explain the meaning 1
audit opinion of audit opinion
(audit report) (audit report)
2 Basic elements Explain the basic 2
of the auditor’s elements of the
report auditor’s report
3 The auditor’s Explain the auditor’s 1
report on report on financial
financial statements
statements
14.2. Unmodified 1 Unmodified Explain the 2
auditor’s report auditor’s report unmodified auditor’s
Modified report
opinions 2 Modified Explain the modified 2
opinions auditor’s report
3 Emphasis of Describe the 1
matter and emphasis of
other matter matter paragraphs
paragraphs in and other matter
the auditor’s paragraphs in the
report auditor’s report
End Unit Assessment 1
Total number of periods 11

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 Lesson 1: Auditor’s report

a) Learning objective
Describe audit report elements and report on financial statements
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books, internet
and projector, case studies, text books, chalks, flipchart, computer resourceful
person and any other trustworthy and reliable resources to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous unit 9, Students studied the audit documentation. That will help them
to discuss and understant how to prepare of audit in this lesson. Remember the
learning objectives are linked to the key unit competence.
d) Learning activities

Activity 14.1
Exploit and use appropriate learning methods that can foster collaborative
learning for (example small groups or pairs, gallery walk). Provide students with
the activity in the student’s book, and give instructions to the activity to be done.
During grouping or pairing, ensure a balance between boys and girls and
students’ different abilities. During this activity ensure that students have
understood the instructions, prompt and probe them through question-and-
answer approach to make sure they are active and their curiosity in learning and
discovery is aroused. Encourage students to work together, value each other’s
contributions, share ideas, etc.
Students present their findings, results, answers through an appropriate method
such as pair-share, small group presentations on the introductory activity.
Encourage different students from the groups to share the group’s work to avoid
just a few students dominating. Also encourage other students to listen and not
disturb when other teams are sharing unless it is a question. Encourage students
to appreciate each other’s work especially the presentation. Appreciate the
team’s presentations and remind them that this activity was not meant to come
to the very right answers but to help them become aware of what to expect in
the lesson. Answers to the activity will be got as the lesson progresses. You
can support students’ answers by referring to possible answers to the activity
below:

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 Answers to learning activity 14.1

Those documents are the following: Audit note book, current and permanent
audit files.

e) Application activities 14.1

Students analyse and discuss about the questions either in groups or in pairs
and come up with possible answers. This activity may be given as a research
question or homework.
Depending on the purpose of the application activity, choose an appropriate
method to assess student’s findings, answers or responses. Depending on the
performance or results, you may decide to give remedial or extension activities.

Answers to learning activity 14.1

1. The importance of audit report for John as a member of ABX ltd company
are:
• Helps them to ensure if their shares are earning interest by the
company and if it is profitable to continue to invest in the company
• Helps to know if the statutory requirements are being implemented
by the company
2. Qualities of a good audit report are:
• It should not be biased to any party with financial stake in the
business.
• It should be not forceful.
• It should be biased on constructive criticism.
• It should offer constructive and timely suggestions to the management
so as to solve problems highlighted in the report.
• It should be clear and concise.

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 Lesson 2: unmodified auditor’s report and modified opinions

a) Learning objective
Describe unmodified, modified auditor’s report and emphasis of matter
paragraph
b) Teaching resources
Basic materials for a class/ lesson to be conducted: Students books,
internet and projector, case studies, text books, chalks, marker pen, flipchart,
computer, resourceful person and any other trustworthy and reliable resources
to enhance learning.
c) Prerequisites/Revision/Introduction (Guidance on how to start the
lesson)
In previous lesson, lesson 1 Students discussed about the basic elements on
audit report. This will help them to understand unmodified, modified auditor’s
report and emphasis of matter paragraph.
d) Learning activities

Activity 14.2
• Put students in small groups and give clear instruction about the activity
• Ask them to read carefully the word in the picture and give the opposite
of the word.
• Guide students’ discussions and make sure that everyone is participating
• Invites students to share their findings.
• Harmonize their findings or answers, and link the findings to the learning
objective, help them draw conclusions/summary. Answer or address
any questions or challenges about the activity. Guide them to make
notes in referring in their students’ book.

Answers to learning activity 14.2

The opposite of the word unmodified audit report is modified audit report.

e) Application activities 3.2

Students can be given an activity to discuss about the questions in groups,
give clear instructions and ensure a balance in the groups for both gender and
capability. Students are to give a report of their findings. Monitor the activity to
ensure students are on track and actively participating.

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Students share their findings to the large group. Assess their answers depending
on the purpose of the application activity. Refer to the possible answer below as
you assess their work.

Answers to application activity 14.2

1. An unmodified audit report is an audit report containing an audit opinion

not modified in any way – either by changing the unmodified opinion or
by adding an extra paragraph such as an ‘emphasis of matter’ or ‘other
matters’ paragraph after the opinion paragraph.
2. Three types of modified opinion are:
• A qualified opinion.
• An adverse opinion.
• A disclaimer of opinion.

Skills lab activity 14

Guidance on the skills lab activity:

In conducting this skills lab activity, present an unmodified audit report to the
students in which some elements are missing, ask them to discuss about it,
tell them to discover the missing elements and request them to rewrite the
appropriate report.

i. Build
Given that students work on the activity,
–– Remind students on the expected objective of the task
–– Help them to be grouped and remember to mix both boys and girls
–– Let each team have the representative
–– Ensure they have where to keep necessary notes from the findings
–– Distribute questions for their research
–– Check their understanding of the assignment
–– Remind them that everybody full participation is mandatory.

ii. Practice
During the discussion, care about the following concerns:
–– Guide students on accessing the question

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 –– Ensure that are available for all of them
–– Respond to any questions for clarification and support accordingly
To facilitate the presenter to prepare his presentation, send him a concept note
describing what has been covered during the class lesson and state what are
students and teacher’s expectations.

iii. Present
During the group presentation, the teacher must assess whether the student
participation in the skills lab activity was effective by:
–– Selecting randomly anyone in all groups to present the report on
behalf of team members.
–– Allowing students to ask question to their fellows.
All team members being presenting are expected to contribute to the plenary
by answering some questions that the presenter is not covering as well as
expected.

iv. Conclusion
The teacher emphasizes on the objective of the research reminding students
that they were expected to be able to discover the missing elements.

14.6. Summary of the unit

1. Auditor’s report

1.1 Meaning of audit report

An audit report is document that expresses an auditor’s opinion on a company’s
financial performance and compliance with generally accepted accounting
principles (GAAP).
An audit report is a document from the auditor of a company that is the end
result of the audit process. It states the auditor’s opinion on whether the
company’s financial statements such as the balance sheet are in compliance
with the generally accepted accounting principles (GAAP) and if they are free
from material misstatement.

1.2. Basic elements of an audit report.

• Title
• Address
• Introduction/ Scope

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 • Responsibilities of directors and auditors
• Refernces/ Basis of opinoin
• Opinion
• Other reporting responsibility
• Auditor’s Address
• Date and place of report
• Signature of the auditor
• Qualities of a good audit report
Qualities of a good audit report are:
–– It should not be biased to any party with financial stake in the
business.
–– It should be not forceful.
–– It should be biased on constructive criticism.
–– It should offer constructive and timely suggestions to the management
so as to solve problems highlighted in the report.
–– It should be clear and concise.
• Importance of audit report

For the audited company

a. Helps to reveal a true and fair view of the company’s financial statements
b. Reveals errors and frauds committed or inherent in the company’s books
of accounts

For the shareholders or associates

a. Helps them to ensure if their shares are earning interest by the company
and if it is profitable to continue to invest in the company
b. Helps to know if the statutory requirements are being implemented by
the company

For the tax authorities

a. The audit report ensures to the government if the taxes due by the
company are properly given by the company
b. Ensures if other legal requirements like social security contributions are
being implemented

For the thirds parties

a. For employees audit report helps them to ensure the continuity of the
company’s activities so as to ensure their job security and continuity of
employment

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 b. For the customers their proud of their relationships with their supplier
(audited company) if good management and fair and true image is
revealed by the audit report

1.3. The auditor’s report on financial statements

The auditor is required to produce an audit report at the end of the audit which
sets out his opinion on the truth and fairness of the financial statements. The
report contains a number of consistent elements so that users know the audit
has been conducted according to recognized standards

2. Unmodified auditor’s report and Modified opinions

2.1. Unmodified audit’s report

Definition
An unmodified audit report is an audit report containing an audit opinion not
modified in any way – either by changing the unmodified opinion or by adding
an extra paragraph such as an ‘emphasis of matter’ or ‘other matters’ paragraph
after the opinion paragraph.
An unmodified opinion is the opinion expressed by the auditor when the auditor
concludes that the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework.
If the auditor concludes that the financial statements as a whole are not free from
material misstatement or cannot obtain sufficient appropriate audit evidence to
make this conclusion, the auditor must modify the opinion in accordance with
ISA 705 Modifications to the opinion in the independent auditor’s report.
We discuss modifications to the opinion in the following sub heading

2.2. Modified opinions

A modified opinion is required when:
The auditor concludes that the financial statements as a whole are not free from
material misstatements or
The auditor cannot obtain sufficient appropriate audit evidence to conclude
that the financial statements as a whole are free from material misstatement.
Types of modifications
There are three types of modified opinion:
• A qualified opinion

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 • An adverse opinion
• A disclaimer of opinion
The following table summarizes the different types of modified opinion that can
arise:

Material but not Material and

Nature of circumstances
pervasive pervasive
Financial statements are qualified opinion adverse opinion
materially misstated

Auditor unable to obtain qualified opinion disclaimer of

sufficient appropriate audit opinion
evidence

2.3. Emphasis of matter and other matter paragraphs in the auditor’s

report
a. Emphasis of matter paragraphs
An emphasis of matter paragraph is a paragraph included in the auditor’s report
that refers to a matter appropriately presented or disclosed in the financial
statements that, in the auditor’s judgment, is of such importance that it is
fundamental to users’ understanding of the financial statements.
Emphasis of matter paragraphs are used to draw readers’ attention to a matter
already presented or disclosed in the financial statements that the auditor feels
is fundamental to their understanding, provided that the auditor has obtained
sufficient appropriate audit evidence that the matter is not materially misstated.

b. Other matter paragraphs

Other matter paragraphs are used where the auditor considers it necessary to
draw readers’ attention to a matter that is relevant to their understanding of the
audit, the auditor’s responsibilities or the auditor’s report.
The other matter paragraph must be included immediately after the opinion
paragraph and any emphasis of matter paragraph, or elsewhere in the auditor’s
report if the content of it is relevant to the other reporting responsibilities section.

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 14.7. Additional information for teachers
Illustration 1:
An auditor’s report containing a qualified opinion due to a material misstatement
of the financial statements
Illustration 1:
Circumstances include the following:
• Audit of a complete set of general purpose financial statements
prepared by management of the entity in accordance with International
Financial Reporting Standards.
• The terms of the audit engagement reflect the description of
management’s responsibility for the financial statements in ISA 210.
• Inventories are misstated. The misstatement is deemed to be material
but not pervasive to the financial statements.
• In addition to the audit of the financial statements, the auditor has other
reporting responsibilities required under local law.

INDEPENDENT AUDITOR’S REPORT

(Appropriate Addressee)
Report on the Financial Statements
We have audited the accompanying financial statements of ABC Company,
which comprise the statement of financial position as at December 31, 20X1,
and the statement of comprehensive income, statement of changes in equity and
statement of cash flows for the year then ended, and a summary of significant
accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these
financial statements in accordance with International Financial Reporting
Standards, and for such internal control as management determines is necessary
to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit in accordance with International
Standards on Auditing. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance

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about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant
to the entity’s preparation and fair presentation of the financial statements in
order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our qualified audit opinion.

Basis for Qualified Opinion

The company’s inventories are carried in the statement of financial position at
xxx. Management has not stated the inventories at the lower of cost and net
realizable value but has stated them solely at cost, which constitutes a departure
from International Financial Reporting Standards. The company’s records
indicate that had management stated the inventories at the lower of cost and
net realizable value, an amount of xxx would have been required to write the
inventories down to their net realizable value. Accordingly, cost of sales would
have been increased by xxx, and income tax, net income and shareholders’
equity would have been reduced by xxx, xxx and xxx, respectively.

Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis
for Qualified Opinion paragraph, the financial statements present fairly, in all
material respects, (or give a true and fair view of) the financial position of ABC
Company as at December 31, 20X1, and (of) its financial performance and its
cash flows for the year then ended in accordance with International Financial
Reporting Standards.

Report on Other Legal and Regulatory Requirements

(Form and content of this section of the auditor’s report will vary depending on
the nature of the auditor’s other reporting responsibilities.)
(Auditor’s signature)
(Date of the auditor’s report)
(Auditor’s address)

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 14.8. End unit assessment
Answers to end unit assessment activities

1. For the audited company the importance of audit report is:

• Helps to reveal a true and fair view of the company’s financial
statements
• Reveals errors and frauds committed or inherent in the company’s
books of accounts
• Traces the strength and weaknesses of the internal control system
• Show if the internal auditing function is working properly
• Helps to ensure if the company fulfils legal requirements
2.
• An unmodified audit report is an audit report containing an audit
opinion not modified in any way – either by changing the unmodified
opinion or by adding an extra paragraph such as an ‘emphasis of
matter’ or ‘other matters’ paragraph after the opinion paragraph.
An unmodified opinion is the opinion expressed by the auditor when
the auditor concludes that the financial statements are prepared,
in all material respects, in accordance with the applicable financial
reporting framework.
• Modified opinion
A modified opinion is required when:
The auditor concludes that the financial statements as a whole are
not free from material misstatements or
The auditor cannot obtain sufficient appropriate audit evidence
to conclude that the financial statements as a whole are free from
material misstatement.
3. The basic elements of an audit report

No Section/ Description
Heading
1 Title Independent Auditor’s Report. The title of the audit
report should be simple and include the word
“independent”.
2 Address The report should clearly state to whom it is
addressed. It is addressed to the shareholders or
board of directors of a company.

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 3 Introduction/ This would be a statement that states the name
Scope of the company that is being audited, the dates of
the financial period that the audit covers, which is
usually the fiscal year.
4 Responsibilities This section clearly states the responsibilities of
of directors and the directors of the company being audited, and
auditors the responsibilities of the auditor. It states that
the management and directors of the company
accept the duty of providing the auditor with all the
financial documentation required for the audit. It also
states that the documentation provided is true and
accurate to the best of the director’s knowledge.
It is stated that the auditor’s role is to audit the
financial statements given by the company. It also
states that the auditor must form his opinion based
on the information provided.
5 Refernces/ The section states that the audit was conducted in
Basis of opinoin compliance with the standards and describes the
audit process and resources. This section may be
longer than the rest.
6 Opinion This section clearly states the auditor’s opinion. The
auditor’s opinion is given in the report regarding the
financial statements and the words” the accounts
show a true and fair view” are normally used.

7 Other reporting If there are any other reporting responsibilities

responsibility such as legal or regulatory requirements they are
mentioned here.
8 Auditor’s The auditor gives his address
Address
9 Date and place The date and city where the report was signed by
of report the auditor.
10 Signature of the Signed by the auditor
auditor
4. An audit report is a document that expresses an auditor’s opinion on
a company’s financial performance and compliance with Generally
Accepted Accounting Principles (GAAP). An audit report is a written
opinion of an auditor regarding an entity’s financial statements.

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 An audit report is a document from the auditor of a company that is the
end result of the audit process. It states the auditor’s opinion on whether
the company’s financial statements are in compliance with the Generally
Accepted Accounting Principles (GAAP) and if they are free from material
misstatement.
The audit report is the end-product of the external audit process. It is the
document in which the auditor expresses his/her professional judgment
on whether the financial statements present a ‘true and fair view’.
It is a document prepared by an auditor at the end of auditing process that
consolidates all of his/her findings and observations about a company’s
financial statements
5. Emphasis of matter paragraphs are used to draw readers’ attention to
a matter already presented or disclosed in the financial statements that
the auditor feels is fundamental to their understanding, provided that the
auditor has obtained sufficient appropriate audit evidence that the matter
is not materially misstated
6. Qualities of a good audit report

Qualities of a good audit report are:

• It should not be biased to any party with financial stake in the
business.
• It should be forceful.
• It should be based on constructive criticism/ideas.
• It should offer constructive and timely suggestions to the management
so as to solve problems highlighted in the report.
• It should be clear and concise.
7. The audit report refers to financial statements and you need to know what
these are. They consist of the following:
• The statement of financial position (or balance sheet).
• The statement of profit or loss (Income statement)
• The statement of changes in equity.
• The cash flow statement.
• The notes to the account

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14.9. Additional activities (Questions and answers)
14.9.1. Remedial activities (Questions and answers)
Question1. What is the meaning of audit report?

Answer 1.
An audit report is document that expresses an auditor’s opinion on a company’s
financial performance and compliance with generally accepted accounting
principles (GAAP).
An audit report is a written opinion of an auditor regarding an entity’s financial
statements.
Is a document prepared by an auditor at the end of auditing process that
consolidates all of his findings and observations about a company’s financial
statements?
Question 2. Give the quality of a good audit report
Answer 2: Qualities of a good audit report are:
• It should not be biased to any party with financial stake in the business.
• It should be not forceful.
• It should be biased on constructive criticism.
• It should offer constructive and timely suggestions to the management
so as to solve problems highlighted in the report.
• It should be clear and concise.

14.9.2. Consolidation activities (Questions and answers)

Question1. Explain what you understand by Emphasis of matter paragraphs
Answer 1. An emphasis of matter paragraph is a paragraph included in the
auditor’s report that refers to a matter appropriately presented or disclosed in
the financial statements that, in the auditor’s judgment, is of such importance
that it is fundamental to users’ understanding of the financial statements.
Emphasis of matter paragraphs are used to draw readers’ attention to a matter
already presented or disclosed in the financial statements that the auditor feels
is fundamental to their understanding, provided that the auditor has obtained
sufficient appropriate audit evidence that the matter is not materially misstated.
Question 2. State basic elements of an audit report.

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 Answer 2.
• Title
• Address
• Introduction/ Scope
• Responsibilities of directors and auditors
• Refernces/ Basis of opinoin
• Opinion
• Other reporting responsibility
• Auditor’s Address
• Date and place of report
• Signature of the auditor

14.9.3. Extended activities (Questions and answers)

Question1. Explain the importance audit report for:
• 1 The audited company
• 2 The shareholders or associates
• The tax authorities
• The thirds parties

Answer 1.

For the audited company

• Helps to reveal a true and fair view of the company’s financial statements
• Reveals errors and frauds committed or inherent in the company’s
books of accounts
• Traces the strength and weaknesses of the internal control system
• Show if the internal auditing function is working properly
• Helps to ensure if the company fulfils legal requirements

For the shareholders or associates

• Helps them to ensure if their shares are earning interest by the company
and if it is profitable to continue to invest in the company
• Helps to know if the statutory requirements are being implemented by
the company

For the tax authorities

• The audit report ensures to the government if the taxes due by the
company are properly given by the company

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 • Ensures if other legal requirements like social security contributions are
being implemented
• Ensures that the company respect accounting principles, company’s
act and other regulations in application
• Ensures if the public funds are being used properly by government
institutions and other private institutions

For the thirds parties

• For employees audit report helps them to ensure the continuity of the
company’s activities so as to ensure their job security and continuity of
employment
• For the customers their proud of their relationships with their supplier
(audited company) if good management and fair and true image is
revealed by the audit report
• For suppliers them ensure their market with the audited company if true
and fair view is revealed by the auditor’s report
• For banks and financial institutions their ensure refund of their loans
granted to the audited company

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 References
1. International, E. W. (2015). Audit and Assurance . Berkshire- United
Kingdom: Emile Woolf International.
2. MANAS’SEH, P. N. (2000). PRINCIPLES OF AUDITING . NAIROBI:
McMore Accounting Books.
3. MEDIA, B. L. (2009). AUDIT AND ASSURANCE (INTERNATIONAL).
London: BPP Learning Media Ltd.
4. MEDIA, B. L. (2019). Audit and Assurance . London: BPP Learning Media
Ltd .
5. MEDIA, B. L. (2020). Audit and Assurance . London : BPP Learning Media.
6. Sagwa, P. N. (2015). Auditing and Assurance . Nairobi-Kenya: Manifested
Publishers Ltd.
7. SALEEMI, N. A. (1997). AUDITING SIMPLIFIED . NAIROBI, KENYA: Uni-
Trade Printers Ltd.

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