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The auditors interest in a clients accounting system The auditors interest in a clients accounting system comes from two sources: 1. Statement of Auditing System (SAS 300) re uires that auditors should o!tain an understanding of the accounting and internal control systems sufficient to "lan the audit and de#elo" an effecti#e audit a""roach. $urther SAS 300 re uires that auditors should% in "lanning the audit o!tain and document an understanding of the accounting system and control en#ironment sufficient to determine their audit a""roach. &. The 'om"anies Act 1()* Section &3+ states: A com"anys auditors shall% in "re"aring their re"ort% carry out such in#estigations as will ena!le them to form an o"inion as to: , -hether "ro"er accounting records ha#e !een .e"t !y the com"any and "ro"er returns ade uate for their audit ha#e !een recei#ed from !ranches not #isited !y them% , -hether the com"anys !alance sheet and (if not consolidated) its "rofit and loss account are in agreement with the accounting records and returns. If the auditors form a contrary o"inion% they must state the fact in their re"ort.


The managements interest in an accounting system 1. The management of an enter"rise need com"lete and accurate accounting and other records !ecause: , , , , The !usiness cannot otherwise !e controlled. day to day records of de!tors and creditors are indis"ensa!le Assets can only !e safeguarded if a "ro"er record of them is made $inancial statements which are re uired for numerous "ur"oses can only !e "re"ared if ade uate "rimary records e/ist

Statutes often ha#e s"ecific re uirements on record .ee"ing for s"ecific ty"es of !usiness

0ecord .ee"ing for 1A23% 45I% 6AT and statutory sic. "ay an statutory maternity "ay is also a statutory re uirement.

&. -hat constitutes an ade uate system of accounting de"ends on the circumstances. A small sho".ee"er may find that a 7Sim"le/ !oo. and s"i.e for un"aid in#oices may suffice !ut an international com"any clearly needs rather more so"histicated records. The !asic needs of a system is that it "ro#ides for the orderly assem!ly of accounting information to ena!le the financial statements to !e "re"ared !ut all the other re uirements a!o#e must !e !orne in mind.


The need for controls o#er the system A system of accounting and record .ee"ing will not succeed in com"letely and accurately "rocessing all transactions unless controls% .nown as internal controls% are !uilt into the system. The "ur"oses of such internal controls are: , To ensure transactions are e/ecuted in accordance with "ro"er general or s"ecific authori8ation. , To ensure all transactions are "rom"tly recorded at the correct amount% in the a""ro"riate accounts and in the "ro"er accounting "eriod so as to "ermit "re"aration of financial statements in accordance with rele#ant legislation and accounting standards. , To ensure access to assets are com"ared with the e/isting assets at reasona!le inter#als and a""ro"riate action is ta.en with regard to any differences , To ensure errors and irregularities are a#oided or made a""arent.


Auditors "rocedure The auditors "rocedures will de"end on the circumstances !ut may include:

9!taining an understanding of the enter"rise as a whole in order to see the accounting system in conte/t and thus !eing a!le to assess the systems effecti#eness and a""ro"riateness.

Ascertaining the com"lete system !y en uiry% use of an internal control uestionnaire or re uesting the client to su""ly full details.

0ecording the system in the form of flowcharts% narrati#e notes% and chec. lists or in the answer to the Internal 'ontrol :uestionnaire.

If the auditor intends to rely on the internal controls% he should record the system of controls in es"ecial detail.

If the system s"ecification was su""lied !y the client% then "erform wal., through chec.s to confirm the correctness of the descri"tion.

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1erform a "reliminary e#aluation of the system. If the system of controls seems ade uate and the auditor is a!le to and wishes to rely u"on the controls% then design and "erforms com"liance tests.

If the auditor does not feel a!le to rely on the controls then "erform su!stanti#e tests on the records. In any case% some su!stanti#e tests must !e "lanned and "erformed on all material items

3#aluate his e#idence and form an o"inion on whether "ro"er !oo.s of account ha#e !een .e"t and whether the records form a relia!le !asis for the "re"aration of financial statements.

SAS 300 re uires that auditors should o!tain and document an understanding of the accounting system and control en#ironment sufficient to determine their a""roach. This does not mean that a detailed .nowledge of the accounting system or internal controls is re uired. 5owe#er SAS 300 suggests that what is re uired is an understanding of the system sufficient to ena!le them to identify and understand:

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;a<or classes of transactions in the entitys o"erations. 5ow much transactions are initiated Significant accounting records% su""orting documents and accounts in the financial statements.

The accounting and financial "rocess% from the initiation of significant transactions and other e#ents to their conclusion in the financial statements.

This seems to !e #ery com"rehensi#e= 5owe#er note the words ma<or and significant. ;ore detailed .nowledge of internal controls may !e re uired if the auditor% after e#aluating ris.s matters% decides that her a""roach is to rely on some internal controls as audit e#idence. In "ractice an understanding of accounting records often goes hand in hand with an understanding of internal controls. In any e#ent the auditor needs to ha#e e#idence on The 'om"anies Act 1()* S &3+ re uirements