Wednesday 29 May 2013

Professional Ethics For Auditors (1)


Auditors give assurance to varied stakeholders.  Auditors as professional have to maintain the level of confidence the users of the auditor’s report have in them.  In acting in the  
interest of the public, auditors observe and comply with some high level principles.  Most professional associations have embodied the principles into code of ethics for their members.  The principles include integrity, objectivity, confidentiality, due care, skills and competence and professional behavior.


 

1.   Principles of Due Care, Skill and Competence


The principle of professional competence and due care imposes the following obligations on all auditors:

a)    To maintain professional knowledge and skill at the level required to ensure that clients receive competent professional service; and

b)    To act diligently in accordance with applicable technical and professional standards when providing professional services.

 Competent professional service requires the exercise of sound judgment in applying professional knowledge and skill in the performance of such service. Professional competence may be divided into two separate phases:

a)    Attainment of professional competence; and

b)    Maintenance of professional competence.

The maintenance of professional competence requires a continuing awareness and an understanding of relevant technical, professional and business developments. Continuing professional development enables an auditor to develop and maintain the capabilities to perform competently within the professional environment.

Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis.

 An auditor shall take reasonable steps to ensure that those working under the professional accountant’s authority in a professional capacity have appropriate training and supervision.

Where appropriate, an auditor shall make clients, employers or other users of the auditor’s professional services aware of the limitations inherent in the services.

 

2.   Principle of Integrity


The principle of integrity imposes an obligation on all auditors to be straightforward and honest in all professional and business relationships. Integrity also implies fair dealing and truthfulness.

An auditor shall not knowingly be associated with reports, returns, communications or other information where the auditor believes that the information:

a)    Contains a materially false or misleading statement;

b)    Contains statements or information furnished recklessly; or

c)    Omits or obscures information required to be included where such omission or obscurity would be misleading.

When an auditor becomes aware that the auditor has been associated with such information, the auditor shall take steps to be disassociated from that information.

The auditor should show respect to all persons he comes in contact with during the performances of his duties.

3.   Principle of Confidentiality


The principle of confidentiality imposes an obligation on all auditors to refrain from:

a)    Disclosing outside confidential information acquired as a result of professional and business relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose; and

b)    Using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties.

An auditor shall maintain confidentiality, including in a social environment, being alert to the possibility of inadvertent disclosure, particularly to a close business associate or a close or immediate family member.

An auditor shall maintain confidentiality of information disclosed by a prospective client.

An auditor shall maintain confidentiality of information within the firm.

An auditor shall take reasonable steps to ensure that staff under the auditor’s control and persons from whom advice and assistance is obtained respect the auditor’s duty of confidentiality.

The need to comply with the principle of confidentiality continues even after the end of relationships between an auditor and a client or employer. When an auditor acquires a new client, the auditor is entitled to use prior experience. The auditor shall not, however, use or disclose any confidential information either acquired or received as a result of a professional or business relationship.

The following are circumstances where auditors are or may be required to disclose confidential information or when such disclosure may be appropriate:

a.    Disclosure is permitted by law and is authorized by the client;

b.    Disclosure is required by law, for example:

                              i.        Production of documents or other provision of evidence in the course of legal proceedings; or

                            ii.        Disclosure to the appropriate public authorities of infringements of the law that come to light; and

c.    There is a professional duty or right to disclose, when not prohibited by law:

                              i.        To comply with the quality review of a member body or professional body;

                            ii.        To respond to an inquiry or investigation by a member body or regulatory body;

                           iii.        To protect the professional interests of an auditor in legal proceedings; or

                           iv.        To comply with technical standards and ethics requirements.
 
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Tuesday 28 May 2013

Duties and Rights of Auditors


Section 136 of the Companies Code outlines the duties and rights of the auditors. We take a brief look at the duties and rights of the auditors of a company.

 

1.   Duties of auditors


The code makes it clear that the auditors should not be seen as officers or agents of the company. The duties of the auditors are as outlined below:

1.    To express opinion on the financial statements examined;

2.    Where the auditors issued qualified report, the auditors should include reasons for such qualification with factual position;

3.    To include in the report of the company such matters as directed by the regulatory authorities;

4.    To attend those general meetings of the company, in which the financial statements and the auditors' report are to be considered;

5.    To make report for inclusion in prospectus;

6.    To make report on declaration of solvency in case of voluntary winding up;

7.    To give the company a statement of circumstance or statement of no circumstance exist when resigning and;

8.    To exercise reasonable care and skill in carrying out his duties and make such inquiries as considered necessary.


2.   Rights of Auditors


The Companies Code gives some exclusive rights to the auditors.  Some of the rights of the auditors are as follows:

1.    Right of access to books of account and vouchers;

2.    Right to receive information and explanations;

3.    Right of access to books and papers of branch;

4.    Right to receive notices of general meetings and to attend those meetings;

5.    Right to make representation where another person is being appointed as auditor;

6.    Right to apply to the Court for directions relating performance of the auditors’ duties;

7.    Right to seek and use the opinion or services of experts and;

8.    Right to provide other services for audit client.

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Change In Auditors


Organizations change their auditors sometimes.  Some of the common reasons that entities might change their auditors are audit fee, size of client or audit firm, auditor does not seek re-election, personality clash and audit rotations.  The two main methods of changing auditors are 1) Resignation of an auditor and 2) Removal of the auditors.

 

1.   Resignation of auditors


During the term of office of auditors they may resign for one or more reasons. The due procedures for the resignation of the auditors are as outlined below:

·         Auditors must deposit written resignation notice together with statement of circumstances relevant to members or statement that no circumstances exist at the registered office of the client;

·         The company must send a copy of the resignation notice package of the auditors to the Registrar of companies;

·         Where the resignation notice package includes statement of circumstances, the company should send a copy of the statement to everyone entitled to receive a copy of accounts;

·         Auditors can require directors to call extraordinary general meeting to discuss circumstance of resignation;

·         Directors must send out notice of meeting within 21 days of having received requisition by auditors.

Although the auditors may have resigned, they have the following rights;

·         To receive notices that relate to a general meeting at which their term of office would have expired;

·         To receive notices that relate to a general meeting where casual vacancy caused by their resignation to be filled;

·         To speak at these meetings on any matter which concerns them as auditors.

 

2.   Removal of Auditors (Section 135)


Section 135 of the Companies Code makes it possible for a company to remove its auditors.  The appropriate procedures for removal of auditors are as follows:

·         A written notice of intention to move a resolution for the removal or appointment of auditors should be given to the company not less that thirty-five (35) days (fourteen (14) days in case of resolution to remove an auditor appointed by the directors) before the annual general meeting;

·         The company should send a copy of the notice to the auditor concerned;

·         The notice of the resolution should be given to members not less than twenty –one (21) days (Seven (7) days in case of resolution to remove an auditor appointed by the directors) before the meeting;

·         The auditors concerned are entitled to be heard on the resolution at the meeting;

·         The auditors are entitled to send to the company a written statement, copies of which the company shall circulate to every person entitled to notice of meeting in the same manner as notice of meetings are required to be given;

·         The company need not circulate the statement of the auditor if it is received by the company less than Seven (7) days before the meeting or the Court orders non-circulation.

·         If the resolution is passed it shall take effect after the conclusion of the meeting.
 
 
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Wednesday 22 May 2013

Appointment and Remuneration of Auditors


Section 134 of the Companies Act, 1963 (Act 179) provides the modalities for the appointment and remuneration of the auditor of a company.  We take a brief look at the provisions very important to us as auditing students.

 

1.   Appointment of Auditors (Subsection 1- 10)


For a person to be appointed as auditor of a company, the following must be met:

·        The auditor consented in writing to be appointment before the appointment;

·        The auditor is duly qualified to be appointed as auditor of the company.

When a partnership firm is appointed as auditors of a company, the partners are deemed appointed as the auditors and they should be duly qualified.

 

                             I.        First Auditors

a)   The first auditors of the company should be appointed by the directors within three (3) months;

b)   The first auditors hold office until the conclusion of the first annual general meeting;

c)   If the directors failed to appoint auditors within the three (3), the Registrar will appoint the auditors.

 

                           II.        Subsequent Auditors

a)   At each annual general meeting, the company (members) shall appoint the auditors through ordinary resolution of the company;

b)   The auditors hold office from the conclusion of that meeting to the conclusion of the next annual general meeting;

c)   If no auditor is appointed at the annual general meeting, the Registrar shall appoint the auditors.

 

                          III.        Casual Vacancy

Casual vacancy occurs when the auditor ceases to be qualified for appointment; the auditor resigns from office by notice in writing to the company and the demise of the auditor.

 

a)   Any casual vacancy shall be filled by the directors;

b)   Auditors so appointed shall hold office till the conclusion of the next annual general meeting

c)   If directors do not appoint auditors to fill casual vacancy with three (3) months, the Registrar shall appoint the auditors.

 

The company should give notice to the Registrar within twenty-eight days of changes in the auditors.


2.   Remuneration of auditors ( subsection 11 – 14)


The fixation of the remuneration of the auditor depends on the authority appointing the auditor.

a)   If the auditors are appointed by the directors, the directors shall fix the remuneration;

b)   If the auditors are appointed by the Registrar, the Registrar shall fix the remuneration;

c)   In all other cases the company (members) shall fix the remuneration by ordinary resolution or in a manner that the company by ordinary resolution may determine.
 
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Qualification and Disqualification of Auditors


Sections 270 and 296 of the Companies Act, 1963 (Act 179) set out clearly who is qualified to be appointed an auditor of a company and who is disqualified.  We take a brief look at the provisions very important to us as auditing students.

 

1.   Qualification of Auditors of Private Companies  (Section 270)


For a person to qualify for appointment as auditor of a private company, the person should be one or both of the following:

·         Member of the Institute of Chartered Accountants who is not disqualified;

·         A practicing accountant licensed by the Institute of Chartered Accountants who is not disqualified.

 

2.   Qualification of Auditors of Public Companies  (Section 296)


For a person to qualify for appointment as auditor of a public company, the person should be a member of the Institute of Chartered Accountants.

 

3.   Disqualification of Auditors of Companies


The following persons are disqualified for appointment as auditor of a company.

a.    an officer of the company or of an associated company;

b.    a person who is a partner of or in the employment of an officer of the company or of an associated company;

c.    an infant;

d.    a person found to be of unsound mind by a law court;

e.    a person in respect of whom order has been made under section 186 of the code while the order remains in force;

f.     an undischarged bankrupt;

g.    a person who is disqualified by instrument of the Registrar.

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Tuesday 21 May 2013

Statutory Audit Requirement

The Part N of the Companies Act, 1963 (Act 179) deals with the Accounts and Audit of companies. We take a brief look at the provisions very important to us as auditing students.

1. Keeping of Books of Account (Section 123)



A company is required to keep proper books of account with respect to its financial position and changes in the books of account. Particularly, the company should keep records in respect of:
a) Cash received and expended by the company;
b) Sales and purchases of goods by the company and;
c) All Assets and liabilities of the company and the interest of the members in the company.

Proper books of account should give a true and fair view of the state of the company’s affairs and are necessary for the preparation of the proper Profit and Loss accounts and Balance Sheets.

The books of accounts may be kept manually in bound volumes or in electronic format.

The books of accounts should be kept at the registered office of the company or any other place decided by the directors.

The books of accounts should be open during normal working hours to inspection by the directors, secretary and auditors of the company.

2. Mandatory Audited Accounts (Section 124)

The section 124 of the companies’ code requires the directors of a company to prepare and send financial reports to members and debenture holders at least once within every calendar year. The report should comprise:
• Signed Profit and Loss accounts and Balance Sheets;
• A report by the directors and;
• A report by the auditors.

Clause (C) of subsection 1 of this section of the code specifically included the auditor’s report in the items to be sent to members. This implies that it is mandatory for all companies to have their accounts audited by an auditor.


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Friday 17 May 2013

Types of Audit

An audit can take different forms, performed at different stages in the financial year and for different purposes and reasons.  We take a brief look at some of the types of audit.

 1.   Non – Statutory Audit

This type of audit is not done to meet statutory requirement but the audit is requested by a stakeholder for specific purposes.  The scope and timing of this type of audit are determined by the interested party.  This type of audit is also referred to as Private audit. Some stakeholders who may commission this type of audit are the board of directors, shareholders, Vendors, Banks, Civil societies, Management and Securities Commission.

2.   Statutory Audit

This is the type of audit required by law.  It is the statutory obligation which should be fulfilled at all cost.  Normally the provisions of the law determine the scope and timing of the audit.

 3.   External Audit


This is the type of audit carried out by qualified persons/body from outside the company being audit.  Statutory audit falls under this type of audit. These auditors are independent and objective and should not be influenced by the management of the company.

4.   Internal Audit

This is the type of audit carried out by persons who are full-time employees of the company being audited.  This type of audit is detailed and frequent.  The aims of internal audit are to ensure efficiency and effectives of operations and timely detection of error and fraud.

5.   Difference between External Auditor and Internal Auditor


Internal Auditor
External Auditor
Full –time employee of the company
Not an employee of the company
Duties and scope of work determined by management of the company
Duties and scope of work determined by law
Reports to the audit committee/management
Reports to the shareholders
Objectives are to identify lapses and make recommendations
Objective is to express opinion on the financial statements

 6.   Complete Audit


This is the type of audit which is started and completed within a time frame in the period.  This type of audit is used in organizations where internal controls are strong and transaction volume is low.

7.   Interim Audit

This is the type of audit which is carried out during the financial period before the final audit is done at the end of the period.  This type of audit is used to minimize the work to be done at the end of the period and is used where transaction volume is expected to be high. Interim audits are normally done quarterly but they could be done monthly or b-annually.

8.   Continuous Audit

This is the type of audit in which checking/audit works are carried out throughout the financial period.  Continuous audit is used in situations where assessed internal control is weak and transaction volume is high.