DEFINITION OF AUDITING

The explanatory foreword to the ISA International Standards on Auditing describes audit as the
independent examination of and expression of an opinion on the financial statements of an
enterprise by an appointed auditor in pursuant of that appointment and in compliance with any
relevant statutory obligation. The purpose of an audit is not to provide additional information
but rather it is intended to provide the users of the accounts with assurance that the information
provided/presented to them is reliable.

Auditing is an independent examination of books of accounts and vouchers of an enterprise

by a qualified auditor so as to ascertain whether the enterprise has kept proper books of
accounts as per the requirements of the Companies Act and whether the financial statements
agree with the contents of the books of account and whether such statements portray a true
and fair view of the company’s state of affairs as at a given date.

The word ‘audit’ when used will mean the independent investigation into the quality of published
accounting information.

OBJECTIVES OF AN AUDIT

Can be divided into three categories namely:

a)Statutory objectives; required by the Companies Act.

b)Professional bodies requirements.
c)Incidental objectives.

STATUTORY OBJECTIVES

a) To prove the true and fair view or otherwise of the company’s state of affairs. This
implies that an auditor must certify the company’s performance (statement of
comprehensive income) and financial position (statement of financial position) at the end
of the audit as to whether financial statements portray a true and fair view.
b) To ascertain whether a company has kept proper books of accounts which should be in
agreement with financial statements from which they have been prepared. These books
include cash book, ledgers assets register and so on.
c) Companies Act requires that the audit rewrites a report at the end of his audit in which he
should communicate his findings arising out of his or her examinations. The report must
contain an opinion addressed to the owners of the business.

PROFFESIONAL STANDARDS REQUIREMENTS

a) Professional bodies require the auditor to give advice to the company management in the
letter of weakness or management letter in which the auditor endeavors to highlight
problems in the internal control systems, planning implementation, budgetary controls,
investment management and so on. In addition, the auditor in this letter will highlight
areas where he may not have obtained full cooperation from management and also areas

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 where the auditor may have detected errors and frauds. Above all the auditor is supposed
to advice the company’s management how each problem may be solved.
b) An auditor is supposed to visit the client on a regular basis and such a visit is aimed at:
i. Boosting the morale of the accounting staff so as to keep the accounts up to date
to ensure the availability of management information necessary for decision
making purposes.
ii. To detect and prevent any frauds that may have been perpetrated since his last
visit.
iii. Boost the strength of the company’s internal control system.

INCIDENTAL OBJECTIVES
Among the incidental objectives of an audit includes the fact that an auditor is expected to
detect errors and frauds. This was the auditor’s primary objective in the early audits that is
before 1948 but later changed to incidental after 1948 when the primary objective became
proving the true and fair view. An auditor however has to detect all errors and frauds in
particular those that are material so as to affect the true and fair view of the company’s
financial state of affairs. However, this duty of detecting and preventing errors and frauds is
really the role of the company’s management to detect and prevent errors and frauds by using
sound internal control systems.

DIFFERENCE BETWEEN EARLY AND MODERN AUDITS

1. In modern audit, the auditor is supposed to prove the true and fair view of the company’s
state of affairs while in the early audit the auditor was supposed to prove the true and
correct view of the state of affairs.
2. Main modern audit objective is to verify the truthfulness and fairness of financial
statements whereas early audit main objective was detection of errors and frauds.
3. In modern audit the auditor owes a duty of care not only to his clients but also to other
parties. In early audit the audit owed no duty to third parties except those with whom he
or she had contractual relationships.
4. In modern audit, auditing and accounting standards and guidelines should be adhered to
during the course of the auditors work whereas in early audit auditing and accounting
standards and guidelines were irrelevant as these had not been developed.
5. In modern audit the auditor is only concern with material errors and frauds while in
early audit the auditor was interested in all errors and frauds in so far as these could
impend the true and correctness of the company financial state of affairs.

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DISTINCTION BETWEEN AUDITING AND ACCOUNTING.
 The auditor must be independent of all the stakeholders such as management.
Accountancy is a management function aimed at assisting management to run the
business in an orderly efficient manner for which independence is not required.

 Auditing is conducted using programmes and tests as an aid to the process of auditing
whereas accounting is conducted using vouchers, books of accounts and other ledgers.

 Auditing involves examination of financial statements to prove the true and fair view of
company’s affairs. Accounting involves preparation of books of accounts to aid in
decision-making.

 Auditing is conducted at year-end after the directors have prepared the financial
statements, although the planning work could be carried out earlier. It is a continuous
process carried out throughout the financial period.

 Auditing is performed by a qualified accountant as per the Accountants Act chapter 15 of

2012. There are no set qualifications of who should be an accountant for the purposes of
preparation of financial statements.

 An audit is mainly governed by the international standards on auditing (ISA) and

guidelines and supervised by the professional bodies. Accounting is guided by IFRSs and
supervised by management.

THE NEED FOR AN AUDIT

Today most businesses are operated in form of limited companies, which are owned by the
shareholders and managed by directors appointed by such shareholders. The appointed
management is faced with a conflict of interest i.e. whether to act in the best interest of the
company and by extension the shareholders’ interest or to act in their best interest. This is what
is referred to as the agency problem.

The separation that exists between the owners and management forces the absentee owners to
institute control measures to ensure honesty of their company’s stewards (i.e. management). The
Companies Act attempts to remedy this problem by requiring the management to maintain
proper accounting records of all the transactions of the company and to prepare financial
statements that show a true and fair view to be presented to the shareholders at the annual
general meeting. The companies Act therefore goes further to require that management must
have the financial statements subjected to an independent examination and a report issued to the
shareholders as to whether the financial statements show a true and fair view. The auditor
carries out this independent examination. To ensure independence of the auditor the companies
Act gives the power of appointment and removal of the auditor from office to the shareholders.

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Benefits of an audit to a public limited company/other business entity:

a. An audit gives assurance and credibility to the accounts for the benefit of the potential
investors. Other stakeholders utilise audit accounts to ascertain the company’s performance.
b. Audited accounts are used for detection of errors and frauds which could otherwise lead to
the failure of an organization.
c. An audit assists in the prevention and detection of errors and frauds through the moral and
deterrent effect.
d. An audit is also used to boost the morale of accounting staff who will keep their accounts to
date and act as a source of management information upon which decisions can be made.
e. Audited accounts are also used by organizations to raise finance from both the public and
other sources as they boost the organization’s credit rating. They are used as basis of
borrowing funds from banks and other financial institutions.
f. Audited accounts are also used by partnerships as a basis of sharing profits and therefore
minimising disputes between partners.
g. Audited accounts are used to admit tax authorities to assess/ascertain the company’s tax
liability and as such avoid any possible disputes between the company and income tax
department.
h. Audited accounts are used to admit partners in a partnership business in that these accounts
will indicate not only the net assets but also the capital the new partner has to contribute.
i. In case of the death of a partner or dissolution of the partnership business audited accounts
are used as a basis for distribution of the assets and/or liabilities amongst partners.
j. Audited accounts are also useful in case of a sale of a business, a merger of a business,
acquisition or takeover of a business as these indicate the fair value of assets to be acquired.
k. Audited accounts are used for the purposes of enhancing the company’s future growth
prospects as all parties to the company will contribute to such a growth on the ground that
such a company is an assured going concern.
l. Audit accounts will assure various parties and stakeholders that such a company has operated
within the disclosure requirement be they accounting or statutory requirement.
m. Audited accounts are also used by the insurance companies to settle claims arising out of
losses that may be insured in which case the client cannot have conflicting situations which
the insurers will object.
n. The auditors experience will enable him to make recommendations on ways of improving the
accounting and the internal control system.

DISADVANTAGES OF AUDIT

a) It is usually a very expensive operation in terms audit fees and audit expenses especially for
small companies.
b) If the report arising out of the audit is unfavorable (qualified), it can lead to the failure of the
business.
c) An audit may not be ideal for small businesses whose transactions are very few.
d) An audit may not in most cases be in the interest of the owners especially if managers in
which case they may end up frustrating the entire process.
DIFFERENCES BETWEEN AUDITING AND INVESTIGATIONS

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 1) Auditing is the examination of books of accounts to prove the true and fair view whereas
investigations are searching inquiry into the affairs of the organization(s).
2) Auditing covers one financial period. On the other side, investigations can cover more
than one accounting period.
3) Auditing is carried out by a certified public accountant while investigations may be
conducted by any competent accountant or non-accountants or a combination of both.
4) Auditing is auditing standards and professional ethics while investigations are not guided
by any standards and guidelines.
5) Auditing is conducted for stakeholders other than owners whereas investigations are
conducted for specific purposes such as acquisition of businesses, lending, fraud, system
breakdown and so on

CHARACTERISTICS/FEATURES/QUALITIES OF AN AUDITOR
a) He/she should be a master of all fields of accounting such as financial accounting, cost
and management accounting, fund accounting, auditing and taxation
b) He must never sign a statement of financial position which he knows is incorrect because
this exposes him to professional liability.
c) He must be a person of unquestionable integrity.
d) He should grasp quickly the technical features of the organization e.g. product lines,
organizational structure, size of the business etc.
e) He must be a master of the principle of auditing, managerial finance and commercial law.
f) He must be tactful so as to gather audit evidence necessary for the formation of the
opinion.
g) He should not reveal the secrets of the clients.
h) He should never be suspicious during the course of his/her audit.
i) He/she should be accurate, vigilant, cautious and methodological during the course of his
audit work.
j) The auditor should be tactical and be able to ask intelligent questions to extract quality
audit evidence.
k) The person must be able to write a good report which is concise, clear and forceful.
l) He must be able to listen to arguments so as to obtain hearsay evidence.
m) He/she must have high level of professional common sense which should enable him or
her form balanced opinions.
n) He/she must be able to seek clarification and avoid pride.

USERS OF AUDITED FINANCIAL STATEMENTS

The annual accounts and report are primarily prepared by the directors to the shareholders.
However, the following parties need financial statements.

i. Those parties with vested interests in a business.

1. Employees.
2. Creditors or suppliers
3. Lenders and debenture holders
4. The management
5. The shareholders to whom the financial statements are addressed.

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 6. Credit rating agencies.

ii. Those with potential interests

1. Potential shareholders
2. Trustees
3. Suppliers
4. Customers

iii. Those with representative interests

a. Lawyers
b. The government
c. The general public.

iv. Others
i. Competitors
ii. Stock brokers
iii. Statisticians
iv. Financial journalists
v. Trade unions.

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 TYPES OF AUDITS
Audits can be classified in two broad ways according to: -

a) Terms of engagements; that is the nature of work done.

b) Method of approach of work done.

TERMS OF ENGAGEMENT-NATURE OF WORK DONE

a) Statutory audits

These are carried out as per the requirements of the various statutes e.g. the Companies Act of
2015 requires that all public limited companies must have their financial statements subjected to
an independent audit. The objectives of the audit are to express an opinion as to whether the
financial statements show a true and fair view. The rights and duties of the auditor are laid out in
the Companies Act or the relevant statute.

b) Private audits
These are audits that are not governed by the Act. These are performed by an independent
auditor because the owners, members or other interested parties require them and not because the
law requires them to be carried out. Private audits are carried out for organizations such as
NGOs, partnerships, clubs and charities among others. The appointment of the auditor is usually
carried out as a private contract between the auditor and the relevant stakeholder. The scope and
objective of the work is determined by the agreed terms between the auditor and the client. The
auditors’ rights and duties are also laid out in the contract.

Comparison between private and statutory audits.

Similarities
1) Both are carried out by qualified auditors.
2) They involve the assessment of the internal control system.
3) They facilitate detection of errors and frauds.
4) Reports issued by the auditors can be used by third parties.

Differences.
Statutory Audits
1. It is a requirement of an Act of parliament e.g. the Companies Act.
2. The scope and objective of work is defined in the Act
3. The report is addressed to the shareholders.
4. Appointment of the auditor is stipulated in the Act, of 2015 (Sections 717 for private
company and 721 for public company). It can either be by shareholders, directors or cabinet
secretary for private company.
5. The auditor is liable to third parties.
6. The auditor has full independence.

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Private Audits
1. It is not a requirement by the Act.
2. The scope is agreed between a client and the auditor therefore it is limited.
3. Report is addressed to relevant stakeholder.
4. Private appointment by the owner.

b) Method of approach to work.

Continuous audits

This is an approach whereby the audit is carried out throughout the financial period. The audit
work is carried out at predetermined intervals usually around three audit visits. This approach is
ideal for large organizations with tight reporting deadlines e.g. multinational banks.

Assuming that the work is carried out in three-audit visits spread over duration of four months,
the first audit visit will mainly entail carrying out detailed planning of the audit. Work carried
out will include;

a. Obtaining a good understanding of the client’s business or updating the business

understanding obtained in the previous audits.
b. Identifying any developments in the client’s business that could have a significant impact
on the audit such as new legislation.
c. Identifying any changes that have taken place at the client’s that could have an impact on
the audit such as changes in management.
d. Determining the number of staff members to be involved in the audit and the level of
experience required and whether there will be need to involve experts.

The second audit visit will be carried out usually half way through the financial period. Work
carried out will include;

a. Ascertaining, recording and testing the clients internal control systems.

b. Concluding on the level of reliance to be placed on the internal control system.
c. Carrying out limited analytical reviews on the interim financial performance of the company.
This will include carrying out ratio analysis.
d. Deciding on the level of substantive testing and the nature of substantive procedures to be
carried out.

The final audit visit will mainly entail review of the financial statements at the end of the
financial year. Work carried out will include;

a. Carrying out substantive procedures on the various account balances

b. Concluding whether there are any significant misstatements in the financial statements.
c. Final analytical review to verify whether the information obtained is consistent and whether
the view presented by the financial statements is consistent with the auditors understanding
of the business.
d. Forming an opinion as to whether the financial statements show a true and fair view.

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Advantages
1 Accounts are usually kept up to date.
2 Errors and frauds are discovered at an early stage.
3 The auditor gathers sufficient knowledge of the business as a result of his frequent visits.
4 Saves time during final audits.
5 Better report is developed, as time spent is more.

Disadvantages
1. It is expensive to have a continuous audit due to the amount of time spent.
2. Frequent disruptions of the clients work during the audit.
3. The auditor’s independence may be adversely affected by the continuous presence at the
client’s premises.
4. Tendencies to over depend on auditing staff to solve accounting problems.
5. Interference of work, which has already been audited by the client’s staff.

Interim audits
This is an audit that is usually carried out mid-way through the accounting period. An interim
audit usually precedes a final audit and is ideal for large to medium size companies.

Work carried out during an interim audit usually include:

1 Obtaining an understanding of the nature of the client’s business;

2 Evaluating any significant changes in the clients operating environment that could have a
significant impact on the client’s financial statements such as change in the management;
3 Ascertaining, recording and testing the clients accounting and internal control system;
4 Concluding on the level of reliance to be placed on the internal control system;
5 Plan and design the substantive procedures to be carried out during the final audit;
6 Reporting to management on any significant weaknesses identified in the internal control
system.

ADVANTAGES
1. It is ideal for dynamic businesses.
2. Compared to continuous audits it is cheaper.
3. It facilitates final audits.
4. Up to date accounts are kept.
5. Errors and frauds are prevented and detected at an early stage compared to final audits.

DISADVANTAGES
1. Errors are at an advanced stage compared to continuous audits.
2. Over-dependence on audit staff to solve accounting problem.

Note

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An interim audit is usually carried in preparation for the final audit at which the financial
statements will be reviewed.

Final audits
Usually done at the end of the year on the financial statements i.e. the statement of financial
position and the statement of comprehensive income. A final audit can be conducted in two
ways;

1 As a continuation of the interim audit for large to medium size organisations;

2 For small organisations the audit could be carried out in one single session after the end
of the financial period.

After examining the end year financial statements, the auditor then forms his opinion as to
whether the financial statements show a true and fair view and reports this to the shareholders.

Advantages of final audits

1. It eliminates tedious note-taking which is true for most audits;

2. It is easier to programme, plan and execute as it takes place one single session at the end
of the year.
3. It eliminates the possibility of alterations of figures because such alterations cannot
benefit perpetrators as this is the last audit.
4. It is less expensive audit as compared to continuous and interim audits because it
demands less time on the part of the auditor.
5. In final audits the auditor is able to give his client a balanced opinion and advice based of
final circumstances.

Disadvantages of final audit

1. If any fraud is perpetrated and detected at the end of the financial period it will have
reached advanced stages so that its detection will not benefit the company as it will not
prevent any loss.
2. It may be difficult to conduct for large companies in which case as a one session audit it
is only ideal to small companies.
3. Due to time constraints, such audits may not allow the auditor to finish his audit
examination in exhaustive manner so as to enable him/her give a balanced opinion.

OTHER TYPES OF AUDITS

Procedural audits

Requires an examination of procedures or records for reliability and accuracy. At the end the
auditor can add new ones, modify existing ones or scrap old ones. Attention is paid mainly to:

a. Company internal control system.

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b. Laid down guidelines and procedures.
c. Changes made without auditors’ knowledge.
d. Records of the company.

ADVANTAGES
1. Reveals any inefficient procedures.
2. Identifies strengths and weaknesses in the internal control system.
3. Creates harmony and co-ordination of company decision making process.
4. Identifies any bureaucracies

DISADVANTAGES
1. It is expensive.
2. Management can frustrate the whole process if they do not want to reveal inefficiencies.
3. It could lead to duplication of effort.
4. It is tedious especially when many procedures are involved.
5. Sometimes the auditor may not understand technical procedures.
6. Procedures change to respond to changes in the economy or the social setting.
7. Where the internal control system is weak, it is of limited applicability.

Management audits
This involves investigation of the company’s entire management to ascertain whether the
management is running the organization in the best interest of the stakeholders. It investigates
company’s managerial aspects of the business from high to low management. It assesses the
efficiency of management to run the organization in the most viable way.

ADVANTAGES
1. It improves management quality.
2. Help assists in solving any bureaucracies.
3. Reveals weaknesses of managements.
4. The strengths and weaknesses of the internal control system are also seen.
5. It acts as a check to the efficiency of budgetary system.
6. Corrective measures may be initiated immediately.

DISADVANTAGES
1. It lowers the morale of top management.
2. Management is unlikely to reveal its weaknesses when the auditor is present.
3. It is difficult to identify the department that is inefficient as all of them rely on each other
heavily.
5. It could lead to frustration of management as it can easily be biased.
6. It is difficult to monitor human actions and responses.

BALANCE SHEET AUDITS

Tests the strength of the internal control system by working backwards to get the initial
transactions. It is based on verification of assets by checking;

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1. Description: Mainly of recording entries.
2. Ownership: Prove of ownership either by use of logbooks for cars or title deeds for land.
3. Value: Cost and method of depreciation.
4. Existence: Is the asset really there?

ADVANTAGES
1. It is cheap compared to other audits.
2. A balanced opinion can be reached.

DISADVANTAGES
1. It is a partial audit.
2. Applied only to business with strong internal control system.

STAGES OF AN AUDIT
In carrying out an audit the following are the main stages. However, note that the steps followed
will vary from client to client and from auditor to auditor.

a) Determining the scope of the audit work. For statutory audits the scope is clearly laid out
in the provisions of the Companies Act and is formally contained in the letter of
engagement.
b) Ascertain nature of the client’s business. The auditor seeks to obtain some background
information of the nature of the client’s business.
c) Planning the audit; the auditor prepares a planning memorandum that shows the general
strategy in to be followed in conducting the audit.
d) Ascertaining and evaluating clients accounting systems and internal controls, use of flow
charts and evaluating using key questions.
e) Carrying out tests of controls: This enables the auditor to determine the level of reliance
to be placed on the internal control system and therefore reduce the level of substantive
testing.
f) Planning the level of substantive testing and formulating the substantive tests to be
carried out.
g) Carrying out substantive testing on the selected account balances.
h) Carrying out the final analytical review and concluding whether the financial statements
show a true and fair view.
i) Drafting the audit opinion and any other reports to be issued under the terms of
engagement e.g. the management letter.

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