PROFESSIONAL STANDARDS AND THE AUDITOR

International, Assurance Auditing, 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.

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IAASB meetings to discuss the development and to approve the issuance of International
Standards, Practice Statements or other papers that 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 and Practice

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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.

IAASBs Standards and Authoritative Documents which are examinable:

ISA No Title
Glossary of terms Preface to ISAs and RSs
100 Assurance Engagements
120 Framework of ISAs
200 Objective and General Principles Governing an Audit of Financial Statements
210 Terms of Audit Engagement
220 Quality control for Audit Work
230 Documentation
240 The Auditor’s responsibility to Consider Fraud and Error in the Audit of Financial
Statements
250 Consideration of Laws and Regulations in an Audit of Financial Statements
260 Communication of Audit Matters with those charged with Governance
300 Planning
310 Knowledge of the Business
320 Audit materiality
400 Risk Assessments and Internal Control
401 Auditing in a Computer Information Systems Environment
402 Audit Considerations Relating to Entities Using Service Organizations
500 Audit Evidence
501 Audit evidence – Additional Consideration for Specific Items
505 External Confirmations
510 Initial Engagements – Opening Balances
520 Analytical procedures
530 Audit Sampling and Other Selective Testing Procedures
540 Audit of Accounting Estimates
545 Auditing Fair Value Measurements and Disclosures
550 Related Parties
560 Subsequent Events
570 Going Concern
580 Management representations
600 Using the Work of another Auditor
610 Considering the Work of Internal Auditing
620 Using the Work of an Expert
700 The Auditor’s Report on Financial Statements
710 Comparatives

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720 Other Information in Documents Contain Audited Financial Statements
800 The Auditor’s report on Special Purpose Audit Engagements
810 The Examination of Prospective Financial Information
910 Engagement to Review Financial Statements
920 Engagements to Perform Agreed Upon Procedures Regarding Financial
Information
930 Engagement to Compile Financial Information

No Title

IAPS 1005 The Special Considerations in the Audit of Small Entities

IAPS 1010 The Consideration of Environmental Matters in the Audit of Financial Statements
IAPS 1013 Electronic Commerce Effect on the Audit of Financial Statements

One of the requirements of ISA 700 the auditor must specifically mention in his report that the
audit has been carried out in accordance with approved auditing standards. This is also required by
IAPS. The auditing standards and guidelines prescribe best practice in auditing but in no way
inhibit the auditor from exercising his judgment in particular situations.

Professional judgement is still required in interpreting the standards in particular areas, determining
the sufficiency and type of evidence needed, areas where no standard or guideline has yet been
pronounced on. Auditing standards therefore raise the requirements for professional judgement
and an effective and economical audit can only be achieved with a great deal of thought at all
stages. Therefore, though mandatory, they are not designed to inhibit professional judgement.

THE INTERNATIONAL FINANCIAL REPORTING STANDARDS

International Financial Reporting Standards are of great importance to an auditor. A detailed
review of those so far issued belongs to an accounting text and for this reason it is assumed that the
students have knowledge of their requirements.

RELEVANCE OF IAS / IFRS TO AUDITING

Auditors must include in their report their opinion on whether the financial statements they report
on give a true and fair view. It is generally felt that in order for accounts to show a true and fair
view there must be compliance with the IASs / IFRSs. There may be situations where compliance
with IAS / IFRS may result in a true and fair view not being given but this is rare. So effectively,
the auditor is being asked to give an opinion on whether all IASs / IFRSs have been complied with
in the preparation of the accounts he is auditing. The auditor therefore must know and understand
the IAS / IFRS in detail. Auditing students are also expected to know the IAS / IFRS in detail
because invariably, there will be an examination question that requires this knowledge and students
are advised to quote from the IAS / IFRS and state which of the IAS / IFRS is relevant to their
answer.

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International Financial Reporting Standards are intended to be applied to all financial statements
which show a true and fair view. They set out the main assumptions underlying statements and
they prescribe which accounting policy should be used when more than one is possible. They also
specify disclosure requirements in many areas including the disclosure of accounting policies.
Again, they are not intended to be a comprehensive code of rigid rules. It is recognised that such a
code sufficiently elaborates to cater for all business situation and circumstances and for every
exceptional and marginal case is impossible. The benefits of IAS / IFRS are:

1. They lead to a degree of uniformity and comparability among accounts.

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

Regulation of the Accounting Profession in Kenya

The broad regulations that govern the Accounting profession in Kenya are set out in the
Accountants Act, Cap 15, of 2008 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 / IFRS KASNEB
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;

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 • 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 the overall audit and 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. In addition, the partner has to approve the detailed plan of work
and give his authority before work can begin. He will carry out a final review of the work once it
has been done before signing the accounts. It is his duty to ensure that up-to-date services and
advice on all professional matters are provided to the client. 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. He can be sued on behalf of the firm.

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

If we look at his position, we find that of the whole audit team he is best placed to discover
errors and irregularities. Also, if the client is not a client of integrity, the accountant in
charge is the easiest person to influence. He is also the easiest person to lose to clients who
are looking for young energetic accountants to join their organisations.
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

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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