����������������ADVANCED AUDITING AND ASSURANCE�� STUDY TEXT FOR PROFESSIONALS��STRATHMORE UNIVERSITY PRESS�(CPAK)�

INTRODUCTION TO AUDITING

• OBJECTIVES
• When you have studied this chapter you should be able to:
• Explain and discuss the nature of auditing
• Describe and discuss the regulatory framework for auditing and related services internationally Describe the requirements of the Accountants Act, in relation to professional misconduct

�DEFINITION OF KEY TERMS

• Auditing is the independent examination of and expression of opinion on, the financial statements of an enterprise by an appointed auditor
• Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria.

RELATED SERVICES

• In addition to audit services, auditors provide other services. These can be classified as:
• Assurance engagements
• Audits
• Reviews
• Non-assurance Engagements (related services)
• Agreed upon Procedures
• Compilations

�DEFINITION OF KEY TERMS

• Auditing should be done by a competent, independent person
• An engagement letter denies clearly the extent of the auditor’s responsibilities
• Minimize the possibility of any misunderstanding between the client and the auditor

​

�RELATED SERVICES

• Assurance engagement is an engagement performed by a practitioner to enable himself to express an opinion about the measurement of subject matter against a criteria
• An assurance engagement is an engagement in which a professional accountant in public practice (PAPP) expresses a conclusion designed to enhance the degree of confidence of the intended users about the outcome of the evaluation or measurement of a subject matter against criteria
• Practitioner (auditor) is appointed by the shareholders (users) to express his opinion (assurance) 

�RELATED SERVICES

• The term non-assurance services is used throughout the Code when referring to engagements that do not meet the definition of an assurance engagement.
• Non-assurance services include other
• management consulting
• accounting
• bookkeeping
• tax services.

​

�REVIEWS

• The objective of a review of financial statements is to enable an auditor to state whether anything has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared, in all material respects
• A similar objective applies to the review of financial or other Information prepared in accordance with appropriate criteria

REVIEWS

• A review comprises inquiry and analytical procedures, which are designed to review the reliability of an assertion that is the responsibility of one party for use by another party
• A review involves the application of audit skills and techniques and the gathering of evidence

�REVIEWS

• It does not involve an assessment of accounting and internal control systems, tests of records and of responses to inquiries by obtaining evidence through:
• inspection,
• observation,
• confirmation and
• computation, which are procedures ordinarily performed during an audit.

COMPILATIONS (ISRS 4410)�(International Standard on Related Service)�

• The objective of compilations is to :
• Collect
• summarize
• classify financial information i.e. using accounting rather than auditing expertise into understandable form e.g. financial statements

AUDIT AND ASSURANCE REPORTS

• The need for assurance reports is increasing because for example:
• The need quicker and better information for decision making in increasingly competitive business environment.
• The need for independent assurance that decisions are made based on reliable information.
• An assurance engagement is an engagement in which the practitioner expresses a conclusion designed to enhance the degree of confidence of intended users

�AUDIT AND ASSURANCE REPORTS

• practitioner provides a written report containing a conclusion that conveys the assurance obtained about the subject matter information.

THE NEED FOR AN AUDIT

• We can clearly distinguish between the providers of funds and those who control those funds.
• The providers of funds are the shareholders, creditors, and other third parties who have given loans to the company.
• Those charged with the responsibility of controlling those funds are usually called directors and management.
• We can also clearly see that the company has resources, (assets), and claims against those resources, (Liabilities and capital.)

THE NEED FOR AN AUDIT

• The report of the directors in the form of accounts lacks credibility, in that:
• a) It may contain errors
• b) It may fail to disclose frauds
• c) It could be misleading
• d) It could be misleading deliberately
• e) It may fail to disclose all relevant information.

THE NEED FOR AN AUDIT

• This independent expert is called the auditor.
• His investigations establish an audit and the report of his investigations an audit report.
• Apart from resolving the problems of credibility an audit is essential to ensure that the requirements of the Companies Act and the International
• Financial Reporting Standards have been complied with.
• The accounts are referred to as financial statements

�SUMMARIES

• To summaries, we can identify the following parties as being interested in the financial statements.
• a) The directors who produce them
• b) The shareholders to whom traditionally they are addressed
• c) Lenders and debenture holders
• d) Potential investors
• e) Employees
• f) Customers
• g) Suppliers
• h) Accountants

�SUMMARIES

• i) Stock-brokers
• j) Credit rating agencies
• k) Financial Journalists
• l) Trade Unions
• m) Statisticians
• n) Competitors
• o) The Government, including the Tax Authorities
• p) Ministry of Finance for Economic Policy Decisions
• q) The general public.
• All these people must be sure that the financial statements can be relied upon.

​

Primary types of audits performed by cpa FIRMS

1. Operational audit—Evaluates the efficiency and effectiveness of any part of an organization’s operating procedures and methods.

• For example, auditors might evaluate the efficiency and accuracy of processing payroll transactions in a newly installed computer system
• It is more difficult to objectively evaluate whether the efficiency and effectiveness of operations meets established criteria

​

Primary types of audits performed by cpa FIRMS

2. Compliance audit—Determines whether the auditee is following specific procedures, rules, or regulations set by some higher authority. Following are examples of compliance audits for a private business.

• Determine whether accounting personnel are following the procedures prescribed by the company controller.
• Review wage rates for compliance with minimum wage laws.
• Examine contractual agreements with bankers and other lender

​

Primary types of audits performed by cpa FIRMS

• CPAs perform three primary types of audits:

3. Financial statement audit—Determines whether the financial statements are stated in accordance with specific criteria. The criteria are normally U. S. GAAP or international accounting standards

• The auditor gathers evidence to determine whether the statements contain material errors or other misstatements
• In determining whether financial statements are fairly stated in accordance with accounting standards, the auditor gathers evidence to determine whether the statements contain material errors

​

​

TYPES OF AUDITS

• 1.Statutory Audits.
• 2.Non-statutory Audits
• 3.Audit of Partnerships
• 4.Interim and Final Audits

​

STATUTORY AUDITS�

• A statutory audit is a legally required review of the accuracy of a company's or government's financial statements and records
• The objectives of the audit are to express an opinion as to whether the balance sheet and the profit and loss account show a true and fair view
• Audits are compulsory under statute in the case of a large number of undertakings including the following:

​

NON-STATUTORY AUDITS

• Non-statutory audits are performed by independent auditors because the owners, proprietors, members, trustees, professional and governing bodies or other interested parties desire them, not because the law requires them.
• In consequence, auditing may and will extend to every type of responsibility which produces accounts, and will include therefore:
• a) Partnerships
• b) Charities (assuming an audit is not in any event statutory)
• c) Sole traders

NON-STATUTORY AUDITS

• It may also extend to forms of financial statement other than the annual reported figures where those responsible for the statement, or those to whom the statement is made, wish an independent opinion to be expressed as to whether it gives a true and fair view.
• Examples would include:
• a) Summaries of sales in support of a statement of royalties’ payable where goods are sold under license;
• b) Statements of expenditure in support of applications for regional development or other governments grants; and
• c) The circulation figures of a newspaper or magazine, used when asking advertising

NON-STATUTORY AUDITS

• Examples of the regulations which would be essential reference material for the auditor in such assignments would include:
• a) The Rules of Societies and Charities
• b) Partnership agreements.

AUDIT OF PARTNERSHIPS

• The audit of a partnership is not normally required by statute and so the auditor must agree with the client what his rights and duties are going to be.
• The auditor must obtain written confirmation of his terms of engagement and must take care to clearly distinguish between audit and accountancy work and ensure that the client appreciates such distinction

​

ADVANTAGES OF AN AUDIT TO A PARTNERSHIP�

• The audit of the accounts of a partnership may also be seen to have the following advantages:
• a) It will provide a convenient means of settling accounts between the partners, thus avoiding the possibility of future disputes.
• b) The auditor may be able to make useful comments on the firm’s accounting and control systems, where necessary making recommendations as to how areas of weakness could be eliminated.
• c) The settlement or adjustment of accounts between partners on the occasion of any change in the partnership structure will be facilitated where audited accounts are available.

ADVANTAGES OF AN AUDIT TO A PARTNERSHIP�

• d) Where audited accounts are available this will perhaps make them more readily acceptable to the income tax
• When it comes to agreeing an individual’s partner’s liability to tax.
• e) The sale of the business or the negotiation of loan or overdraft facilities may well be facilitated if the firm is able to produce properly prepared and audited accounts.

INTERIM AND FINAL AUDITS

• The interim audit will normally take place approximately three-quarters of the way throughout the financial year
• An interim audit is part of audit work or audit strategy where audit testing is performed on interim financial statements.
• This is a part of the audit strategy when the auditor wants to reduce audit works at the annual audit or final audit testing
• The auditors will usually perform this to some financial statements of their customer, for instance, for six or nine months

ADVANTAGES AND DISADVANTAGES OF A CONTINUOUS AUDIT

• (a) Advantages
• i. The continual or regular attendance of the auditor may act as a deterrent to fraud
• ii. Weaknesses in the client’s systems are noticed earlier and, if they exist, errors and fraud may be discovered more quickly
• iii. It is sometimes possible to start the balance sheet work before the year end.
• This will lead to swifter financial reporting
• iv. The auditor’s work is spread more evenly throughout the year.
• This will help to relieve the pressures on staff that arise for many audit firms during the first few months of each year.

ADVANTAGES AND DISADVANTAGES OF A CONTINUOUS AUDIT

• (b) Disadvantages
• i. Audit staff who spend much of their time working on one client may find their independence adversely affected
• ii. The auditor’s frequent (and sometimes unexpected) visits may cause inconvenience to the client
• iii. It is possible that figures may be altered (innocently or fraudulently) after they have been checked;
• iv. It may be found that outstanding points and queries raised at one visit are forgotten and not followed up at a later stage.
• Strict control is needed to ensure that this does not happen particularly where the staff assigned to the audit has changed.

THE AUDITOR AND DUTIES

• Make a report to the members on all accounts laid before the members in general meeting during his tenure of office:
• The report must contain matters mentioned in the 7th Schedule to the Act. Section
• This therefore means the auditor has to include in the report statements on the accounts i.e.
• i. Compliance with the Companies Act;
• ii. Truth and fairness of the balance sheet and profit and loss account.

THE AUDITOR AND DUTIES

• The auditor also has to investigate and report whether or not:
• i. Proper books of account have been kept;
• ii. Proper returns have been received from branches not visited by the auditor.
• iii. The accounts are in agreement with the books of accounts.
• The auditor has also to report whether or not he has obtained all the information and explanations which to the best of their knowledge and belief were necessary for the purposes of their audit.

​

AUDTIT RIGHTS

• 1.Right to have his report read before the Company. (Section 162(2).
• 2. Right of access at all times to the books, accounts and vouchers of the company.
• 3. Right to require from offices of the company such information and explanation as he thinks necessary for the performance of the duties of the auditor.
• 4. Right to receive notice of and attend meetings and report on any matters that concern him as auditor. (Section 162(4).
• 5. Right to report to the members on his findings including failure by the directors and employees of the company to supply him with all the information and explanations

QUALIFICATIONS FOR APPOINTMENT AS AUDITOR

• Auditor must be a holder of a practicing certificate issued according to Section 21 of the Accountants Act. (Section 161(1).
• Should not be an officer or servant of the company. (Section 161(2a)(i).
• Shall not be a partner of or in the employment of an officer or servant of the company. (Section 161 (2a)(ii).
• Should not be a body corporate. (Section 161 (2a)(iii).

THE AUDITORS AND THE COMPANIES ACT

• Appointment
• Every company must appoint an auditor/auditors at each annual general meeting to hold office from the conclusion of that, until the conclusion of the next annual general meeting.
• Retiring auditor is supposed to be reappointed without passing a resolution at an(Annual General Meeting ) AGM unless:
• 1. He is not qualified for reappointment;
• 2. Resolution is passed at the AGM appointing somebody instead of him or providing that he should not be reappointed.
• 3.He has given notice in writing of his unwillingness to be reappointed Section 159(2)a, b, c.

DISMISSAL/REMOVAL

• An auditor can be dismissed at any time before the end of his contract of office.
• This is despite any agreement between him and the company.
• This removal is by ordinary resolution at a meeting with special notice (28 clear days) having been served.
• Only the members in a properly constituted meeting can remove an auditor from office.

DISMISSAL/REMOVAL

• When an auditor is removed before expiry of his tenure of office
• Then the company must within fourteen days give notice of this fact to the Registrar.
• The auditor must be informed of all attempts to dismiss or remove him, from office.
• He is allowed to make representations to the members if he feels the directors want to remove him unfairly.
• The directors have to circulate the representations to the members.

​

THE NEW ENGAGEMENT

• An audit is the independent examination of, and expression of opinion on, the financial statements of an enterprise by an appointed auditor in that appointment and in compliance with any relevant statutory obligation
• it is important for the new auditor to ensure that he has been appointed in a proper and legal manner
• The initial procedures to be observed can be considered in 2 stages:
• a) Procedures before accepting nomination; and
• b) Procedures after accepting nomination.

PROCEDURES BEFORE ACCEPTING NOMINATION

• The nominee auditor must take the following steps:
• a) Ensure that he is professionally qualified to act i.e. is not disqualified on any legal or ethical.
• b) Ensure that the firm's existing resources are adequate to service the needs of the new client.
• This will raise questions of staff and time availability and the firm's technical expertise.
• c) Seek references in respect of the new client company, independent enquiries should be made concerning the status of the company and its directors.
• d) Communicate with the retiring auditor

PROCEDURES AFTER ACCEPTIN NOMINATION

• (a) Ensure that the outgoing auditor’s removal or resignation has been properly conducted in accordance with the Companies Act 1962.
• The new auditor should see a valid notice of the outgoing auditor’s resignation, or confirm that the outgoing auditor was properly removed at a general meeting of the company.
• (b) Ensure that the new auditor’s appointment is valid.
• The new auditor should obtain a copy of the resolution passed at the general meeting appointing him as the company’s auditor.
• (c) Set up and submit a letter of engagement to the directors of the company.

​

THE ENGAGEMENT LETTER

• Purpose
• It is the purpose of an engagement letter to define clearly the extent of the auditor’s responsibilities and so minimize the possibility of any misunderstanding between the client and the auditor
• The engagement letter provides written confirmation of the auditor’s acceptance of the appointment, the scope of the audit, the form of his report and scope of any non audit services

THE ENGAGEMENT LETTER

• Purpose
• The contents of an engagement letter should be discussed and agreed with management before it is sent and preferably prior to the audit appointment.
• The engagement letter is a well established audit technique and ISA 210 Terms of Audit
• Engagements provides guidance in this area

INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF KENYA (ICPAK)

• Functions:
• To promote standards of professional competence and practice amongst members
• To promote research into the subjects of accountancy and finance and related matters, publication of books, periodicals, journals and articles
• To promote the international recognition of the institute

ORGANIZATION IN AN AUDITING FIRM

• Partner
• Manager
• Accountant in Charge
• Audit Assistants, Trainees, juniors

PARTNER�

• The partner would be responsible for the overall audit and he would sign the final accounts
• In addition, the partner has to approve the detailed plan of work and give his authority before work can begin.
• He will carry out a final review of the work once it has been done before signing the accounts.

MANAGER�

• The manager is appointed for every job and he is responsible to a partner for satisfactory completion of that assignment.
• His initial responsibility usually involves preparing provisional timings and costing for the audit and to agree the timings with the client.
• He has to ensure that there are sufficient staffs at the right grade to cover the client’s requirements.
• From the appropriate staff, he has to select the proper accountant in charge and to brief him on what needs to be done.
• He will also review the audit plan and the related budget which may be prepared by the accountant in charge
• He will monitor the progress of the job constantly to ensure that targets are achieved.
• He has to review the working papers in detail before they are submitted to the partner for his final review.

ACCOUNTANT IN CHARGE�

• The accountant in charge is sometimes referred to as a supervisor or audit senior.
• His job is to control the day to day operation of the audit. However, his degree of autonomy depends very much on a particular firm’s policy
• The personalities of the managers and the accountant’s own experience and ability.

​

ACCOUNTANT IN CHARGE�

• His typical responsibilities include:
• a) The collection of detailed information for the preparation of the audit plan.
• b) The delegation of speciic areas of work to the audit assistants or trainees.
• c) The planning and supervision of the day to day running of the audit.
• d) The constant review of progress by comparison of actual time spent against budget.
• e) Ensuring that the working papers have been prepared and are presented in an orderly manner to the manager and the partner for review.

​

AUDIT ASSISTANTS, TRAINEES, JUNIORS�

• Audit Assistants or trainees are responsible to the accountant in charge for the detailed work of the audit.
• They are expected to produce working papers set out in accordance with the firm’s quality control procedures.

SUPPORT STAFFS ARE CALLED CONSULTANTS AND HAVE GRADING SUCH AS:

COMPETENCE

• The professional accountant must be fully familiar with
• Accounting and Book-Keeping
• Auditing
• Taxation Law and Practice
• Internal Control and Accounting Systems
• Company Law
• Information Technology
• Management and Financial Consultancy
• Valuation
• Liquidation, and Bankruptcy proceedings
• Economic environment, policies and trends

COMPETENCE

• Ability to communicate both orally and in writing
• • To his staff in giving instructions and directions
• • To the management and employees in obtaining evidence
• • To shareholders in reporting his findings
• • To other third parties in reporting his findings and obtaining evidence.

QUALITY CONTROL AND REVIEW

• Importance of high quality audit work
• To achieve audit objectives
• To operate effectively, efficiently and economically
• To avoid disputes with clients and minimize risk of litigation
• To provide professional service to clients.
• To ensure regulatory visits proceed smoothly.
• To ensure staff are monitored and controlled.
• To help identify training needs at all levels.
• To ensure staff appraisal systems operate effectively at all levels.
• To provide assurance of the audit .process to stakeholders.

BENEFITS OF IAS / IFRS

• The benefits of IAS / IFRS are:
• 1. They lead to a degree of uniformity and comparability among accounts.
• 2. They assist understanding by providing readers of the accounts greater information about the preparations of the accounts.
• 3. They assist accountants and auditors by aiding in the process of determining what a true and fair view is. They therefore help refine the meaning of true and fair view.
• 4. They describe a method of accounting and or disclosure requirement approved by the institute.
• 5. Members of the institute are obliged to secure adherence to IAS / IFRS whenever they are concerned with financial statements be they directors, accountants, company secretaries, auditors or in any other role.

MINIMISING AUDITOR’S LEGAL LIABILITIES�

• 1) Limited liability to involve a contractual and contributory negligence limit.
• 2) Joint and several liability to be removed in favour of proportional liability according to name not ability to pay.
• 3) Lawyer of losing party to pay legal costs of winning party (“fee shifting”) to prevent ready acceptance of litigation cases.
• 4) Refrain from out of court settlements. 5) Prevent incorporation of audit firms. Discourage avoidance of high risk clients by following professional ethics. 6) Use engagement letters to deines tasks and responsibilities undertaken by client and auditor

MINIMISING AUDITOR’S LEGAL LIABILITIES�

• 8) Attempt to limit the use of documents to the purposes for which they are prepared for: identifying authorised recipients, stating the purposes of the report and stating that it may not otherwise be relied on.
• 9) Obtain expert advice where appropriate.
• 10) Obtain indemnity from the client or third party e.g. obligate the client or third party to indemnify the author from third party claims but do not limit the third party’s liability to assert their claims.
• 11) Take steps to restrict use or citing of fifrm’s name.
• 12) Liability to assert their claims.
• 13) Take steps to restrict use or citing of irm’s name.

THE QUALITIES OF AN AUDITOR OR PROFESSIONAL ACCOUNTANT

• The Qualities of an Auditor or Professional Accountant are
• o Competence
• o Integrity
• o Independence

SUBSTANTIVE TEST

• These are tests of transactions and balances and other procedures such as an analytical review which to seek to provide audit evidence as to:
• The completeness
• Accuracy
• Validity of the information contained in the accounting records or in the financial statements.

AUDIT SOFTWARE

• Audit software may be used during many compliance and substantive procedures.
• Its use is particularly appropriate during substantive testing of transactions and balances, as it may scrutinize large volumes of data and extract information leaving skilled manual resources to concentrate upon the investigation of the results.

​

AUDIT SOFTWARE

• The following are the objectives:
• i) To establish whether input data is validated and edited as close to the point of origination as possible.
• ii) To ensure that the escalation date and percentages are reasonable
• iii) To identify any duplications or unreasonable items that may have occurred during processing
• iv) To ensure that the calculated amounts as reflected in the system are reasonable
• v) To ensure that all documents produced by the system are accounted for, to the invoices on the rent due for collection.

THE AUDITOR'S LIABILITY

• The auditor's liability falls under three specific headings:
• (a) To his clients under contract law;
• (b) To third parties under the law of tort;
• (c) Civil and criminal liability under statute law

​

CHAPTER QUIZ

• 1) What is the objective of auditing According to the International Standard on Auditing (ISA) No. 200
• 2) An auditor is felt to have committed a criminal offence if:
• 3) What are the Qualities of an Auditor or Professional Accountant
• 4) Name two types of auditing.
• 5) It is the purpose of an …………… to diene clearly the extent of the auditor’s responsibilities and so minimize the possibility of any misunderstanding between the client and the auditor