OBJECTIVES AND PRINCIPLES

Auditing 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

An audit is an objective examination and evaluation of the financial statements of an

organization to make sure that the records are a fair and accurate representation of the

transactions they claim to represent. It can be done internally by employees of the organization,

or externally by an outside firm.

Auditor—“Auditor” is used to refer to the person or persons conducting the audit, usually the

engagement partner or other members of the engagement team, or, as applicable, the firm. Where

an ISA expressly intends that a requirement or responsibility be fulfilled by the engagement

partner, the term “engagement partner” rather than “auditor” is used.

A. PRIMARY OBJECTIVES OF AUDIT

The main objectives of audit are known as primary objectives of audit. They are as follows:

i. Examining the system of internal check.

ii. Checking arithmetical accuracy of books of accounts, verifying posting, costing, balancing

etc.

iii. Verifying the authenticity and validity of transactions.

iv. Checking the proper distinction of capital and revenue nature of transactions.

v. Confirming the existence and value of assets and liabilities.

vi. Verifying whether all the statutory requirements are fulfilled or not.

vii. Proving true and fairness of operating results presented by income statement and financial

position presented by balance sheet.

B. SUBSIDIARY OBJECTIVES OF AUDIT

These are such objectives which are set up to help in attaining primary objectives. They are as

follows:

i. Detection and prevention of errors

Errors are those mistakes which are committed due to carelessness or negligence or lack of

knowledge or without having vested interest. Errors may be committed without or with any

vested interest. So, they are to be checked carefully. Errors are of various types. Some of them

are:

- Errors of principle

- Errors of omission

- Errors of commission

- Compensating errors

ii. Detection and prevention of frauds

Frauds are those mistakes which are committed knowingly with some vested interest on the

direction of top level management. Management commits frauds to deceive tax, to show the

effectiveness of management, to get more commission, to sell share in the market or to maintain

market price of share etc. Detection of fraud is the main job of an auditor. Such frauds are as

follows:

- Misappropriation of cash

- Misappropriation of goods

- Manipulation of accounts or falsification of accounts without any misappropriation

iii. Under or over valuation of stock

Normally such frauds are committed by the top level executives of the business. So, the

explanation given to the auditor also remains false. So, an auditor should detect such frauds

using skill, knowledge and facts.

iv. Other objectives

- To provide information to income tax authority.

- To satisfy the provision of company Act.

- To have moral effect

INTERNATIONAL, REGULATORY FRAMEWORK FOR AUDIT AND ASSURANCE

SERVICES

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

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.

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.

AUDITORS LIABILITY

Where the auditor’s legal liability falls. We need therefore to refer to decided cased in other

countries. But even in those countries there are in fact very few decided cases against auditors. In

those countries, the vast majority of actions against auditors are settled out of court. This saves

what could otherwise be very expensive court costs. It is also significant to note that this saves

dragging the professional firm's name through the courts and most likely through the

newspapers. Firms are of course anxious to avoid such bad publicity.

It is however generally known that the auditor's liability falls under three specific headings:

(a) To his clients under contract law;

(b) To third parties under the law of tort;

(c) Civil and criminal liability under statute law and we will deal with each in turn:

To his clients: The auditor is under duty to report to the members in general meetings on all

accounts examined by him and laid before them. His contract is therefore with the company as a

whole and not with individual shareholders. The auditor can therefore be accused of negligence

if:

(a) he fails to detect fraud or error which he should reasonably have detected;

(b) if he fails to comply with generally accepted auditing standards and practices.

However, it is also generally held that for an auditor to suffer actual financial loss, the following

conditions must be met.

i. he must be proved to have been negligent;

ii. the complainant must have suffered a loss;

iii. the loss must be as a direct consequence of his reliance on the auditor's report and the

auditors negligence.

Therefore if the auditor fails to detect a fraud which is immaterial to the accounts and unless there

are suspicious circumstances which he had noticed or should reasonably have noticed, it is unlikely

that he will be held negligent.

Even if the fraud was material to the accounts, he may still escape liability if detection could not

reasonably have been achieved using normal audit procedures. It must be admitted however this

is a very dubious area of law.

The auditor has no duty to individual shareholders. A shareholder who makes an investment

decision by relying on the auditor's report and suffers loss cannot claim under the law of

contract. Only if the company as a whole has suffered, can the whole body of shareholders claim

from the auditor.

In a number of cases it appears that claims have arisen as a result of some misunderstanding as to

the degree of responsibility which the accountant was expected to take in giving advice or

expressing an opinion. It is therefore important, to distinguish between disputes arising from

misunderstanding regarding the duties assumed, and negligence in carrying out agreed terms

Liability to third parties

For a long time liability to third parties existed only in respect to physical injury. Liability for

financial loss is a recent development. Examples of occasions when an accountant may run the

risk of insuring a liability to third parties may include the following:

(a)Preparing financial statements or reports for a client when it is known or ought to be known that

they are intended to be shown to and relied upon by a third party even if the identity of the third

party is not disclosed.

b) Giving references regarding a client's credit worthiness or an assurance as to his capacity to

carry out the terms of a contract or giving any other reference on behalf of the client.

Again, it must be shown that the accountant was negligent, third parties suffered a financial loss,

the financial loss occurred as a result of the accountant's negligence and that the accountant knew

the purpose for which his report or accounts were to be used.

Liability under statute

Civil liability: Section 206 of the Companies Act provides that officers of the company and for

these purposes auditors are considered as officers, may be liable for financial damages in respect

of the civil offences of misfeasance and breach of trust. This section which is only relevant to

winding up refers to a situation where officers have misused their position of authority for the

purposes of personal gain.

Criminal liability: Section 46 of the Companies Act states that an auditor shall be criminally

liable if he wilfully makes a materially false statement in any report, certificate, financial statement

etc. Wilfully implies fraudulently and can be difficult to prove. Whereby, it is held that where

an officer of a body corporate with intent to deceive members or creditors, publishes or concurs in

publishing a written statement of account which to his knowledge is or may be misleading, false

or deceptive in a material particular he shall on conviction be liable to imprisonment for a term not

exceeding 7 years.

Other relevant issues to be considered under this section include:

- The auditor with errors and irregularities;

- The auditor with illegal acts by client or client's staff;

- Questionable payments;

ILLEGAL ACTS

Auditors may uncover criminal offences committed by a client or an employee of the client. This

puts them in a difficult position, but the auditor should act carefully and correctly and if necessary,

take legal advice. The auditor must not commit a criminal offence himself. It is felt that he would

have committed a criminal offence if:

(a) He advises his client to commit a criminal offence;

(b) Aids the client in devising or examining a crime;

(c) If he agrees with a client to conceal or destroy evidence or mislead the police with

false statements;

(d) If he knows that his client has committed an arrest able offence and tries to impede

his arrest and prosecution. Impede does not include refusing to answer questions or refusing to

produce documents without the client's consent;

(e) If he knows that his client has committed an offence and agreed to accept

consideration to withhold information;

(f) If he knows that the client has committed treason and fails to report the offence to the

proper authority.

Discovery of unlawful acts

When an auditor discovers unlawful acts, usually he is not expected to disclose to the police or

other authorities unless:

i. The client authorises disclosure;

ii. That disclosure is compelled by process of law for example, a court order;

iii. That disclosure is required in the auditor's own defence;

iv. The circumstances are such that the auditor has a public duty to disclose, for

example, when the client has committed a serious crime or his act treasonable