THE REGULATION AND LEGAL REQUIREMENT OF THE AUDITORS

The Auditor and the Kenya Companies Act, 1962, Cap 486
Duties
Make a report to the members on all accounts laid before the members in general meeting during his
tenure of office:

• The report must contain matters mentioned in the 7th Schedule to the Act. Section 162(1).
• This therefore means the auditor has to include in the report statements on the accounts i.e.
i. Compliance with the Companies Act;
ii. Truth and fairness of the balance sheet and profit and loss account.

The auditor also has to investigate and report whether or not:

i. Proper books of account have been kept;

ii. Proper returns have been received from branches not visited by the auditor.
iii. The accounts are in agreement with the books of accounts.

The auditor has also to report whether or not he has obtained all the information and explanations
which to the best of their knowledge and belief were necessary for the purposes of their audit.

Rights
1. Right to have his report read before the Company. (Section 162(2).
2. Right of access at all times to the books, accounts and vouchers of the company.
3. Right to require from offices of the company such information and explanation as he thinks
necessary for the performance of the duties of the auditor. (Section 162(3).

4. Right to receive notice of and attend meetings and report on any matters that concern him as
auditor. (Section 162(4).
5. Right to report to the members on his findings including failure by the directors and employees
of the company to supply him with all the information and explanations which he deemed
necessary. (Section 162(1) and 7th Schedule company. (Sections 161(3).

Powers
The rights may be considered to be powers but the Companies Act does not give the auditor any legal
powers to assist him in his work.
The directors can refuse to give any information he wants and they can refuse to publish his report and can
deny him access to the records and also fail to serve him with notice of meetings and there is NOTHING
THE AUDITOR CAN DO!
The Companies Act does not give the auditor any legal powers.

Qualifications For Appointment As Auditor

Must be a holder of a practising certificate issued pursuant to Section 21 of the Accountants Act. (Section
161(1). Should not be an officer or servant of the company. (Section 161(2a)(i).

Shall not be a partner of or in the employment of an officer or servant of the company. (Section 161 (2a)(ii).

Should not be a body corporate. (Section 161 (2a)(iii).

If an auditor is disqualified from appointment as an auditor of the company's subsidiary company or holding
company or any other venture which if it were a company would be a subsidiary or holding.

Please note that references to officer or servant should not be construed to mean auditor (although the
auditor HOLDS OFFICE). (Section 161(2)(b).

1.5 The Auditors and the Kenya Companies Act, 1962, Cap 486
Appointment
By members in an AGM
Every company must appoint an auditor/auditors at each annual general meeting. To hold office from the
conclusion of that, until the conclusion of the next annual general meeting.

Retiring auditor is deemed to be reappointed without passing a resolution at an AGM unless:

• He is not qualified for reappointment;

• Resolution is passed at the AGM appointing somebody instead of him or providing expressly that
he should not be reappointed.
• He has given notice in writing of his unwillingness to be reappointed Section 159(2)a, b, c.by the
directors
The directors can appoint the first auditors at any time before the first AGM to hold office till that AGM.
The directors can fill a casual vacancy in the office of auditor. Section 159(6).
By the registra
If at the AGM no auditor/(s) is/are appointed or deemed reappointed, the registrar may appoint a person to
fill the vacancy. Section 159(3).

Remuneration
Fixed by whoever appoints the auditor/s. Section 159 (7) (a). Remuneration includes any expenses of the
auditor/s paid by the company. Section 159 (7) (b).

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

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

Resignation
Auditors in Kenya cannot under the Companies Act resign before the end of their tenure of office. The
closest they can come to resigning is giving notice in writing to the company that they are unwilling to be
reappointed. Section 159(2)(c).

1.6 The New Engagement

Background
Reiteration of the ICPAK definition of an audit highlights the problems of the new audit.
An audit is the independent examination of, and expression of opinion on, the financial statements of an
enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant
statutory obligation: If we take the example of a limited company audit, then we can immediately
appreciate that (before a new audit client is accepted, the auditor concerned must ensure that there are no
independence or other ethical problems likely to cause conflict with the ethical code. Furthermore, it is
important for the new auditor to ensure that he has been appointed in a proper and legal manner - it will be
appreciated that one auditor's appointment is normally another auditor's removal or resignation).
Essentially, the initial procedures to be observed can be considered in 2 stages:

a) Procedures before accepting nomination; and

b) Procedures after accepting nomination.

Procedures before accepting nomination

The nominee auditor must take the following steps:

a) Ensure that he is professionally qualified to act i.e. is not disqualified on any legal or ethical
grounds.
b) Ensure that the firm's existing resources are adequate to service the needs of the new client.
This will raise questions of staff and time availability and the firm's technical expertise.
c) Seek references in respect of the new client company, it may be, as is often the case, that the
directors of the company are already personally known to the firm, if not, independent
enquiries should be made concerning the status of the company and its directors.
d) Communicate with the retiring auditor:

Procedures after accepting nomination

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

The engagement letter

Purpose
 We have established that the directors and auditors of a limited company have very precise legal duties, we
are also aware that modern accountancy firms thrive on their ability to provide a wide range of professional
services in addition to audit.

It is the purpose of an engagement letter to define clearly the extent of the auditor's responsibilities and
so minimise the possibility of any misunderstanding between the client and the auditor. Further, the
engagement letter provides written confirmation of the auditor's acceptance of the appointment, the scope of
the audit, the form of his report and scope of any non audit services. If an engagement letter is not sent to
clients - both new and existing - there is scope for argument about the precise extent of the respective
obligations of the client and its directors and the auditor. The contents of an engagement letter should be
discussed and agreed with management before it is sent and preferably prior to the audit appointment).

vii. The engagement letter is a well established audit technique and ISA 210 Terms of Audit
Engagements provides guidance in this area.

Regulation of the Accounting Profession in Kenya

The broad regulations that govern the Accounting profession in Kenya are set out in the Accountants Act,
Chapter 531 of the Laws of Kenya.
The act establishes various bodies to regulate the profession in Kenya. These are detailed below with their
major respective functions summarised.

1. Kenya Accountants and Secretaries National Examination Board (KASNEB) (Section 17).
Functions: • Prepare syllabuses for accounting examinations;
• Make rules with respect to examinations;
• Arrange and conduct examinations;
• Issue certificates to candidates who have satisfied examination requirements;
• Promote recognition of its examinations in foreign countries.

2. Registration of Accountants Board (RAB)

Functions: • Register accountants who are effectively graduates of IAS / IFRSNEB examinations or hold
qualifications recognised by RAB (Section 23 & 24).

• Issue of Practising Certificates (Section 21).

3. Institute of Certified Public Accountants of Kenya (ICPAK)

Functions: • To promote standards of professional competence and practice amongst members;

• Promote research into the subjects of accountancy and finance and related
matters, publication of books, periodicals, journals and articles;

• Promote the international recognition of the institute;

• Advise the KASNEB on matters relating to examination standards and policies.

4. Disciplinary Committee
Membership to be determined by Council of ICPAK. Where the Institute Council has reason to
believe that a member may be guilty of professional misconduct it shall refer the matter to the
Disciplinary Committee which will inquire into the matter.
After its inquiry the Committee can recommend:-
a) No further action be taken against the member;
b) The member be reprimanded;
c) The member be reprimanded with publication of the reprimand in the Gazette;
d) Registration be cancelled;
e) Practising certificate be suspended.

Section 28 of the Accountants Act details what constitutes professional misconduct.

Organisation in an Auditing Firm

The organisation adopted by most of the large firms in Kenya involves a pyramid structure that is
usually made up as follows:

Partner

Manager

Accountant in Charge

Audit Assistants, Trainees, juniors

The partner would be responsible for

1. the overall audit
2. he would sign the final accounts although most firms have a second partner with whom the first
partner will consult particularly on matters of qualification in reports.
3. the partner has to approve the detailed plan of work and give his authority before work can begin.
He will carry out a final review of the work once it has been done before signing the accounts.
4. It is his duty to ensure that up-to-date services and advice on all professional matters are provided to
the client.
5. He has to ensure continuity in the relationship which can be absent lower down the pyramid. With
difficult clients he is also charged with negotiating the audit fees.
6. He can be sued on behalf of the firm.

The manager is appointed for every job

1. he is responsible for ensuring for satisfactory completion of the audit assignment.
2. He is involved in preparation of provisional timings and costing for the audit and to agree the
timings with the client.
3. He has to ensure that there are sufficient staffs at the right grade to cover the client's requirements.
4. From the appropriate staff, he has to select the proper accountant in charge and to brief him on what
needs to be done.
5. He will also review the audit plan and the related budget which may be prepared by the accountant
in charge and he will monitor the progress of the job constantly to ensure that targets are achieved.
6. He has to review the working papers in detail before they are submitted to the partner for his final
review.
7. The manager is a crucial person in the audit assignment. He has to ensure that the proposed report
is properly drawn up.
8. He has to ensure that the deadlines are met;
 9. he has to ensure that the accounts comply with all regulations in every way.

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

a) The collection of detailed information for the preparation of the audit plan.
b) The delegation of specific areas of work to the audit assistants or trainees.
c) The planning and supervision of the day to day running of the audit.

d) The constant review of progress by comparison of actual time spent against budget.
e) Ensuring that the working papers have been thoroughly prepared and are presented in an orderly
manner to the manager and the partner for review.

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

Typical Set-Up in a Professional Firm: Only Professional Staff

Grading/Department: Senior Partner - Qualified Accountant: Overall in charge of the
practice and co-ordinates the functions and relationships of all departments, and is usually the
primary liaison with the international firm (if any).

Audit Department: Audit Partners - constitute a major part of the partnership as auditing is usually
the core of securing business for the practice.

Tax Department: Tax Partner - usually one partner, at the same level as the audit partners, concentrates on
running the tax department for both corporate and personal taxation.

Company Secretarial Department: Usually a company registered under the Companies Act with all the
partners as directors. One partner may be assigned the responsibility of overseeing the activities of this
department usually run by a qualified Company Secretary who is a manager level employee but not a
partner. Changes brought about by the new act on Company Secretaries will require that this employee be
made a director as corporate bodies can no longer be Company Secretaries.

Special Service: Providing book-keeping and accountancy services this department is usually headed by a
person of junior manager grade with several clerks as support staff.

Insolvency Department: One audit partner can double up as insolvency partner when volume of business
is small otherwise a full partner will be in charge of this department with several key support staff, that
would include managers.

Management Consultancy: Usually headed by a Director who is same level as a partner but is not
necessarily a qualified accountant. Most in-fact possesses other skills in consultancy. Information
Technology is a major MCS involvement, Recruitment services, Management Training, Management
Consultancy are the other areas of involvement.

Support staffs are called consultants and have grading such as:
 Senior Consultant — Audit Equivalent — Senior Manager
Consultant — Audit Equivalent — Manager
Junior Consultant — Audit Equivalent — Supervisor

The Qualities of an Auditor or Professional Accountant

Quality Quality Explained
1. Competence 1.1 The professional accountant must be fully conversant with
• Accounting and Book-Keeping;
• Auditing;
• Taxation Law and Practice;
• Internal Control and Accounting Systems;
• Company Law;
• Information Technology;
• Management and Financial Consultancy;
• Valuation;
• Liquidation, Receiverships and Bankruptcy proceedings;
• Economic environment, policies and trends.

1.2 Ability to communicate both orally and in writing

• To his staff in giving instructions and directions;

• To the management and employees in obtaining evidence;
• To shareholders in reporting his findings;
• To other third parties in reporting his findings and obtaining
evidence.

1.3 Judgement

The accountant must be able to make sound judgements, not only in

professional matters but also of people.

He must therefore not only possess the skill and have the experience
but he must also have imagination and the ability to differentiate
between material and non-material items and to recognise apparent
inconsistencies and abnormalities.

2. Integrity The accountant must be and be seen to be honest, a follower of the

ethical code of the institute, a person of discretion and tact and a
person aware of his or her wider responibility to the community at
large. The synonyms for integrity include honesty, uprightness,
probity, rectitude, moral soundness.
When an accountant has ethical difficulties or is unsure of what
course of conduct to follow, he must consult the institute or seek
legal advice.

3. Independence The accountant's "reason to be" is independence. A dependant

accountant is a contradiction in terms. The rule is that the
accountant must approach every assignment with objectivity. He
must approach his work in a spirit of independence of mind. Again
not only must he be independent, he must be seen to be independent.
Any interest which might diminish an accountants' objectivity of
approach or which might appear to do so must be avoided.
 What the profession does to secure the Board responsible for development/action
qualities in the accountant
Requirement to pass comprehensive KASNEB
examinations for entry into the profession
Requirements of a good general education before KASNEB
registration as student
Requirement of a minimum period of practical RAB
experience in a firm of Certified Public
Accountants of Kenya before a practising
certificate is given (an accountant cannot be an
auditor without a practising certificate)
Requirement of registration with the Registration RAB
of Accountants Board of Kenya on qualification
as an accountant
Determination of the financial reporting ICPAK
framework
Holding of seminars, Issue of magazines and ICPAK
other technical literature
Existence of the disciplinary committee The Council of ICPAK

International, Auditing and Assurance, Standards Board (IAASB)

The preface to the International Standards on Quality Control, Auditing, Assurance and Related Services
(International Standards or IAASB’s Standards) is issued to facilitate understanding of the objectives and
operating procedures of the International Auditing and Assurance Standards Board (IAASB) and the
scope and authority of the pronouncements it issues, as set forth in the IAASB’s Interim Terms of
Reference.
The mission of the International Federation of Accountants (IFAC), as set out in its constitution, is “the
worldwide development and enhancement of an accountancy profession with harmonized standards, able
to provide services of consistently high quality in the public interest.”
In pursuing this mission, the IFAC Board has established the IAASB to develop and issue, under its own
authority, high quality standards on auditing, assurance and related services engagements (IAASB’s
Engagement Standards, as defined in paragraph 14),
related Practice Statements and quality control standards for use around the world.

The IAASB’s pronouncements govern audit, assurance and related services engagements that are
conducted in accordance with International Standards.
They do not override the local laws or regulations that govern the audit of historical financial statements
or assurance engagements on other information in a particular country required to be followed in
accordance with that country’s national standards. In the event that local laws or regulations differ from,
or conflict with, the IAASB’s Standards on a particular subject, an
engagement conducted in accordance with local laws or regulations will not automatically comply with
them. A professional accountant should not represent compliance with the IAASB’s Engagement
Standards unless the professional accountant has complied fully with all of those relevant to the
engagement.

The IAASB is committed to the goal of developing a set of International Standards generally accepted
worldwide. To further this goal, the IAASB works cooperatively with national standard setters, and takes
a lead role in joint projects with them, to promote convergence between national and international
standards and achieve acceptance of IAASB’s Standards.

The International Auditing and Assurance Standards Board

The IAASB is a Board established by IFAC. The members of the IAASB are appointed by the IFAC
Board to serve on the IAASB.
IAASB members act in the common interest of the public at large and the worldwide accountancy
profession. This could result in their taking a position on a matter that is not in
accordance with current practice in their country or firm or not in accordance with the position taken by
those who put them forward for membership of the IAASB. Each IAASB member has the right to appoint
one technical advisor who may participate in the discussions at IAASB meetings.

IAASB meetings to discuss the development and to approve the issuance of International Standards,
Practice Statements or other papers are open to the public. Agenda papers, including minutes of the
meetings of the IAASB, are published on the IAASB’s website.

The Authority Attaching to International Standards Issued by the International Auditing and
Assurance Standards Board
International Standards on Auditing (ISAs) are to be applied in the audit of historical financial
information.
International Standards on Review Engagements (ISREs) are to be applied in the review of historical
financial information.

International Standards on Assurance Engagements (ISAEs) are to be applied in assurance

engagements dealing with subject matters other than historical financial information.

International Standards on Related Services (ISRSs) are to be applied to compilation engagements,

engagements to apply agreed upon procedures to information and other related services engagements as
specified by the IAASB.

ISAs, ISREs, ISAEs and ISRSs are collectively referred to as the IAASB’s Engagement Standards.

International Standards on Quality Control (ISQCs) are to be applied for all services falling under the
IAASB’s Engagement Standards.

The IAASB’s Standards contain basic principles and essential procedures (identified in bold type
lettering) together with related guidance in the form of explanatory and other material, including
appendices. The basic principles and essential procedures are to be understood and applied in the context
of the explanatory and other material that provide guidance for their application. It is therefore necessary
to consider the whole text of a Standard to understand and apply the basic principles and essential
procedures.

The nature of the IAASB’s Standards requires professional accountants to exercise professional judgment
in applying them. In exceptional circumstances, a professional accountant may judge it necessary to
depart from a basic principle or essential procedure of an Engagement Standard to achieve more
effectively the objective of the engagement. When such a situation arises, the professional accountant
should be prepared to justify the departure.

Any limitation of the applicability of a specific International Standard is made clear in the standard.

The Authority Attaching to Practice Statements Issued by the International Auditing and
Assurance Standards Board
International Auditing Practice Statements (IAPSs) are issued to provide interpretive guidance and
practical assistance to professional accountants in implementing ISAs and to promote good practice.
International Review Engagement Practice Statements (IREPSs), International Assurance
Engagement Practice Statements (IAEPSs) and International Related Services
Practice Statements (IRSPSs) are issued to serve the same purpose for implementation of ISREs, ISAEs
and ISRSs respectively.

Professional accountants should be aware of and consider Practice Statements applicable to the
engagement. A professional accountant who does not consider and apply the guidance included in a
relevant Practice Statement should be prepared to explain how the basic principles and essential
procedures in the IAASB’s Engagement Standard(s) addressed by the Practice Statement have been
complied with.