AUDITING

Auditing comes from a Greek word Audin' which means to hear, therefore auditors were
traditionally hearers. They had oral reports on how other people managed the economic
resources entrusted to them by the owners.
In Britain for eample, the !ing with the help of the "hancellor of the #che$uer used to
hear oral reports of how the !ingdom resources were managed to ascertain whether they
were properly used.
%resent auditing has roots in the Industrial reudution &'()*+. The de,elopment of
industries and their epansion re$uired professional management because the owners
found it difficult to manage their own businesses. The de,elopment of auditing in !enya
can be traced to the coming of colonial rule and the beginning of organi-ed money trade
in the business world.
FACTORS INFLUENCING THE GROWTH OF AUDITING IN KENYA
Industrial Revolution
The industrial re,olution a conse$uent epansion of technology resulted in the increase of
business si-e hence necessitating growth or need for auditing.
%ublic .wnership and %rofessional /anagement
0ue to separation of owners of business from management, the shareholders re$uired an
independed epert to report to them on their companies' financial affairs at the end of
each financial period. The auditors act as an arbitrator between the owners and the
management hence the need for auditors to be independent.
1egislation by 2tate
The conduct of audits has been made a statutory obligation to companies registered under
the "ompanies Act "ap 3(4. "ompanies are therefore re$uired by law to ha,e their
financial statement audited leading to de,elopment of auditing.
%ronouncement by the "ourt of 1aw
The many cases brought by court with regards to auditors has made pronouncement
which reflect the growing epectation of society from profession to impro,e $uality of
work especially presentation and reprinting financial statements. "ourts are not only
making it easy to sue the auditor, but they are also demanding for establishment of
accounting principles and auditing standards hence growth of auditing.
0efine Auditing
Auditing is an independent eamination of the books of account, finance statements and
,ouchers by the appointed auditor to ascertain whether they reflect a true and fair ,iew of
the company's state of affairs as at the balance sheet.
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ELEENTS OF DEFINATION
1. Independent Examination
It is a re$uirement of company Act as a professional body &i.e. I"%A"+ that the
auditor should be independent. %rofessional independence means that the
auditors should be free from any influence of the management.
2. Books of Accounts
The "ompanies Act "ap 3(4 re$uires that all public limited companies should
keep proper books of the accounts i.e. cashbook ledgers.
3. Financial Statements.
5efers to the % and 1 account, balance sheet, it is a re$uirement of a "ompany Act
that they must be tabled before shareholder's AG/.
4. Vouchers
These are support documents behind any accounting transactions e.g. receipts, log
book, title deeds, che$ues
. !rue and Fair Vie
True means6 in accordance with reality or correct or a percei,ed standard. True
account means not false, ficticious and in accordance with the fact. The auditor
therefore should identify and ascertain that the accounts contain elements of truth
especially in the balance sheet and % and 1 account.
7airness means8 accounts should be fair to the users because they ha,e certain
epectation. The users epect that the accounts comply with the "ompany Act and
confirm to the generally accepted accounting principle or practices &G.A.A.%2+. If he
certifies these epectations of the users it can be said that we are fair.
It's epected that accounts will reflect the resources used in the company and claims
against resources.
De!ine an Audit
An audit is an independent eamination and epression of opinion on financial statement
of an enterprise by an appointed auditor in pursuance to that appointment and in
compliance with any rele,ant statutory re$uirements. Audit opinion is the auditors own
professional 9udgement as to whether financial statement she has audited reflect a true
and fair ,iew.
A true audit opinion &:,e+ is known as an un"uali!ied O#inion whereas a negati,e &;,e +
opinion is known as a $uali!ied O#inion%
A $ualified opinion may lead to the following effects on the company8
'. 7all in price of shares on the stock echange market
<. 1oss of current and potential in,estors
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=. 0ismal of Board of 0irectors by shareholders
3. 1i$uidation of the "ompany in etreme cases
0istinction Between Auditing and Accounting
AUDITING ACCOUNTING
' It is an independent eamination of the books of
account, financial statement and ,ouchers to ascertain
whether they reflect a true and fair ,iew of balance
sheet
Accounting is the recording,
classifying and
communication of economic
information to assist in
decision making
< Auditing comes after accounting Accounting usually proceeds
auditing therefore books of
accounts must be prepared
= Auditing is performed by auditors who must be fully
$ualified accountants
Accountancy is performed by
accountants who may either
be partially or fully $ualified
accountants
3 Auditing is performed by auditors who report to
shareholders of the company
Accountancy is performed by
accountants who usually
report to the management
) Auditing is conducted at the end of the year Accountancy is a continuous
process
4 Auditing is a statutory re$uirement for limited
companies
Accountancy is essential for
all businesses regardless of
their nature and time.
> The professional body &I"%A!+ is usually ,igilant o,er
auditing process
The professional body does
not keep ,igil o,er the work
of accountancy
O&'ECTI(ES OF AN AUDIT
)ri*ar+ O,-e.tives
To epress all audit opinion on the financial statement prepared and presented by the
management regarding a true and fair ,iew.
The following should be stated in auditor's opinions8;
?hether the "ompany has kept proper books of account
?hether the auditor's has recei,ed all important information and eplanation necessary
for his audit work.
?hether ade$uate returns ha,e been recei,ed from branches not ,isited by the auditor
?hether financial statements are in agreement with the books of account
?hether the accounting policy followed is in agreement with the generally acceptable
accounting principles or practice &G.A.A.%s+ &IA2+.
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Se.ondar+ o,-e.tives
'. %ro,iding ad,ice to the clients management through the management letter on the
following8;
<.
i+ ?eaknesses in internal control system, insensiti,e areas like cash office
ii+ Areas where the auditor did not recei,e co;operation from the
management
iii+ 7udications of impending dangers to the business
i,+ 2olutions to the problems identified
=. To detect errors and frauds
3. @B8 As a matter of fact, the responsibility to defect and pre,ent errors rests with
clients management. Aowe,er the auditor should perform his own audit tests to
enable him to detect fraud or irregularities
i+ To pro,ide general ad,ice to the client on matters that would help him
impro,e efficiency
USERS OF THE AUDITED RE)ORTS
'. 2uppliersBTrade "reditors ; They are interested in "ompany ability to pay them.
<. Go,ernment and Its Agencies ; To obtain information that is important for
determination of go,ernment resources, taes and regulation of business acti,ities
=. #mployees ; They are interested in stability and profitability of the company to
impro,e on their welfare as well as employees stability to pay their retirement
benefit
3. "ustomers ; They are interested in "ompanies performance to ensure stability in
the supply of goods and ser,ices that they are used to
). In,estors ; In,estors who wish to in,est in the company are interested in
profitability to make in,estment decisions.
4. Insurance "ompanies ; In determining the ,alue of the company for compensation
purposes.
>. 2tock #change /arkets ; To know the trend of business growth and
de,elopment
Ad,antages of an Audit
'. An audit gi,es assurance and credibility to the accounts of the company for the
benefit of potential in,estors. .ther stakeholders use the audited reports to
ascertain the companies performance.
<. Audited accounts are used as a pre,enti,e and detecti,e measure against fraud
and errors which could otherwise lead to failure of failure of business
organi-ations.
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=. They are used by firms to raise finance as they boost the forms credit rating
therefore they are used as a basis of borrowing
3. It is used by ta authorities to assess the "ompany ta liability and helps to a,oid
possible disputes between the "ompany and income ta authority
). In cases where the business is to be sold as a going concern, audited accounts are
used as a basis of fiing prices
4. Insurance compensation claims can only be settled on the basis of the latest
audited financial statements
>. It keeps client staff ,igilant and upto date all the time
(. They are used to assure ,arious parties that the company has operated within the
pro,isions of the "ompany Act.
C. Its used by shareholders as the basis of sharing profits and therefore minimi-e
disputes among them.
Disadvanta/es o! an Audit
'. "ompany secrets are eposed to competitors
<. In the e,ent of loss, the credit rating of the company is affected hence loss of
creditors
=. Its costly to organi-ations
3. It can scare away potential in,estors
). In etreme cases, it can cause li$uidation of a company
4. The company's ,alue is affected in the course of mergers or take;o,ers
TY)ES OF AUDITS
According to nature of work undertaken,
0% Statutor+ Audit 1)u,li. Audits2
'. They are re$uirements of "ompany Act "ap 3(4 of laws of !enya
<. They conducted for public 1imited "ompany. It is a re$uirement of the law that
the audited financial statements be presented to the shareholders at A.G./.
=. The "ompany Act outlines the scope and nature of work to be done which can be
increased by the management but ne,er to be decreased
3. The rights of the auditor during the audit are defined by law. The ob9ecti,es of
statutory audit is to epress an opinion on a true and fair ,iew of the "ompany's
financial statements.
). 2tatutory auditors are appointed according to the "ompany Act
3% )rivate Audits
They are not re$uired by the law but re$uested by owner of business. The scope
of work to be co,ered is defined by the owner or depends on the agreement
between the auditor and client
The rights of the auditor are limited by the clients or withdrawn altogether
%ri,ate audits are done ,oluntarily and the auditor may do both accounting and
auditing.
They are suitable for small organi-ations
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The auditor puts a disclaimer opinion &no opinion+ as a caution to report users that
he has only done partial audit
0ifferences between statutory and pri,ate audits
Statutor+ Audits )rivate Audits
' 2tatutory audits are a re$uirement of "ompany
Act of all 1td "ompanies
%ri,ate audits are not legally
re$uired but are perfomed at
the re$uest of the owner or
management
< 2tatutory auditors are either appointed by
directors, registrar of companies or shareholders
%ri,ate audit , auditors are
appointed by the management
= In statutory audits, rights and duties of the auditor
are defined by the "ompany Act and cannot be
limited by management
%ri,ate audit, rights are
defined by the owner and their
limited
3 2tatutory audits aim at pro,ing a true and fair
,iew
%ri,ate audits aim at detecting
errors and frauds and
ascertainment of profit and ta
purpose
) In statutory audits, the scope of work is
determined by the company's Act and cannot be
limited
The scope of work of the
pri,ate auditors are limited by
the management
Internal Audits
This is an independent appraisal acti,ity instituted by the management to help in
achie,ing their desired ob9ecti,es.
The scope of work to be co,ered is defined by management
They are not legally re$uired by the "ompany's Act but are carried out by organi-ations
to reduce the cost of eternal audits
The main ob9ecti,es include8;
To safeguard the fied assets of the company
To detect errors and fraud and their pre,ention
To help in the implementation of company policies and procedures
To ensure accuracy, ,alidity and completeness of records
To ensure adherence to statutory re$uirements
"B# !he$ are usuall$ concerned %ith internal control s$stems of the or&ani'ation
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According to the method of approach8;
7inal AuditB"omplete AuditB0etailed AuditsB2tatutory Audits
This is conducted at the end of a financial year
It is carried out to completion in one continuous session
The auditor takes possession of all books of account for eamination and forms an
opinion on a true and fair ,iew of the company's state of affairs
7inal audits facilitate commencement of the AG/
They are suitable for businesses with fewer transactions and are used as a basis of
declaring and appro,ing di,idends.
Advanta/es o! Final Audit
They are suitable for small businesses with small transactions
They are economical since the auditors spend less time hence less epensi,e to the
"ompany
They are con,ened because they take place at the end of the financial year when most
acti,ities of the company ha,e come to an end and therefore, help minimi-e interactions
to the client's work
Aelps in the elimination of note taking because the auditors does not re$uire notes to be
made each time indicting the stages reached
They are fleible because the auditors can prepare ade$uate programs to co,er all areas
of the audit.
Disadvanta/es o! Final Audits
0ue to limited time a,ailable at the end of the financial year, the auditor may take few
tests hence increasing his liability in cases of negligence.
?here internal controls are weak, it may take a log time to finish hence delaying the
report and AG/
They are unsuitable for organi-ations with many transactions
2ince they are carried out at the end of the year when the % and 1 account and balance
sheet ha,e been prepared errors and frauds can only be detected when they ha,e
already caused ad,erse effects on the organi-ation
?here the audit firm has se,eral audit engagements it becomes difficult for it
schedule its audit staff because of similar year ends
Continuous Audits
In this audits the auditor is engaged throughout the year
Audit staff may be with the client continuously or at certain time inter,als
It in,ol,es detailed eamination of the books of accounts
Its suitable for large organi-ations with many transactions and where internal controls
are weak
They are suitable in banking and manufacturing sectors
Advanta/es o! Continuous Audit
They enable the auditor to carryout detailed eamination of the accounts hence
epressing a balanced audit opinion because he has enough time.
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They facilitate interim audits necessary for payment of interim di,idends
They facilitate final audit because much of the work would ha,e been done
They help to minimi-e errors and frauds in the organi-ation
0ue to regular ,isits by the auditor, he gets a better understanding of the clients
accounting system
The audit firm benefits because the audit staff are kept busy throughout the year
Disadvanta/es o! Continuous Audits
They are time consuming
They incon,enience the clients from time to time
It in,ol,es intensi,e note taking to a,oid alteration after books of account ha,e been
audited
The clients accounting staff may depend on the audit staff to sol,e their accounting
problems because the audit staff is continuously with them
They are epensi,e to the client
SOL(ING )RO&LES OF CONTINUOUS AUDITS
0etailed notes should be taken to a,oid alteration of figures
The auditor should adopt sampling approach to sa,e time and the cost of the audit
The client should impro,e on the internal control system
The auditor should plan his work well so that the audit can take place when the
business of the client is at a minimum le,el of work
Interi* Audits
It is conducted with the accounting period and concentrates of the % and 1 account
It measures the performance of the company and is useful in the declaration of
interim di,idends as well as determining the price or ,alue of the company incase of
mergers
Derification of assets on the balance sheet is left until final audits are arri,ed at.
It helps in the detection and pre,ention of errors and frauds at their earliest stage
It also facilitates completion of final audits and helps the auditing staff to update the
clients book because they are aware that the auditor is coming
)ro.edure Audits
This is an eamination and re,iew of internal procedures and records of the
organi-ation
The auditor obser,es the accounting system of the client to ensure that the records are
,alid, accurate and complete.
These audits seek to re,eal an economic procedure for correcti,e measures to be
taken
They are suitable where controls are not effecti,ely operational
They facilitate writing the management letter &1etter of Internal ?eaknesses+
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Advanta/es o! )ro.edure Audits
Aelps the management to know procedures that are not followed and why
Aelps the management to identify outdated and uneconomical procedures
They ensure effecti,e co;ordination of organi-ation acti,ities to boost profitability of
the company
They form the basis of writing the management to correct all weaknesses identified
Disadvanta/es o! )ro.edure Audits
They are difficult to carry out where the organisation has many procedures
They are epensi,e because the auditor will take a long time to familiari-e himself
with the procedures used
The management may frustrate the auditor by not re,ealing inefficiencies of
procedures leading to a biased audit opinion
ana/e*ent Audits
It deals with management of all le,els concerning their effecti,eness
The management is in,estigated from the point of ,iew of profitability and efficient
running of the business
Advanta/es o! ana/e*ent Audit
Aelps to impro,e the $uality of management of the business
Aelps in identifying how decisions are made
It re,eals the weakness of management in running the company
It does not interrupt company operations as fewer of its books are checked
Disadvanta/es o! ana/e*ent Audit
2ome top managers may not re,eal their inefficiencies leading to a biased report
2ometimes it kills the morale of managers instead of impro,ing it
&alan.e S4eet Audit
This audit starts with the balance sheet backwards to the books of original entry
0ocumentary e,idence &,ouchers+ are also eamined
Its suitable where internal controls are effecti,eBstrong
T4e auditor .4e.5s !or t4e !ollo6in/78
)8#resentation
To ensure that the financial statement is presented in accordance with IAs
A8aut4ori9ation
To ascertain the authority for ac$uisition of assets &minutes of a meeting and resolutions
passed are eamined+
D8Dis.losure:des.ri#tion
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To ensure that assets as outlined on the balance sheet are properly recorded and described
O8o6ners4i#
The auditor will eamine ,ouchers such as title deeds, log books etc to pro,e ownership
(8valuation
The auditor will compare the ,alue of the assets as recorded with the physical assets itself
E8e;isten.e
The auditor will physically eamine the assets to pro,e their real eistence
Advanta/es o! &alan.e S4eet Audits
They are not epensi,e because few entries are checked
They are suitable where internal controls are strong
It gi,es a balanced opinion because the balance sheet contains most important items
"hances of changing figures after the audit are minimal
Disadvanta/es
It's a partial audit and therefore not suitable for ltd liability companies
It is practical only for organi-ations with strong internal control system
The auditors liability may increase because of eamining few entries
Classi!i.ation a..ordin/ to user /rou#:#ur#ose o! audit re#ort
7inancial AuditBstatutory Audit
.perational AuditB%rocedure Audit
"ompliance Audit
Finan.ial Audit
The auditor independently eamines e,idence necessary for his audit work
7inancial audits ensure that the interest of shareholders are well taken care of
They are re$uired by the companies Act &2tatutory Audits+ and the auditor gi,es an
opinion on a true and fair ,iew regarding the financial statement as at a gi,en date.
O#erational Audit
They seek to establish whether company policies and procedures are followed
Their report is used by internal users
The results of an operational audit is a report on the strengths and weaknesses of the
system
5ecommendations for impro,ement are also gi,en to the management
@B8 .perational audits are simply procedure audits.
Co*#lian.e Audit
They are responsible for determining whether a particular set of laws or administrati,e
procedures are being followed
They can be performed either by internal or eternal auditors
They are mostly used by go,ernment agencies
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LEGAL AS)ECTS AND THE AUDITOR
The legal en,ironment of the auditor is go,erned by the "ompanies Act "ap 3(4 and the
Accountants Act "ap )='.
)ur#ose o! Le/islation
Co*#eten.e
1egislation ensures that a person meets basic re$uirements in terms of professional
$ualification before being allowed to practice as an auditor
Inde#enden.e
The auditors independence and security is enhanced by legislation e.g. in matters
concerning his appointment and dismissal
De!inition o! Dut+
The auditors duties and matters that should be co,ered in the audit report are defined
by legislation
Ri/4ts and O,li/ations
1egislation gi,es the auditor the rights and obligations in the performance of his
duties.
$uali!i.ation o! Auditors
7or one to $ualify to practice as an auditor in !enya he should fulfil the following
conditions of the Accountants Act "ap )=' of 'C>>8;
.ne must be a member of a professional body &I"%A!+
.ne must ha,e been registered by !2@#B and has passed the final le,el of "%A &!+
.ne must ha,e a post;graduate eperience in an auditing en,ironment &< years*
/ust be a holder of a practicing certificate issued by the registration Accountants
Board &5AB+
It could be anyone authori-ed by the registrar of companies who has a degree in
accounting and eperience in an auditing en,ironment
Dis"uali!i.ation !ro* ,ein/ Auditors
The following parties are not legible for appointment as auditors as outlined by 2ec '4'
of the "ompanies Act 3(48;
An officer or ser,ant of a company whose books are being audited
%ersons who are dis$ualified as auditors of the company's subsidiary or holding
company
A person who holds more than )E of the companies authori-ed share capital
Body corporate
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A 1imited "ompany cannot be an auditor because shareholders are many and they cannot
epress a personal opinion on the financial statement.
A##oint*ent o! Auditors
The auditors appointment is done in accordance with the re$uirements of the "ompanies
Act "ap 3(4 &2ec ')C+ and can be appointed in the following ways8;
A##oint*ent ,+ &oard o! Dire.tors
This is done in the following circumstances8;
Incase of the '
st
auditor of the company before the AG/
The auditor shall be appointed =* days after the registration of the company and
should o,ersee the company affairs until the net AG/
Incase of filling a casual ,acancy caused by the auditors death or incapacitation
"B# A casual (acanc$ created )$ the auditors resi&nation can onl$ )e filled )$
shareholders in the Extraordinar$ A*+ ,Ex-A*+. ,held earlier than other A*+s.
A##oint*ent ,+ s4are4olders in t4e AG
The shareholders during the AG/ can appoint the auditor to o,ersee the affairs of the
company from that AG/ to the conclusion of the financial period to the net AG/.
The outgoing auditor should be gi,en a <( days notice if shareholders ha,e intention
to ha,e him remo,ed from office
A resolution to appoint another auditor only calls for a simple ma9ority
The auditor can automatically be re;appointed in the following circumstances8;
7inances where there is no intention to remo,e him from office
If the pre,ious auditor has not gi,en a <( days notice of his unwillingness to continue
as auditor
If he has not committed or found in breach of professional misconduct
N&7 An auditor s4all !ail to ,e auto*ati.all+ re8a##ointed i!78
Ae is guilty of professional misconduct
Ae has gi,en a <( days notice of his unwillingness to be re;appointed
2hareholders ha,e gi,en a notice for a resolution to appoint another auditor
A##oint*ent ,+ t4e Re/istrar o! Co*#anies
The registrar would only appoint an auditor if8;
After conduction of the AG/ the shareholders ha,e not agreed as to whom is to be
the companies auditor
After such a disagreement, the shareholders ha,e not delegated duty to the Board of
0irectors to appoint one, then after > &se,en+ days from the conclusion of the AG/,
the registrar shall appoint an auditor for the company.
RIGHTS OF THE AUDITOR
5ight to access the books of account and records all the time
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5ight to information and eplantions that he considers necessary for the performance of
his audit assignment and epression of opinion.
5ight to recei,e notice&s+ of meetings e.g. <( day notice of the AG/ discussing remo,al
<' days notice to attend the AG/ in which
accounts are discussed
'3 days notice to attend #F;AG/ to discuss his resignation
5ight to attend any general meeting and to be heard in matters concerning him as an
auditor
5ight to remuneration pro,ided that he has completed his ?ork
@B8 ?here he is illegally remo,ed from office he has a right to be paid a whole years'
fee
5ight to be identified in cases where his name is tarnished by the client and where he has
incurred liabilities in his defense.
5ight to legal and technical ad,ice from eperts such as lawyers, engineers, ,aluers etc.
Aas rights during his remo,alBdismissal8;
5ight to be heard in the meeting discussing his remo,al
5ight to recei,e <( days notice of the AG/ discussing his remo,al
5ight to sewd his written representations to be made a,ailable to shareholders
5ight to read his representations in the AG/ discussing his remo,al incase they were not
sent to shareholders in good time.
DUTIES OF THE AUDITOR
The duty of an auditor is to generally report to shareholders on matters contained in the
>
th
schedule of the "ompanies Act "ap 3(4 of the 1aws of !enya
These matters include8;
0uty to make a report on a true and fair ,iew of the financial statement audited
0uty to epress an opinion on compliance to the statutory re$uirements
0uty to ensure that accounts prepared do comply with general accepted accounting
principles or practices
0uty to ascertain whether ade$uate returns ha,e been recei,ed from branches not
,isited by himBher
0uty to ascertain whether information eplanations ha,e been recei,ed
0uty to ascertain whether the client has kept proper books of account
ENGAGEENT LETTER
An engagement letter is a written confirmation to the acceptance of an audit assignment
and appointment by a statutory auditor in pursuance to his appointment and incompliance
with the re$uirement of the professional body &I"%A!+
It is the re$uirement of the professional body that an auditor should send an engagement
letter to his prospecti,e client
The engagement should be sent on or before commencement of an audit
The engagement letter spells out the statutory and professional duties of the auditor
It is a letter that formali-es the initial conduct between the auditor and his client
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The letter of engagement helps to minimi-e the risk of misunderstanding between the
auditor and client during the audit assignment
Contents o! t4e En/a/e*ent Letter
#planation of an Audit
2tatutory responsibilities of the auditor
%rofessional responsibilities of the auditor
"onformity to auditing standards and guidelines
@eed for the letter of representation from the management
A reminder to the management that their responsibility is to pre,ent and detect mis;
statements in the financial statement
The basis of charging audit fee
A note re$uesting the client to accept the letter
.ther ser,ices pro,ided by the auditor e.g. taationBaccountancy etc.
Cir.u*stan.es o! Sendin/ an en/a/e*ent Letter
It should )e sent to the client in the follo%in& circumstances
Ne6 Client
This is where a new client has appointed an auditor
E;istin/ Client
This is where the eisting client had not recei,ed the engagement letter initially
C4an/es in .ir.u*stan.es
This is where material changes ha,e taken place in the client's company which ha,e
significantly changed the duties of the auditor as outlined in the original engagement
letter
La#se o! ti*e
A re,ised engagement letter can be sent to the client after epiry of = years.
I)ORTANCE OF THE ENGAGEENT LETTER 1Need:)ur#ose2
It outlines the scope of work including the etent of the auditor's responsibilities
It helps to minimi-e misunderstanding between the auditor and the client
It is a written confirmation of the ,erbal agreement between the auditor and his client
It informs the client among other matters that it is his responsibility to detect and
pre,ent material misstatement in the financial statement and to maintain proper books
of accounts
Aelps to minimi-e the auditor's liability especially in pri,ate audits by outlining his
work.
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An engagement letter if re;affirmed by the client creates a contractual obligation
between the client and the auditor
It is a professional re$uirement that an auditor should rent an engagement letter to his
client on or before commencement of the audit assignment.
E;a*#le o! an En/a/e*ent Letter
.!?#@0A A@0 ".. "#5TI7I#0 %GB1I" A"".G@TA@T2
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NAIRO&I
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0#1.ITT# ".. 1T0
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NAIRO&I
0ear 2irB/adam,
RE7 ACCE)TANCE OF ENGAGEENT
The purpose of this letter is to outline the basis of which we are to act as companies
auditor. It therefore shows the areas of responsibility of the company and oursel,es on
the following8;
AUDIT AND OUR STATUTORY O&LIGATIONS
?e ha,e the statutory obligation to report to shareholders in our opinion8;
?hether proper books of accounts ha,e been kept by the company
?hether the company balance sheet and % and 1 account are in agreement with the
accounting records.
?hether we ha,e recei,ed all the information and eplanations we consider necessary
for our audit
?hether the information in the directors report is consistent with that in the audited
financial statement.
ANAGEENT RE)RESENTATIONS
As part of our audit, we shall re$uire written representations from the management which
ser,es as confirmation on their accuracy, ,alidity and completeness of the financial
statements as it is a re$uirement of the professional body &I"%A!+. The timing of this
representation shall be at the completion of the audit.
)RE(ENTION OF ERRORS AND FRAUDS
This is to inform you that the responsibility of the pre,ention and detection of errors and
frauds primarily rests with you. Aowe,er, we shall plan our audit in such a manner that
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we ha,e reasonable epectation of detecting material misstatement in the financial
statements.
AUDIT FEE
.ur fee shall be charged on the basis of the time spent on your affairs by the partners and
on the le,el of skills and responsibility in,ol,ed. The audit fee shall be build certain time
inter,als during the course of the audit and will be due on presentation.
ACCOUNTANCY AND OTHER SER(ICES
?here appropriate we shall undertake accountancy ser,ices and taation ser,ices to
ascertain the company's ta liability.
AGREEENT OF TERS
.nce accepted, this letter will remain effecti,e from one period to another until replaced.
?e shall be grateful if you confirm in writing your agreement to the terms of this letter.
Hours faithfully
(alle+ O56anda
OKWENDA AND CO% CERTIFIED )U&LIC ACCOUNTANTS
Failure to Re8a!!ir* t4e En/a/e*ent Letter
5e;affirmation of the engagement is where the clientBmanagement accepts, adopts or
appro,es and signs to the content of the engagement letter and the terms contained
therein.
In cases where the client's management ha,e failed to re;affirm the engagement letter,
the auditor should take the following actions8;
2eek for eplanations from the management for reasons of not confirming the letter
5e;consider the materiality of the information contained in the letter and its
importance
2end a reminder letter to the client's management
If still not re;affirmed decline the appointment
Dis*isal o! t4e Auditor
Irrespecti,e of who appoints him, the auditor can only be remo,ed from office by
shareholders.
/easons for auditors dismissal could )e#-
Breach of any professional ethics issued by I"%A!
Incapability of the auditor to perform his duty as per the engagement
Technical dis$ualification under the "ompanies Act
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)ro.edure o! Dis*issin/:Re*ovin/ t4e Auditor !ro* O!!i.e%
2hareholders wishing to ha,e the auditor remo,ed from office shall gi,e a '3;days
notice to the company
A special notice of <(;days is issued by the Board of 0irectorsB/anagement to the
outgoing auditor before the AG/
.n recei,ing this notice, the auditor shall send written representation to the company
.n recei,ing the written representations from the auditor the company shall circulate
them to the shareholders pro,ided they are recei,ed on good time.
In cases where written representations are not sent to shareholders the auditor has a
right to read them in the AG/ discussing his remo,al
The retiring auditor has a right to attend and speak in the AG/ discussing his
remo,al
0uring the AG/ discussing his remo,al, the auditor is dismissed or remo,ed by way
of ,oting and a simple ma9ority is re$uired for his dismissal.
Resi/nation o! t4e Auditor
%rocedure for the Auditor's 5esignation
The present auditor should tender his resignation letter at the company's head office
stating the date and time of resignation
The auditor should accompany the resignation letter with circumstances or reasons
eplaining why he is no longer willing to be the clients auditor
.n recei,ing the auditor's resignation letter, the management notifies shareholders,
creditors and the registrar of companies within '3 days.
The auditor then re$uests for an #;AG/ within <' days to discus his resignation. In
respect this #;AG/, the auditor has the following rights8;
5ight to re$uest for the #;AG/ to discuss his resignation
5ight to attend the #;AG/
5ight to speak in the #;AG/
The auditor shall tender his resignation under the following circumstances
0is$ualification from being the clients auditor as stipulated in the "ompany Act
7rustrations by the clients management &limitations in the scope of work+
/aterial changes affecting the client which the audit firm is not competent in handling
!nowledge of intention for his remo,al by shareholder will cause him to resign before
his dismissal.
Re*uneration o! t4e Auditor
The auditor's remuneration is a matter of right and it is fied by the parties that appoint
him.
!he auditor is therefore remunerated in the follo%in& %a$s#-
?here he is appointed by shareholders in the AG/, the same AG/ shall ha,e his
remuneration fied
If appointed by the Board of 0irectors the same board shall fi his remuneration
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?here he is appointed by the 5egistrar of "ompanies, the registrar shall fi his
remuneration in consultation with the Board of 0irectors
If automatically re;appointed he shall continue recei,ing the pre,ious remuneration
@B8 Aowe,er in practice company auditors are usually remunerated by the Board of
0irectors working within their delegated responsibilities.
T4e !ollo6in/ !a.tors are a.tive deter*inants o! t4e audit !ee78
Time re$uiredBspent in the client's business
The degree of responsibilities in,ol,ed
/arket rate for similar ser,ices
2kills and eperience re$uired
Technology re$uired
Audit risk in,ol,ed
Le/al Lia,ilities o! t4e Auditor
The auditor may be penali-ed for failing to applying reasonable care and skill
This could call for disciplinary action by the professional body I"%A! or it could take
ci,il or criminal proceedings
!he auditor0s le&al lia)ilities can )e classified as follo%s#-
Auditors liability under pri,ate audits
2icne they are not legally re$uired the auditors scope of work is limited to the etent
of the agreement between him and client
The auditor's liability shall therefore depend on the contractual obligation based on
the agreement
The auditor shall not be held liable should he fail to ascertain accuracy, ,alidity and
completeness of accounts not specified in the agreement.
Ae should therefore approach his work in a manner that shall minimi-e his eposure
to chances of negligence
Should the auditor )e accused of ne&li&ence1 the follo%in& should )e ascertained )$ the
parties accusin& him#-
That the auditor was negligent to the initial agreement
That as a result of his negligence the client suffered loss
That the financial loss was suffered by a person who had a contractual obligation with
the auditor
In his report the auditor should therefore caution that the audit should not be relied upon
by any =
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parties to make in,estment decisions.
This is due to limitation of scope of the auditor's work which is a characteristic of pri,ate
audits
Auditor<s lia,ilit+ in Statutor+ Audits
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In statutory Audits the auditor's scope of work, rights and duties are go,erned by the
"ompany Act.
The auditor owes a primary duty of care to his client with whom he has a contractual
obligation.
Aowe,er, ci,il liabilities against the auditor may etend to =
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parties with no contractual
obligation but to whom the auditor owes a duty of care.
!he part$ %ho suffers loss can claim from the auditor pro(ided he pro(es the follo%in&#-
That the auditor was negligent
That as a result of his negligence the client has suffered financial loss
That the financial loss suffered in material and can be $uantified
!hird parties could hold the auditors lia)le if the$ can pro(e#-
That the statement made by the auditor was untrue
That the auditor knew that statement was untrue
That =
rd
parties relied on it and suffered financial loss
That the auditor ga,e consent for the statement to be published
!he auditor can )e lia)le to 3
rd
parties under the follo%in& circumstances
That the party relied on the financial statement and suffered financial loss
?here it can be pro,ed that the auditor did not eercise professional care and skill
?here it can be pro,ed that the auditor was aware that the report could be relied upon
by =
rd
parties for in,estment decisions
?here the auditor did not put a disclaimer opinion to stop reliance by =
rd
parties
?here it can be pro,ed that =
rd
parties actually relied on the statement
If the auditor finds out that there was a misstatement after signing the prospectus, he can
withdraw his consent in writing before the prospectus is issued or published
The auditor should ha,e supporting e,idence as to how such a report is issued
The auditor should attach a disclaimer that he is unable to form an opinion as caution to
report users.
Ae should properly document his audit work for it will act in his reference in the court of
law
Ae should use reasonable duty of care and skill during the course of his work &audit+
A.tions Ta5en ,+ Individual Auditors to ini*i9e Lia,ilities
Ae should employ suitable and properly trained staff with re$uired competence and
skills
Ae should follow IAs and I2A issued by the professional body I"%A!
Ae should ensure that an independent attitude is maintained at all times and
ob9ecti,ity adhered to in the course of the audit
Ae should record his work properly and keep all letters of representation from the
management
Ae should define well his responsibilities in the engagement letter
Ae should seek for professional ad,ice where necessary in areas of difficulty
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Ae should insure himself against audit liabilities which would reduce the financial
conse$uences of such liabilities.
LIA&ILITY OF THE AUDITOR UNDER CRIINAL LAW
Case Stud+7 Re; (s% K+lsant and oorland 0=>0 1UK2
"riminal proceedings were brought against the auditor in this particular case.
The chairman and auditor were accused of8;
That the chairman had issued a false annual report to shareholders with the intention
to decei,e not only shareholders but also other stakeholders
The auditor was also accused of being guilty of abetting and auditing the issuance of
a false report. Both the chairman and the auditor were ac$uitted of charges but the
chairman on further charge was found guilty of publishing a prospectus which he
knew was false in material terms. "onse$uently, the auditor's criminal liabilities were
defined to arise out of the following8;
If the auditor alters, falsifies, mutilates or destroys or is pri,y to allegations of
falsification, mutilation or destruction of any books of accounts, ,ouchers or statements
If he makes a statement which is false in material terms knowing it to be false
If he makes or is pri,ing to making of fraudulent entries in the companies accounts,
,ouchers or registers.
If the auditor willfully contra,enes any pro,isions of the "ompanies Act which under
normal circumstances he is supposed to follow in the course of his audit work e.g.
If he fails to re$uest for returns intentionally
If he does not use professional skill and care
If he is aware of a material statement that has been omitted in the report or e,en in the
prospectus but does not re,eal this fact
"B# In the a)o(e circumstances the auditor ma$ )e fined or imprisoned for a term not
exceedin& 2 ,se(en. $ears or )oth and after such a term1 his certificate ma$ )e nullified
and expelled from the profession alto&ether.
Cir.u*stan.es7 7ined
Imprisoned for > years
@ullification of "ertificate
#pulsion from the profession
STE)S TAKEN &Y THE )ROFESSION TO REDUCE AUDITORS RISK
Issue of accounting standards and guidelines
This pro,ides the auditor with the rules of measurement and disclosures aimed at
reducing error 9udgement
Issue of Auditing 2tandards and guidelines to enable the auditor practice according to
standards of Auditing
Issue of Guidelines on #thical "onduct and Independence
Gse of 0isciplinary "ommittees
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"ontrol of issuing practicing certificates to make sure that only those who meet
minimum re$uirements are allowed to practice
Gse of continuous professional education to help the auditors maintain their
competence all the time
)ro!essional As#e.ts and t4e Auditor
)ro!essional Et4i.s
This is a set of rules and regulations imposed by a professional body to its members to
go,ern their practice
To the practicing accountants, the rules and regulations are imposed by I"%A!
A member of a profession owes duty to the public industry those that ha,e employed him
Ae also owes a duty to the profession itself
This duties may at times be contrary to his personal self;interests
The professional ethics help to regulate the conduct of members in order to beha,e as
professionals who act abo,e personal interests
I*#ortan.e o! )ro!essional Et4i.s
5egulation of beha,iour and conduct of members
%rofessional #thics enables members in public practice to beha,e in a manner
acceptable to that profession
0iscipline
#thics are meant to distill discipline among members of the profession to enhance
the image of the profession
Achie,ement of .b9ecti,es
In the absence of professional ethics the auditor in public practice may engage in
acti,ities that are against achie,ement of audit ob9ecti,es
#thics therefore helps to keep the auditor focussed in approach to his audit work
%roduction of /embers
#thics protect members of a profession from accusations of members of the public
The auditor who does not contra,ene of be in breach of professional ethics is not
likely to face accusations from members of the public including his client
It is a professional re$uirement that each profession should ha,e rules to go,ern
its practice hence enabling the professional body to take disciplinary actions
against its members who are found guilty of professional misconduct.
Gniformity
%rofessional ethics enhance uniformity in reporting
0ifferent auditors gi,en the same information from a client are epected to
produce similar reports as long as they adhere to professional ethics
%ublic image
1ike any other profession, accountancy takes public criticism should members of that
profession beha,e in a manner that negati,ely reflects on the profession.
The image of the professional body is also tainted
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In order to safeguard its image, its important for a professional body to ha,e ethics
acceptable to that profession.
ETHICAL STATEENTS )U&LISHED &Y )ROFESSIONAL &ODY IC)AK
An auditor should not misrepresent facts knowingly
Ae should not surbodinate his 9udgements to others
Ae should not accept an engagement which he cannot complete with competence
Ae should not allow his name to be associated with financial statements which he
has not audited in such a manner as to imply that he has conducted such an audit
while he has not.
Ae should ne,er epress an opinion that financial statements agree with the
G.A.A%s when they are not.
Ae shall ne,er undertake a ser,ice for free or at a fee which will depend upon a
gi,en finding or results of his audit
An auditor should not pay commission to obtain clients
The auditor should not commit an act that discredits the profession
INTEGRITY
An auditor should be honest, sincere and straight forward, in his approach to
professional work by a,oiding actual and apparent conflicts of interests.
'*. CONFIDENTIALITY
The auditor should maintain top secrecy in regard to his clients affairs
The auditor is under legal obligation not to disclose any information in the course
of professional work.
?hen he disco,ers unlawful acts, usually he is not epected to disclose them to
the police or other authorities unless8;
The client authori-es the disclosure
Gnless the disclosure is completed by a process of law &court order+
Gnless the disclosure is re$uired in the auditor's own defense
Gnless the circumstances are such that the auditor has a public duty to disclose
If non;disclosure will affect true and fair ,iew, then insist on disclosure or $ualify the
audit report
NB: Gpon disco,ering by an auditor of any unlawful acts, he should do nothing positi,e
to assist in the offence or to pre,ent its disclosure.
CO)ETENCE
The auditor's degree of competence to perform his duty should not be doubted
In cases where the auditor has inade$uate knowledge pertaining to some matters in the
course of his audit, he should consult an epert
O&'ECTI(ITY
The auditor should communicate the information fairly and ob9ecti,ely by disclosing all
rele,ant information that could reasonably influence the users understanding of the
financial statement.
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The auditor should therefore approach his work with a ,iew of being free from bias in his
report
AD(ERTISING AND )U&LICITY
A firm of practicing accountants is not allowed to ad,ertise publicly to obtain clients.
Aowe,er, ad,ertising can be done under the following circumstances8;
?hen seeking for employees
?hen informing the clients or the public in the conduct address
?hen opening or closing down a branch
?hen in need of epert ad,iceBepertise knowledge
?hen ad,ertising for their clients
CHANGE IN )ROFESSIONAL A))OINTENT
The incoming auditor should seek for permission from the client to communicate with the
outgoing auditor. ?here permission is granted, the incoming auditor should write to the
outgoing auditor re$uesting him of any necessary information
The obtained information enables the incoming auditor to consider whether or not to
accept the appointment
Before replying to the incoming auditor, the outgoing auditor should also seek for
permission from the client and where such a permission is denied, decline the
appointment
INDE)ENDENCE
Independence in the contet of auditing means free from the influence of the
management
Independence is the central pillar in auditing
Fa.tors I*#airin/:Destru.tin/ t4e Auditor<s Inde#enden.e
The auditor's independence is impaired or undermined if8;
The audit fee is paid by the client's company
If the auditor owns shares in the clients company
If the auditor gi,es loans or recei,es loans from the client's company
If the auditor is related to the client's management either by blood or marriage
If the auditor is an employee of the company or employs the employee of the
company
If the auditor is employed by a group of related companies
If the auditor is in partnership with an officer of the company
If the auditor recei,es gifts from the client's company
If the auditor has audited the books of the company for many years
Fa.tors t4at .an i*#rove t4e auditor<s inde#enden.e
The following factors can impro,e the auditors independence8;
If the auditor is financially independent or if the auditor's fee comes from another
source other than the client
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If the audit appointment is rotated e,ery after a few years to a,oid o,er;
familiari-ation with the client
If the audit process is re,iewed for $uality by an outside agency
If the auditor limits the pro,ision of other ser,ices to the clients to a,oid conflict of
interests
If auditing techni$ues are sufficiently de,eloped to deal with the client's high
technology system
If the audit firm is sufficiently large to the etent that loss of any indi,idual client
would not be material to the audit firm
Need !or auditor<s inde#enden.e 1I*#ortan.e2
The profession re$uires the auditor to be independent to enable her epress a balanced
opinion on the financial statements
An audit is an independent eamination and therefore, the persons conducting it must
also be independent of all parties with financial state in the company
The independence of the auditor is the re$uirement of the "ompany Act "ap. 3(4
sec.'4'. As a result, the "ompany Act dis$ualifies some parties from being auditors due
to lack of independence
The auditor is an agent of shareholders and performs his duties as a watchdog therefore6
he must be independent of the directors
=
rd
parties re$uire that the auditor should be independent if his opinion is to safeguard the
interests in the company.
It's a professional re$uirement by a professional body &I"%A!+ that the auditor must be
independent.
CLASSIFICATION:TY)ES OF INDE)ENDENCE
The auditor's independence can be classified in = types
)ro/ra**in/ Inde#enden.e
This is freedom from control or undue influence in the selection of audit
techni$uesBmethods and procedures and how such a procedure should be applied
Incase of computeri-ed accounting, the auditor should ha,e freedom to de,elop his own
programs and steps to be included including the amount of work to be co,ered.
Aowe,er, this must be done within the terms of the engagement.
Investi/ative Inde#enden.e
This is freedom from undue influence in the selection of areas acti,ities and management
policies to be eamined
This re$uires that any legitimate source of information should be accessed by the auditor
and must not be influenced by the management while eamining the areas identified.
Re#ortin/ Inde#enden.e
This is freedom from the influence of the management in the statement of facts re,ealed
by one's eamination of the financial statement.
This could include recommendations or epression of opinion as a result of the
eamination.
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)ROFESSIONAL ISCONDUCT
%rofessional misconduct is a breach of professional ethics issued by the professional body
I"%A!.
The accountants Act "ap )=' of the 1aws of !enya deals with such breaches as follows8;
2ec. =* pro,ides that I"%A! should in$uire into a members failure to obser,e the
professional ethics
2ec.=' pro,ides that the council of the institute should refer such a member to a
disciplinary committee to ascertain the nature of punishment to be accorded to the
member who is guilty of breaching the professional ethics.
2ec.=< pro,ides that the disciplinary committee should refer such a matterBmember to the
5egistration of Accountants Board &5AB+ for the implementation of actions
recommended by the disciplinary committee
T4e !ollo6in/ a.tions .an ,e ta5en a/ainst a *e*,er78
?ithdrawal of a practicing license
@ullification of the professional certificate of a member
0e;registration of the member from the board
$UALITIES OF AN AUDITOR
The auditor should ne,er pass a transaction unless it is correct
Ae should ne,er be influenced directly or indirectly by others in the attempt to change his
opinion
Ae must be well ,ast with all branches of accounting e.g 7BA, costing, and /anagement
Accounting
The auditor should be willing to resign instead of signing a wrong balance sheet which
will epose him to liabilities
Ae must be accurate, ,igilant and methodical in the course of the audit assignment
Ae should be prepared to hear arguments as a source of audit e,idence which will
strengthen his opinion
Ae should ha,e professional common sense in his obser,ations, inter,iews and all
aspects that affect his opinion
Ae must be familiar with commercial and company law
Ae should be honest or should be a person of un$uestionable integrity and should not
certify as true what he does not belie,e to be true
STAGES OF AN AUDIT
GENERAL A))ROACH TO AN AUDIT
2pecific procedures for conducting an audit ,ary from audit to audit
Aowe,er, all audits show a common approach
T4e !ive /eneral ste#s:sta/es o! an audit are78
!nowledge of the "lient and Audit 2ituation
7or proper audit eamination the auditor must ha,e good knowledge of the client
&auditee+
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Ae must also understand the clients industry
This knowledge enables the auditor8;
To know how the industry operates
To know what types of assets and acti,ities to epect
To know what le,el of profitability is epected
To know specific laws or accounting principles
Gnderstanding of the audit situation helps the auditor to know8
?hether the business is newly opened or well established
To know if the client has many or few competitors
To know if the client operates in a high or low income community
Aowe,er, much of the information about the client are obtained by re,iewing the audit
working papers of the pre,ious periods that are in the possession of the outgoing auditor
Ot4er sour.es o! /ainin/ an understandin/ o! t4e .lient in.lude78
5eading client's stories in trade 9ournalsBmaga-ines
5eading industry publications written about the industry
Taking formal courses about the industry
"ommunicating with pre,ious auditors of the client
Inter,iewing the client's management and employees
Touring the clients operations for personal obser,ation
Assess*ent o! Ris5 and aterialit+
In larger organi-ations, it is possible for the auditor to ,erify each transaction for this
would be epensi,e and time consuming
Also, an audit report loses its ,alue if it is not timely
The auditor should therefore focus on areas of great risk and of greatest importance to
report users
2uch areas are where most problems are likely to be found and which are likely to be
material to =
rd
parties.
)lannin/ t4e nature? e;tent and ti*in/ o! tests
@ature of tests refers to specific procedures to be performed by the auditor
They usually ,ary with the nature of the industry
#tent of tests refers to the amount of testing to be performed or how far the auditor
should go &scope of work to be co,ered+
Timing to tests refers to the period far from close to the AG/
The auditor should therefore de,ote time on the nature, etent and timing of tests.
The auditor's usually write their audit plan in step by step listing called Audit
%rograms
Gat4erin/ o! Eviden.e
#,idence is gathered by performing the procedures in the audit program
The procedures could6 counting of stock, ,erification of assets and accuracy of
calculations
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"ollected e,idence should be recorded in audit working papers
The work of the audit staff should be re,iewed by the audit seniors or super,isors
If necessary, the <
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partner should also re,iew the work
The re,iewing pro,ides a system of $uality control within the audit firm
Iuality controls enhances epressions of a balanced audit opinion
Interpretation of #,idence, 5eading a "onclusion and %reparation of a 5eport
7inancial audits end with a report epressing an opinion on a true and fair ,iew.
.perational Audits end with a report on the specific strengths and weaknesses of Internal
"ontrol 2ystem
The recommendations for impro,ement are also reported at this stage
"ompliance audit end with a report on compliance to specific laws and regulations
SYSTES &ASED A))ROACH
The systems approach of auditing is where the auditor approaches the tasks of forming an
opinion on a true and fair ,iew of financial e,idence by8;
Gndertaking a planned re,iew of financial control systems
.btaining e,idence about the efficiency of those control systems
5e,iewing and testing the financial statements produced by those controls
The systems Approach is recommended for all statutory audits. In a 2ystems Based
Approach an audit consists of the following stages8
Audit, %lanning, "ontrolling and 5eporting
The auditor's operational standards state that, the auditor should plan, control and record
his work ade$uately.
!his aspects helps the auditor#-
To minimise the risk of losing control
"onduct the audit effecti,ely and economically
Aelps the auditor to be focused on the audit ob9ecti,es
Aelps the auditor to record the auditing process
Ascertainment and E(aluation of 3ontrol S$stems
Ascertainment of the 2ystem helps the auditor to identify financial information channel
while e,aluation helps the auditor to understand the $uality of information produced by
the channels
!estin& the S$stems and their 4utput
Testing pro,ides e,idence to the preliminary e,aluation of the system
?here weaknesses are identified correcti,e measures can be taken by the client
7urther audit planning could also be done by the auditor should be reali-e that weakness
are many
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*atherin& Audit E(idence
It in,ol,es termination of the le,el and si-e of system e,aluation
The e,aluation could include8 statistical test, physical counts &,erification+ and =
rd
party
en$uiries.
Revie6in/ t4e Finan.ial State*ents
This in,ol,es testing of indi,idual items in the financial statements which could also
in,ol,e carry out of analytical re,iew procedures.
/eportin& Audit 4pinion to Shareholders
This in,ol,es weighing audit e,idence against the statutory re$uirements and auditing
standards.
An opinion on a true and fair ,iew is drawn on the financial statement
AUDIT RISK A))ROACH
An audit report is relied upon by many parties to make in,estment decisions.
Therefore, if the auditor gi,es an audit opinion which is wrong then both the auditor and
the user stand a chance of the auditor suffering damages as a result of gi,ing wrong
resultsBopinion or8;
It is the possibility that the financial statements contain material misstatement which had
escaped detection by both internal controls which the auditor relied on and the auditor's
own substanti,e tests.
It can also be looked at as the possibility that the auditor may be re$uired to pay damages
to the client and other parties as a result of8
7inancial statements containing misstatements
The complaining party suffering loss as a direct conse$uence of relying of the financial
statement
As a result of negligence by the auditor for not detecting and at the same time not
reporting misstatements identified.
All audits in,ol,es and element of risk irrespecti,e of how strong the controls are and the
nature of audit e,idence obtained. There is always a possibility of error or fraud going
undetected howe,er careful the auditor may be.
TY)ES OF AUDIT RISK
I% NORAL AUDIT RISK
Audit risk can either e normal or higher than normal
The following indicators show a normal audit risk6
The client ha,ing management and staff who are competent and who ha,e
integrity
?here the client has an accounting system that is sub9ect to the strong internal
controls
?here the client has no financial problems
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?here Board of 0irectors are acti,ely in,ol,ed in pro,iding $uality leadership
?here the clients business is firmly established and not sub9ected to fre$uent
changes
If the organi-ation has an audit committee
?here the auditor is faced with normal audit risk, the audit approach adopted is usually
one of reliance of key controls supported by subsistence tests
AUDIT COITTEE
It is a sub;committee of the Board of 0irectors consisting of ma9ority of independent,
non;eistence directors
It assists the directors to fulfill their responsibilities effecti,ely concerning financial
reportingBcontrol.
O,-e.tives o! Audit Co**ittee
To promote the accuracy, reliability, credibility of the companies financial
reporting
To ensure that proper accounting and internal control procedures are maintained
to protect the "o. assets.
To deal with any other responsibilities assigned to it by the #ecuti,e of
0irectors.
Advanta/es o! Audit Co**ittee
It enhances the independence of internal audit department
It impro,es the $uality of work done to enhance eternal auditors reliance on the
work done by internal auditors.
It promotes communication between directors, internal auditors, management
It helps in the impro,ement of controls in the company
It re,iews the financial statement the financial statement ob9ecti,es effecti,ely
inorder to impro,e the $uality of financial reporting and public confidence in the
financial statements
It enables non;eecuti,e directors to become deeply in,ol,ed in the "ompany
affairs.
Disadvanta/es
It creates conflicts within the "ompany
It may split the Board of 0irectors of 0irectors
If encroaches on management responsibilities
%reparation of financial statements may delay
Its epensi,e in terms of time and cost
They don't ha,e real power and therefore their recommendations may be ignored
/ost organi-ations do not ha,e non;eecuti,e directors
II% HIGHER THAN NORAL AUDIT RISK
/ost audit assignments in,ol,e higher than normal audit risk and in any client's work
there is always atleast one area ha,ing higher than normal audit risk
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Indicators that an audit has an element of higher than normal audit risk include8
%oor management with lack of controls and poor book;keeping
?here the organi-ation faces many financial problems
?here there are fre$uent changes in the controls and key staff
?here there are fre$uent changes in the accounting procedures
@o new inno,ations
.,er;reliance on few productsBcustomersBsuppliers
In the abo,e situations the auditor should approach his work by8;
5elying on high calibre staff
"ollection of audit e,idence in each area from a wide range of sources
Taking etreme care in the in the preparation of audit working papers
In,estigating thoroughly high risk and problematic areas
#ercising etreme care in drafting the audit report
It is important therefore that the audit firm should organi-e itself in such a way as to
minimi-e the risk of suffering damages.
The auditor can take the following measures8;
%roper recruitment and training of all stuff
Allocating responsibilities to the audit staff in areas where they can handle
without problems
%lanning the audit well in ad,ance so that it can be approached in a relaed and
disciplined manner
Gse of audit manuals that conform to audit standards and guidelines
Gse of updated letters of engagement
#ffecti,e briefing of the audit staff before starting the assignment
#mphasi-ing on materiality and use of ade$uate sample si-e
5e,iew the work done properly at e,ery stage of the audit.
INHERENT RISK
This is the risk that occurs within the entity and its en,ironment before establishment of
internal controls
CONTROL RISK
This is the risk that the errors will not be pre,ented or detected by the implemented
internal controls of the client.
DETECTION
This is the risk that material errors which ha,e not been detected by the established
internal controls systems will still not be detected by the auditors substanti,e tests.
ANALYTICAL RISK
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This is the risk that analytical re,iew procedures used by the auditor will not detect
material errors.
O(ER(IEWING OF THE AUDIT )ROCESS
@egotiation with client
"ommunication with pre,iousBoutgoing auditor
#ngagement letter
2election of method of approach
In,estigation of internal control system
/anagement 1etter
"ompare 7inal Accounts with 5ecords
Ascertain a true and fair ,iew
.btain 5epresentations 1etter
0raft and 2ign 5eport
COUNICATION WITH )RE(IOUS OR OUTGOING AUDITOR
5easons for "ommunication
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To know the reasons why the pre,ious auditor is no longer the client's auditor
To obtain information on areas of weakness
To get assistance for returns from branches ,isited by the outgoing auditor
It is a professional re$uirement to do so
Its an act of courtesy to do so
ACCE)TANCE OF A))OINTENT 1NEW CLIENT2
There are se,eral factors to be considered or steps to follow before accepting an
appointment from a new client8;
T4e .a#a.it+ o! t4e .lient
This helps the auditor to ascertain whether the client has resources enough for the audit
assignment
Co**uni.ation 6it4 t4e out/oin/ auditor
This enables the auditor to obtain more information inorder to understand the client and
where permission is denied by the client decline the appointment.
Statutor+ Re"uire*ents
The auditor should ascertain whether his appointment meets the re$uirements of the
"ompanies Act.
Relations4i# 6it4 t4e Client
The auditor should ascertain whether the audit firm is related to the client in terms of
blood relations with the management, financial relations, or ac$uisition of shares by the
auditor from the clients company
Co**uni.ation 6it4 t4e .lient
The auditor should then communicate with the client officially by sending an engagement
letter.
Client<s Co*#an+ In!or*ation
The auditor should obtain a list of names of the companies responsible officers e.g. Board
of 0irectors, "hief Accountant and their signatures.
Dis.ussion 6it4 t4e Client
The auditor should then discuss with the client matters pertaining to the audit eplaining
his obligations as auditor and the need for corporation from the clients management
during the audit assignment.
E;a*ination o! t4e A..ountin/ S+ste*
The auditor should then eamine the accounting system including internal controls with a
,iew of reporting the weaknesses and as a basis of planning the audit assignment.
O,tainin/ 6ritten state*ents !ro* t4e .lient
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In cases where the client informs the auditor that the internal control system is ,ery
strong, the auditor should obtain a written representations to that effect.
Fillin/ o! (ou.4ers
The auditor should inform the client to file all ,ouchers in order of their occurrence.
E;a*ination o! e*orandu* and Arti.les o! Asso.iation
These documents help the auditor to know whether company operations are in agreement
with the purpose of incorporation
Incase of the '
st
Audit the auditor should in,estigate the prospectus and obtain a note
from the promoters
)re#aration o! Audit )ro/ra*
The auditor should then prepare the audit programBplan and commence his audit
assignment.
ACCE)TANCE OFA))OINTENT 1E@ISTING CLIENT2
The following matters should be considered before an auditor accepts appointment from
an eisting client8;
/atters arising since the pre,ious audit
The auditor should ascertain matters pertaining to changes affecting the client since
the pre,ious audit, he should therefore discuss such matters with the responsible
officers of the company.
The auditor should ascertain whether the client has material changes in respect of
industrial and economic de,elopment.
In cases where there are material changes, the auditor should sign as re,ised
engagement letter before commencement of an audit assignment
The auditor should ascertain whether there are changes in accounting auditing
standards affecting his client as a result of new changes instituted by the management.
The auditor should then ascertain staff re$uirements to cope with the changes if any.
It also helps the auditor to know whether to know whether to reduce or increase audit
staff in comparison with the pre,ious audit.
The auditor should plan his work to accommodate the changes that ha,e taken place
since the pre,ious audit.
AUDIT )LANNING
The auditor's operational standards that, JThe auditor should ade$uately plan, control and
record his workJ this is done to ensure that an audit is carried out effecti,ely and
efficiently.
The need to plan, control and record the audit eists irrespecti,e of the si-e of the
business.
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Audit planning is an ad,ance organi-ation of policies, procedures and the audit staff by
the audit manager in respect of the audit work before commencement of the audit
assignment.
7or effecti,e planning, the audit 9uniors should be pro,ided with an audit planning
memorandum. An audit planning memorandum is a written notification of the audit
progress from the audit manager to the audit staff.
It ser,es the following purposes8;
It informs the audit staff on the nature, etent and timing of the audit assignment
It's a basis of maintaining the auditors note book
It is a way of recordingBdocumenting of the audit work
The audit planning /emorandum contains the following information8
7ied assets of the company
2tock in trade and work in progress
Accounting policies used by the client
Ade$uacy of the client's internal control system
AUDIT )ROGRAE
An audit programme is a step by step breakdown of the audit work to be performed by
the audit staff from the beginning until the end of the audit assignment. Audit programs
pro,ide guidance to the audit work.
There are three types of audit programmes8
)RE8DETERINED AUDIT )ROGRAES
They are prepared for all clients whether small or large businesses
They co,er all areas of an audit
)ROGRESSI(E AUDIT )ROGRAES
They are prepared by managers and audit assistants in charge of the audit
They usually progress as the work progresses and they co,er only some areas of the
audit.
INDI(IDUAL AUDIT )ROGRAES
They are prepared by eperienced audit staff and are limited to areas of eperience for a
particular audit assignment.
AUDIT )LANNING )ROCEDURE
RE(IEW
5ead through the pre,ious year files and ascertain the nature of work co,ered and the
problem areas identified.
CONSULTATION
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The auditor should then consult the management on any significant mattersBchanges
affecting the client since the pre,ious audit.
COR)ORATION FRO ANAGEENT
The auditor should then ascertain the degree of corporation epected from management
and internal audit staff.
IDENTIFICATION OF AUDIT STAFF
The auditor should then identify audit staff to be engaged in the assignment. This should
be done considering the numbers le,el of skills and eperience of the audit assistant
&RIEFING
The audit staff should be briefed on particular areas of the audit e.g. work to be co,ered,
likely problems to be encountered during the audit as indicated in the audit planning
memorandum of the outgoing auditor.
Audit staff are also allowed to make their contribution.
%reparation of a comprehensi,e audit planning memorandum which should contain all
areas of the audit and a summary of what is to be done by each member of audit team.
NEED:I)ORTANCE OF AUDIT )LANNING
Achie,ement of .b9ecti,es
#ffecti,e planning enables the auditor to achie,e the ob9ecti,es of the audit
0irection and control
%lanning helps the auditor in determining the direction that the audit will take and
controlling of the work
This enables the auditor to minimi-e his eposure to audit risks
It helps to ensure that the auditor gi,es attention to critical aspects of the audit
Ade$uate planning facilitates conclusion of the audit work since all areas are
accommodated in the audit plan
It is a professional re$uirement that the auditor should plan, control and record his
work in accordance with the auditor's operational standards
LIITATIONS OF AUDIT )LANNING
1ack of corporation from the clients management and other responsible officers of the
company6 may lead to failure of getting necessary information re$uired by the auditor
for proper audit planning.
Audit firms usually ha,e a high staff turno,er due to mo,ement of employees from
such firms as a result of poor remuneration hence ad,ersely affecting audit planning.
"ompleity of the client's business
2ome of the businesses and operations of the client could be so complicated that the
auditor may fail to ade$uately plan audit procedures which may epose him to risks.
2imilar year ends
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In cases where the audit firm engages different clients who prepare accounts on
similar year ends. The auditor may fail to ade$uately plan for all clients.
"hanges in the client's business may affect audit planning especially if the audit team
is not competent enough to deal with the new changes instituted by the
managementBclient.
AUDIT CONTROLLING
Audit controlling is the process by which the super,isorBmanager
delegatesBdirectsBsuper,isesBre,iews and documentsBrecords the audit work during the
audit assignment
It is the duty of the audit manager to ensure that work is being performed to acceptable
standards
Audit controlling therefore in,ol,es the directions and super,ision of audit staff in order
to ensure compliance with the firm's $uality controls.
AUDIT CONTROLLING )ROCEDURE
7or effecti,e controlling of the audit work the following procedures should be adopted by
the auditor.
Dele/ation o! t4e Audit Wor5
0elegation is the process by which the audit manager allocates the audit work to the audit
staff.
The manager should therefore ascertain the number of personal re$uired for a particular
assignment.
7or proper delegation the audit manager should match the rele,ant audit work with
$ualification and eperience of audit 9uniors.
N&7 0elegation is basically allocation of work
Dire.tion o! Wor5
This is the process by which audit manager gi,es proper instructions to audit 9uniors on
how to effecti,ely perform the audit assignment.
7or effecti,e direction, the auditor should pro,ide rele,ant, reliable and sufficient audit
instructions to the audit staff.
The auditor should also make a,ailable the audit planning memorandum to the audit staff
during the direction or instructions phase.
NB: 5irection is )asicall$ &i(in& of instructions
Su#ervision o! Wor5
This is where the audit manager monitors the performance of the audit staff
7or proper super,ision, the auditor should compare the work being performed with the
audit programs and instructions gi,en
2uper,ision if properly done helps the auditor identify de,iations from the epected and
correcti,e measures can be taken.
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@B8 2uper,ision is simply monitoring performance
Revie6 o! 6or5 done
This is where the audit manager analyses and interprets the work done before it is
recorded and documented.
7or effecti,e re,iewing the auditor should thoroughly compare work done with standards
of $uality and the audit program used.
Any material differences in the performance should be ascertained and eplained
5e,iewing helps the auditor to ensure that work was ade$uately performed.
@B8 5e,iewing is simply measuring the $uality of work done in relation to $uality
standards.
Do.u*entation o! 6or5 done
This is where the auditor records the audit work after it has been super,ised and properly
re,iewed.
0ocumentation helps the auditor in epressing a balanced audit opinion on the financial
statements
0ocumentation is simply recording of work done.
NEED:I)ORTANCE OF AUDIT CONTROLLING
Allocation of work
"ontrolling enables the auditor to allocate work to the audit staff with appropriate
training and eperience.
"ontrolling enables the audit staff to understand their responsibilities through gi,ing
of instructions
Ade$uate audit recording enhances effecti,e recording of work done through audit
working papers
"ontrolling is necessary for re,iewing of work done by the audit staff
"ontrolling facilitates successful completion of audit assignment
"ontrolling promotes the $uality of work carried out through proper super,ision.
2pecial attention
The final stages of an audit are usually stressing to the auditor this is because some
critical areas re$uire special attention.
"ontrolling therefore ensures that mistakes do not occur and that special areas are
gi,en attention.
AUDIT CONTROLLING AND $UALITY CONTROLS
Iuality controls are the policies and procedures established by the audit firms to
pro,ide assurance that the audit work is performed in accordance with the auditor's
operational standards and guidelines.
Iuality controls helps the audit firm to minimi-e its eposure to audit risks
The auditing guidelines on $uality controls pro,idesBstates that8
#ach audit firm should establish $uality controls appropriate to its circumstances
which should be communicated to all partners and rele,ant staff
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There should be procedures in the firm to ensure that all members adhere to principles
of independence, integrity, ob9ecti,ity, and confidentiality as pro,ided by the
professional body I"%A!.
The audit firm should ha,e staff who ha,e the skills and competence re$uired to fulfil
their responsibilities.
NB: Iuality controls enables the audit firm to determine, the nature etent and timing of
audit tests to be performed.
Y)ES OF $UALITY CONTROLS
)ersonal $ualities
The audit firm should engage persons with independence, integrity, ob9ecti,ity and
confidentiality.
They help the firm in the implementation of $uality controls
Before Acceptance of another client, considerations should be gi,en by the audit firm to
ensure that the new client does not ad,ersely affect the eisting client.
Dire.tion and Su#ervision
The audit manager should ade$uately control the audit work by use of audit programs
timetables and instructions gi,en should be comprehensi,e enough to enable the staff to
perform their work ade$uately.
Ins#e.tion
The audit staff should where possible inspect the clients, assets and other balances to
ascertain presentation, authori-ation, disclosure, ownership, ,aluations, eistence.
The audit firm should engage people that ha,e ade$uate knowledge, skills and eperience
re$uired to undertake a gi,en audit assignment to enable the auditors obser,e due
professional cared.
AUDIT RECORDING
The Auditor's .perational 2tandards re$uires the auditors to plan, control and record their
work ade$uately.
Audit recording is the process of documenting the audit work that has already been
planned and controlled by the audit manager to enable the epression of a balanced audit
opinion on the financial statement.
5ecording enables the auditor to keep records on important matters co,ered during the
audit assignment.
Audit recording is done in audit working papers.
Def: Audit working papers are records kept by the auditor on the procedures applied,
information obtained and conclusions arri,ed at during the audit assignment. They
should always be sufficiently complete to pro,ide e,idence of work performed to support
conclusions reached.
SOURCES OF AUDIT WORKING )A)ERS
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%hotocopies of financial statements under the Audit and other documents of the client's
company such as /;.A K A...A.
Taking notes on arrears of weaknesses in internal controls especially where the auditor
cannot get ade$uate eplanations.
7illing of e,idence from =
rd
parties e.g. the client's bank, debtors, etc.
Auditor's opinion
The auditors would file their own e,idence according personal obser,ation and 9udgment.
Internal control $uestionnaires
Information on audit working papers would also be obtained from tools of e,aluating
internal controls e.g. internal control $uestionnaires, flow charts etc.
I)ORTANCE OF AUDIT WORKING )A)ERS
The outgoing auditors work can be used by the incoming auditor to assess the clients
pre,ious performance
?orking papers help future auditors in understanding the problems encountered by
pre,ious auditors.
%reparation of working papers enables the auditor to approach his work in a
methodical manner hence reducing his eposure to risks.
In cases where the auditor is sued for negligence, audit working papers may pro,ide
e,idence that he approached his work professionally i.e. they pro,ide e,idence for
work done.
?here the company is under in,estigation by go,ernment agencies, audit working
papers are important to the person in,estigating
#pression of opinion
Audit working papers if properly recorded facilitates epression of a balanced audit
opinion on the financial statements.
It's a professional re$uirement of the Auditor's .perational 2tandards.
That the audit should plan, control and record work.
CURRENT AUDIT FILES
This is a file which relates to the current audit
A new audit file is opened e,ery year
"urrent audit files are usualy closed at the end of the current financial period
"urrent audit files if need be should be destroyed after ) years.
Contents o! Current Audit File
A copy of the engagement letter
Audit programmes and dates when different acti,ities were carried out
A copy of the management letter highlighting weaknesses in internal controls
A list of audit ob9ecti,es or statutory re$uirements
A record of $uestions asked and answers obtained either from employees of
management
"orrespondences between the auditors and other parties e.g. debtors, creditors, etc
A copy of the current financial statement being audited
A schedule of items in the balance sheet
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A copy of shareholders and directors' minutes
)ERANENT AUDIT FILE
This is a file that contains information that is useful to the auditor beyond a financial
period and i.e that information is permanent in nature and should be updated at each
annual audit.
Contents o! a )er*anent Audit File
/emorandum and Articles of Association of the client's company
.rgani-ational charts of the company
"opies of the last years accounts
Aistory of the client in terms of growth
A list of company properties
A copy of accounting and auditing standards
A list of company ad,isors e.g lawyers, stock;brokers etc
0etails of a computer system in operation
Address of the registered office
LIEN O(ER AUDIT WORKING )A)ERS
.riginally, it was belie,ed that audit working papers belonged to the client
This belief was based on the following claims8
That the auditor obtained his papers from the client's books and financial statements
That the auditor is simply an agent of the client and as such is bound by the law of
agency to hand them o,er to the principal &client+
That the working papers contain secrets of the client and as such should be kept by the
owner to preser,e the secrets.
That after paying his fee, the client has a right not only o,er the working papers but also
any other information that the auditor may ha,e obtained by ,irtue of his appointment
4n the other hand1 the auditor claims o%nership of %orkin& papers on the follo%in&
&rounds#-
That working papers will act as a defense in case he is sued by the client in future
That the outgoing auditor has a professional duty to hand o,er these papers to the
incoming auditor to enable him to understand his client better
That they are used for future reference to facilitate future audits
That the auditor has infact gathered such papers himself and little if any is his
original documents of the client
That the auditor has ,iew o,er working papers especially his audit report in cases
he is not paid his fee in which case he has a right to retain the report and other
working papers. Gntil such a fee is paid.
@e,ertheless, the ownership of working papers has been resol,ed through legal and
professional channels as follows8;
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In the case of 2tokinky Ds Bright Graham &G! 'C=(+, the court ga,e the ruling in fa,our
of the auditors or the bonified of the working papers on grounds that the auditor is an
independent contractor not agents of the clients but adhere discression, the auditors may
gi,e their clients some papers such as income ta returns, correspondence between him
and =
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parties etc.
The IA2 no.<=* paragraph 3 states that the auditor is the bonified owner of the working
papers but at his discression he may gi,e the client etracts or portions of such working
papers.
Advanta/es o! Audit Wor5in/ )a#ers
They show a record of work done
They assist incoming auditors to assess the position of the new client before they
begin their actual audit work
They assist in,estigators in the financial matters of the client
They are used in training audit assistants because they contain audit programmes
which are good training tools
They help in minimi-ing duplication of audit effort in a gi,en audit assignment
They are useful in the assessment of the efficiency of not only the audit staff but
also the audit process generally
They are used to determine the audit fee payable by the client as they indicate the
scope of work done and time taken in each of the audit assignment areas
They enable the auditor to meet his deadlines especially the reporting re$uirement
Incase the clients business suffers any loss as a result of a disaster such as fire,
floods etc audit working papers are used by insurance companies to compensate
the client
They are useful for comparison purposes as they contain comparati,e figures for
different financial periods and therefore useful as a source of e,idence in form of
analytical re,iews
They are useful in enabling the auditor to adopt a methodical approach to his audit
work.
Disadvanta/es o! Audit Wor5in/ )a#ers
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parties may delay in replying to circulari-ation
2ome symbols used may be difficult to comprehend
Incompetent audit assistants may compile inade$uate working papers which may
not be easy to re,iew
%ersonal 9udgment may be relati,e in some cases leading to a biased opinion
The client may ha,e weak internal control systems which may compromise
records as a source of e,idence
There may be lack of corporation on the part of the management to a,ail
information not only in form of documents but also in form of inter,iews
The nature of the client's business may be comple thus the need to engage
eperts in compiling audit working papers which may lose professional touch
&done by a person who isn't a professional+.
"ollision between management and =
rd
parties may limit gathering of working
papers
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"hanges in the clients business may render working papers obsolete.
INTERNAL CONTROL SYSTE
I.".2 is defined by the auditing guidelines on internal controls as JThe whole system of
controls established by the management in order to carry on the business of the enterprise
in an order and efficient manner, to ensure adherence to management policies, safeguard
the assets as secure as possible and completeness and accuracy of records.J
"ontrols are indi,idual components of an internal control system
O&'ECTI(ES OF INTERNAL CONTROLS
To ensure adherence to management policies
To safeguard the assets of the company
To secure the accuracy, ,alidity and completeness of records
To pre,ent and detect occurrence of errors and frauds
To ensure that management does its work in an orderly and efficient manner
To ensure that the ob9ecti,es of the company are achie,ed
To establish standards of performance
To monitor and reward performance
To create responsible centers in an organi-ation
To enhance reliance on internal controls and internal audits by an eternal auditor
TY)ES OF INTERNAL CONTROLS
AUTHORISATION CONTROLS
A sound internal control system should ha,e the following controls8
Aut4orisation Cotrols
These are controls that are instituted by the management to ensure that only necessary
transactions are processed, fraudulent transactions are pre,ented and to ensure no
atteration on already processed documents.
E;a*#les in.lude7
Appro,al only by responsible officers
Gse of special ink for signing purposes
2etting authorisation limits e.g. a che$ue of o,er !shs.'**,***BL to be authori-ed by
the chief financial officer and no other person
Gse of official company seal
"oding of information
Gse of serial numbers
"hecking the authenticity of signatures
Douching of documents
!eeping already authori-ed documents under key and lock
RECORDING CONTROLS
These are controls to ensure that all authorised transactions are recorded in the financial
records.
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They include8
Internal check system
This is where work of an employee is automatically checked by another to ensure
that there are no errors
"ut off procedures to ensure that transactions are recorded in the accounting
period to which they relate
%reparation of reconciliation statements
5outine checksBsurprise checks etc to ensure accuracy, ,alidity and completeness
in recording
Gse of $ualified personnel to minimi-e negligence in recording
#ffecti,e super,ision of the recording procedure
Gse of serial numbers on e,ery document
Gse of computation machines
CUSTODY CONTROLS
These are controls to ensure that assets of the business as record in the accounts are free
from mis;appropriation, theft, negligence
This controls include8;
Gse of security person, fencing, security clock &principal control+
!eeping sensiti,e assets under key and lock
Gse of public lyck dri,er instructed not to carry unauthori-ed persons, no through
pass beyond this point
Gse of passwords and secret codes for users of computer
2igning of work tickets before ,ehicles lea,e the company
SEGREGATION CONTROL
These ensure that no single officer initiates a transaction and de,elops it to its conclusion
If properly done segregation helps to minimi-e occurrence of errors and frauds and their
pre,ention.
(OCATION AND ROTATION
"ompulsory lea,e should be gi,en to accounting staff to enable the company to ascertain
their efficiency and that of other officers replacing them
5otation of duties helps to ensure that an officer does not o,er;familiari-e himself in
some areas.
ATTERS TO CONSIDER WHEN DE(ELO)ING SOUND
INTERNAL CONTROL SYSTE
5eason for failure of earlier controls
2i-e of the organi-ation
"ostBa,ailability of resources
The personnel to implement the controls
.b9ecti,es or purpose of controls
7leibility of the system and epected efficiency
INDICATORS OF A WEAK INTERNAL CONTROL SYSTE
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?here staff of the client are unwilling to take up annual lea,e
?here relati,es are employed in related nature of work
?here the integrity of the management and their competency is $uestionable
?here auditors and legal eperts are checked fre$uently
?here the company depends on ' or few customers
?here auditors and legal eperts are highly remunerated
LIITATIONS OF INTERNAL CONTROLS
Irrespecti,e of how strong the internal controls are, they ha,e the following limitations8;
/anagement are in position to o,er;ride their own controls. This is because they don't
want particular controls to apply to them hence, by;passing them.
Internal controls could be abused by the responsible officers to whom they are entrusted
through collusion
"ontrols are implemented at a cost, i.e. its ,ery epensi,e to instal and maintain a strong
internal control system
A strong Internal "ontrol 2ystem could also be rigid and i.e. not fleible enough to meet
the purpose for which they were designed.
.,er;reliance by management
?here internal controls are strong management are likely to o,er;rely on controls hence,
their responsibility of super,ision is compromised
.,er;reliance by the auditor
The auditor is likely to be tempted to o,er;rely on a strong I.".2 hence, performing
inade$uate tests which cannot detect errors and frauds
There is always a possibility of human error either by using wrong figures or due to
fatigue
ANAGEENT RES)ONSI&ILITY UNDER I%C%S
The auditing guidelines on internal controls states that, JIf the auditor wishes to place
reliance on any internal controls, he should ascertain and e,aluate these controls and
perform compliance tests on their operations.J Aowe,er it's the responsibility of
management to decide on the etent of internal controls which are appropriate to the
business or company.
This will depend on the following8
2i-e, nature and ,olume of transactions
The degree of control which the management team is able to eercise personally
The geographical distribution of the enterprise.
AUDITORS RES)ONSI&ILITY O(ER I%C%S
The auditors ob9ecti,e in e,luating and testing of internal controls is to determine the
degree of reliance which he may place on the information contained in the financial
statement. Aowe,er, the auditor should not solely rely on internal controls as a basis of
epressing his opinions on the financial statement.
This is because there is no internal control system that can guarantee effecti,e
administration. Therefore if the auditor wishes to place reliance on any internal controls,
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he should ascertain and e,aluate those controls and perform compliance tests on their
operations.
ASCERTAINING THE ACCOUNTING SYSTE
An accounting system refers to a series of tasks that produce accounting information to
make possible the preparation of financial statements.
Accounting system therefore constitutes internal controls that deal with accounting
information.
The system ensures that only authorised transactions are processed and recorded.
It also ensures that transactions of accounting nature are accurate, ,alid, complete and
that sensiti,e documents are kept by financial officers who are responsible under key and
lock
Ascertaining the system refers to gathering of information by the auditor on how the
internal controls operate.
5ecording of system refers to the implementation of the I.".2 by way of flow charts,
narrati,e notes, internal control e,aluation, $uestionnaires etc.
ETHODS USED IN ASCERTAINING THE CLIENTS ACCOUNTING SYSTE
Gse of procedure manuals which show day to day acti,ities.
Audit working papers prepared by the auditor for pre,ious years to gain an understanding
of the system
The auditor may establish the facts about the system by inter,iewing the clients
management and employees.
Gsing work of internal auditors on how the system operates
%ersonal obser,ation of procedures as undertaken by employees
Internal "ontrol #ample
)URCHASES and CREDITORS
2uppliers should be appro,ed before purchase orders are placed
The purchasing department should maintain a list of authori-ed suppliers which should be
continuously re,ised
%urchase order's should be properly appro,ed
An indi,idual ability to authori-e purchase orders should be kept within certain limits
after which further authori-ation is re$uired for appro,al
The purchasing department should be centrali-ed in order to obtain economy efficiency
in ordering
There should only ' area of re,iewing goods
This helps to minimi-e inspection and storage costs as well as loses
There should be a policy to ensure that goods recei,ed should only be accepted against
authorised purchase orders a copy of which should be sent to the department recei,ing
goods.
Goods recei,ed should be properly inspected before being accepted. .nce recei,ed
accurate recording should be done.
Goods returned to suppliers should be recorded and a re9ection note raised at the deli,ery
point
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Goods recei,ed and returned records should be monitored and controlled to ensure that
all in,oices and credit notes are properly recei,ed.
TECHNI$UES:ETHODS:TOOLS OF RECORDING AND E(ALUATING AND
INTERNAL CONTROL SYSTE
FLOW CHART
These and diagrammatic representations of the companies accounting systems and
procedures
"harts use hori-ontal lines to indicate the mo,ement of items, across departments and
,ertical flow lines to indicate mo,ement of items within the same department
"harts are used by the auditor to identify ma9or functional areas where he wants to place
reliance.
The following points should be considered when drawing flow charts &$ualities of a good
flow chart+
Gse the organi-ation chart as the basis of preparing the flow chart
It must be simple and clear to understand
It should not contain any writing
"harts should not be congested with flow lines which ser,e no purpose
Gse hori-ontal or ,ertical flow lines when preparing a flow chart
7low chart goods and documents separately
Gse serial numbers not words in the flow chart
The flow chart should be cross referenced to internal control $uestionnaires and
letter of internal weaknesses
"harts must show the origin of each document, se$uence of operation and the
officer who performs the task
The specimen of the document should be attached to the flow charts.
%urchasing 0epartment 5ecei,ing 0epartment 2tores 0epartment Accounts 0epartment






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/o,ement of an item across departments
/o,ement of records within and across departments
"ontinuous flow lines represent strong internal controls
Gaps in flow lines represent weakness in I.".2
Advanta/es
They enable the auditor to get the entire picture of internal controls in a particular
organisation
They highlight the relationship between parts of internal controls in a systematic
manner
It shows weaknesses in the internal controls which can be spotted clearly through
gaps in the flow lines
They form a consistent method of recording internal control system in an
organi-ation.
Li*itations
Gnless eplained they may be difficult to follow
The don't contain all the information and therefore notes may ha,e to be taken as
well
They are time consuming and difficult to prepare
They may not ideal for small business with few transactions
2ymbols used in the low chart may not be inform and therefore may cause
problems in understanding by other parties.
INTERNAL CONTROL $UESTIONNAIRES
This is a set of $uestions prepared by the auditor and which should be answered by the
client in the presence of the auditor
These $uestions re$uire short answers like8H#2, @., @ot Applicable where H#2
indicates strengths in the internal control and @. or @.T Applicable answer indicate
weaknesses in I.".2.
Advanta/es
It assists the auditor to know the books of the client accounts kept and the information
remained in the books.
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Gsing answers of internal $uestionnaires, the auditor is able to assess the strength and
weakness of I.".2. more easily to facilitate audit planning
They discuss or indicate which official to consult
They ser,e as a basis of writing the management letter as they show weakness in I.".2
They assist the auditor in drawing up audit programs as they will show areas where the
auditor should concentrate more
Internal control $uestionnaires are used for future reference and as a means of preparing
future audit programs
Disadvanta/es o! Internal Control $uestionnaires
They may be answered impulsi,ely without gi,ing thought to the $uestions leading to a
biased opinion
They may ignore changes in the clients business if they are poorly prepared
If they are poorly prepared they may be a,oided by the client
They are usually standardi-ed and yet there are no two similar business that may re$uire
use of similar $uestions
They are ideal for large businesses with many transaction but not small ones with fewer
transactions.
NARRATI(E NOTES
@arrati,e notes are used to describe the procedures and policies as established by the
management which are followed by the management on day to day handling of
transactions
They are usually contained in procedure manuals and they help the auditor to ascertain
their practicability hence determining effecti,eness of controls
Advanta/es
They enable the auditor to understand how procedures are followed in the organi-ation
Aelps the auditor to identify procedures in the organi-ation
They enable the auditor to identify areas of strength and weaknesses in the procedures
followed.
0isad,antages
2ometimes they do not gi,e a true picture of what is happening practically
?here changes ha,e taken place they are rendered useless
INTERNAL CHECKS
This is part of the internal control system and is defined as the checks on the day to day
transactions which operate continuously as part of the routine system where work of one
person is appro,ed or checked independently by another person
If effecti,ely done errors and frauds are detected early and corrected
The aim of internal check system is to ensure that no of officer does a 9ob from beginning
to completion without being controlled by others.
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O&'ECTI(ES OF INTERNAL CHECK SYSTE
To pre,ent errors and fraud
To pre,ent goods and cash misappropriation by keeping a check on the receipts and
payment to ensure no single officer is allowed to recei,ed and dispatch goods at the same
time.
To put some responsibility on a particular clerk or employee so that e,eryone will know
who committed the error or fraud
To enable the company to ha,e accurate, reliable and complete records
Advanta/es
It !a.ilitates dis.over+ of errors and frauds at an early stage
It pre,ents misuse of cash and goods since no single clerk is supposed to gi,e and
recei,ed at the same time
It impro,es the efficiency of the accounting staff through automatic checks
#nsures accomplishment of tasks as per the management schedule
It places responsibility on officers hence helping to reduce negligence
They facilitate accuracy, reliability and completeness of records
Disadvanta/es
It lowers the morale of staff for people do not like to be checked all the time
It can be abused through collusion of workers
The management may also o,er;rely on it leading to relaation in super,ision
The auditor may also o,er;rely on the system, hence carrying out fewer tests which could
epose him to liabilities
INTERNAL CONTROL E(ALUATION DOCUENTS:$UESTIONNAIRES
Internal "ontrol #,aluation 0ocuments are e,aluation $uestions designed to operate on
the basis of key control $uestions to co,er the principle ob9ecti,es of an internal control
system.
They are used to bridge the limitation of other e,aluation tools
Importance of Ascertaining and 5ecording the 2ystem
To enable the auditor gain an understanding of the clients nature of business
To enable the auditor establish the type of internal controls, implemented by the client
To enable the auditor plan his work to suit the circumstances of the client
To determine the nature of accounting system used by the client whether manual or
computeri-ed
To know the degree of management in,ol,ement in suspension and segregation of
responsibilities
To establish whether the audit firm has ade$uate personnel to perform the audit
To know the strength, $uality and effecti,eness of management
To know whether the Internal Audit 0epartment eists and its effecti,eness
To know whether the client is operating in accordance with the /..A and A..A
INTERNAL AUDITING 1INTERNAL AUDIT DE)T2
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An internal Audit is an element of the internal control system set up by the management
to eamine, e,aluate and report an accounting and other controls that are in operation
The institute of internal auditors define internal audits as follows8;
It is an independent appraisal acti,ity established within an organi-ation as a ser,ice to
the organi-ation or it.
It is a control which functions by eamining and e,aluating the ade$uacy and
effecti,eness of other controls
O&'ECTI(ES OF INTERNAL AUDIT DE)ARTENTS
To re,iew the accounting system and related controls
To act as a consulting department to other departments
To re,iew the implementation of organi-ation policies, plans and procedures
To re,iew the economy, efficiency and effecti,eness of operations
To pre,ent and detect errors and frauds
To ensure the safeguarding of company assets
To enable the organi-ation carry out special in,estigations
RELIANCE ON INTERNAL AUDITS &Y THE E@TERNAL AUDITOR
The auditing guidelines on reliance on internal audits states that, JBefore any decision is
taken to place reliance on internal audits, it is necessary for the eternal auditor to make
an assessment of the likely effecti,eness and the rele,ance of the internal auditing
function.J
The criteria for making this decision or assessment should include the following8;
De/ree o! Inde#enden.e
Internal auditors are employees of the organisation and therefore the cant be epected to
be independent
Aowe,er, the should be able to plan and carry out their work as they wish and ha,e
access to the highest le,el of the management but without being influenced by the
management in the performance of their work
The eternal auditor therefore should ascertain their independence before relying on their
work.
The 2cope of Internal Audits
The eternal auditor should eamine the internal auditors scope of work and ob9ecti,es to
ascertain whether or not to rely on their work
The scope of work should not be too narrow but reasonable
0ue %rofessional "are
The eternal auditor should consider whether work of internal auditors is properly
planned, controlled and recorded before placing reliance on the work done
Technical "ompetence
#ternal auditor should ascertain whether the work of internal audit department is
performed by persons ha,ing ade$uate skills and eperience as auditors
)
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Internal Audit 5eport
The $uality of reports produced by internal audit dept should be ascertained, determined
or assessed to know whether the management responds to them by implementing
recommendations of the reports.
5esources
The eternal auditor should ascertain whether the internal audit department has ade$uate
resources in terms of staff, computers and other necessary facilities to implement the
internal control systems desired by the organi-ation.
REASONS FOR GROWTH OF INTERNAL AUDITING
The main reasons influencing the epansion of internal audits are8;
The increased demand for accountability and transparability
The increased costs associated with the eternal audits
Increased si-e of businesses with many transactions
"hanges in the global market, demanding for impro,ed efficiency in ser,ice deli,ery
The economic trend such as 8 epansion and recession.
DIFFERENCES &ETWEEN INTERNAL AND E@TERNAL AUDITS
' Internal audits are conducted on behalf of the They are conducted on
/anagement behalf of shareholders
< They are not a re$uired of the "ompany Act but
pro,ided for by the Auditors .perational 2tandards
They are a re$uirement of the
"ompany Act
= Internal Audits are continuous appraisal acti,ities of
the organisation
The audits are conducted
periodically at the end of the
financial year
3 Internal auditors need not to be professionally
$ualified accountants
They must be professionally
$ualified accountants
) Internal auditors are employees of the "ompany #ternal auditors are
professionals who are not
employees of the client
4 Internal Audits aim at strengthening internal
controls
They aim at ascertaining a
true and fair ,iew of the
financial statement
> Internal auditors work and scope is determined by
the management
The work and scope is
determined by the "ompany
Act
( Internal audit reports are used by management The reports are used by
shareholders and =
rd
parties
C Internal audits are conducted to e,aluate routine
operations of the company
#ternal audits are conducted
to e,aluate the "ompany
7inancial %erformance
)
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AG0IT #DI0#@"#
Audit e,idence is the information obtained by the auditor in arri,ing at a conclusion on
which he bases his opinion on the financial statements.
The auditors operational standards states that, JThe auditor should obtain rele,ant and
reliable audit e,idence sufficient to enable him to draw reasonable conclusions therefrom.
@ATG5# .7 AG0IT #DI0#@"# &Iualities of Audit #,idence+
Audit e,idence should ha,e the following $ualities8;
2ufficiency
The auditors 9udgement of what constitutes sufficient audit e,idence is influenced by the
following factor8
Auditors knowledge of the clients business or industry
The degree of risk of misstatement through errors and frauds
The persuasi,eness of e,idence obtained
5ele,ance
7or information to be rele,ant it must relate to the ob9ecti,es of forming an opinion on
the financial statements, it must relate to items contained in the % K 1 aBc and balance
sheet
It must be rele,ant to the current financial period
5eliability
The reliability of audit e,idence depends upon particular circumstances howe,er, the
following pressumptions should be noted while assessing the reliability of audit
e,idence8;
0ocumentary e,idence is more reliable than oral e,idence
#,idence obtained from independent sources outside the "ompany is more reliable than
e,idence obtain within
#,idence originated by the auditor through analysis and inspection is more reliable than
e,idence obtained from other sources
.riginal documents are more reliable than photocopies
TY)ES OF AUDIT E(IDENCE
)RIARY AUDIT E(IDENCE
This e,idence is gathered from internal sources
2ources could include8 accounting records and documents generated from within the
company
2ince primary sources of audit e,idence is from within it can be biased and therefore less
reliable.
2#".@0A5H AG0IT #DI0#@"#
This is obtained from eternal sources
2ources could include8 0ebtors, "reditors, 2uppliers
)
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?here there is no collusion with the management, secondary audit e,idence could be
more reliable
This e,idence is obtained by circularisation process to =
rd
parties.
CIRCUSTANTIAL AUDIT E(IDENCE
Its obtained by the auditor through obser,ation of "ompany procedures e.g.
%rocedures concerning stock taking ; wage payment, purchases etc, mail opening
5eliability of circumstantial e,idence depends on the effecti,eness of the clients internal
control system
Aowe,er, where the client is aware of the auditors ,isit, this type of e,idence could be
biased.
This is because, employees and management could ha,e orders, knowing that the auditor
is obser,ing them.
HEARSAY AUDIT E(IDENCE
Its obtained by the auditor from the clients management, employees and members of the
general public with ade$uate knowledge of the client the auditor obtains this e,idence by8
"onducting inter,iews
#ngaging concerned parties in a con,ersation
Asking intelligent $uestions to concerned parties
The e,idence obtained must relate to the clients operations
Aearsay e,idence is usually ,ery persuasi,e but not conclusi,e.
FACTORS AFFECTING AUDIT E(IDENCE
@ature of Internal "ontrol 2ystem
?here internal controls established by management are strong, audit e,idence would
be more reliable than where they are weak
/ateriality of the Item
?here the item being assessed is material or significant, more audit e,idence has to
be obtained if such e,idence is to be relied upon.
?here the auditor has enough time sufficient audit e,idence can be obtained hence
reliable than where time is limited
?here management co;operates with the auditor sufficient audit e,idence could be
obtained hence mo,e reliable than where management frustrates the auditor
?here the auditor has audited the clients financial statements before, he would obtain
sufficient audit e,idence due to past eperience than where he is dealing with a new
client
TECHNI$UES:ETHODS OF O&TAINING AUDIT E(IDENCE
This is the re,iew and physical eamination of the client's documents, records and assets
5ecords are eamined to establish their accuracy, ,alidity and completeness while assets
are inspected to ascertain their eistence, ,alue, ownership etc.
O&SER(ATION
)
=
This in,ol,es looking at an operation or procedure being performed by other parties with
a ,iew to determine their nature of performance.
.bser,ation is only reliable at that particular time of obser,ation and not any other time.
The auditor could 9oin the clients employees to obser,e procedures relating to stock;
taking, wages, payment, general security measures etc.
En"uiries
This is simply seeking rele,ant information from knowledgeable persons within or
outside the "ompany.
#n$uiries could be through inter,iews, $uestionnaires, con,ersations etc.
5eliability of en$uiries depends on the competence, eperience, independence and
integrity of respondents.
"omputationB5e;computationsB5e;calculation
This in,ol,es checking for arithmetical accuracy of accounting records or performing
independent calculations
It helps the auditor to ascertain the agreement between boos of original entry and the trial
balance
The areas that need computation include8 %ayroll deductions, 0epreciation "alculation,
2tock Daluation etc
=
rd
%arty "onfirmations
This is the process of ascertaining the reliability of records by corresponding with =
rd

parties
The auditor does it by circularisation of debtors and creditors re$uesting them to confirm
their balances with the client.
Analytical 5e,iew %rocedures
It in,ol,es the study and obser,ation of economic trends to enable comparison to be
made on the performance of the company o,er a gi,en period of time
Analytical re,iew procedures seek to ascertain any unusual or unepected ,ariations
The comparisons to be made usually depend on the nature, a,ailability and rele,ance of
the information
Douching of #ntries
Douching is the process by which the auditor ascertains the ,ouchers of the business,
whether ,ouchers of a business ha,e been formerly authori-ed, whether they relate to the
financial year, whether they belong to the organisation or if they are properly recorded.
LIITATIONS OF O&TAINING AUDIT E(IDENCE
Audit e,idence irrespecti,e of how its obtained could ha,e the following limitations8
"ollusion with management
Incases where =
rd
parties collude with the management the o,erall audit e,idence
obtained could be biased.
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?eaknesses in the 2ystem of Internal "ontrols
?here Internal "ontrol 2ystem is weak, some of the important documents could be
missing and other records could be incomplete
This makes the auditor not to gather sufficient audit e,idence
/isinterpretation
In case of the auditors personal 9udgment by way of obser,ation, he may misinterpret
some information due to his own bias as a result of own epectations
@ature of "lients Business
?here the auditor deals with a client ha,ing a comple business he may not understand
operations of the client hence limiting his ability to gather sufficient audit e,idence.
2abotage by management
This is where management can deliberately destroy some documents with a ,iew to
manipulating the accounts.
If craftily done it may go unnoticed by the auditor hence limiting his ability to obtain
,alid and reliable audit e,idence.
AUDIT LETTERS
RE)RESENTATION<S LETTER
The Auditors .perational 2tandards states that, JThe auditor should obtain rele,ant and
reliable e,idence sufficient to enable him to draw reasonable conclusions there from.J
5epresentations by management is one of these sources of audit e,idence usually, oral
e,idence is obtained by the auditor from the management when seeking for eplanations
on any sub9ect that is not enough, reliable and accurate. 0ocumentary e,idence is more
reliable and therefore the auditor should ha,e written representations from the
management to support oral e,idence.
0efinition8 /anagement representations letter which is also called representation's
1etter, representations by management is a written confirmation by management that they
ha,e signed and appro,ed all the information contained in the financial statement or it's a
declaration by management that the financial statements are true, fair and reliable.
The e,idence pro,ided in the representations letter is important to the auditor when
drawing or epressing audit opinion on a true and fair ,iew of the financial statements.
5epresentations letter is important where conclusi,e audit e,idence is not forthcoming.
2ome of those situations that re$uire representations letter to shed more light include8;
"ontigent 1iability ; The auditor may not tell that e,ery legal suit against the company
has been considered
The auditor cannot get sufficient assurance that proper accounting has been done
especially where small companies are in,ol,ed. This is because management is closely
in,ol,ed in the control and authori-ation process. 2imilarly, there are also insufficient
staff to segregate the responsibilities
The audit cannot pro,e that the ad9usting and non;ad9usting e,ents ha,e been treated as
such in the financial statements.
)
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)ROCEDURE OF )RE)ARING THE LETTER OF RE)RESENTATION
The auditor should agree with the management early enough on the material information
to be documented
/aterial representations should be identified by the auditor during the course of the audit
The auditor should then discuss such a representations with the management
The auditor should then encourage the management to draft the representations letter
containing material representations discussed.
The letter should bear the signature of responsible officers only
The auditor should also re$uest that representations should be formerly minuted by the
Board of 0irectors
?here the management are unwilling to sign or minute the representations letter, the
auditor should composeBdraft a letter which should contain the auditors understanding of
the main representations and seek for management confirmations
?hene,er possible the disagreement arising between the management and the auditor
should be followed and resol,ed amicably.
?here the management refuses to sign the letter e,en after it has been drafted by the
auditor, the auditor has no choice but to $ualify the report on the basis of limitation in
scope &0isclaimer .pinion+
CONTENTS OF A RE)RESENTATIONS LETTER
The accounting policies adopted by the company
The clients nature of internal controls
The accuracy and reliability of financial statements
Types of contingencies and post balance sheet e,ents
"ompliance with the re$uirements of the "ompanies Act
The ade$uacy of pro,isions on bad and doubtful debts
The ade$uacy of pro,isions on depreciation of fied assets
Daluation of the company's fied assets
The nature of a,ailable audit e,idence.
The clients nature of accounting system
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5#8 5#%5#2#@TATI.@'2 1#TT#5
?e confirm to the best of our knowledge the following representations gi,en to you in
connection to the audit of the year that has 9ust ended on ='B'<B*>.
?e acknowledge as directors our responsibilities for financial statements. All the
financial statements ha,e been made a,ailable to you for the purpose of the audit.
The legal claims against our company by 2ura /baya "o. 1td, has been settled out of
court. The company paid !shs.',***,***,*** and no further amount are epected to be
paid.
It is not within the arrangement of the company to pro,ide credit facilities to its directors
ecept as disclosed in the financial statements.
.ther than fire damage, disclosed in our foot notes of the financial statements there ha,e
been no e,ents since the balance sheet date that could re$uire the re,ision of the figures
included in the financial statement.
2hould any other material e,ents occur that may re$uire ad9ustments of the figures on the
financial statements will ad,ice you accordingly.
Hours faithfully
Dalley .kwenda
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5eliability
The representation's letter enhances the reliability of the financial statement
The representations letter pro,ides a confirmation on a true and fair ,iew of the financial
statements
/anagement representations letter pro,ides documentary e,idence to the auditor
concerning the accuracy, ,alidity and completeness of financial statements.
It pro,ides a declaration that company assets ha,e been properly ,alued
It pro,ides a declaration that the financial statements prepared complies with the statutory
re$uirements
It ser,es as a basis of epressing audit opinions on the financial statements
It's a professional re$uirement by I"%A! that representations by management should be
minuted and signed before being gi,en to the auditor
)
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FAILURE TO )RESENT OR SIGN ANAGEENT RE)RESENTATIONS
LETTER
5efusal to present to the auditor or sign the management representations
1etter constitutes limitations of scope of the auditors work.
The auditor should do the following in the e,ent that the management fails to present the
letter8;
0iscuss with the management on the need for such a representation and their likely
conse$uences
"onsider the materiality of representations that the auditor had come across across
initially
Iualify the audit report by way of a disclaimer opinion
ANAGEENT LETTER 1Letter o! Internal Wea5nesses+
/anagement letter is the auditors report written to the management pointing out material
matters that ha,e come to his attention during the audit and which may ha,e an impact on
future performance of the company
The auditor through this letter gi,es recommendations for impro,ement
The contents of the management letter should first be discussed by the management
before the letter is written or else it would be re9ected by the management who may think
that the auditor is attacking them.
)UR)OSE:I)ORTANCE OF ANAGEENT LETTER
#nables the auditor to gi,e comments on the systems and controls that he has eamined.
Through this letter the auditor highlights and brings to the attention of the management
areas of weaknesses and material errors
Through the letter the auditor ad,ices the management on areas where resources are
poorly utili-ed including profitable acti,ities.
Through the letter the auditor is able to communicate matters that ha,e come to his
attention and which might ha,e an impact or future audits and general performance of the
company.
CONTENTS OF ANAGEENT LETTER
?eaknesses in the structure of the organi-ation, accounting systems and internal controls.
Inappropriate accounting policies and practices
@on;compliance with accounting standards and other irregularities
ImplicationsBeffects of the weaknesses on the financial statements and on a true and fair
,iew
The auditors suggested recommendations necessary to correct the weaknesses identified
The "onse$uences of not following the recommendations
The effects of recommendations on future audits and performance of the company
A22#5TI.@2 ".@TAI@#0 I@ TA# 7I@A@"IA1 2TAT#/#@T2
Assertions are representations by management that are contained in the financial
statements
They are classified as follows8
"ompleteness
)
(
These is the assertion that the information pro,ided in the financial statement is complete,
accurate and relaiable
That there are no omissions of any important transactions of the "ompany
That all transactions ha,e been recorded and that the amounts indicated are e$ually
correct.
.ccurrence
This is the assertion that all the recorded transactions actually occurred as recorded
#istence
This is the assertion that all assets that ha,e been mentioned eist. That liabilities
contained in the financial statements also did occur and that parties who hold any assets
on behalf of the company can pro,e their eistence
Daluation
This is a declaration that the assets of the company were properly ,alued
%resentation and 0isclosure
This is the assertion or declaration that all information had been disclosed in compliance
with the accounting standards and any other eisting legal re$uirement.
It's a declaration that elements of the % K 1 account and the Balance 2heet ha,e been
presented in accordance with the G.A.A.%.
/easurement
This is the assertion that is epressed in monetary ,alue where non;monetary
considerations are made.
/easurement is usually said to be in cash or cash e$ui,alent
7inancial transactions i.e. whether monetary or non;monetary
ERRORS AND FRAUDS
An error is defined as an international mistake. Aowe,er, from the compliance testing
point of ,iew, an error is defined as the inoperati,e and ineffecti,eness of the internal
controls, therefore, an error does not only affect the financial statement but can also occur
in internal controls making them inoperati,e and ineffecti,e.
7rom the point of ,iew of substanti,e testing, an error can be seen as both unintentional
and intentional mistake
#rrors can occur at any stage in a business transaction
7rauds are defined as use of deception to obtain an un9ust financial ad,antage or its an
intentional misstatement or omission of amounts of an entity's accounting records or
financial recordsBstatements to decei,e the users.
7rauds usually in,ol,e a concealment since they are tactfully perpetuated and could
therefore not be easily identified or detected by the auditor
RES)ONSI&ILITY FOR THE )RE(ENTION AND DETECTION OF ERRORS
AND FRAUDS
)
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%rimarily, the responsibility for the pre,ention and detection of errors and frauds rests
with the management.
The responsibility arises as a result of a contractual relationship between them and
shareholders
/ost directors and managers carry out these responsibilities by instituting a strong I.".2.
.n the other hand, the auditor should gather e,idence to ensure that no material errors or
frauds ha,e occurred and if they ha,e, they ha,e to be corrected and disclosed to the
management.
The auditor should not be relied upon for the pre,ention and detection of errors and
frauds but he should arrange his procedures such that if any material errors ha,e
occurred, they can be detected.
In general, the auditor is simply a watchdog and he should only test areas where he is
suspicious that errors and frauds eist.
AUDIT )LANNING IN )RESENCE OF ERRORS AND FRAUDS
The auditor should upraise the risk of material errors and frauds that ha,e taken place.
The factors which he has to take into consideration include8;
The situation facing the client
The known problems of internal controls
The nature of the business, that is, its ser,ices or goods
"ircumstances that might influence the management to distort the reported profit
The known strengths and weaknesses of the management
The ability of the management to o,erride the controls
Accounting records whether computeri-ed or manual
Accounting areas that are highly susceptibleB,ulnerable to errors or unusual transactions
ACTIONS THE AUDITOR SHOULD TAKE ON DISCO(ERY OF ERRORS AND
FRAUDS
Ae should consider materiality, if the matter is not material no further action should be
taken apart from informing the management.
If the matter is material he should perform additional audit tests
If errors and frauds ha,e occurred he should also consider their effects on the financial
statement
?here weaknesses in internal controls are know he should inform the management by
way of management letter
If further in,estigations are re$uired and there is no sufficient time to a,oid delay in audit
report, $ualify the report due to uncertainties
?here areas identified ha,e material frauds the auditor should take photocopies of the
fraudulent transactions.
INDICATORS OF ERRORS AND FRAUDS
/iing of ,ouchers
#,idence of falsified documents
Gnsatisfying eplanations
#,idence of inoperati,eness; ineffecti,eness of internal control system
In,estigation of the client by the go,ernment or agencies of the go,ernment
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#,idence of the lifestyle of employees and directors beyond their income
)RACTICAL AUDITING
SU&STANTI(E TEST AND AUDIT OF ) A L A:C AND &ALANCE SHEET
Audit tests are procedures or tests adopted by the auditor when eamining the financial
statements in order to enable him detect material errors and frauds
Audit tests as a general rule should be applied throughout the audit
The application of the test depends on the nature and ade$uacy of the client's accounting
system and internal controls
Audit tests are either primary or secondary
%rimary tests are either substanti,e or compliance tests while secondary tests are all other
tests other than substanti,e or compliance tests.
They include8
?alk;through tests
2urprise tests
"omplete checks
In depth tests
SU&STANTI(E TESTS
These are primary audit tests performed on account balances and transactions to help the
auditor ascertain their accuracy, ,alidity and completeness
If properly done, substanti,e tests helps the auditor to obtain audit e,idence and detect
material misstatements in the financial statements
The items to be eamined depends on the auditor's 9udgment and effecti,eness of internal
controls
2ubstanti,e tests are applied through;out the audit assignment, howe,er, most of them
should be applied during the final stage of the audit.
CO)LIANCE TESTS
They are primary audit tests performed by the auditor to obtain reasonable assurance, that
the internal controls on which he wishes to rely are effecti,ely operational
They apply through;out the audit, but most of them are applied during the internal states
of the audit
If properly carried out, compliance tests re,eal that internal controls are effecti,e and
operational and the auditor may limit the etent of substanti,e tests to be carried out
?A1! TA.GGA T#2T
These are audit procedures or tests designed to assess the general ,iew of operations of
the entity by pro,iding an assurance on reliability of financial statements.
?hile performing walk;through tests the auditor traces a small number of transactions &'
or < in each case+ through the system.
The purpose is to help the auditor ascertain whether the accounting system operates as
recorded
There are = steps to be followed when performing walk through tests8;
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In$uiring into the 2ystem
This enables the auditor to identity the controls, how they operate and the person incharge
of the controls
5ecording of the 2ystem
It enables the auditor to compile flow charts and notes on how the system functions.
"onfirming the system
This is where the auditor identifies < or ' transaction and performs o,erall walk;through
tests to confirm the accuracy and effecti,eness of the system.
?alk through tests could be a combination of substanti,e and compliance tests for they
seek to test the effecti,eness of internal controls and the records produced by the system.
2G5%5I2# T#2T2
They are tests directed at checking indi,idual transactions by the auditor with the aim of
disco,ering errors and frauds
They are applied on sensiti,e areas that are prone to errors and frauds e.g. stock taking,
cash counting etc.
CO)LETE:TOTAL CHECKS
These are tests which are aimed at checking transactions from the initial stage to the final
state
They help the auditor to ascertain the accuracy, ,alidity and completeness of records
They are used where internal controls are weak, but are not practical in large
organi-ations with many transactions
IN DE)TH AUDITS
This is a test or procedure where the auditor obtains a number of transactions and check
thoroughly the selected transactions.
The checking should be done from the beginning to the end.
AUDIT TECHNI$UES
These are audit procedures adopted by the auditor when eamining the financial
statements with a ,iew of pro,ing a true and fair ,iew on the financial statements.
Audit techni$ues are applied through out the audit, howe,er the following general
guidelines are important8;
(ou.4in/
This is done or applied during the interim stages of an audit
Derification
Its performed or used during the final stages of an audit
Cir.ulari9ation
Its used at the final stages of an audit
The application of audit techni$ues or tests is affected by the following8
The time a,ailable
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"o;operation of the clients management
@ature of the clients accounting system. ?hether computeri-ed or manual
The strengths or weaknesses of the I.".2
The degree of risks associated with audit assignment
The si-e of the clients entity and nature of transactions
The auditors terms of engagement
The capacity of the client to carry out such a test
TY)ES OF AUDIT TECHNI$UES
(OUCHING
It's a substanti,e procedure that in,ol,es detailed eamination of support documents to
ascertain for their accuracy, ,alidity and completeness in recording
.b9ecti,es of Douching
To enalbe the auditor test internal controls
To detect and pre,ent frauds in source documents
To enable the auditor identify functions of ,ouchers
To enable the auditor obtain e,idence from source documentsBsupport documents
To enable the auditor determine the accuracy, ,alidity and completeness of transactions
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ATTERS THAT THE AUDITOR UST )AY S)ECIAL ATTENTION TO
WHEN E@AINING (OUCHERS
0ate of the ,oucher
%arties to the ,oucher
2erial @os.
?hether the ,oucher is in the name of the client
The reasonableness of the amount
2ignatures of responsible officers of the company
5easons for authori-ation
Agreement of amount in words and figures.
E@A)LES OF IRREGULAR (OUCHERS
Gnsigned che$ues
5eceipts that are not dated
%hotocopies of the original
Douchers with conflicting amounts or where formsB,ouchers are mutilatedBdestroyed to
make contents ,ague
AD(ANTAGES OF (OUCHING
They are useful in the detection and pre,ention of error and frauds
They pro,ide documentary audit e,idence in support of transactions
They are used as tests of controls &"ompliance tests+
It identifies the origin and end of transactions hence ensuring completeness and accuracy
They make possible the audit of % and 1 aBc items
They enable the auditor to know that transactions are rele,ant to the accounting period.
DISAD(ANTAGES OF (OUCHING
They are time consuming and therefore epensi,e to eamine
Douchers, if craftily falsified frauds cannot be easily detected by the management and the
auditor
The audit staff tends to o,er;rely on the clients staff for ,ouching
(ERIFICATION
It's a techni$ue which is applied to establish %A0.D#' of assets and liabilities
It's a techni$ue that enable the auditor to pro,e a true and fair ,iew of the financial
statements
AUDIT OF FI@ED ASSETS
.b9ects of Auditing 7ied Assets
To ascertain authori-ation ; whether proper authori-ation from shareholders or directors
was done
To ascertain the Dalue of Assets
To ascertain ownership by making sure that the assets in possession are rightly owned by
the organi-ation
To ascertain eistence by inspecting or ,erifying physically
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To ascertain whether assets owned by the company are properly recorded in the assets
register
INTERNAL CONTROLS O(ER FI@ED ASSETS AND THEIR )UR)OSE
To ensure that ac$uisition of fied assets are properly authori-ed
%hysical controls to protect assets against misuse and theft
5ecording controls to ensure that proper records of assets are kept
Internal checks to ensure that there is accountability in the use of assets
E;a*#le 0
/otor Dehicle &Audit procedure+
Derify for its eistence to seeBascertain whether mB,an registration @o. !A! ))4T
actually eists
Derify ownership whether owned by the company or not by eamining its log book to
establish whether it is in the name of the client
Derify authori-ation to see whether it was authori-ed by shareholder or Board of
0irectors &,erify minutes of meetings+
"onfirm with =
rd
parties especially the registration authorities if the ,ehicle is really
registered in the name of the client
Derify for its ,alue or engage eperts to ascertain the ,alue
#nsure that the ,ehicle is depreciated o,er its useful life
Ascertain whether the ,ehicle is properly disclosed and described as shown in the
financial statements
AG0IT .7 %1A@ A@0 /A"AI@#5H
%lant and machinery are tangible assets that are held for use in the production or supply
of goods and ser,ices or for rental to others or for administrati,e purposes and are
epected to be used for more than ' financial period.
AG0IT .BM#"TID#2 .7 %1A@T K /A"AI@#5H
To ,erify eistence of plant and machinery
To ascertain whether ac$uisition was properly authori-ed
To establish whether plan and machinery are owned by the organi-ationBclient
To ascertain whether they were properly ,alued
To establish whether they are properly presented or ade$uately disclosed in the financial
statements.
AG0IT %5."#0G5# .7 %1A@T K /A"AI@#5H
#amine internal controls o,er plant K machinery
.btain support documents relating to their ac$uisition
#nsure that they are in the name of the client
#stablish that they eist through physical inspection eamination
"heck the ,aluation procedure or method of ascertain whether it was properly ,alued
#stablish whether any disposals were properly authorised
Agree all the information with what is recorded in financial statements
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AUDIT OF LAND AND &UILDINGS
.b9ecti,es
To ,erify eistence of land and buildings
To ascertain that organisation owns land and buildings
To confirm that land and buildings are properly ,alued
To establish that land and buildings are properly disclosed in the financial statements
Audit procedure of land and buildings
The auditor should physically inspect land and building s for eistence
Ae should obtain a map of the area from responsible authorities to confirm that the
reported land and buildings are actually the ones that he had formed ,isual impression
Inspect documents of title for ownership of land and buildings
7or buildings, the auditor should obtain a certificate of work completed from contractor
to confirm that the client was the actual contractor
The auditor should inspect bank statements to pro,e that the firm actually paid for land
and buildings
The auditor should ,ouch through supporting documents to ,erify the cost of land and
buildings
The auditor should correspond with seller to confirm the agreed cost
AUDIT OF LONG TER LIA&ILITIES
Audit %rocedure
The auditor should check the authority to ac$uire such loans e.g from shareholders or
Board of 0irectors by8
Ascertaining the amount of loan
Interest payable
5epayment period
The auditor should check Articles and /emorandum of Association to ascertain whether
the co. has power to borrow the amount raised
The auditor should obtain loan agreement and check for the following
Amount of loan
Interest payable
5epayment period
@.T# 8All should agree with number '
The auditor should obtain a schedule of loan outstanding which should include 8
@ame of lender
Amount in,ol,ed
Amount of interest payable
0ate of maturity
2ecurities pledged
The Auditor should communicate directly with the lender and re$uest confirmation
regarding the outstanding amount or balance and repayment pattern
The auditor should check the securities pledged to ensure that they ade$uately co,er the
loans with a =*E margin in fa,our of the ,alue of the loan
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The auditor should ,erify the interest charged for the period by computing such an
interest by himself .Ae should also re,iew any restrictions and ascertain whether they
ha,e any limitations in the use of the loan. Ae should therefore8
5e,iew any correspondence between the client and the lender
2hould re,iew confirmation replies for more compliance
If a default appears to eist the auditor should ascertain the reason and re$uest
management for actions to be taken to a,ert attachment of the company's assetsB
securities pledged in the ac$uisation of the loan
Incase such a loan was obtained on the strength of a guarantee the auditor should refer to
the Articles of Association to ascertain whether the guarantee is appropriate
Incase such a loan was obtained for a special purpose the auditor should ascertain it was
used for such a purpose. Ae should ,erify the assets ac$uired in relation to the ,alue of
loans.
)EER RE(IEW
This is an audit techni$ue from audit firm's point of ,iew that helps the
auditor to ascertain whether the audit firms $uality controls ha,e been
followed by audit 9uniors during the audit assignment
A0DA@TAG#2 .7 %##5 5#DI#?2
They ensure compliance with professional standards of auditing
They encourage echange of professional ideas
They increase the credibility of the audited financial statements and report
They promote communication between members of the profession
They pro,ide a way of continuosly impro,ing the $uality of work
They enhance the image of the profession and the audit firm
DISAD(ANTAGES OF )EER RE(IES
They cause conflicts between professionals due to disagreement
They are ,ery epensi,e because the top gream of the audit firm are utili-ed &audit
re,iew+
There is no professional pronouncement to guide the re,iew
Its not a re$uirement of the "ompany's Act.

AG0IT .7 0#BT.52
The term debtor is used in financial statements to include the following items where they
are reali-able within ' years of the balance sheet debt and are not sufficiently material to
the disclosed separately.
They include8
Amounts due in respect of goods sold or ser,ices rendered
DAT reco,erable
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Interest recei,able etc
Audit .b9ecti,es 5egarding 0ebtors
To ,erify that all debtors are ,alid
To ,erify that debtors are completely and accurately recorded
To ensure that proper pro,isions ha,e been made against debts which may not be
reali-able in full
To ensure that fair disclosure is made in compliance with the accounting standards
Internal "ontrol 2ystem .,er 0ebtors
There should be segregation of duties between the people who collect the money and
those who record the transactions
The "ompany should ha,e a credit policy which sets out the credit limit
There should be a debtors control account maintained by the client
There should be regular mailing of customer's statement
5ecords on aged debtors should be prepared regularly and re,iewed by the management
0ebts should be collected at the right time
5easons for "ircularisation
0ebtor circularisation is a direct confirmation from debtors to establish their eistence
and is used for the following reasons8;
To obtain direct e,idence that the debtor actually eists
To confirm the correctness of the figures of debtors in the client's books
To pro,ide e,idence on the eistence of disputed items
To ascertain the correctness of cut;off procedures followed
To obtain confirmatory e,idence on the strength and weakness of internal controls
Approach of "ircularisation
In carrying out circulari-ation eercise the auditor8;
/ust first obtain authority from the client or communicate with debtors
2hould then obtain a list of debtors
2hould select a sample of debtors to be circulari-ed from the list although all debtors can
be circulari-ed.
2elect the method to use whether positi,e or negati,e circulari-ation or both
0raft the circulari-ation circular but ensure that it is written in the client's letter head
#nsure that all replies are sent directly to the auditor by including a directi,e in the
circular to that effect
"omplete the circular by filling in the details of the debtors and the year end balances
The auditor should then dispatch the letters himself
Auditor should recei,e and e,aluate all replies
Auditor should make a follow up if replies are not recei,ed.
7ormsB/ethods of "irculari-ation
@egati,e "onfirmation
Gnder this method of circulari-ation the debtor is asked to communicate only if he does
not agree with the balance
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The debtor is also told that if no reply is recei,ed from him then the auditor will conclude
that the debtor is in agreement with all the information in the circular
The limitation of this method is that if the debtor does not recei,e the circular the auditor
will assume that e,erything is ok which might lead the auditor to make wrong
conclusions
%ositi,e "onfirmationB"irculari-ation
In this method the debtor is asked to reply whether or not he agrees with the balance
Ae is also asked to supply the balance himself. This system is preferred where controls
are weak.
@B8 ?hat the auditor should do if the debtor does not reply8;
2end a reminder to the debtor and if after the reminder there is no reply, the auditor
should apply the following audit procedures8;
"arry out detailed ,ouching of entries
#amine the past balance sheet e,ents &ad9usting ones+
#amine the debtor's payments and reminders sent by the client
Disitor the debtor and get a confirmation from the debtor himself.
T##/I@G A@0 1A0I@G &"arry .,er 7raud+
This is the misappropriation of the amount obtained or recei,ed from debtors
The person recei,ing such amounts misappropriates the amount from four debtors and
conceals it from amounts recei,ed from debtor
This may continue until the debt and shame on you is written off as a bad debt or until
cash is repaid later
/easures to take to pre,ent Teeming and 1ading
The organi-ation should establish strong internal control system in particular, a strong
internal check system where work of clerks is properly segregated to a,oid chances of
collusion o,er cash.
The auditor should ad,ice the company to ensure that the recei,ing cashiers do not ha,e
access to8;
0ebtors ledger
Bank statements
5econciliation statements
"ashiers should be rotated fre$uently to a,oid o,er;familiari-ation and to be able to
detect shortage ,ery easily
0iscounts writing off of bad debts should be properly super,ised in relation tot eh credit
policy
"ash recei,ed should be banked daily and when intact
.pening of mails should be properly super,ised and done in the presence of a senior
officer
AUDIT )ROCEDURES IN(OL(ED IN THE AUDIT OF DE&TORS
.btain a schedule of debtors preferably old debtors
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Dalidate the records and controls o,er sales through a selected sample
"onduct a detailed eamination of control accounts including a re,iew of the
reconciliation between the ledger control and the debtor's ledgers
"irculari-e a sample of debtors for confirmation of eistence
Ascertain cut off procedures to ensure that sales and debtors ha,e been accounted for in
the rightBcorrect period
1ook for e,idence to confirm that balances attributed to indi,idual debtors are composed
of specific items
#amine all debtors to ensure that each account is settled from time to time.
(ERIFICATION OF CASH IN HAND
The auditor should ensure that he pay surprise ,isits to the client to compare the actual
cash with the cashbook balance
?here the company has different cash collection points, cash counts should be done
simultaneously.
Incase of shortage the auditor should obtain a certificate of shortage and mention it in the
management letter
The client should be ad,ised against keeping too much cash in the organi-ation
?here other parties like agents ha,e cash balances, the auditor should also obtain a
certificate of balance from these parties
"ash should be kept under key and lock and the auditor must ensure that this is done.
(OUCHING OF )ETTY CASH
#amine the strength of internal controls o,er petty cash
"heck whether the petty cash ,ouchers are properly authori-ed
"ross;check the list of epenses to ascertain their ,alidity and reasonableness
"arry out surprise tests to reconcile the petty cash
.btain a certificate of shortage that is signed by the petty cashier incase of any shortage
AUDIT OF CASH AT &ANK
O,-e.tives
To ,erify that cash at bank actually eists
To ascertain that cash has been accurately and completely recorded
To confirm that all recorded balances and deposits are payable to the "ompany
To ensure fair disclosure in the accounts
STE)S TAKEN TO ENSURE )RO)ER )ROCEDURE REGARDING &ANKING
"ash recei,ed should be banked daily and when intact
"ash recei,ed should be recorded promptly in the cash book
The sales ledger personnel should not ha,e access to the cash book
A comparison should be made periodically between the che$ues recei,ed and banked
Bank reconciliation should be done by an independent party.
AUDIT OF WAGES
The following are common frauds associated with the payroll8;
GhostB0ummy ?orkers
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These are casual workers who are not working but who appear to work and are in the
payroll through collusion between the salaries department and the %ersonnel 0epartment
Du#li.ation o! Na*es
This is where a gi,en name in the payroll is duplicated se,eral times
/anipulation of commissions through o,erstating or entering fictitious "ommissions
/isappropriation of 2tatutory deductions e.g. @227, @AI7
7ictitious payments for o,ertime
Inflating the payroll through increments
INTERNAL CONTROLS FOR )IECE WORKERS
2trong super,ision should be put in place to establish the number of pieces produced and
the $uality of work done
There should be proper recording of the pieces produced to ensure that piece;work cards
are recorded by the foreman and the super,isor of each department
%ieces produced should be taken to the store where they are recorded and recounted.
Incase some pieces are defecti,e or damaged the employee concerned should be charged
accordingly and the piece work records should also indicate it.
At the end of the week, the number of pieces produced should be reconciled to the stock
records
I@T#5@A1 ".@T5.12 7.5 TI/# ?.5!#52
There should bee close super,ision o,ertime spent in a gi,en business by both the
foreman and super,isor to a,oid misuse of time
"asual workers should be gi,en 9ob cards to record time in and time out
If clocking is not possible then the employee time in and out should be recorded in the
register which should be kept by time keepers who should be rotated to a,oid collusion
The register should be checked at regular time inter,als to ensure that it agrees with all
other procedures used
A responsible officer should from time to time pay a surprise ,isit to the site to count
employees that are present and reconcile with the register and employee 9ob cards
INTERNAL CONTROLS FOR )RE)ARATION OF WAGES
?ages should be prepared such that, there are different wage sheets for time workers and
piece workers
Information for preparation of wages should be gathered by clerks other than those
recording piece;work or time;work entries
All clerks who participate in gathering information should be properly segregated
The work's manager should authenticate information gathered by signing a sheets to
pro,e reliability and accuracy.
INTERNAL CONTROLS FOR )AYENT OF WAGES
There should be strict super,ision to ensure no fraud is perpetrated
The cashier paying wages should be different from the one who prepared wages
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?ages should be paid in the presence of a responsible officer to ensure that there is no
impersonation.
The dates for withdrawal of wages should be kept secretly
?ages of absentees should only be paid to their agents with the consent of the employees
concerned whose permission should be in writing
?ages sheets should be authenticated by the paying cashier, work's manager and the
employees concerned
Any officer responsible for employment should be engaged in payment of wages
%ayment of wages should be done in such a manner that casual workers identify
themsel,es
A list of unpaid wages should be kept and signed by the paying cashier, foreman, work's
manager
Gnpaid wages should be banked immediately and absentees paid later after eplaining
reasons for their absence
)ROCEDURE FOLLOWED WHEN AUDITING WAGES
"ompare the personnel files with the wage sheets and in,estigate any differences
0uring payment employees should use identity cards to ensure that wage sheets are
authentic
"heck consistency of employees signatures on the wage sheets
The auditor should pay surprise ,isits during wage payments to ascertain the following8
Adherence to company policies regarding wage payment
To obser,e workers being paid and ensure that no dummies are paid
0ummy workers if any should be interrogated
The auditor should compare the sanctioned strength of the work force with the actual
force and in,estigate the differences
"ompare current wage sheets with the pre,ious sheets and re$uest for eplanations to the
following8;
0ifference in number of employees
0ifference in amounts paid
All should be in,estigated
The auditor should then compare the budget of wages with the actual wages, then re$uest
for eplanations in case of any differences
The auditor should then test employment procedures to ascertain whether internal
controls actually eist
AUDIT OF STOCK
2tock or in,entory are those goods that are held for manufacture of goods in case of a
manufacturing organisation or for re;sale in the ordinary course of business, incase of a
merchandising organisation
They include8
7inished Goods
5aw materials
?ork in progress
There are two systems of counting stock, namely8;
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%eriodic 2ystem
%erpetual 2ystem
%eriodic system is where stock balances are ascertained by means of physical counts at a
time when the balances are needed while perpetual system is one where continuous
records are maintained showing the mo,ement of stock through purchases and issues to
subse$uently reflect end of period balances
)RO&LES ASSOCIATED WITH AUDIT OF STOCK
Before conducting an audit of stock the auditor must first understand thoroughly the type
of stocks kept by the client
This is because there is no item in the balance sheet that presents ,erification problems to
the auditor to the etent that stocks do
This problems include8;
2tock has a ' for ' impact on the reported profit, that is, an increase of stock by
!shs.'*BL increases the reported profit by !shs.'*BL
2tocks are portable i.e. open to pilferage
The number of items in,ol,ed are numerous creating ,erification problems as far as
eistence and condition is concerned
Although stocks are ,alued at the lower costs what constitutes costs can ,ary from one
management to another and therefore the basic of determining that cost can be sub9ected
to many different methods all resulting in different ,alues for the same items
This is an area that is susceptible and damaged stock is a $uestion of 9udgment therefore,
it is ,ery easy for the auditor and the management to disagree.
AG0IT .BM#"TID#2 .7 2T."!
To establish that stock eists
To establish that stock is owned by the client
To ascertain that stock are completely recorded
To establish that proper pro,isions ha,e been made for obsolete and slow mo,ing stock
To establish that stocks are properly controlled
To establish that stocks are stated on a consistency basis at lower costs or net reali-able
,alue
To ensure that they ha,e been fairly disclosed in the accounts in compliance with the
rele,ant accounting standards
)ROCEDURE OF CARRYING OUT STOCK8TAKING
The procedure of carrying out physical stock;taking ,aries in details according to the si-e
and circumstances of the business as well as the nature of its stock records, howe,er,
definite instructions in written should be issued to guide those engaged
2tock taking instructions should contain the following8;
Identification of items and their ownership
"ounting, weighing and measuring procedures
Identification and reporting of stocks of stocks which are damagedBdefecti,e
Aow the stock;taking should be recorded
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2tock;taking should be planned well in ad,ance and carried out carefully and
systematically by persons fully informed of their duties
?here speciali-ed knowledge is needed, the client should make sure that the personnel
with such a speciali-ed knowledge are a,ailable
Arrangements should also be make to ensure that proper cut off procedures are used.
)ROCEDURES OF STOCK8TAKING
Audit procedures concerning stock;taking are co,ered under = stages
They include8;
Before +
0uring +2tock taking
After +
&EFORE STOCK8TAKING
The auditor should re,iew the pre,ious years working papers and ha,e a discussion with
the management if changes ha,e taken place
The auditor should familiari-e himself with the nature and ,olume of stock
Ae should familiari-e himself with locations of stock;taking and plan for the work to be
undertaken
The auditor should study the clients stock taking instructions and recommend for
impro,ement if he considers them inade$uate.
Ae should consider the location of stock and likely points of problems especially cut;off
procedures
Ae should consider if internal auditors work is to be relied upon or not
Ae should arrange to obtain from =
rd
parties, confirmation of stock in their possession on
behalf of the client
To establish whether epert ad,ise is needed.
DURING STOCK 8TAKING
The auditors main task during stock taking is to8;
Ascertain whether staff are following the instructions
Ae should ascertain the procedures used to identify damaged stock, slow mo,ing and that
which is obsolete
Auditor should select a sample of a few items count them and compare the results with
those of the clients staff
5ecord fully the work done during stock;taking eercise and ,erify the stock;sheets used
by the clients staff
0etermine whether the stock;taking eercise can be relied upon as a basis of ,aluing
stock
AFTER STOCK8TAKING
This is mainly a follow;up eercise and it in,ol,es8;
"hecking the cut;off with the details of the last numbers of stock mo,ement forms e.g.
goods outwardsBinwards during the year and at the end of the year
#nsuring that final stock;sheets ha,e been properly prepared from the stock count records
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3
@B8 The auditor should ensure that all forms of stock that were issued ha,e been
returned
The auditor should check the final stock sheets for ,aluation and summari-ation of the
stock count eercise.
The auditor should follow up any notes made during the eercise for the purpose of
disclosure re$uirements
If any problems are encountered during the stock taking eercise the management should
be informed accordingly through the management letter
NON ATTENDANCE AT STOCK TAKING
If the auditor is unable to attend stock taking eercise the following procedure may be
used8
Arrange for stock taking to be done at an earlier date
Appoint an agent to attend stock;taking
Gse rotation method
#amine perpetual in,entory records more thoroughly
AUDIT OF CA)ITAL
)ROCEDURE OF (ERIFICATION OF CA)ITAL
.btain / of A and A of A and the prospectus if the company is newly formed
Ascertain the authori-ed number of shares and their type
#amine the allotment letters to ascertain the total number of shares issued and the
amount that is due
Agree the abo,e information with the cash book and bank entries
.btain the counterfoils of share certificate and agree them with the entries in the
shareholders register
Ascertain whether the closing balance of the pre,ious year is the same as the opening
share capital balance for the current year
5ead through the shareholders meeting minutes to find information for additional capital
if any
#amine the shareholders register to ascertain the correctBeact number of shareholders
/ultiply the number of shares by price per share to ascertain the ,alue of share capital
(ERIFICATION OF TA@ATION
AUDIT )ROCEDURES
"heck the internal controls o,er ta computation and recording
.btain a ta liability schedule and check for reasonableness
.btain the ta paid receipts from the income ta department for the ta paid during the
year
Incase of any ta dispute with the income ta department, the auditor should ascertain
whether the client has made pro,isions e$ual to the ta in dispute
"ompute ta liability for the current year personally
#nsure that ta liability is properly recorded
Trace these to the % K 1 account and the balance sheet to ,erify if it is properly disclosed
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AUDIT OF LIITED LIA&ILITY CO)ANIES
The following books and documents should be eamined by the auditor while auditing
limited liability companies.
DOCUENTS
EORANDU OF ASSOCIATION
This is an important document that should be submitted to the registrar of companies
before the incorporation of a company. It should be eamined by the auditor to ascertain
the following8;
The ob9ecti,e clause to ensure that the "ompany is carrying on with the businesses for
which it was incorporated
The issue of share capital and the ,alue of authorised share capital
The situation clause to ensure to ensure that the "ompany is in eistence and in the
location where it is supposed to be
A declaration clause to ascertain whether the "ompany has complied with the
re$uirements of the "ompany's Act
Articles of Association
This document contains rules and regulations regarding the way the "ompany should be
managed
The auditor eamines A of A for the following8;
To know remuneration for "ompany directors
To know the powers of directors in gi,ing a guarantee on behalf of the company for any
loans borrowed
The directors powers to borrow or lend on behalf of the company
%rocedure for sharing di,idends and reser,e policy
Doting powers of shareholders and types of shares
%rospectus
This is a document written by the management to the public in,iting them to buy the
shares of that company.
It is eamined for the following8;
The audited financial statements for the last ) years
"urrent director of the company
7uture prospects of the company
"ompany ad,isors such as lawyers, brokers etc
@umber of shares issued for sale and ,alue of each share
The company history and that of its pro,iders
2TATGT.5H B..!2
/inutes Books
2hareholders /inutes Books
This books contain the minutes of shareholders meetings and information on the
decisionsBresolutions reached
They ha,e information on the financial statements in form of the audit reports
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The auditor eamines shareholders minutes books to ascertain authorisation of ma9or
acti,ities of the company
0irectors /inutes Books
These are books containing minutes of directors meeting or resolutions reached
They contain information on proposed di,idends, fiing of auditor's remuneration,
authorisation for purchase of "ompany assets on behalf of shareholders etc
"ommittee /inutes Books
These are books for recording the minutes of committees that are appointed by Board of
0irectors
The committees could include8 finance, disciplinary, in,estment, administrati,e etc
5egister of 2hareholders
This is a book that contains information about shareholders
The information could include8
@ame of shareholder
.ccupation
/embership @umber
0ate of ac$uisition of shares
Types of shares owned by shareholders &ordinary or preference+
In,estment's 5egister
This is a book that contains information regarding the nature of in,estments of the
company
They are usually maintained where the company has di,ersified in,estment &portfolio+
The information in the books include8
@ames of in,estments
1ocation
"urrent market priceB,alue
Any reductions of in,estments etc
5egister of "ontract
This register has information on the parties to the contract the ,alue of the contract,
period of the contract, terms of the contract etc
7ied Assets 5egister
This book containing specific information regarding assets owned by the client.
It contains the following information8;
Type and nature of assets
0ate of ac$uisition of assets
The cost price of each asset
The epected economic life of the asset
The methods or rates of depreciation
5epairs done on the assets during the year
Assets disposed during the year
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The estimated scrap ,alue of some assets
(OUCHING OF CREDIT SALES
INTERNAL CONTROLS O(ER CREDIT SALES
Ascertain the credit worthiness of a customer before etending credit to him
2egregation of duties should eist between the accounts and the sales departments
There should be strong super,ision between the sales and account departments
In,oices and credit notes should be properly authori-ed and appro,ed before being issued
AUDIT )ROCEDURES OF CREDIT SALES
#amine the appro,al of credit sales by a responsible officer of the "o.
Agree the prices with the price list
#nsure that in,oices are serially numbered
#amine the postings from day books to the sales ledgers
Agree the debtors ledgers with the debtors control aBcs
Assess the pro,isions for bad debts
"heck whether there is any break in the numbering of in,oices
INTERNAL CONTROLS O(ER )URCHASES
There should be re$uisition procedures on specified forms
There should be segregation of duties between ordering of goods staff and recei,ing of
goods staff
All orders should be pre;numbered and safely kept by responsible officers
Goods recei,ed should be counted and compared with $uantity ordered on the order
documents
%rocedures &cut;off+ should be conducted at the end of the year to a,oid o,erlap of
transactions.
)ROCEDURE IN THE AUDIT OF )URCHASES
#amine the internal controls o,er purchases
"heck a number of in,oices for authori-ation and appro,al
Agree the in,oices with goods recei,ed
"heck the seriali-ation of che$ues and statements of discounts recei,ed
"heck whether in,oices are for the company
"heck the reasonable of purchases
#nsure that in,oices ,ouched are cancelled to a,oid their reproduction
#nsure that all transactions were effecti,ely recorded
(ERIFICATION OF CONTIGENT LIA&ILITIES
"ontingent liabilities are liabilities that are determinable or not easily determinable at the
time of the balance sheet
They arise from the company's past acti,ities which may turn later to be actual liabilities
or which may not.
#amples include8;
1egal suits against the company
0isputes for wage increase with trade unions
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Areas of cumulati,e preference share di,idends
TREATENT OF CONTIGENT LIA&ILITIES
"ontingent liabilities should be disclosed in the following manner8;
?here the possibility of a contingent liability turning out to be an actual liability is high
in the current financial period, it should e disclosed under current liabilities
?here chances of a contingent liability turning out to be an actual liability in the current
period are low they should be disclosed by way of footnotes in the financial statements
?here the contigent liability is immaterial but with high chances of becoming an actual
liability, it should be disclosed in the financial statement by way of footnotes
?here contigent liability is immaterial with low chances of becoming an actual liability
in the current financial period it should be ignored
0isclosure by way of footnotes should be done in the following ways8;
"ontigent liability in respect of legal suits against the company !shs.'*/
"ontigent liability in respect to trade unions of wage increase amounts to !shs.)/ etc.
TESTING DISCLOSURES IN RES)ECT TO CONTIGENT LIA&ILITIES
5e,iew internal controls o,er contigent liabilities
5e,iew the financial statement for disclosures of contigent liabilities
0iscuss with the management the possibility of contigent liabilities becoming actual
liabilities
0iscuss with the "ompany lawyers the possibility of contigent liabilities becoming actual
liabilities in respect of the law
Inspect company policies to do with payment of di,idends to establish any preference
cumulati,e shares
Incase of contigent liabilities arising as a result of cumulati,e share di,idends seek for
management measures on how to meet this liability
#nsure that the guarantee that is gi,en is reasonable
7or bills of echange discounted, confirm the dates of maturity from the person accepting
the bill
Trace the matters pertaining the bill of echange through the records of discounting house
#nsure that all records are reasonable or accurate
I)ORTANCE OF CONTIGENT LIA&ILITIES TO THE AUDITOR
They enable the auditor to ascertain their fair ,alue in the client's records
They enable the auditor to establish their effects on a true and fair ,iew of the company's
financial statement
They enable the auditor to establish whether they really eisted at the balance sheet date
They enable the auditor establish their disclosure and presentation in the financial
statement
(ERIFICATION OF )OST8&ALANCE SHEET E(ENTS
This refers to the financial and non;financial acti,ities that take place between the
balance sheet date and the date when the financial statements are appro,ed
%ost;balance sheet e,ents are either8;
Ad9usting
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@on;ad9usting
Ad9usting #,ents
Ad9usting e,ents are those acti,ities which pro,ide e,idence of the conditions that
eisted at the balance sheet date and therefore must be ad9usted in the financial statement
#amples include8
Bankruptcy of a ma9or debtor after the balance sheet date
%ayment of a ma9or liability which eisted at the balance sheet date
Ad9ustment in the ,aluation of stock and ?.I.%
5eco,ering of a debt from a debtor which was pre,iously thought to be a bad debt
@on;ad9usting #,ents
These are e,ents or acti,ities which do not pro,ide e,idence of the conditions that eisted
at the balance sheet date and since it is not an ad9usting e,ent it should be treated as a
differed liability
#amples include8
"hanges in the rates of foreign echange after the balance sheet date
"losing down of a branch for legal reasons
?here go,ernment policy and actions ha,e taken place e.g pri,ati-ation and
liberali-ation
I)ORTANCE OF )OST &ALANCE SHEET E(ENTS TO THE AUDITOR
True and fair ,iew of the financial statement can be re,ersed b the eistence of these
e,ents failure to disclose them would affect the primary ob9ecti,e of an audit &ad9usting
e,ents+
%ost balance sheet e,ents are important because they may increase the auditors liabilities
for negligence, in order to minimi-e this, the e,ent must be thoroughly eamined and
disclosed in the management letter
%ost balance sheet e,ents normally affect subse$uent opinion &opinion in the net audit+
and therefore they should be properly reported to the management &non;ad9usting e,ents+
2ince they ha,e an impact on future performance of the company they must be re,ealed
to shareholders by the auditor
%ost balance sheet e,ents would affect the financial affairs of the company and may
ad,ersely affect the in,estments in the company should in,estors become aware of their
eistence and therefore, the auditor should establish measures put in place by
management to deal with the problem
%ost balance sheet e,ents usually ha,e an implication on the current management
especially the directors. The directors past actions which could result into huge losses by
the company could lead to their dismissal by shareholders and therefore the auditor must
disclose such acti,ities to shareholders
Both the company's act and the professional body I"%A! re$uires the auditor to disclose
all uncertainties affecting the client in the course of carrying out the audit
%ost balance e,ents are important to the auditor since they affect the cut;off procedures of
the company.o
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AUDIT )ROCEDURES OF )OST &ALANCE SHEET E(ENTS
#amine the nature of internal controls to do with post balance sheet e,ents
#amine the reasonableness of disclosure regarding post balance sheet e,ents
5e,iew the pre,ious years audit working papers to establish the nature of e,ents whether
their knowledge eisted or not
.bser,e the cut;off procedures to do with the post balance sheet e,ents
Ascertain whether the disclosures conform with the accounting policies and standards
THE &ALANCE SHEET AND THE GOING CONCERN ASSU)TIONS
The financial statements are normally prepared on the assumption than an enterprise is a
going concern and will therefore continue with its operations.
It is assumed that the entity has not intention nor the need to curtail significantly the
scope of its operations
Aowe,er, if such an intention or need eists the financial statements may ha,e to be
prepared on a different basis other than the going concern.
This other treatment should be disclosed in the financial statement
The importance of the going concern assumption is understood when one considers its
full implication on the financial statement8;
7ied assets are classified under normal circumstances to show that their use is to the
future benefit of the organi-ation but if the entity ceases to be a going concern there is no
future and therefore fied assets are classified as current assets. This is because they are
a,ailable for disposal like any other current asset.
1ong term liabilities immediately become current liabilities when a company ceases to be
a going concern. 2imilarly intangible assets like goodwill suddenly loose ,alue and cease
to eist
@ew liabilities not pre,iously recogni-ed may suddenly arise and re$uire recognition e.g
redundancy
TA5#AT2BI@0I"AT.52 .7 G.I@G ".@"#5@ A22G/%TI.@
The following are e,ents or conditions which collecti,elyBindi,idual may cast signficant
doubt on the going concern assumption8;
?ithdrawal of financial support by creditors
2ubstantial operating losses or significant deterioration of the ,alue of items used to
generate cash flows
Ares or discontinuation of di,idends
Inability to pay creditors
"hange from credit to cash on deli,ery transactions with suppliers
Inability to obtain financial for essential new product new product de,elopment
1oss of key management without replacement
1oss of a ma9or market or principle suppliers
2hortage of important supplies
1abourBstrained labour relations &fre$uent strikes+
@on;compliance with capital market re$uirements
%ending legal or regulatory proceedings against the company that may if successful result
in claims that are unlikely to be satisfied.
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AUDITOR<S RE)ORT 1ISA BCC2
?hether the auditor $ualifies or un$ualifies the audit report depends on the >
th
schedule
re$uirements of the "ompany's Act "ap 3(4 of the 1aws of !enya.
Two ma9or etreme reports are8;
Gn$ualified+
Iualified + Audit reports
Aowe,er, sometimes the auditor may stand the middle ground by gi,ing a disclaimer
opinion that is the opinion that he is unable to either $ualify or un$ualify the report
The auditor therefore considers the >
th
schedule as gi,ing the minimum contents of the
report
2imilarly, he should consider the International 2tandards of Auditing &I2A+ specifically
&I2A >**+ which is called The Auditor's 5eport on 7inancial 2tatements
UN$UALIFIED AUDIT RE)ORT
This is a report gi,en by the auditor when he has no reser,ations whatsoe,er on any of
the re$uirements of the >
th
schedule of the "ompany's Act
This is where the auditor will report as follows8;
That he has recei,ed all the information and eplanations he considered necessary for the
purpose of his audit
That in his opinion proper books of account ha,e been kept
That the financial statements are in agreement with the books of account
That the % and 1 account and balance sheet disclose the information re$uired by the
"ompanies Act in a manner so re$uired
That in his opinion the financial statement gi,e a true and fair ,iew of the affairs of f the
"ompany at the Balance 2heet date.
@B8 If the abo,e facts are prominent or complied with, the auditor should gi,e an
un$ualified audit report in accordance with the rele,ant reporting framework.
#ample of an Gn$ualified Audit 5eport
?e ha,e audited the financial statements set out on page B to N which ha,e been
prepared on the basis of accounting policies set out in note F. ?e ha,e obtained all the
information and eplanations which to the best of our knowledge were necessary for the
purpose of our audit and to pro,ide a reasonable basis for out opinion. The financial
statements of the company are in agreement with the books of account.
The directors are responsible for the preparation of financial statements which gi,e a fair
and true ,iew of the state of affairs of the "ompany and of the group. .ur responsibility
is to epress an independent opinion on the financial statements based on our audit and to
report our opinion to you.
?e conducted our audit in accordance with the I2A. The standards re$uire that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatements. An audit include eamining on a test
basis. #,idence supporting the amounts and disclosure in the financial statement. It also
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includes assessing the accounting principles used and estimates made by the management
as well as e,aluating the o,erall financial statements. ?e belie,e that our audit pro,ides
a reasonable basis for our opinion.
In our opinion, proper books of accounts ha,e been kept and the financial statements gi,e
a true and fair ,iew of the financial position of the company and of the group as of ='
st

0ecember <**>.
/atters that 0o @ot Affect the Auditor's .pinion
There are occasions where the auditor has no reser,ations concerning the matters
contained in the >
th
2chedule of the "ompany's Act.
These are matters that should be complied with considering the rele,ant International
Auditing 2tandards, howe,er, the auditor is of the ,iew that unless the matter concerned
is not brought to the attention of the reader, then the reader may not get a proper
understanding of the financial statements and the results of the entity. This means that
the auditor is satisfied with all the re$uirements of the >
th
2chedule and he can report in
the affirmati,e concerning all these matters but due to usual circumstances, he wants to
highlight certain information for the benefit of the reader.
?hen faced with unusual circumstances the auditor should modify the report by adding
an emphasis of matter paragraph.
This paragraph should come after the opinion paragraph to highlight unusual
circumstances identified by the auditor.
The emphasis of matter paragraph should read as follow8;
J?ithout $ualifying our opinion abo,e, we draw your attention to note I to the financial
statements. The company is a defendant in a law suit alleging infringement of trademark
rights. The company has filed a counter;claim and court proceeding of both suits are in
progress. The outcome of the matter cannot be determined presently and no pro,ision for
any liability that may arise has been made in the financial statementsJ
/atters that 0o Affect the Auditor's .pinion
There are occasions when the auditor has reser,ations about the re$uirements of the >
th

2chedule as defined by I2A >**.
These matters could include8;
That the auditor may not ha,e obtained all the eplanations and information he
considered necessary for his audit.
That in his opinion, proper books of accounts ha,e not been kept
That returns that are ade$uate for the purpose of his audit were not recei,ed from
branches not ,isited by the auditor
That the accounts are not in agreement with the books of accounts
That the balance sheet does not gi,e a true and fair ,iew of the state of affairs of the
"ompany as at the end of the yearBperiod.
That the % and 1 account doesn't gi,e a true and fair of the profits and losses of the period
ended.
That the accounting policies adopted by the client do not conform to the IA2 and that
their application is not 9ustified.
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Therefore the auditor may be unable to epress un$ualified audit opinion because of the
abo,e reser,ations. The I2A >** classifies the auditor's reser,ations on the abo,e matters
into two namely8;
1imitations in scope of the auditor's work
0isagreements with management on material matters
%G '
AG0IT .7 5#@T
The auditor should ascertain the authority from the Board of 0irectors or the AG/ to
lease property on whose account rent is recei,ed
The auditor should then pay attention to the contents of the minutes of
directorsBshareholders with respect to the following8;
The property leased
%eriod of lease
5ent payable
Terms such as repairs and maintenance
The auditor should communicate with the lesseeBtenant and obtain the lease agreement
and check for the following8;
5ent paid
%ro,isions for repairs and maintenance
0ue date of payment rent
%enalty for late or non;payment of rent
If properly is leased through an agent, ascertain the agreement between the client and the
agent and the commission payable to the agent.
The auditor should then engage a ,aluer to ascertain the market rent payable with the rent
recei,ed.
If rent is paid through the bank, communicate with the bank to ascertain the amount
recei,ed
The auditor should then trace the rent paid to the cashbook, bank inslips and bank
statements.
The auditor should ascertain whether rent recei,ed is properly or ade$uately disclosed in
the financial statement.
%G =
AG0IT .7 0IDI0#@02 5#"#ID#0
Ascertain the authority to undertake in,estments whose returns are di,idends. The
authority should be from the AG/ or Board of 0irectors
The auditor should then communicate with the company paying the di,idend to
ascertain8;
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The type of shares on which di,idends are paid
The period
The rate
The auditor should then check for any correspondence which may pro,e receipt of such a
di,idend i.e. pressBnewspaper report, notice to the AG/ as recei,ed by the "ompany.
The auditor should then ensure that di,idends recei,ed are properly recorded and that
they are recorded in the current financial period
The auditor should then recomputed the di,idends recei,ed against shares purchased
Incase di,idends are recei,ed by the bank on behalf of the client, the auditor should
check the bank statement and agree the amounts recei,ed with the following8
In,estment's 5egister
0i,idends 5ecei,ed from each In,estment
The auditor should then check the recording of such di,idends with the cash book and
bank statements all of which should agree.
AG0IT .7 I@T#5#2T 5#"#IDAB1#B5#"#ID#0
Interests will be recei,ed an account of loan ad,anced by a client or a fied deposit with
a bank. In which case the auditor should undertake the following audit procedures8;
Ae should ascertain on which in,estments interests are recei,ed whether by way of loan,
fied deposits etc
In each case the auditor will need to check the authority for the eecution of this
in,estment from AG/ or Board of 0irector
The auditor should check articles and /emorandum of Association to ascertain whether
the client has powers to undertake such in,estments.
Incase interest is recei,ed on account of a loan, the auditor should re$uest the client to
make a,ailable the loan agreement and ascertain the following8;
Amount of loanBmoney
Any special terms
The auditor should then recomputed the interest recei,ed based on the principal to
ascertain the authenticity of the interest recei,ed
The auditor should then communicate with the clients bank to ascertain the interest
recei,ed on behalf of the client
The auditor should then write to the borrower and ascertain8;
The amount borrowed
5ate of interest
0ate due, all of which should agree with the agreement obtained from the client
The auditor should then check the recording of the amount recei,ed in the cashbook to
the rele,ant ledgers and the bank statement
The auditor should ascertain whether the interest recei,ed is properly disclosed in the
financial statement.
AG0IT .7 2A1A5I#2
The auditor should ascertain the authority for payment of salaries and for this reason he
should check the salaries register to ensure that a responsible officer appro,ed it before
payment was done.
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The auditor should obtain from the personnel department the number of employees and
agree their number with the number that is in the payroll
The auditor should also obtain the payrolls and check them for salaries paid to ensure that
they are properly recorded.
If salary is paid as cash within the organisation the auditor should obtain salaries
,ouchers to ensure that they are signed by payees or employees and if paid by che$ue the
auditor should ascertain the amount paid by eamining the counterfoils.
7or any increments, allowances and other benefits the auditor should ascertain whether
they were properly authori-ed by a responsible officer.
If salary is paid by che$ue, the auditor should compare the che$ue number and the
numbers that appear in the bank statement
The auditor should then check for any statutory deductions to ensure that these ha,e been
assessedBprocessed in the ,ouchers and salary account and also ensure their prompt
payment.
If an employee was paid ad,ance, the auditor should ensure that the salaries books were
ad9usted to a,oid o,erpayment
AUDIT OF DIRECTOR<S FEE
#amine policies concerning director's fee for consistency
#amine the Articles of Association to ascertain that fee payable to directors is paid in the
amount in manner pro,ided for
#amine minutes of meetings of shareholdersBdirectors for authori-ation
"heck attendance register of directors to ensure that they recei,e their fee as a result of
attending meeting
#amine disclosure of directors fee in the financial statement
"onfirm that the directors fee is paid net of ta from supporting documents
"onfirm that fee payable and benefits recei,able in relation to the current accounting
period ha,e been properly accounted for.
ANALYTICAL RE(IEW )ROCEDURES
This is the study of relationships between elements of financial information epected to
conform to a predictable pattern based on the organi-ation's eperience and between
financial and non;financial information
It in,ol,es in,estigating unepected ,ariations identified by analytical re,iew
It in,ol,es obtaining and substantiating eplanations for such ,ariations
It also in,ol,es e,aluating the rest with other audit e,idence obtained e.g.
Analy-ing the relationship between items of financial data such as between sales and cost
of sales or between financial and non;financial information such as between payroll costs
and the si-e of the work force.
"ompany actual data with predictions deri,ed from the analysis of known and epected
relationships between items of data
"ompany information for the latest period with corresponding information for earlier
periods
If in,estigation of unepected ,ariations which are identified by such analysis and
comparisons
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#,aluating the results of such analysis, comparison and in,estigation in the light of other
audit e,idence obtained to support the auditor's opinion on financial statement.
7A"T.52 TAAT I@71G#@"# TA# #FT#@T .7 G2I@G A@A1HTI"A1 5#DI#?
%5."#0G5#2
The nature of the entity and its operations e.g. a long established business with number of
changes &stability+
!nowledge gained in pre,ious audits of the enterprise
The management's own use of analytical re,iew procedures e.g. reliable budgetary
control and reliability of information prepared by the management
A,ailability of non;financial information to support financial information e.g. information
on production and resources used to make prediction possible.
The reliability, rele,ance, and comparability of the information a,ailable
The cost effecti,eness of the use of analytical re,iew in relation to other methods of
obtaining e,idence
The a,ailability of staff with eperience, ade$uate training and intelligence in using
analytical re,iew procedures
?hen or if it is mandatory to use
%G5%.2# .7 G2I@G A@A1HTI"A1 5#DI#? %5."#0G5#2
Analytical re,iew procedures are used at different stages of the audit for a number of
reasons8;
The stages include8;
%lanning stage
0uring the Audit
7inal 2tage
%lanning 2tage
To determine the nature, timing and etent of other audit procedures
"arry out preliminary risk assessment
To obtain knowledge of the client
0uring the Audit
To de,elop epectations in order to compare information
To de,elop margins acceptable de,iations
To in,estigate de,iations which eceed acceptable de,iations
To include and $uantify any uneplained differences
7inal 2tage
To test reasonableness of information obtained
To identify areas re$uiring further testing
To pro,ide an o,er,iew of consistency of financial statements with auditors knowledge
of the clients business
AG0ITI@G I@ A "./%GT#5I2#0 #@DI5.@/#@T
"omputers are currently ,ery important components in accounting and auditing.
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/any organi-ations are therefore mo,ing away from a manual accounting system to
computeri-ed accounting systems therefore present auditors need to undertake rele,ant
computer training to enable them to audit in a computeri-ed en,ironment
AG0ITI@G "./%GT#5 2H2T#/2
AG0ITI@G TA5.GGA TA# "./%GT#5
This is where the auditor is epected to ha,e knowledge of computer inputs processing
and output technology
Ae should study the e$uipment processing and controls incorporated to ensure that all
transactions are accounted for
The emphasis on auditing through the computer is to ensure eistence and sufficiency
of internal control systems
5easons for Auditing Through the "omputer
There are too many transactions to be done manually
There are sophisticated programs to use which can preser,e the integrity of data
Ad,antages of Auditing Through the "omputer
Its faster and easier to use
2uitable in large organi-ations with many transactions
It uses the computer as the auditing tool to enhance the auditors knowledge of computers
It ensures completeness, accuracy and ,alidity of financial information
AG0ITI@G A5.G@0 TA# "./%GT#5 &B1A"! B.F AG0ITI@G+
This is where the auditor is assumed to be literate in computer technology and therefore
he can't e,aluate the integrity of software and hardware.
7or auditing purposes he takes the manual sample of computer input and compares it with
the computer output and if both are correct or in agreement processing is assumed to ha,e
been correct also
Ad,antages of Auditing Around the "omputer
Its reliable and easy to use
Its ,ery suitable for small organisations with fewer transactions
The auditor needs not to ha,e computer knowledgeBtechnology
AG0IT T5IA1
This is the tracing of total transactions and analysis of balances through a system from
the source to completion
"auses of 1oss of Audit Trail
0eletion of past data to create storage space hence only the most current information is
maintained
Gse of magnetic files where stored data cannot be directly inspected
2orting source documents ; These are only sorted by computer and tracing the source
document from output documents is ,ery difficult.
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.,ercoming 1oss of Audit Trail
#nsuring special print;outs for auditors
0oing alternati,e tests e.g. physical stock;counting
Gse of programmed interrrogation which interrogates all stages of a transaction from the
source to completion
#nsuring clerical accuracy in in,oicing and computations
Gse of computer aided audit techni$ues &"AATs+
"./%GT#5 AI0#0 AG0IT T#"A@IIG#2
These are techni$ues which help the auditor to o,ercome the loss of audit trail.
They normally come in form of audit packages
They include
T#2T 0ATA
It in,ol,es inputing the same data and processing it inorder to see whehther a system is
processing data the way it should.
The epected results are calculated in ad,ance and then compared with actual results that
arise
If the two are in agreement then the auditor has reasonable assurance that the program is
performing satisfactorily.
1imitations of Test 0ata
.nly indi,idual programs can be tested but not the entire system
Gse of test data in,ol,es reliance on the clients accounting staff and therefore reliability
of e,idence obtained is less reliable
The techni$ue cannot detect incidences where programmes ha,e been interested with.
#/B#00#0 AG0IT 7A"I1ITH
This allows continuous re,iew of data collected and the manner in which it is treated by
the system.
The embedded facility has audit modules incorporated into computer elements of the
"ompany's Accounting 2ystem
#amples include8;
Intergrated Test 7acility
It in,ol,es creation of fictious entries e.g. customer, department etc but within the
framework of the regular application
Transactions are then posted to the fictious entry along with the regular transactions
The results produced by the normal processing sacco are compared with that of a
ficticious entity
The auditor must ensure that dummy or ficticious transactions are recogni-ed by the
computer before printing out any data.
Ad,antages
Application controls o,er the entire system can be tested including inputs and output
controls
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#mployees in,ol,ed in routine processing of transactions are unlikely to be aware that an
item of data is for test purposes since it can be included along with real transactions
It can be processed through;out the period under audit especially with the assistance of
internal audit department
1imitations
"omplete independence is not achie,ed because it re$uires assistance of the client
If employees become aware of the dummy accounts independence is further
compromised
ActualBli,e data may also be corrupted
Its effecti,eness depends on internal audit department
2ystems "ontrol and 5e,iew 7ile &2"A57+
#ach account record is gi,en a H#2 or @. field by the auditor
This indicates whether or no &2"A57+ applies to this account
A monetary ,alue limit is set by the auditor
All transactions posted to a 2"A57 aBc which had a ,alue in ecess of the limit amount is
written to a separate 2"A57 file
The techni$ue enables the auditor to maintain material transactions or sensiti,e
transactions with ease
%arallel 2imulation
This is preparation of separate program that imitates or simulates the real system
5eal data is then passed through the real system and the imitated program
Its used to reperform controls such as to identify any missing items from a se$uence
%rogram 1ogic and "oding
A logic path analysis draws flow charts of any accounting system
A code comparison program compares the original speciali-ed program to the current
program to detect unauthori-ed amendments
0uplication
This is where auditors use their programs to duplicate their clients system in certain areas
into their own programs
Graphics
This is a software that eists to aid the auditor in flowcharting or tracking of documents
around the system
7A"T.52 T. ".@2I0#5 ?A#@ "A..2I@G A "./BI@ATI.@ .7 ".A.A.Ts
?hen planning the audit the auditor should consider the most appropriate combination of
".A.A.Ts
In determining whether to use ".A.A.Ts the following factors should be considered8;
"omputer knowledge and eperience of the auditor
A,ailability of suitable ".A.A.Ts to use
#fficiency and effecti,eness of using ".A.A.Ts o,er manual techni$ues
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Time a,ailable
The le,el of audit risk in,ol,ed
1e,el of training re$uired for audit staff
The effecti,eness of ".A.A.Ts in presenting and detecting frauds
".A.A.Ts %1A@@I@G
The following steps should be undertaken by the auditor in preparing for the application
of the selected ".A.A.Ts
2et audit ob9ecti,es of ".A.A.Ts
0etermine the accessibility and a,ailability of the organi-ations facilities and programs
0efine the procedure to be undertaken
0ocument ".A.A.Ts that are going to be used including their ob9ecti,es
Types of 2oftware that the Auditor can use in %ersonal "omputer
2TA@0A50 2.7T?A5#
This is used for word processing and spreadsheets which can be used to carry out general
audit work in accounting systems
#F%#5T 2H2T#/2
They are de,eloped by large audit firms which are aimed at determining the sample si-e,
doing the recalculations and performing analytical re,iew procedures
"ommon Gses of 2oftware
7or selecting items for the audit tests
7or performing complete checks
7or detecting ,iolation of systems rules
Ad,antages of Gsing 2oftware
%erformance of a wide ,ariety of audit tests
The deal with a large ,olume of data
They ensure accuracy and completeness of records
0isad,antages
They re$uire a high degree of skills to use
The initial set up cost is high
They are not '**E secure
?ays in which the Auditor "an Gse %ersonal "omputers in an Audit
%reparation of Audit working papers
2tatistical sampling ; They enable the auditor to do sample selection, determining the
sample si-e, through generation of random numbers.
They enable the auditor to carry out analytical re,iew procedures
Gse of standard software such as ?ord, enables the auditor in the production of
information accurately and faster
They are used in preparing flow charts
Gsed in the preparation of audit programs
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%reparation of audit budgets and control of audit budgets
Gsed in the ,aluation of audit risk
Gsed for maintaining a permanent audit file which can be updated year after year
Identifying the amounts in ecess of the credit limit
Identifying debtors with ,ery high discount rates
2electing items for confirmation and printing of confirmation re$uests.
".@T5.12 I@ "./%GT#5 A%%1I"ATI.@
A%%1I"ATI.@ ".@T5.12
These are controls to ensure the completeness, accuracy, ,alidity, authori-ation and
proper maintenance of master files
They relate to transactions and data obtained from e,ery transaction to ensure that they
are properly recorded.
Application controls include8;
"ompleteness of Input "ontrols
To ensure that a document is raised for e,ery transaction
To ensure that information is processed in time
Accuracy of Input
To identify the accuracy of data
To ensure that all transactions are recorded
Authori-ation "ontrols of Input
To ensure that each transaction is authori-ed
To ensure that the indi,idual who authori-ed the transaction was empowered to do so
"ontrols o,er processing &Gpdating of 0ata+
To ensure that all input data is processed
To ensure that right master files are used
To ensure that the processing of each transaction is accurate
To ensure production of accurately updated master files
"ontrols .,er .utput
To ensure that output is checked for completeness and accuracy
To ensure that output is properly distributed and acted upon
"ontrols .,er /aster 7iles
To ensure that all data held on master files is accurate and upto date
To ensure that any amendment to data is properly authori-ed
GENERAL CONTROLS
T4e+ .over t4e /eneral environ*ent 6it4in 64i.4 a##li.ation .ontrols o#erate
T4e+ .over t4e !ollo6in/ areas78
Controls over S+ste* Develo#*ent
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)ur#ose
To ensure that systems de,elopment is fully authori-ed
To ensure that proper standards are followed during de,elopment
To ensure that changes are properly tested and documented
Controls to )revent and Dete.t Errors durin/ )ro/ra* E;e.ution
)ur#ose
To ensure that errors arising are noted and resol,ed
Controls to #revent and Dete.t C4ar/es to Data Files
)ur#ose
To ensure that charges are authori-ed
To ensure that charges are made accurately
Controls to ensure Continuit+
)ur#ose
To ensure that the system can continue to function in the e,ent of a breakdown or disaster
CONTROLS USED TO )ROTECT CO)UTER AUDITS
)4+si.al Controls
To limit access to computer room by locking the room and keys kept by a specified
person
Back;up 0isks
%reparation of back;up disks is necessary and should be kept in a separate place from
where the main disks are kept to enable reco,ering incase of a disaster
0ata 7iling
#ach disk should be labeled clearly following a set pattern so that data stored on it can be
identified immediately.
Gse of printed labels is necessary to impose a degree of control on how each disk should
be identified
#ach disk should be filed in special boes to pro,ide a degree or protect against li$uids
and being folded to ruin the contents.
0ocumentation
It pro,ides support for work already stored on disks and filed
It pro,ides a record of data currently being processed or updated
2taffing
#,ery staff in,ol,ed with electronic data processing should be ade$uately trained to
understand the system and protect the controls which they must keep.
%roofing
There should be a special room for proofing data freshly keyed in to identify mistakes
immediately for correcti,e action to be taken.
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%5.G5A//#0 ".@T5.12
Gse of %asswords
They are used to pre,ent to either all or specific files
0ata %rompts
They are controls used to control deletion of any files
The computer poses and asks the user if deletion command was intentional
5easonableness "hecks
A programme will check to ensure that data input is reasonable gi,en the type of input
e.g. A payroll system is designed to check that hours recorded for the week fall within the
range of =* ; )*
#istence "hecks
A computer will check to ensure that data input is ,alid by checking that the entity
already eists on the system e.g. checks to ensure that an employee number input already
eists on the system.
AUDITING AND ACCOUNTING STANDARDS
Accounting and Auditing 2tandards are guidelines issued by the %rofessional Bodies to
guide accountants and auditors in the performance of their work. If properly followed,
they enable accountants or management to prepare financial statements that reflect a true
and fair ,iew.
2imilarly, they enable auditors to approach their work in a professional manner by
pro,iding rules of measurement and a framework in which all auditors should operate to
ensure uniformity and standardi-ation in the work done.
Ad,antages of Accounting 2tandards
They increase reliability and comparability of financial statements
They narrow the areas where different accounting policies can be adopted hence
promoting uniformity in the work done
They pro,ide a basis for the interpretation of a true and fair ,iew
They reduce areas of uncertainty hence promoting standardi-ation.
They enable accountants to be focused in their work and to maintain ob9ecti,ity in their
reporting.
0isad,antages of Accounting 2tandards
They are rigid in some areas and too general in others
They create conflicts among professionals particularly on the interpretation and treatment
that should be gi,en on a particular aspect
They may not be suitable for small companies that may be unable to keep proper books
of accounts
They cannot be easily changed once adopted.
Ad,antages of Auditing 2tandards
They pro,ide a framework for all audits
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They help to standardi-e the approach of all auditors with the ob9ecti,e of epressing an
audit opinion
They assist the court of law in interpreting the concept of due professional care.
It increases public awareness on the work of the auditor hence minimi-ing the
epectations gap
They pro,ide support to auditors in,ol,ed in a dispute with their clients because they
indicate the scope of work to be co,ered.
0isad,antages of Auditing 2tandards
They are rigid
They may not be changed once adopted
They cause conflicts among professionals
They may not be suitable for small companies with few transactions
AG0IT 2A/%1I@G
Audit 2ampling is the application of compliance and substanti,e tests to less than '**E
of items within an account balance, class of transactions or other population as a
representati,e of that population to enable the auditor to obtain and e,aluate e,idence of
some characteristic of that population and assist in forming a conclusion concerning that
characteristics.
.r it is a test where part of the items from a population is taken and eamined for a
certain characteristic so that the results obtained can be used to infer about the $ualities of
the whole populations
0#7I@ITI.@ .7 T#5/2
%opulations ; It refers to the entire data such as account balances, specified transactions.
It is from this population that the sample is selected about which the auditor wishes to
draw conclusions
#rror ; 7rom the point of ,iew of compliance testing, an error means that the internal
controls are inoperati,e or in effecti,e but from a point of ,iew of substanti,e testing an
error means both intentional and non;intentional mistake.
Attribute &"haracteristic+ ; This refers to any characteristic that is present or absent e.g
the presence or absence of particular internal controls like authori-ation, physical
controls, segregation of duties.
/ateriality le,el ; It refers to the maimum error or tolerable error rate that the auditor is
prepared to accept and still be satisfied that the financial statements show a true and fair
,iew.
2tatistical 2ampling ; This is an approach that uses random sample selection and
probability theory to determine the sample si-e, to e,aluate the sample results and to
measure the sampling risk.
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Mudgemental 2ampling ; It is a sampling techni$ue where the auditor determines the
sample si-e and its composition based on his personal 9udgement or, it is any sampling
that does not fulfil the conditions of statistical sampling.
2ampling 5isk ; It is the risk that the auditors conclusion from the sample may be
different from the conclusion that may be arri,ed at if he had tested the entire population.
#trapolation &pro9ection+ ; This is the application of the sample results to the population
as a whole with a ,iew to forming an audit opinion.
TH%#2 .7 AG0IT 2A/%1I@G
There are two type of audit sampling namely8
2tatistical sampling
@on;statistical sampling
2TATI2TI"A1 2A/%1I@G
This is a scientific approach that uses random selection and probability theory to
determine the sample si-e.
It is used in cases where many transactions are in,ol,ed
2tatistical sampling should ensure8;
That the sample is sufficiently large
That the sample is chosen at random
That all items in the population ha,e same or e$ual chances of being selected
Ad,antages of 2tatistical 2ampling
It is more ob9ecti,e since it is not based on the auditors personal 9udgement on the sample
si-e
2tatistical sampling re$uires the auditor to define his ob9ecti,es hence enabling him to
achie,e better results
Its results can be pro,ed.
0isad,antages of 2tatistical 2ampling
It is time consuming because a lot of time is re$uired to design and manage the selection
process
It re$uires audit staff who are well trained in scientific statistical sampling
2ince only a few transactions are tested the auditor would remain suspicious of
transactions not tested.
It depri,es the auditors personal 9udgment or epression of personal opinion on the
results
0efinition of error is sub9ect is sub9ect to auditors 9udgment and can therefore not be
relied upon.
MG0G#/#@TA1 2A/%1I@G &@.@;2TATI2TI"A1 2A/%1I@G+
It's a techni$ue where the auditor determines the sample si-e and its sample si-e based on
intuition or personal 9udgment
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Ad,antages
It is easy to use because it does not re$uire the auditor to ha,e statistical knowledge
It is time sa,ing
It is easily understood by most auditors
It enables the auditor to use his professionalism in choosing the sample
0isad,antages
It can be biased since the auditor relies on personal 9udgment
?here the auditor lacks skills and eperience it could pro,e ,ery difficult to apply
2ince intuition is used, it may lea,e no documentary e,idence to support the results
SA))LING A))ROACH
The common aspect in approach to sampling whether statistical or 9udgmental includes
the following8;
Determining the Objectives of the Study/Sample
The auditor must state clearly what he is seeking to establish
The ob9ecti,es keep the auditor focused in approach
Determining the Population
The auditor has to determine the population in terms of the attribute or characteristics
These attributes will be those characteristics that are either present or absent
The auditor should define the error or deviation
0efinition of an error depends on the type of audit tests e.g. in compliance audit tests an
error means that the internal controls are inoperati,e and ineffecti,e while in substanti,e
tests an error means both intentional and unintentional mistakes.
The auditor should therefore establish the maimum tolerable error. This is an error
whose inclusion or omission does not deter the auditor from concluding that the results of
the audit are sufficient, reliable and rele,ant.
Determining the Sample Sie
In scientific approach, the auditor should select randomly to ensure that e,ery component
of the population has e$ual chances of being selected.
It can be done by using random generation of numbers by way of computer simulation.
?hen using a 9udgmental approach the auditor should a,oid being sub9ecti,e or biased.
Fa.tors t4at in!luen.e t4e Sa*#le Si9e in Su,stantive Tests
The auditors assessments of inherent risk
?here the risk is high, the auditor should increase the sample si-e
The total error that the auditor is willing to accept
The number of sampling units in the population
The auditors re$uired confidence le,el
Gse of other substanti,e procedures directed at the same financial statement
The amount of error epected by the auditor to find in a population.
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Fa.tors In!luen.in/ Sa*#le Sele.tion in Co*#lian.e Tests 1Tests o! Control+
The auditors intended reliance on internal control system
The auditors understanding of the business
Auditors assessment of detection risk
"hanges in personnel or internal control system
The results of audit procedures in prior periods
The auditors re$uired confidence le,el
The auditors epected error rate
Selecting the Sample !tems " As a rule, no sample item should be included in the sample
unless it is a member of the population
Testing the Selected !tems " The auditor should then apply ade$uate audit tests on the
selected items to enable him to draw a conclusion on the entire population
The auditor should therefore plan, control and record his work accurately with respect to
the items selected.
#valuating the $esults of the Test " The results obtained should be e,aluated to ascertain
whether they are in agreement with the tests carried out and with the ob9ecti,es of the
audit.
Projecting the #rror to the #ntire Population " The sampling errors should be pro9ected
to the whole population to ascertain the materiality of the sampling risk to the whole
population.
%ssessing the $is& of !ncorrect 'onclusion " After pro9ection has been done and the
effects known, the auditor should assess the risk of incorrect conclusion.
I)ORTANCE OF AUDIT SA)LING
It is time
2ampling enable the auditor to sa,e time hence facilitating preparation of the report
before the AG/
2ampling enable the auditor to perform both compliance and substanti,e tests making the
information obtained more reliable.
Incase of a large business, it is not practical for the auditor to eamine '**E transactions
and controls, therefore sampling makes his testing easier.
If scientifically done, it enables the auditor to ascertain the amount of risk hence
controlling his work.
?here internal controls are weak, the auditor should eamine all transactions if possible
and therefore sampling enables the auditor to define the scope of work to be co,ered
where controls are strong.
STRATIFICATION OF )O)ULATION
This is the sub grouping of the population which displays a particular tendency towards
homogeneity
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By dealing with such groups the auditor increases assurance of what he is seeking to
obtain
2tratification is done in the following ways8;
According to geographical area
"hronological order
Alphabetical order
Account balances
The method to be used depend on the audit ob9ecti,es.
Advanta/es o! Strati!i.ation
It reduces ,ariation of the remaining items hence the lower the ,ariance the higher the
confidence le,el
It enables the auditor to concentrate on a particular characteristic a population
?here a top stratum has been '**E tested it may result in a ,ery high proportion of the
entire population being accurately ,erified
CHARACTERISTICS OF A GOOD SA)LE
/ust be easy to understand and apply
&LOCKS
Outline t4e users o! audited !inan.ial re#orts or t4ose #arties t4at .an su..ess!ull+
sue t4e auditor
In,estors
#mployees
"ustomers
1enders
Insurance firms
/anagement
2uppliers
Ta authorities
Go,ernment agencies
0irectorsBmanagers
2hareholder
7inancial Analyst
E;#lain t4e *ain o,-e.tives o! audit o! !inan.ial state*ents
Audit ob9ecti,es are deri,ed from authority such as statutory, professional, incidental.
Statutory
To enable the auditor to epress an opinion whether financial statements are prepared in
accordance with the reporting framework
?hether proper books of accounts ha,e been kept by the company
?hether they ha,e obtained all information and eplanations necessary for the purpose of
the audit
?hether the returns ade$uate for the purpose of the audit ha,e been recei,ed from
branches not ,isited by the auditors
?hether financial statements prepared are in agreement with the books of account.
Professional
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The professional body like I"%A! re$uires the auditor to issue a management letter to
highlight among others
%roblems encountered during the audit
?eaknesses in the internal controls and accounting system
0angers facing the client
2olutions to the problems identified
#ffects of implementing pro,ided solutions
"onse$uences of not implementing the solutions
Areas where the auditor did not recei,e full co;operation from the management
Areas where the auditor detected errors and fraud
!ncidental
0etection of errors and frauds
%re,ention of errors and frauds
To ad,ice management on adherence of financial reporting framework
To pro,ide general ad,ice to the client regarding computeri-ation
E;#lain 6a+s in 64i.4 t4e o,-e.tives o! an audit o! !inan.ial state*ents 4ave
.4an/ed over t4e +ears
Traditional function of detecting errors and frauds is no longer the primary ob9ecti,e of
an audit
There has been a shift from a true and correct ,iew to true and fair ,iew
Accounting and auditing that were pro,ided to a client by the auditor are now performed
under two different engagementsBassignments
There has been a shift from ,ouching techni$ue to systems based approach and now
mo,ing to risk approach.
Give reasons t4at 4ave led to t4e .4an/es in audit o,-e.tives
Increased compleity of business
%ressure to keep the cost of auditing
"hanges in company law and professional body re$uirements as outlined in the >
th

2chedule of the "ompanies Act
#nactment of the Accountants Act "ap )='
The de,elopment of Accounting 2tandards
2ociety epectations of the auditor due to in,estor awareness
State t4e advanta/es o! an audit
Gi,es assurance and credibility to the accounts to benefit in,estor
%re,ents errors and frauds
Gsed as a basis of borrowing because they increase the credit rating o the company
Gsed as a basis of sharing profit hence minimi-ing disputes
Gsed for ascertainment of ta liability
Gsed as a basis of determining the ,alue of the business during mergers, ac$uisition etc
Gsed for determining of insurance compensation incase of damage claims
It keeps the client's staff ,igilant all the time
Auditors offer ad,ice to management on the performance of the company
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%ro,ides assurance to =
rd
parties that the company has operated within the pro,isions of
the "ompanies Act
Assures employees about continuity of the business
Disadvanta/es o! an Audit
It is costly to the "ompany
#poses weaknesses of the business to competitors
The entire management may be dismissed in case of mismanagement
#rrors and frauds are detected too late
They may limit the borrowing ability of the company incase of negati,e opinion
They disrupt the client's work routine especially in continuous audits
The company may loose internal in,estors, the companies share price at the stock
echange can decline
/ay epose the auditor to legal liabilities incase of negligence
1i$uidation of the "ompany in etreme cases
Outline t4e auditors res#onsi,ilities over !inan.ial state*ents
To perform an opinion on a true and fair ,iew of the financial statements
To make a report on the same
ana/e*ent Res#onsi,ilities over Finan.ial State*ents
To prepare financial statements that gi,e a true and fair ,iew
To present financial statements as per the accepted financial reporting framework
To maintain sufficient accounting records to show the position of the company at all
times
To select suitable accounting policies and apply them consistently
To make reasonable 9udgment and accounting estimates
To implement suitable accounting controls and accounting system
To pre,ent and detect errors and frauds in financial statements
OCK
State and E;#lain t4e *ain assertions t4at t4e auditor 6ould ,e .on.erned 6it4 in a
su,stantive #ro.edure
"ompleteness ; This is the assertion that all assets, liabilities, re,enues and ependitures
ha,e been recorded and that there are not omissions
.ccurrence ; This is the assertion that transactions actually occurred
#istence ; This is a representation by management that assets mentioned eist and that
they are owned by the client
Daluation ; This is the assertion that the assets in the financial statements are properly
,alued
5ights and .bligations ; This is the assertion that all known rights and obligations of the
firm to =
rd
parties ha,e been taken care of in the financial statements
%resentation and 0isclosure ; This is an assertion on compliance with the accounting
2tandards and other legal re$uirements.
/easurement ; This is a representation that assets, contingencies etc ha,e been fairly
,alued and that there is no o,er or under ,aluation in the financial statements
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Outline t4e !a.tors t4at 6ould in!luen.e t4e sa*#le si9e used ,+ t4e auditor in
su,stantive testin/
Auditors assessment of inherent risk
The total error that the auditor is willing to accept
The number of sampling units in the population
The auditors re$uired confidence le,el
Gse of other substanti,e tests directed at the same financial statement assertion
Amount of epected error in the population
Time a,ailable
E;#lain t4e i*#ortan.e o! de,tor .ir.ulari9ation as a *et4od o! .olle.tin/ audit
eviden.e
#nables the auditor to obtain direct e,idence that debtors eist
#nables the auditor to confirm the correctness of the figures of debtors in the clients
books
To obtain confirmatory e,idence to the strengths and weaknesses of the internal controls
#nables ascertainment of the correctness of cut;off procedures followed
%ro,ides e,idence on the eistence of disputant items
Aow would the auditor ,erify the amounts and ade$uacy of the pro,ision of bad and
doubtful debts appearing in the account8
#,idence of any debts in disputes e.g. for non deli,er, breakages, poor $uality
Ade$uacy of the system of internal controls relating to the appro,al of credit and
following up of poor payers
The period of credit allowed and taken
?hether the account is within the maimum credit appro,ed
5eports on each debtor from collectors
%resent ,alue and realisability of securities if any gi,en as collateral
The state of legal proceedings &if any+ and the legal status of the debtor in li$uidation and
bankruptcy
"B# 5e)ts considered irreco(era)le should )e %ritten off.
Lists t4e se"uen.e o! ste#s involved 64en dire.tl+ .on!ir*in/ de,tors
.btain permission from the client
.btain a list of debtors from the client
2elect a desired sample from list
2elect the method to use either positi,e or negati,e or both
0raft the circular
7ill in the details
0ispatch the circulars yourself or super,ise the dispatch
5ecei,e and e,aluate replies directly from debtors
/ake a follow;up of debtors who do not reply to the circular
Outline t4e ele*ents 1*ain2 o! t4e s.o#e o! #ara/ra#4 o! t4e auditors re#ort
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A statement that the audit was planned and performed to obtain reasonable assurance
about whether financial statements are free from material misstatements
That the audit was conducted in accordance with I2A
0escription of the work doneBscope
Assessment of the accounting principles used in preparing the financial statements
Assessment of the significant estimates made by the management in the preparation of
financial statements
#,aluating the o,erall financial statement presentation
State t4e *atters t4e e;ternal auditor 6ould re#ort ,+ e;.e#tion in .o*#lian.e 6it4
t4e Co*#anies A.t 1Re#ortin/ in t4e Ne/ative2
5eporting by eception means that in the auditors opinion the re$uirements of the
"ompanies Act and any other regulations ha,e not been complied with therefore the
auditor will report as follows8;
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That proper books of accounts ha,e not been kept
That proper returns ade$uate for the audit ha,e not been recei,ed from branches
That the "ompanies Balance 2heet is not in agreement with the accounting records
That the auditor has not recei,ed necessary information and eplanations for the audit
That the directors report &representations letter+ is inconsistent with the financial statements
E;#lain t4e #rin.i#le *atters 64i.4 t4e auditors .onsider in !or*in/ an o#inion on t4e
!inan.ial state*ents
Aa,ing accumulated audit e,idence about indi,idual items or group of items the auditor should
carry out an o,erall re,iew to determine whether in his opinion
?hether financial statements ha,e been prepared using acceptable accounting
policies which ha,e been consistently applied and are appropriate to the
business
If results of operations, state of affairs and all other information included in the
financial statements is in agreement with each other and with the auditors
knowledge of the client
If there is ade$uate disclosure of all appropriate matters and if the information
contained in the financial statement is suitably classified
If financial statements comply with all statutory re$uirements and other
regulations that are rele,ant
?hether the conclusions drawn from other tests carried out and those drawn
from his o,erall re,iew of the financial statements enable him to form an
opinion on the financial statements
W4at is a .ontin/ent lia,ilit+D Give e;a*#les o! .ontin/ent lia,ilities and e;#lain t4e
i*#ortan.e o! .ontin/ent lia,ilities to t4e auditor
"ontingent liabilities are e,ents that are determinable or not easily determinable and which
arise from the "ompany's past acti,ities and which may turn out later to be actual liability or
not
#.g ; 1egal 2uits against a company
Bills of echange discounted
Guarantees gi,en to =
rd
parties
%arty paid share di,idends
7orward contracts
0isputes with trade unions o,er pay increase
I*#ortan.e o! Contin/ent Lia,ilities
It enables the auditor to establish their disclosure and presentation in the financial statements
Aelps to ascertain their fair ,alue in the clients records
To know whether they eisted at the balance sheet date
To establish their effects on a true and fair ,iew of the companies financial statement
Outline t4e audit #ro.edure to .arr+ out in res#e.t o! an a*ount dis.losed in t4e notes as
.ontin/ent lia,ilit+
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Ascertain the effecti,eness of internal controls regarding recording of contingencies
.btain a list of contingent liabilities and agree the ,alue of indi,idual items to a,ailable
e,idence e.g. a notice of claims and agree reasonableness
5e,iew Board /inutes concerning contingencies to ascertain whether a resolution was passed
in support of the amount disclosed
#nsure that disclosure is done ade$uately.
E;#lain t4e #ro.edure t4e auditor 6ill !ollo6 to veri!+ e;isten.e o! #endin/ le/al suits
a/ainst t4e .lient
5e,iew the clients I"A of recording contingencies
0iscuss with legal department or "ompany 2ecretary
#amine board of management minutes for indications of possible claims
#amine correspondences between the lawyer and company
.btain list of matters referred to lawyers with company estimates of possible liabilities
.btain letter of representation from management to pro,e that they are aware or not aware of
any other matters referred to the lawyers
Ascertain that disclosure is done ade$uately
Outline *atters t4at +ou 6ill .onsider ,e!ore #la.in/ relian.e on t4e 6or5 o! internal
auditors
2trength of internal control system
2cope of work done
Independence of the auditor
#istence of Audit "ommittee
0ue professional care
5eportsB$ualityBresponse
"ompetenceBIualification of Auditors
Te.4ni"ues o! o,tainin/ audit eviden.e
Inspection
.bser,ation
#n$uiries
=
rd
party confirmations
Analytical 5e,iew %rocedures
Douching of #ntries
5ecalculation
$ualities o! Eviden.e
4ral E(idence
They are not reliable e.g. con,ersations, inter,iews
3
rd
6art$ 3onfirmations
They are more reliable e.g. debtor circulari-ation
E(idence from %ithin
They are not reliable due to possible bias by the management e.g. books of account documents
W4at are #ost ,alan.e s4eet events
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These are e,ents that take place between the balance sheet date and the date when the financial
statements are appro,ed
There are ad9usting and non;ad9usting e,ents.
Ad-ustin/ Events
"ollection of a debt pre,iously written off
%ayment of a ma9or liability
0isco,ery of a decline in the ,alue of in,estment at the balance sheet date
0isco,ery of errors and frauds which indicate that financial statements were wrong
0i,idends recei,ed after the balance sheet date
"laims in respect of insurance which were under negotiation but settled after the balance sheet
Bankruptcy of a ma9or debtor after the balance sheet date
Non8Ad-ustin/ Events
/ergers and ac$uisitions after balance sheet date
0isposal of large portions of business production assets after balance sheet date
2erious losses resulting from fire, floods and other calamities
Issue of new shares and debentures
"losure of significant trading acti,ities
"hanges in rates of foreign echange
)ur#ose o! )ost Audit Revie6
#nable the audit establish cut off procedures of the company
They help the audit to minimi-e liability for negligence
To enable the auditor establish their effects on the net financial period's performance
To establish their effect on a true and fair ,iew of the financial statement
They affect the financial affairs of the company if in,estors become aware of them
They enable shareholders to know performance of management
They affect subse$uent audit opinion
It's a professional re$uirement
State t4e Audit )ro.edures to identi!+ *aterial #ost ,alan.e s4eet events
#amine internal controls to do with post balance sheet e,ents
#amine reasonableness of disclosures regarding post;balance sheet e,ents
5e,iew pre,ious years audit working papers to establish the nature of e,ents &if their
knowledge eisted or not+
"onsider materiality in the disclosures of e,ents
Ascertain whether disclosures conform with the accounting policies
.bser,e the cut off procedures to do with post balance sheet e,ents
E;#lain 64+ "ualit+ .ontrols are i*#ortant to audit !ir*s
#nables audit firms to employ people who ha,e necessary skills therefore enhancing
performance and efficiency in carryout the audit
They enable audit firms to employ people of integrity, ob9ecti,ity, confidentiality,
independence which enhances epression of a balanced audit opinion
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They enable audit firms to mimimi-e eposure to audit risks because they guide members to
a,oid being negligent in the performance of their work
They enable audit firms to achie,e the ob9ecti,es of the audit through direction and super,ision
of members of the audit team leading to $uality work.
I*#ortan.e o! Audit Wor5in/ )a#ers
It is e,idence of work done by the auditor
They are used for future reference
They are used by insurance firms to compensate losses
They are used to determine audit fees payable
They are used to access the efficiency of audit staff
They are used as defence in the court of law
They are used by go,ernment agencies when carrying out in,estigations
They are used as basis of epressing balanced audit opinion
They enables incoming auditor to understand the client and audit situation
They are used as a training tool for audit assistants
It is a professional re$uirement of the "ompanies Act
Outline t4e Contents o! a Corre.t Audit File 1CAF2
A copy of the engagement letter
Audit programmes and dates when different acti,ities were carried out
A copy of the management letter highlighting weaknesses in the internal controls
Auditing and accountant 2tandards used in the audit
"orrespondences between the auditor and =
rd
parties
7inancial statement being audited
A list of ob9ecti,es and statutory re$uirements
A copy of shareholders and directors minutes.
Li*itation in S.o#e o! Auditor<s Wor5
?hen the auditor recei,es the audit appendednent late
0estruction of audit working papers through fire and floods
1ack of co;operation by the management staff
Aostility from management
0enial of perfmission to carry out tests considered appropriate and there is no other method
An engagement with many limitations to etent of work to be done
Disa/ree*ent o! auditor 6it4 .lient
0isagreement of some amounts
0isagreement of the method used to perform the audit
0isagreement on interpretation
()/*+
State t4e !a.tors t4at .an 4inder t4e auditor !ro* a.4ievin/ o,-e.tives
1ack of co;operation from the management
In ade$uate planning, controlling and recording of his work.
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7ailure by the auditor to gather rele,ant, reliable and sufficient audit e,idence due to limitation
in scope
7ailure to conduct compliance tests before relying on the clients I"2
Incompetence of the audit personnel
"ompleity of the client's business
1imitation in time
1ack of resources or audit facilities especially in a computeri-ed en,ironment
Outline 6a+s 4el#in/ t4e auditor to *eet 4is o,-e.tives
Gse of comprehensi,e audit programmes
#mployment of skilled personnel
Gse of auditing standards and guidelines
%roper definition of the auditors scope of work in the engagement letter
Gndertake continuous professional education to impro,e auditors competence
%erforming =
rd
party confirmations before relying on Internal "ontrols
%roper super,ision of the audit work by the auditor
5e,iewing of auditors work before epression of opinion
E;#lain t4e i*#ortan.e o! t4e .on.e#t o! #ro!essional inde#enden.e to t4e auditor
It is a professional re$uirement that the auditor should be independent
It is a legal re$uirement of the "ompanies Act to be independent
#nables the auditor to epress a balanced or unbiased audit opinion
=
rd
parts rely on the auditors to safeguard their interests and therefore should be independent
from the management
An audit is an independent eamination and therefore persons conducting it should also be
independent
T4e auditor *ust ,e and ,e seen to ,e inde#endent% Co**ent on t4is vie6
To be independent means, freedom from the influence of management
The auditor needs to be independent of mind a mind that permits him to pro,ide an opinion
that is free from influences, or that affects or compromises professional 9udgement
Ae must therefore act with integrity, eercise ob9ecti,ity at all times
To be seen to be independent means to a,oid facts or circumstances which will lea,e no doubt
in the mind of =
rd
parties that your beha,iour acti,ities, integrity and ob9ecti,ity ha,e been
compromised
Therefore, the auditor should not only be seen to be honest but also ob9ecti,e in performance of
the audit work.
Outline t4e 6a+s in 64i.4 t4e inde#enden.e o! t4e auditor *a+ ,e .o*#ro*ised in t4e
.ause o! t4e audit
?here the auditor has a direct financial interest in the clients company
?here the auditor entirely depends on audit fee from client
Aa,ing close relationships with the clients
?here the auditor guarantees the client to obtain loans
?here the auditor accepts gifts from the client
?here the auditor has employed an employee of the client
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?here the auditor has firm relations with the client or where a member of the audit team is
related to the management
Fro* ti*e to ti*e #ro!essional auditors en.ounter situations 64i.4 /ive rise to .on!li.t o!
interests
Outline this situations
There may be pressure from a super,isor not to test some sensiti,e areas of the audit against
professional re$uirements
There may be family or personal relationships with the client
"onflicts could also arise when misleading information is published by the client which may
be to the ad,antage to the client but against the auditors interest where substantial part of the
audit fee is from a client and the auditor wants to protect that course
?hen the auditor accepts goods and ser,ices from the client
?here the auditor pro,ides more ser,ices than auditing to the client e.g. accounting
W4en !a.ed 6it4 .on!li.t o! interest outline t4e *easures t4e auditor s4ould ta5e to
resolve t4e*
7ollow the policies established by the organi-ation to resol,e the conflict
If organisation policies cannot resol,e the issues, then re,iew the conflict with the immediate
senior
The auditor should not ha,e financial attachment to the client
A,oid offering more ser,ices to the client other than auditing
A,oid relations &Business+ with the management
2tick to the professional code of conduct
Gse the IA2 and IA2 to maintain professionalism
5estrict yourself to the scope of work within the engagement letter
2eek for legal ad,ice where conflicts cannot be easily resol,ed
5esign when you cannot resol,e the conflicts.
Outline t4e #ro.edure involved in t4e re*oval o! a statutor+ auditor !ro* o!!i.e
2hareholders gi,e a '3 days notice to the management of their intention to remo,e the auditor
from office
The /anagementB0irectors issue a <(;days notice to the auditor concerning his remo,al
The auditor prepares his representations and sends them to the management
/anagement circulates them to shareholders if there is enough time
If there is no time a,ailable the auditor has a right to read them to the shareholders in the AG/
Auditor has a right to attend the meeting discussing his remo,al
Auditor is remo,ed from office in way of ,oting and a simple ma9ority is re$uired
Under 64at .ir.u*stan.e .an t4e auditor ,e a##ointed auto*ati.all+
Incase where there is no intention to remo,e him from office by shareholders
?here he has not gi,en a notice regarding his unwillingness to continue
If he has not breached any professional code of ethics
)oint out .learl+ situations 64i.4 s4all .ause t4e auditor to !ail to ,e auto*ati.all+ re8
a##ointed
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If he is guilty of professional misconduct
If he gi,es a notice of his unwillingness to be re;appointed
?here shareholders ha,e gi,en a notice of their intention to ha,e him remo,ed from office
E;#lain t4e i*#ortan.e o! #ro!essional et4i.s i*#osed ,+ IC)AK to its *e*,ers 64o are
in #u,li. #ra.ti.e
To instill discipline among the members
%rotection of its members from public accusations
To enhance uniformity in reporting
To protect and enhance the image of the profession
Aelps auditors to be focused in their approach to achie,e audit ob9ecti,es
%rotects auditors from eposure to liabilities
Acts as a basis of disciplining its members
E;#lain t4e a.tions t4at t4e #ro!essional ,od+ 6ill ta5e a/ainst auditors 64o a.t .ontrar+
to #ro!essional et4i.s
A member is fired
@ullification of the practicing certificate
Imprisonment for a period not eceeding > years
0eregistration from 5AB
#pulsion from the profession
Give reasons 64+ t4e in.o*in/ auditor *ust .o**uni.ate 6it4 out/oin/ auditor
To know why the pre,ious auditor is no longer the clients auditor
To obtain audit working papers of the pre,ious years
To obtain information on areas of weaknessesBproblems
To ascertain the pre,ious audit fee charged by the outgoing auditor
It is a professional re$uirement
It's a matter of courtesy to do so.
E;#lain !a.tors or ste#s to !ollo6 ,e!ore a..e#tin/ a##oint*ent !ro* a ne6 .lient
"ommunication with the outgoing auditor
Ascertaining capacity of the client
Ascertain whether appointment meets statutory re$uirements
#stablish whether the auditor has relations with the client
.btain clients company information
"ommunicate officially with the client through engagement letter
0iscuss with the client your rights and duties and need for management co;operation
#amination of accounting and internal controls
%reparation of audit program
7illing of ,ouchers in order of occurrence
List and e;#lain t4e et4i.al .onsiderations an e;ternal auditor 4as to ,ear in *ind 64en
auditin/ !inan.ial state*ents
2hould not misrepresent facts knowingly
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2hould not allow his name to be associated with financial statements that he has not audited
2hould not pay commission to obtain clients
2hould not certify as true or correct what he does not belie,e is correct
2hould be independent and not subordinate his 9udgment to others
2hould not undertake an audit assignment for free
2hould obser,e confidentiality all the time
2hould maintain ob9ecti,ity in epressing opinion
2hould not accept an engagement whose fee depends on the outcome of the audit
E;#lain 4o6 t4e statutor+ auditor .an resi/n !ro* o!!i.e
Auditor should send a resignation letter to the "ompany Aead .ffice stating the time of his
resignation
5esignation letter should be accompanied with reasons why he has resigned
.n recei,ing the auditors resignation letter management should notify creditors, shareholders
K the registrar of companies within '3 days
Auditor should then re$uest for #;AG/ from the management
?here permission is granted #;AG/ should be notified to shareholder within <' days
The auditor has a right to attend and to speak during the meeting on his resignation
J)lannin/ is .onsidered to ,e innevita,le in ordinar+ li!e situations and is .onsidered to
#la+ a vital role in t4e a.4ieve*ent o! o,-e.tives irres#e.tive o! t4e underta5in/
Ere"uired7 E;#lain t4e i*#ortan.e o! auditor #lannin/E
It is essential in helping to control and record audit work.
#nables the auditor to achie,e audit ob9ecti,es
Aelps to mimi-e auditors eposure to risksBliability
7acilitates completion of audit work in good time
#nables the auditor to focus on material or sensiti,e areas of the audit
#nables the auditor to a,oid duplication of work.
It is used as a basis of planning, controlling and re,iewing subse$uent financial periods
It's a professional re$uirement of I"%A!
Des.ri,e t4e #rin.i#le *atters t4at t4e auditor s4ould .onsider 64en develo#in/ a
.o*#re4ensive audit #lan
@ature of the clients business or work.
2taffing re$uirements in terms of numbers and skills
The strength of I"2ystem
"o;operation epected from management
/ateriality of the clients work.
Audit risk in,ol,ed
Time a,ailable
The le,el of technology to be used
.b9ecti,es of the audit assignment
#$uipment re$uired to facilitate the audit
W4at is aterialit+
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/ateriality refers to important items that ha,e a greater influence on the economic decision;
making process of the users
/ateriality depends on the si-e of an item, its ,alue and the error in,ol,ed
Give reasons 64+ t4e auditor s4ould .onsider *aterialit+ 64en .arr+in/ out t4e audit
assi/n*ent
To increase the credibility of the audited financial statements
It enables the auditor to defend himself easily incase he is sued by the client
#nables proper planning to ensure that errors and frauds are detected and pre,ented
It enables the auditor to determine the nature, etent and timing of the audit
It contributes to audit efficiency and effecti,eness
It helps the auditor to epress an opinion on a true and fair ,iew of the financial statements
W4at is t4e i*#ortan.e o! .ontrollin/ in a 6ell8#lanned audit
#nsures that ade$uate re,iewing of work by the audit staff
#nsures allocation of audit work.
7acilitates successful completion of the audit work.
%romotes the $uality or work done through super,ision
#nsures that mistakes or omissions do not occur by laying emphasis on critical areas
#nsures recording of work done to a,oid duplication
%romotes uniformity in work done
Aelps the auditor to minimi-e eposure to risks
%rofessional re$uirement that work must be controlled
&rie!l+ a..ount !or t4e #ro.edure to ,e !ollo6ed ,+ t4e auditor to ensure e!!e.tive
.ontrollin/ o! t4e audit 6or5%
0elegation of work by allocating work to each staff in relation to their eperience and numbers
0irecting of the audit work by pro,iding rele,ant, reliable and sufficient audit instructions on
how to perform the work.
2uper,ising the audit by monitoring performance of the audit team in relation to instructions
gi,en
5e,iewing of work by analy-ing and interpreting the work done by comparing actual
performance with the standards of performance set by the audit firm
0ocumentation of work done after proper re,iewing for the purpose of epressing a balanced
audit opinion
Outline t4e *ain .ate/ories o! ite*s t4at 6ould ,e in.luded in a .o*#lete set o! audit
6or5in/ #a#er
Information of continuing importance such as /.Aand A.A
Audit planning information such as time budget, details of the clients stock taking procedures
The auditors assessment of the accounting and I"2ystems operations
The detailed audit work undertaken together with all conclusions drawn from there including
notes on errors and actions taken or recommended
#,idence that work performed by audit staff has been re,iewed by some senior personnel
Analysis and summaries supporting the balances and re,iew items in the financial statements
#ngagement and representations letter
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A summary of significant points affecting the audit financial statements and the auditors
reports and how they were dealt with
Outline t4e /uidelines to !ollo6 64en #re#arin/ audit 6or5in/ #a#ers
Gse permanent ink
0escribe audit symbols used
All working papers must be prepared neatly and should each be headed with the following8;
"lient's name and file
7inancial period being co,ered
2ub9ect of working paper
5eference of working papers within current or permanent files
Initials of prepare and date of preparation
Initials of re,iewer and date of re,iew
De!ine and e;#lain t4e *eanin/ o! audit #ro/ra**e
It is a step by step breakdown of the audit work including audit ob9ecti,es and tests to be
carried out during the audit
Outline t4e advanta/es and disadvanta/es o! usin/ standard audit #ro/ra*es
%dvantages
%ro,ides a guide to the audit team by focussing on important aspects
#nables the team to a,oid duplication of work done
#nables audit assistants to be effecti,e e,en without super,ision
#nables allocation of work to the audit team
%romotes uniformity in work done
7acilitates completion of work in time
#nables achie,ement of audit ob9ecti,es
%ro,ides a record of work done
Acts as a training tool for audit assistants because it is easy to follow
Disadvantages/,imitations
2ome are rigid and cannot accommodate any changes
They deny audit assistants ability to plan and discharge their duties
They are unnecessarily to prepare especially for small firms
They are not suitable for firms with few transactions
E;#lain 4o6 +ou .an dra!t an outline o! an audit #ro/ra**e
It should include the following8;
@ame and address of the audit firm
@ame and address of the client
@ature of work to be tested
2cope of work to be co,ered
Audit procedures and methods to be used
0ate and time of work.
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Give reasons in su##ort o! t4e .lient t4at audit 6or5in/ #a#ers ,elon/ to 4i*
That the auditor obtains them from the clients books, schedules financial statements
The auditor is only an agent of the client and is bound by the law of agency to hand them o,er
to the principle &client+
That working papers contain secrets of the client and should be kept by the owner
That after paying audit fee the client has a right o,er working papers and any formation
obtained by ,irtue of his appointment
E;#lain /rounds on 64i.4 t4e auditor .an .lai* o6ners4i# 6or5in/ #a#ers
That working papers act as defense incase he is sued by the client in future
That the outgoing auditor has a professional duty to hand them o,er to the incoming auditor to
enable him understand the client better
They are used for future reference to facilitate future audits
That he has lien o,er them incase he is not paid audit fee &audit report+
That the auditor himself gathers information and nothing or the original document of the client
T4e auditor uses several *et4ods in as.ertain t4e .lients a..ountin/ s+ste*% &rie!l+
su**aries t4is *et4ods
Ascertainment of the system refers to gather the information by the auditor on how accounting
and internal controls operation
-ethods used
#amining pre,ious audit working papers
5e,iewing procedure manuals of the clients
Inter,iewing the clients staff and management on how the system operates and how they carry
out their duties
.bser,ation of the clients procedure such as wages payout, stock taking
Tracing transactions &walk through tests+
Give !our 6a+s in 64i.4 an auditor .an re.ord 4is .lients s+ste*
@arrati,e notes
.rganisation charts
Internal control $uestionnaires
7low "harts
N&7 #amine their ad,antages and disad,antages
E;#lain ,rie!l+ t4e i*#ortan.e o! as.ertainin/ and re.ordin/ o! t4e .lients a..ountin/
s+ste*
#nables the auditor to plan his work to suit the circumstances of the client
Aelp the auditor to gain an understanding of the clients nature of business
#nables the auditor to establish the type of controls implemented by the client
#nables the auditor to establish whether the client is operating in accordance with /.A and
A.A.
0etermines the nature of accounting system used by the client whether manual or
computeri-ed
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To know the degree of management in,ol,ement in super,ision and segregation of duties
To establish whether audit firm has ade$uate number of personnel to perform the audit
To know the strengths and weaknesses of management
To know whether the internal audit department eists
E;#lain ,rie!l+ *a-or .ate/ories o! internal .ontrols
Organisation 'ontrols ; A plan defining the allocation of authority and responsibilities as well
as defining lines of
Segregation 'ontrols;To ensure that no single officer can record and process a complete
transaction
Physical 'ontrols ; To ensure protection of assets and access to assets only by authori-ed
personnel
%uthoriation/%pproval controls;By ensuring that only authori-ed transactions are undertaken
and that they are authori-ed by persons that ha,e authority to do so
%rithmetical/%ccounting 'ontrols ; To ensure that all transactions are correctly recorded and
accurately processed
Personnel 'ontrols ; To ensure that personnel who are assigned responsibilities are competent
and ha,e necessary skills and integrity to do the 9ob well
Super vision 'ontrols ; To ensure that all operations of the enterprise are super,ised on a day
to day basis
-anagement 'ontrols ; To ensure that they take an acti,e part in the running of the
organi-ation
.ocation / $otation 'ontrols ; To a,oid o,er familiari-ation of employees in one 9ob
To pre,ent errors and frauds
W4at are *a-or o,-e.tives o! internal Control S+ste*s
To run the business in an orderly and efficient manner
To ensure adherence to management policies
To safeguard the assets of the company
To ensure completeness, accuracy and ,alidity of records
To pre,ent and detect errors and frauds
To achie,e ob9ecti,es of the entity
To enhance reliance on internal audits by eternal auditor
To establish standards of performance
To create responsibility centers
To monitor and reward performance
&rie!l+ e;#lain indi.ators o! 6ea5 internal .ontrol s+ste*
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Gnwillingness of staff to take up annual lea,e
?here relati,es are employed in related nature of work.
?here integrity of management and competence is $uestionable
?here auditors and legal eperts are changed fre$uently
?here the "ompany depends on one or two customers
?here the auditor and legal eperts are remunerated eorbitantly
?here there are regular changes in accounting policies and practices
Controls 64ere .as4 is .olle.ted ,+ sales #eo#le
Authority to collect cash should be defined clearly
2ales people should be re$uired to remit cash and sales reports at regular time inter,als
A responsible officer should follow up $uickly on sales people who do not submit re$uired
returns
All collections should be recorded
"ash collected should be reconciled with cash banked
A responsible officer should periodically check the sales persons own receipt book with cash
book entries
If sales persons holds stock of goods, and independed reconciliation of stock with sales and
cash recei,ed should be made.
Cas4 Re.eived:Cas4 Sales 6it4in A&C Ltd #re*ises
"ash sales should be recorded when the sale is made by means of cash sale in,oices
"ash sale in,oices should be pre;numbered
"ash recei,ed should be reconciled daily with in,oice totals
5econciliation should be done someone independent of those recei,ing and recording cash
0aily banking should be checked against in,oice totals and differences in,estigate
A responsible officer should sign caunded in,oices at the time of reconciliation
All in,oices should be checked periodically
&an5in/ o! .as4 re.eived
All cash recei,ed should be banked daily when intact
A specified person should do the banking
Bank in slips should be reconciled with cash book entries
2ales ledger personnel should not ha,e access to bank inslips
A comparison should be made between che$ues recei,ed and banked
5econciliation should be done to confirm cash banked and cash book entries by use of bank
statements.
Controls over .4e"ue #a+*ent
Gnused che$ues should be held in a secure place
%ersons who prepare che$ues should not ha,e responsibility o,er purchases
"he$ues should be signed only when e,idence of appro,ed transaction is a,ailable e.g. payroll
Those appro,ing original documents should be independent of those signing che$ues
"he$ue signatories should be restricted to a minimum practical number
2igning of blank che$ues should be prohibited
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2igning of che$ues in fa,our of signatories should also be prohibited
"he$ues should be crossed before being signed
2igned che$ues should be dispatched immediately or held in a safe place
State t4e #ro.edures to ,e ado#ted ,+ t4e .lient to ensure t4at all sto.5s are .ounted on.e
and onl+ on.e
An indi,idual should be gi,en authority o,er all stock taking and ensure that all employees
know him
2tock should be di,ided into definite number of areas and assigned to teams who should count
all stock
Issue a list of stock to each team and their sheets should be pre;numbers and the se$uences
agreed before and after stock takingBcounting
#ach stock item counted should be marked for easier identification
/o,ement of stock should be kept at a minimum
?I% should be counted at the end of the day
Goods recei,ed during the day should be kept in separate locations and counted from there to
a,oid double counting
Goods dispatched should be sent out with normal documentation from the finished goods store
Outline t4e #ro.edures to ,e !ollo6ed to ensure a..ura.+ o! .ut8o!! #ro.edures durin/
sto.58ta5in/
2et the period under consideration or the financial period under re,iew
Derify stock opening balances
.btain all purchase made during the year
5ecord all mo,ement of stock in and out of the store on the day of counting
#nsure that stocks finished on the day of counting are included in the balances
"onsider also items of stock in transits
Ascertain $uantity of closing stock at the end of the period
Outline t4e #rin.i#le #ro.edures t4at t4e auditor s4ould !ollo6 in #lannin/ attendan.e at
a sto.5 ta5e
5e,iew audit working papers of pre,ious years to gain knowledge of the client business and
stock
"ontact the client to obtain a copy of stock taking instructions and re,iew then together
Agree on stock taking dates
0iscuss controls re$uired o,er stock;taking
%repare staff for stock;taking
Brief staff that are to attend stock on material areas to in,estigate
Ascertain the need for epert ad,ice
#nsure that stock held by =
rd
parties are known and staff dispatched to locations stock.
Outline t4e *a-or areas t4at t4e .lients sto.5 ta5in/ instru.tions 6ill .over
Identification of items or articles to count
Instructions on measurement
%rocedure of reporting damages and other defecti,e stock
/arks to indicate that stock has been counted to a,oid double;counting
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Appointment of competent stock count super,isors
2tandardi-ed pre;numbered forms for recording counts.
Give reasons 64+ t4e auditor s4ould attend t4e sto.58ta5in/ e;er.ise
To ,erify eistence of stocks
To ,erify ownership of stock
To ensure that instructions are followed by the stock taking team
To test stock ,aluation
To test the cut;off procedures used
Outline t4e 6or5 to ,e #er!or*ed and *atters to ,e re.orded at t4e sto.58ta5in/ e;er.ise
0etails of defecti,e or damaged stock
0etails where stock;taking instructions were not followed
Goods help in truest for =
rd
parties
0etails of cut;off procedures used
Information on slow mo,ing goods
5ecord of work done including conclusions as to whether stock;taking eercise can be relied
upon to epress an opinion
Impression formed by the $uality of stock
/ake copies of the sample of stock;records
E;#lain t4e *eanin/ o! in4erent audit ris5 and /ive reasons invest*ents in sto.5 and
s4ares re#resents assets 6it4 a 4i/4 audit ris5
Inherent audit risk is the risk of material error arising from the nature of the clients business
2tocks and shares present a high audit risk due to the following8;
Daluation
2hares are normally ,alued in the financial statements at the cost of purchase and
permanent full at the end of the year must be accounted for
Assessment of whether a fall is permanent or temporally is uncertain
?here frauds or theft are pre,alent share certificates can be forged and sold by
employees for cash hence undermining determination of actual ,alue of shares which
also makes it difficult in determining the completeness of records and di,idends to be
earned per share.
Outline t4e audit #ro.edures t4at 6ould veri!+ e;isten.e and o6ners4i# o! s4ares
Douching of share certificates to pro,e eistence and ownership of shares because the clients
company name and the holder are stated in the certificate
?here certificates are kept by =
rd
parties a confirmation letter should be sent to confirm the
shares held
If share certificates do not ha,e the clients name they should be agreed with other documents
to confirm ownership
If shares were purchased during the year eamine the contract note to confirm ownership
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E;#lain 4o6 t4e auditor .an deter*ine t4at all invest*ents in.o*e in s4ares 4ave ,een
#ro#erl+ re.orded in t4e a..ounts re.ords
Agree on independent summary of di,idends due to the actual di,idends recei,ed in the cash
books
"heck the calculations of the di,idends by multiplying the number of shares held by the
amount of di,idends
"onfirm with the bank the amount of di,idends recei,ed on behalf of the client
"ompare the amounts from the bank with the amount in the cash book records
Under 64at .ir.u*stan.es .ould t4e auditor t4e use o! e;#erts in .arr+in/ out t4e audit
assi/n*ents
Daluation of certain types of assets e.g. land and buildings, plan and machinery, precious stones
0etermination of amounts using speciali-ed methods or techni$ues e.g actuarial ,aluation in
determination of assets
/easurement of work completed or to be completed or ?I%
1egal opinion concerning interpretation of agreements, statutes and other regulations
W4at !a.tors s4ould t4e auditor .onsider ,e!ore deter*inin/ t4e use o! e;#erts
The professional knowledge and eperience of the epert
/ateriality of the items in,ol,ed
The $uantity and $uality of other audit e,idence epected to be obtained
The scope of work to be co,ered
The time a,ailable
The cost of using the epert
.b9ecti,ity of the epert and his reputation
T4e auditin/ /uidelines on internal .ontrols states t4at t4ere is no internal .ontrol s+ste*?
4o6ever ela,orate it .an ,e
,imitations on !nternal 'ontrols
They are rigid and therefore cannot ensure fleibility and efficiency in ser,ice deli,ery
/anagement can o,er;rely on strong controls and abdicate their responsibility of super,ision
hence encouraging frauds and errors
/anagement are in a position to o,er;ride their own controls
.,er reliance by the auditor on strong controls resulting in the failure to perform ad$uate tests
"ontrols are sub9ect manipulation by employees through collusion
They are epensi,e to instal and maintain
There is always human error due careless and fatigue
E;#lain ,rie!l+ !a.tors to .onsider 64en .4oosin/ a s+ste* o! .ontrols
5easons for the failure of pre,ious controls
@ature and si-e of the organi-ation
A,ailability of resources
%ersonnel to implement the controls
The epected efficiency of controls
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Outline t4e .ontrols t4at 6ould ,e e;#e.ted to ,e !ound in A&C Co% Ltd% Sales s+ste*
6it4 re/ard to t4e !ollo6in/
'ash received by post
2afeguard against possible interception between recei,ing and opening of mails
#nsure that the mail bo is locked and restricted access to the keys
.pening of post mail should be super,ised by at least two responsible officer
.pening of mail should be in the presence of a responsible officer
A record should be made at the time of the opening of mail to record che$ues and cash
recei,ed
All che$ue and postal orders be strictly crossed
The cashier and sales ledger personnel should not ha,e access to the mails before they are
recorded
The date of recei,ing should be mentioned to a,oid teaming and lading
Outline t4e .onditions t4at one s4ould !ul!ill to #ra.ti.e as an auditor in Ken+a
/ust be a member of I"%A!
/ust be a holder of a practicing certificate issued by 5AB
/ust ha,e a post;graduate eperience in an auditing en,ironment
/ust ha,e been registered by !A2@#B
/ust be a holder of "%A &!+
Na*e #arties 64o are ineli/i,le !or a##oint*ent as Co*#an+ Auditor
.fficer or ser,ant of the "ompany whose books are being audited
%ersons who are dis$ualified as auditors of the "ompanies subsidiary or building company
A co;operate ltd liability co. because it cannot epress a personal opinion
A person who is materially indepted to be company or has gi,en a guarantee on behalf of the
"ompany
A person who holds more than )E of the "ompany authori-ed share capital
Outline t4e Statutor+ Ri/4ts o! t4e auditor in t4e .ourse o! 4is assi/n*ent
5ight to access books of account
5ight to recei,e notices to attend meetings
5ight to legal and technical ad,ice right to fair remuneration
5ight to information and eplanations
5ight to be indemnified
5ight to attend the AG/ and to be heard during his dismissal
State t4e *ain statutor+ duties:res#onsi,ilit+ o! t4e auditor as outlined in t4e Co*#an+
A.t
0uty to make a report on a true and fair ,iew of the financial statements
0uty to epress an opinion on compliance with statutory re$uirements of the "ompany's Act
e.g 0uty to ensure that prepared accounts comply with GAA%'s
That ade$uate returns ha,e been recei,ed from branches
That ade$uate information and eplanations ha,e been recei,ed
0uty to ascertain whether books ha,e been kept by the client
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E;#lain t4e .ir.u*stan.es under 64i.4 t4e auditor .an send and en/a/e*ent letter
To a new client in the case of '
st
appointment
To an eisting client if the letter was not sent
5e,ised engagement if material changes ha,e taken place
?ith the passage or lapse of time
State t4e *easures s4ould ta5e i! *ana/e*ent !ails to re8a!!ir* t4e en/a/e*ent
2end a reminder letter to the management concerning the engagement
"onsider materiality of the items outlined in the engagement
2end <
nd
reminder
0ecline appointment if not re;affirmed
0ou are carrying out the audit of Ndombi and 'o1 ,td and one of its larged customers2
3anyoi&e Distributors that is e4periencing going concern problems
$e5uired: Describe the e4tent to 6hich you 6ill tell director of Ndombo 'o1 ,td that
3anyoi&e Distributors is e4periencing 7oing 'oncern Problems
It is implied in e,ery audit contract that the auditor should not disclose the client's information
ac$uired in the cause of professional ser,ice
The duty of confidentiality continues e,en after the end of the relationship between the auditor
and the client
Aowe,er, there are = eceptional circumstances where an auditor may disclose the client's
information
?hen disclosure is authorised by the client
?hen the law re$uires disclosure
To produce documents or gi,e e,idence in the course of legal proceedings
To disclose to public authorities, infringement of the law
?hen there is a professional duty or right to disclose e.g
To comply with technical standards and ethics re$uirement
To respond to an in$uiry or in,estigation by a member of a regulatory body
To comply with the $uality of re,iew
E;#lain t4e *eanin/ o! an audit .o**ittee
An audit committee is a sub;committee of the Board of 0irectors composed of independent
non;eecuti,e directors
Outline t4e !un.tions o! an audit .o**ittee
To re,iew the company internal control procedures
To re,iew the internal audit function by pro,iding an independent reporting charnnel
To re,iew the companies current accounting policies and possible changes resulting from the
introduction of new accounting standards
To re,iew the annual financial statements to be presented to the auditor
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To re,iew the results of the eternal auditors eamination to ensure that he has performed an
effecti,e and independent audit
5ecei,ing and dealing with the eternal auditors criticism of the management and ensuring
implementation of the recommendations of the auditor
5ecommending normation and remuneration of the eternal auditor
Gndertaking any other responsibilities gi,en to it by the eecuti,e directors
E;#lain t4e #ur#ose and #rin.i#le .ontents o! t4e re#resentations letter
Purpose
5eminds the directors of their duties concerning the financial statement
It pro,ides the auditor with a further source of auditor e,idence
%ro,ides a declaration that the accounts are in compliance with the account standards and
statutory pro,isions
%ro,ides a declaration that the assets ha,e been properly ,alued
)rin.i#les Contents
Accounting policies adopted by the client
A statement on the nature of internal controls
A statement on the accuracy and reliability of financial statements
Types of contingencies and post;balance sheet e,ents
Ade$uacy of pro,ision of bad and doubtful debts
"ompliance with the "ompany Acts re$uirements
@ature of Audit e,idence a,ailable
7ied assets depreciation pro,isions
Daluation of "ompany Assets
@ature of the clients accounting system
E;#lain t4e a.tions t4e auditor s4ould ta5e i! t4e *ana/e*ent re!uses to #rovide
re#resentations letter
Auditor should discuss the matter with directors to resol,e the problem
The auditor could write a letter and ask the directors to sign
Auditor should $ualify the report if he considers that enough information is not gi,en
E;#lain 64+ its i*#ortant !or t4e auditor to dis.uss t4e .ontents o! t4e letter o!
re#resentation at an earl+ sta/e o! t4e audit
%ro,ides time for the directors to consider representations re$uired
To facilitate the ending of the audit and signing of the audit report without delay
Assist the auditor in planning and controlling his audit
!eeping directors informed of the auditors work.
To promote good relations between the auditor and the directors
E;#lain t4e di!!eren.es ,et6een errors and !rauds
An error in an intentional mistake or ommissions of amounts and disclosures of an entities
financial statement
Inoperati,es and ineffecti,eness in internal control system
7rauds are intentional mistakes whose aim is to decei,e the users of the financial statements
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They include frauds which in,ol,es the use of deception to obtain un9ust or illegal financial
ad,antage
Intentional misstatements in the accounting records
Outline t4e dire.tors res#onsi,ilities in t4e #revention and dete.tion o! errors and !rauds
2etting up appropriate system of internal controls
Issuing code of conduct to employees
2etting up internal audit department to help in monitoring internal controls and to increase their
efficiency
Audit committee should be constituted to enable checking of any ecess of the board of
directors
E;#lain t4e a.tions t4e auditor s4ould ta5e on dis.over+ o! errors and !rauds
Alert the management immediately
Take photocopies of the original fraudulent transactions
Increase substanti,e tests on other transactions
Assess the materiality of errors and frauds on a true and fair ,iew of financial statements
5econsider the reliability of earlier audit tests and methods used
Take legalBtechnical ad,ice if necessary
?hether further in,estigations are re$uired but time does not allow, $ualify the audit report on
the basis of limitation in scope.
Co*#anies *a+ ,e involved in !rauds on investors? .reditors? /overn*ent or *a+,e
involved in launderin/ *onies !ro* dru/ dealers or *a!ia a.tivities% Outline #ossi,le
indi.ators t4at irre/ularities e;ist in t4e or/ani9ation
/issing ,ouchers and documents
#,idence of falsified documents
Gnsatisfactory eplanation to $uestions asked by the auditor
#,idence of disputes
#,idence that internal controls are not operating as intended
#,idence of la,ish lifestyles of officers and employees
If the firm is being in,estigated by police or regulatory authority
?here commissionsBsubstantial fees are paid which are larger or smaller than usual to
consultants or ad,isers for unspecified ser,ices
Transactions with o,erseas JshellJ companies
In so*e situations a ,usiness *a+ ,e re"uired to #a+ a .o**ission to so*e !ir*s to
a."uire ,usiness
The auditor disco,ers such a payment &$uestionable+. .utline guidelines that he should follow
to consider appropriate actions to be taken
Ae should satisfy himself that the payment is as stated and that he has been told all the truth
Ae should satisfy himself also that payments were genuinely made in the furtherence of the
clients business
Ae should ascertain that all directors ere aware of the payment
Ae should obtain a letter of representation signed by all director to confirm that they were
aware of the payments
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If the client is a subsidiary, the auditor has to ensure that the holding company and its auditors
are aware of the same payments
Ae has to consider whether a disclosure is re$uired or gi,e a true and fair ,iew without
disclosures.
Outline t4e *atters t4at t4e auditor s4ould .onsider 64en #lannin/ audits 6it4 re/ards
to !rauds and ot4er irre/ularities
"onsider the nature of the clients business6 its ser,ices or goods
"ircumstances that might induce the management to distort the report profit
The known strethgs, $uality and effecti,eness of management
The ability of the management to o,er ride controls
The internal control en,ironment including the degree of management in,ol,ement,
super,ision and the degree of segregation of duties
The eistence and effecti,eness of internal audit department
The accounting records whether manual or computeri-ed
E;#lain t4e auditors res#onsi,ilit+ 6it4 re/ard to #revention and dete.tion o! errors and
!rauds
The auditors responsibility is only incidental for the primary responsibility of detecting and
pre,enting errors rests with the management6 howe,er, the auditors responsibility is to apply
ade$uate tests by planning and controlling the work to enable him to detect errors and frauds
.n disco,ery of errors and frauds, his responsibility is to inform the management through the
management letter.
Outline !a.tors indi.atin/ t4at t4e /oin/ .on.ern o! an entit+ is dou,t!ul or ,ein/
t4reatened
1oss of key personnel without replacement
5elying on short term loans to finance long;term pro9ects
0eteriorating relationships with the creditors
"losing down of some branches
Auge financial losses that recur in subse$uent periods o,er the years
.,er;reliance on the success of particular pro9ect
0elay in payment of salaries to employees
?orking capital problems
Areas or discontinuation of di,idends payment
"hange from credit to cash on deli,ery transactions with suppliers
%ending legal or regulatory proceedings against the entity that may
If successful result in claims that are unlikely to be satisfied
1a2 Sa*#lin/ is used 64en t4e auditor 6ants to test less t4an 0CCF o! t4e ite*s in a
#o#ulation% Outline t4e .onditions t4at are ideal !or use o! sa*#lin/
?here the population is sufficiently large
?here entries to be tested run the same risk of ha,ing errors and frauds
?here the population is homogenous
?here e,ery item has e$ual chances of being selected.
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1,2 &rie!l+ e;#lain "ualities o! a /ood sa*#le
The sample should be a representati,e of the population
The sample should produce the desired e,idence
The sample should not be too large or too small
The sample should be homogenous as the population
It should contain the characteristic of the population
,c. 7ou are the auditor of a ma8or petroleum refiner$1 $ou are a)out to commence the interim
audit. !he compan$ utili'es an on-line computeri'ed accountin& s$stem operated )$ a central
computer %ith terminals located in se(eral departments. !he audit senior has asked $ou to
take char&e of the interim audit of sales and de)tors and has arran&ed a meetin& )et%een
$ourself and the accountant responsi)le for de)tors section. !he audit senior further informs
$ou that he wishes you to re,iew the controls in eistence not only as regard the accounting for
sales and debtors, but also the data;base facility as far as it concerns your audit assignment
$e5uired:
1a2 E;#lain t4e .ontrols 64i.4 out to ,e in e;isten.e in order to *aintain t4e inte/rit+ o!
t4e data8,ase
%roper authori-ation of input before submission of data to the system
Dalidation tests on input and authori-ation, should be built into the system
Access must be restricted to authori-ed personnel, by use of passwords to identify and
permit different le,els of access
%ermissible acti,ity should be defined to ensure that operator access to terminals,
terminal access to programmes and program access data are restricted and controlled
The data;base manager should ha,e o,erall responsibility of safeguarding data through
effecti,e super,ision of data input.
?ork should be segregated for control purposes from applications de,elopment systems
analysis, programming operators, librarians etc.
1,2 E;#lain t4e reasons 64+ it is i*#ortant !or t4e auditors to .onstantl+ 5ee# u# to date
6it4 t4e develo#*ents in .o*#uteri9ed s+ste*s
To ad,ice clients at the de,elopment stage on audit aids and controls to be built into the
system
To understand different programmes used
To understand how to test the controls that are in;built in the system
To highlight key features and help access risk
To obtain computer print;outs for direct use on the audit e.g. for the circulari-ation of
debtors and creditors
To appreciate the need to re,ise audit software to use on new operational systems
To enable the auditor ad,ice management on new controls or in the design of a new
system
7ou are the auditor of 97: 3ompan$ and $ou ha(e )een asked to su&&est ho% audit %ork
should )e carried out on the sales s$stem. 97: 3ompan$ sells stationer$ to shops1 most sales
are to small customers %ho do not ha(e a sales led&er account
!he$ can collect their purchases and pa$ )$ cash. For cash sales to the customer#
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4rders the stationer$ from the sales department %hich raises a pre-num)ered multicop$ order
form
!he dispatch department makes up the order and &i(es it to the customer %ith a cop$ of
the order form
!he customer &i(es the order form to the cashier %ho prepares a hand %ritten sales
in(oice
!he customer pa$s the cashier for the &oods )$ che;ue or in cash
!he cashier records and )anks the cash
/e;uired#
1a2 State t4e 6ea5ness in t4e .as48sales s+ste*
There is a failure in segregation of duties in allowing the cashier to both complete the
sales in,oice and recei,e the cash as he could perpetrate a fraud by retracing the
original in,oice with one of lower ,alue and keeping the difference.
@o one checks the in,oices to make sure that the cashier has completed them correctly
e.g. by using correct prices and recomputation
The completeness of the se$uence of sales in,oices cannot be checked unless they are
pre;numbered se$uentially and the presence of all the in,oices is checked by another
person
There are no checks that the cashier banks all cash recei,ed
There is no reconciliation done to ensure that in,oice totals, cash book totals and bank
statement totals are in agreement.
1,2 Des.ri,e t4e s+ste*s ,est tests +ou 6ould .arr+ out to .4e.5 .ontrols over t4e s+ste*
After confirming the sales system was operating as described &walk through test+
"arry out the following tests
2elect a sample of order forms issued to customers during the year
Trace the related sales in,oice and check to ensure that the details are in agreement in
terms of date, items and amounts in,ol,ed
Ascertain whether the customer signed for the goods recei,ed and whether a copy was
retained by the dispatch department
7or the sales in,oice obtained, check to ensure that the correct order form number is
recorded on the in,oices that prices used are correct by reference to the pre,ailing price
list and ascertain arithmetical accuracy
Trace the ,alue of the sales in,oices to the cash book and from the cash book to the
amount banked which should appear on the bank statements and bank slips used
Because of the weaknesses in the system, the auditor should ensure that he checks all
the order forms present and in,estigate those missing check all sales in,oices in a
se$uence and in,estigate any that are missing
7rom the results obtained epress an opinion as to whether the cash sale system has
operated without material frauds and errors.
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1a2 E;#lain t4e *a-or ste#s to ,e underta5en ,+ t4e auditor in t4e a##li.ation o! C A Ts
2et the ob9ecti,es of "ATs application
0etermine the content and accessibility of the entity files
0etermine the transaction types to be tested
0efine the procedures to be performed on data
Identify computer personnel to be used in the audit
#nsure that the use of "ATs is properly controlled and documented
#stimate the cost and benefits of using "ATs
#,aluate the results after performing tests
1,2 E;#lain 6a+s in 64i.4 an auditor .an use #ersonal .o*#uters in an audit
%roduction and maintenance of audit programmes
/aintenance of permanent audit files which can be updated year after year
%reparation of audit working papers
%reparation of audit budgets and their control
2tatistical sampling in sample selection through generation of random numbers
In the preparation of flow charts
In performing analytical re,iew procedures
1.2 E;#lain t4e advanta/es o! usin/ auto*ated 6or5in/ #a#ers
The risk of errors is reduced
The working papers will be neat and easier to re,iew
The time sa,ed will be substantial as ad9ustments can be made easily to all working
papers
2tandard forms do not ha,e to be carried to audit locations
Audit working papers can be transmitted for re,iew ,ia a modem or facts facilities
1d2 Outline t4e uses o! a test8#a.5 in testin/ t4e sales led/er s+ste*
The auditor could use a test pack to test the sales ledger system by including data in the pack
which would normally be processed through the system such as8 sales, credit allowed, discount
allowed etc
The processing of input data would include8
%roduction of sales in,oices with correct discounts
%roduction of credit note
%osting of cash recei,ed, in,oices and credit note to indi,idual debtors account to
appear on the statement
%osting all transactions to the sales ledger control account and producing balances
1e2 W4at .ontrols *ust ,e #ut in #la.e over a #ersonal .o*#uter used in an audit
Access controls for users by means of password&s+
Back;up of data contained on files
5egular production of hard copies
Training users
Diral protection for programmes
#,aluation and testing of programmes before use
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2trict super,ision of the users
2egregation of duties for the users
%roper recording of input data to ensure reasonableness of output
7ou ha(e )een asked to carr$ out the audit of %a&es s$stem )$ the senior in char&e of the audit
of / 3ompan$ <td. +ost of the emplo$ees are paid their %a&es %eekl$ in cash. =o%e(er1
directors1 senior mana&ers and some office staff ha(e their salaries paid monthl$ )$ a direct
pa$ment into their )ank accounts. Emplo$ees %ork is record on clock cards and o(ertime must
)e authori'ed )$ the %orks mana&er. >a&e rates are authori'ed )$ the mana&in& director and
the &rade of an emplo$ee is decided )$ the %ork0s mana&er for all %orks emplo$er and +5 for
all other emplo$ees
!he personnel department keep a record of %hen emplo$ees start %orkin& %ith compan$ and
%hen the$ lea(e. !he pa$roll is prepared )$ the %a&es department usin& a computer %hich
calculates the emplo$ees &ross pa$ from the hours %orked includin& o(ertime1 determines the
deductions for income tax1 "SSF and other non-statutor$ deductions and calculates the net
pa$ and prints the pa$slip. !he %a&es 6kts are prepared )$ the %a&es department. Emplo$ees
&in for their pa$ %hen the$ recei(e their %a&e pkt.
$e5uired:
1a2 &rie!l+ des.ri,e t4e #rin.i#le ai* o! auditin/ a 6a/es s+ste*
To ensure that no errors or frauds ha,e taken place in the payroll
To ensure that wages paid are at the authori-ed rate for the time actually worked
To ensure that payments are made only to ,alid employees
To ensure that deductions from employees are
1,2 In relation to starters and leavers tests
1i2 &rie!l+ des.ri,e t4e #ur#ose to t4ese tests
The main purpose of a test of employees 9oining and lea,ing the organi-ation is to ensure that pay in
respect of these employees does not etend to periods before they started employment or after
they lea,e employment.
1ii2 Des.ri,e 4o6 +ou 6ould .arr+ out t4e test to as.ertain t4at -oiners or starters are
t4ere o! leaves 4ave le!t
"ompile a list of starters and lea,ers from the personnel records of staff starting and
lea,ing dates ensuring that the records ha,e been authori-ed by a responsible officer.
The payroll at each of these two dates can then be eamined to ensure that for
employees lea,ing, there is no pay shown at a later date and for those 9oining, there is
no pay at the earlier date and if the eamination re,eals that they were paid,
in,estigations must be carried out to ascertain why they were paid.
G List and ,rie!l+ des.ri,e7
1i2 T4e #rin.i#le audit o,-e.tives in .arr+in/ out a .4e.5 o! t4e #a+8out o! 6a/es
All wage pkts are either collected by a bonafide employee or recorded as unclaimed
wages
@o person collects more than ' wage pkt
.nly wages claimed are signed for as collected
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All unclaimed wages are accounted for by a responsible officer
The wages pay;out is in general carried out in an ordinary way.
1ii2 T4e .4e.5s +ou 6ould #er!or* in .arr+in/ out a 6a/es #a+ out test
#nsure that cash counted for wage pkts is checked by a <
nd
employee and that the total
cash is reconciled to the total net cash wages shown on the payroll.
#nsure that names of employees are checked against the payroll before wage pkts are
remo,ed from the wages department
#nsure that security measures are in place before taking wage pkts to the pay;out
location
#nsure that appropriate procedures take place when wages are handed out e.g. ' person
should hand out the wage pkt&s+ while another should obtain the employees signature
#ach employee should take only the pkt bearing hisBher name and should sign as
acknowledgement that heBshe has recei,ed the wage pkt.
A responsible officer should identify the wage employee recei,ing the pkt
#nsure that unclaimed wages are returned to the wages department.
#mployees who are absent at the time of wages payout should collect their wages from
the wages department should be collected by the agent who must ha,e written
authori-ation from the absent employee.
1iii2 T4e tests +ou 6ould #er!or* in .4e.5in/ un.lai*ed 6a/es
"heck that the unclaimed wages book has been regularly and properly written;up.
"heck that signatures of employees claiming wages which were not collected and the
pay;outs are entered in the book
Test check employees signatures to personnel files
#nsure that wages unclaimed for certain period are banked
"heck that the wage pkts are present for all employees who ha,e not claimed their
wages as recorded in their unclaimed wages book.
Test count the contents of unclaimed wage pkts.
It may arise when the auditor for any reason is uanable to obtain all the necessary informations
and eplanations for the purpose of his audit
This concers information which he would ha,e reasonably epected to be a,ailable and whose
una,ailability is not, due to uncertainity.
1imitations of scope of work can be imposed by the management in the following ways8;
Aostility and lack of co;operation from the management
0enial of commission to obtain an audit procedure &tests+ considered necessary by the auditor,
and the auditor is sure that by using other tests he cannot reach a conclusion on that matter
Getting an audit appointment at the end of the year, such that the auditor is unable to carry out
comprehensi,e tests because of limited time
0estruction of records due to floods, fire or deliberate destruction by management
?here the auditor is gi,en an engagement in which limitations are placed on the etent of
work to be performed. In this case therefore, the auditor is unable to reach a conclusion on a
matter or he is unable to make an opinion wholly or to some etent.
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0I2AG5##/#@T ?ITA /A@AG#/#T
Gnlike limitation in scope, incase of disagreement, the auditor is able to reach a conclusion
because he has recei,ed all the informations and eplanations.
Aowe,er, his conclusions ,ary or differ with the position adopted by the management and the
,iew shown by the financial statements
The following circumstances could lead to disagreements between the auditor and
management8;
The acceptability of the accounting policy
The method of application of the accounting policy
The ade$uacy of disclosures in the financial statements
0isagreements regarding some amounts.
0isagreements on the interpretation of the accounting standards
0isagreements concerning basic facts contained in the financial statement.
This reser,ations on matters mentioned may affect the auditors opinion.
Aowe,er, before epressing another opinion, other than un$ualified audit opinion, the auditor
has to adopt further considerations
The auditor must therefore decide whether the reser,ations, be it limitations in scope or
disagreement with management is material but not per,asi,e or material and per,asi,e.
The auditor will will not modify his opinion by $ualifying the report if the matter is not
material
@B8
A matter is material if its inclusion or ommission would affect the decision of a rational user of
the financial statement or the ,iew gi,en by the financial information
A limitation is scope of the auditors work becomes material and per,asi,e when its effects on
the financial statements taken as a whole would make them totally meaningless. This means
that the information is of little ,alue to the user and for decision;making purposes
A disagreement becomes material and per,asi,e when its effects on the financial statement
taken as a whole would make them totally misleading. This means that they do not reflect a
true and fair ,iew.
IGA1I7I#0 AG0IT 5#%.5T
A $ualified audit report is a report gi,en by the auditor when he has reser,ations on the matters
contained in the >
th
schedule of the companies Act.
Inorder to $ualify the report, the reser,ations be it limitation of scope or disagreement should
both be material and per,asi,e
?hen the limitation of scope is material but not per,asi,e the auditor will introduce his
$ualification with following words.
J#cept forOO the financial statement reflects a true and fair ,iew.J
A0D#52# .%I@I.@
?hen the disagreement in material and per,asi,e, it means that in the auditors opinion, the
management are totally misleading the users of the financial statement
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In the auditors ,iew the financial statements do not reflect a true and fair ,iew of the financial
position of the company. The auditor therefore does not $ualify his statement, he instead issues
an ad,erse opinion stating that the financial statements do not reflect and true and fair ,iew6
that proper books of accounts ha,e not been kept, the accounts as well do not disclose the
information re$uired by the "ompanies Act and that the prepared financial statement does not
conform with the re$uirements of the financial reporting framework as re$uired by IA2.
0I2"1AI/#5 .%I@I.@
A disclaimer of opinion arises when the auditor in his opinion is unable to draw a conclusion
on whether or not the financial statements reflect a true and fair ,iew.
In this case, he takes a middle ground by gi,ing no opinion for he is not able to $ualify or
un$ualify due to insufficient information obtained.
#1#/#@T2B%A5T2B"./%.@#@T2 .7 TA# AG0IT 5#%.5T
The I2A >** re$uires that the auditor's report should ha,e the following elements.
Title
It may be presented in the following ways8;
Independent Auditor's 5eport
Auditor's 5eport
This is intended to distinguish the auditor's report from reports that might be issued by officers
of the entity such as Board of 0irectors.
Addressee
This is the party to whom the report is addressed e.g. shareholders.
Introductory %aragraphB.pening %aragraph
It shows the financial statements of the entity that ha,e been audited including the date and
period co,ered by the financial statements
It also includes a statement that the preparation of financial statements is the responsibility of
the management and that the responsibility of the auditor is to epress an opinion on the
financial statement based on the audit.
It also shows the basis, on which the financial statement was audited especially the accounting
and auditing standards.
The 2cope %aragraph
It shows how the audit was carried out and the scope of work co,ered by making reference to
the I2A and how disclosures were arri,ed at.
It also highlights the audit tests carried out or used.
.pinion %aragraph
It shows whether the auditor is un$ualified, disclaiming or gi,ing an ad,erse opinion on the
financial statement
It epresses the auditors opinion as to whether financial statements gi,e a true and fair ,iew.
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0ate of the 5eport
It shows when the report was signed by the auditor
It informs the reader that the auditor has considered the effects on the financial statements and
on the report of e,ents and transactions of which the auditor became aware and which occurred
upto that date.
Address of the Auditor
This is used for future reference or further correspondence between the auditor and the client
It should therefore name a specific location or city where the auditor maintains the office.
2ignature of the Auditor
This is the auditors commitment that he has gi,en a personal opinion on the financial
statements.
It should be signed in the name of the audit firm or personal name of the auditor or both.
Aowe,er, the auditors report is ordinary signed in the name of the firm as the firm ensure or
assumes responsibility for the report.

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