1. Define auditing from different scholar’s perspective?

 The term “audit” has been derived from the Latin word “audire,” which means “to
hear.” Hence, an auditor is a person who hears or listens.
 International Federation of Accountants (IFAC), “An audit is the independent
examination of financial information of any entity, whether profit-oriented or not and
irrespective of its size, or legal form when such an examination is conducted to
express an opinion thereon.”
 According to R.R. Comber, “Audit is an independent examination of the financial
books and records of some person or persons responsible or accountable to the third
party with a view of verifying the accountancy of statement prepared by or for the
accounting party.”
 According to Spicer and Pegler defined an audit as “such as examination of the
books, accounts, and voucher of a business, as will enable the auditor to satisfy
himself that the balance sheet is properly drawn up, to give a true and fair view of the
state of the affairs of the business and whether the profit and loss account gives a true
and fair view of profit or loss for the financial period, according to the best of his
information and the explanations given to him and -as shown by the books; and if not,
in what respect he is not satisfied.”
 According to Montgomery, “Auditing is a systematic examination of the books and
records of a business or the organization to ascertain or verify and to report upon the
facts regarding the financial operation and the result thereof.”
2. Write historical development of auditing in Ethiopia?
A. Pre 1974: -
 In Ethiopian context, auditing is relatively new phenomenon in earlier periods, the
responsibility to administer and control the country’s revenue and expenditure was
exclusively performed by ministry of finance.
 Government auditing dates back to the establishment of an Audit Commission by
proclamation No. 69/1944 during Emperor Regime. Major power and function of the
Commissions were as follows:
 Responsible for the examination and control of the accounts of the Ministry of Finance,
and was directly accountable to the Prime Minister
 The power to control and examine the accounts of all other Ministries was given to the
Officers of the Ministry of Finance.
 The Establishment of Audit and Control Office: - in 1946, proclamation No. 79/1946 was
provided to centralize the audit control of all government accounts in one department by
establishing the Audit and Control office under the direction of the comptroller and
Auditor General who reported and was directly responsible to the prime Minister. As a
result of this proclamation, the powers and duties of the new office were clearly defined
and the scope of its activities expanded.
 According to the Revised Constitution of 1955 (1948 E.C.) provided even wider duties
and a large measure of independence. Accordingly, the Auditor General reported to the
Emperor and the Parliament on the financial operations of the government and was given
access to all books and records of government accounts.
B. 1974 – 1991: -
  Following a revolution in Ethiopia, a military government came into power in Ethiopia in
1974 and declared a communist ideology. As a result, private companies underwent
nationalization and the number of state-owned companies in the country increased.
Following this, international public accounting firms that have been operating in
Ethiopia, were closed. However, beside the nationalization event an important landmark
in the history of accounting and auditing in this period was the formation of the Audit
Service Corporation (ASC) by Proclamation 126/1977 (Government of Ethiopia, 1977).
C. 1991 to Present
 According to Argaw , the free-market system has been taken as one of the signals of the
hope for a better future for the auditing and accounting profession . Beside this, the
current government has been undertaking financial reforms in the financial reporting and
internal audit areas in the public sector (Peterson, 2001). The Ethiopian government has
also been providing enhanced support to the development of internal audit since 1994
(Teklegiorgis, 2000). In 1994, the Prime Minister set up a task force that forwarded
recommendations to improve internal audit in government offices. Consequently, the
Ministry of Finance and Economic Development (MoFED) has been mandated to
develop a manual for internal audit in government organizations.
3. Explain in detail the contemporary issues related with auditing system in Ethiopia?
4. Who is the concerned body/institution to certify CPA in Ethiopia? Write the requirements set
by such institution to qualify a person as CPAs?
5. Why is there a special need for ethical behavior by professional’s? why do the ethical
requirements of the CPA profession differ from those other profession?
 There is a special need for ethical behavior by professionals to maintain public
confidence in the profession, and in the services provided by members of that profession.
The ethical requirements for CPAs are similar to the ethical requirements of other
professions. All professionals are expected to be competent, perform services with due
professional care, and recognize their responsibility to clients. The major difference
between other professional groups and CPAs is independence. Because CPAs have a
responsibility to financial statement users, it is essential that auditors be independent in
fact and appearance. Most other professionals, such as attorneys, are expected to be an
advocate for their clients.
6. Distinguish between business failure and audit risk. Why is business failure a concern to
auditors?
a. Business failure occurs when a business is unable to repay its lenders or meet
the expectations of its investors because of economic or business conditions.
And audit failure occurs when the auditor issues an incorrect audit opinion
because it failed to comply with the requirements of auditing standards. The
reason a business failure is a concern to auditors is that when a business failure
occurs, users commonly claim that an audit failure has occurred. This is even
more evident when the most recently issued auditor’s report indicates that the
financial statements were fairly stated. This occurs due to an “expectation gap”
between users and auditors, where users believe that the auditors guarantee the
financial viability of the business

b. Business failure is that stage where the business is not in a condition to repay its
debts due to internal or external conditions. Here internal condition includes
 poor management and external condition includes the recession. Whereas, audit
risk is that stage where the auditor does not know the fraud that might be
reflecting in a company's financial reports.

 The concern of auditors about business failure: When there comes a situation of business
failure it is a matter of concern for the auditors because they examined the financials of a
company and hence, they would have to answer the relevant parties in such a case.

c.
d.
7. What is the role of the Public Company Accounting Oversight Board (PCAOB) and
American Institute of Certified Public Accountants (AICPA)?
A. The PCAOB is a nonprofit corporation established by Congress to oversee the audits of
public companies in order to protect investors and further the public interest in the
preparation of informative, accurate, and independent audit reports. The PCAOB also
oversees the audits of brokers and dealers registered with the Securities and Exchange
Commission (SEC), including compliance reports filed pursuant to federal securities laws.
 The PCAOB has four primary duties:
I. Register public accounting firms that prepare audit reports for issuers, and SEC-
registered brokers and dealers.
II. Establish or adopt auditing and related attestation, quality control, ethics, and
independence standards.
III. Inspect registered public accounting firms' audits and quality control systems.
IV. Investigate and discipline registered public accounting firms and their associated
persons for violations of specified laws, rules, or professional standards.
B. The American Institute of CPAs was founded in the late 1800s and has developed into an
institution that gives its 400,000 members support in their chosen field. There are different
levels of membership depending on the requirements of the certified public accountant,
but one of the biggest benefits and functions of the AICPA is the Uniform CPA exam.
I. Developing and Scoring the Uniform CPA Exam
II. Setting Standards for CPAs
III. Advocates within the Government for Accounting Professionals
IV. Publications for its Members and Other Interested Parties.
V. Research and Business Reporting
8. Explain the effect of extensive misstatements found in the prior year’s audit on inherent risk,
planned detection risk, and planned audit evidence?