INTRODUCTION

The term audit is derived from the Latin term �audire,� which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia, Greece, Egypt. Rome, U.K. and India.

The original objective of auditing was to detect and prevent errors and frauds. Auditing evolved and grew rapidly after the industrial revolution in the 18th century. With the growth of the joint stock companies the ownership and management became separate. The shareholders who were the owners needed a report from an independent expert on the accounts of the company managed by the board of directors who were the employees.

The objective of auditing shifted and an audit was expected to ascertain whether the accounts were true and fair rather than detection of errors and frauds.

With the increase in the size of the companies and the volume of transactions the main objective of audit shifted to ascertaining whether the accounts were true and fair rather than true and correct. Hence the emphasis was not on arithmetical accuracy but on a fair representation of the financial efforts. The Kenya Companies Act also prescribed the qualification of auditors

The International Accounting Standards Committee has developed standard accounting and auditing practices to guide the accountants and auditors in the day to day work.

The later developments in auditing pertain to the use of computers in accounting and auditing. It can therefore be can be said that auditing has come a long way from hearing of accounts to taking the help of computers to examine computerised accounts

BOOKS OF ACCOUNT

Every company must keep proper books of account in the English language with respect to�

(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (b) all sales and purchases of goods by the company; (c) the assets and liabilities of the company:

The books of account shall be kept at the registered office of the company or at such other place or places in Kenya as the board deems fit and shall always be open to the inspection of the directors.

The board may, from time to time, determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the company or any of them shall be open to the inspection of members not being directors and no member, not being a director, shall have any right of inspecting any account or book or document of the company except as conferred by statute or authorised by the directors or by the company in general meeting.

FORMS AND CONTENTS OF ACCOUNTS

The Companies Act in Sec. 149 provides the following rules on the forms and contents of accounts:

(1)    Every balance sheet of a company must give a true and fair view of the state of affairs of the company as at the end of its financial year. The profit and loss account of a company must give a true and fair view of the profit or loss of the company for the financial year.

(2)    A company�s balance sheet and profit and loss account must comply with the requirements of the Sixth Schedule

(3)    The registrar may, on the application or with the consent of a company�s directors, modify in relation to that company any of the requirements of the Act as to the matters to be stated in a company�s balance sheet or profit and loss account.

(4)    The points discussed in (1) and (2) shall not apply to a company�s profit and loss account if� (a) The company has subsidiaries; and

(b) The profit and loss account is framed as a consolidated profit and loss account dealing with all or any of the company�s subsidiaries as well as the company and�

i)    Complies with the requirements of the Act relating to consolidated profit and loss accounts; and

ii)  Shows how much the consolidated profit or loss for the financial year is dealt with in the accounts of the company.

If any person who is a director of a company fails to take all reasonable steps to secure compliance as respects any accounts laid before the company in general meetingor the provisions of the Act, he/she shall, in respect of each offence, be liable toimprisonment for a term not exceeding twelve months or to a fine not exceeding ten thousand shillings.

It�s important to note the following 2 main points;

(a)  Any reference to a balance sheet or profit and loss account must include any notes or document that give information which is required by the Act.

(b)  Any reference to a profit and loss account shall be taken(in the case of a company not trading for profit) to refer to its income and expenditure account.

GROUP ACCOUNT

According to Section 150 of the Companies Act, a group account is a financial statement that is prepared at the end of every financial year by a company that has subsidiaries. Itmentioned the state of affairs and profit or loss of the company and the subsidiaries must be laid before the company in general meeting when the company�s own balance sheet and profit and loss account are so laid.

Group accounts shall not be required where the company is at the end of its financial year the wholly owned subsidiary of another body corporate incorporated in Kenya. Group accounts do not deal with a subsidiary of the company if the company�s directors are of opinion that�

i)      it is impracticable, or would be of no real value to members of the company, in view of the insignificant amounts involved, or would involve expense or delay out of proportion to the value to members of the company; or

ii)    the result would be misleading, or harmful to the business of the company or any of its subsidiaries; or

iii)  the business of the holding company and that of the subsidiary are so different that they cannot reasonably be treated as a single undertaking.

If the directors are of such an opinion about each of the company�s subsidiaries, group accounts shall not be required: Provided that the approval of the registrar shall be required for not dealing in group accounts with a subsidiary on the ground that the result would be harmful or on the ground of the difference between the business of the holding company and that of the subsidiary.

If any person being a director of a company fails to take all reasonable steps to secure compliance as respects the company with the provisions on group accounts, he shall, in respect of each offence, be liable to imprisonment for a term not exceeding twelve months or to a fine not exceeding ten thousand shillings or to both:

However the person shall not be held liable if he can prove that� (Sec 150(3))

i.    He had reasonable ground to believe that a competent and reliable person was charged with the duty of seeing that the requirements in relation to group accountswere complied with and was in a position to discharge that duty.

ii.  The offence was committed willfully.

Form of Group accounts (Sec. 151)

The group accounts laid before a holding company shall be consolidated accounts comprising �

i.       a consolidated balance sheet dealing with the state of affairs of the company and all the subsidiaries to be dealt with in group accounts;

ii.      a consolidated profit and loss account dealing with the profit or loss of the company and those subsidiaries.

If the company�s directors are of opinion that it is better for the purpose�

(a)     of presenting the same or equivalent information about the state of affairs and profit and loss of the company and those subsidiaries; and

(b)    of so presenting it that it may be readily appreciated by the company�s members, the group accounts may be prepared in a form other than that stated in (i) and (ii) above. In particular, it may consist of more than one set of consolidated accounts dealing respectively with the company and one group of subsidiaries and with other groups of subsidiaries or of separate accounts dealing with each of the subsidiaries, or statements expanding the information about the subsidiaries in the company�s own accounts, or any combination of those forms.

The group accounts may be wholly or partly incorporated in the company�s own balance sheet and profit and loss account.

Content of Group Accounts(Sec. 152)

The group accounts laid before a company shall give a true and fair view of the state of affairs and profit or loss of the company and the subsidiaries dealt with thereby as a whole, so far as concerns members of the company.

Where the financial year of a subsidiary does not coincide with that of the holding company, the group accounts shall, unless the registrar on the application or with the consent of the holding company�s directors otherwise directs, deal with the subsidiary�s state of affairs as at the end of its financial year ending with or last before that of the holding company, and with the subsidiary�s profit or loss for that financial year.

DIRECTORS� REPORT

In Sec. 157 there should be attached to every balance sheet laid before a company in general meeting a report by the directors with respect to 

i) The state of the company�s affairs,  ii) The amount, if any, which they recommend should be paid by way of dividend,  iii) The amount, if any, which they propose to carry to reserves within the meaning of the Sixth Schedule.

The report shall deal, so far as is material for the appreciation of the state of the company�s affairs by its members and will not in the directors� opinion be harmful to the business of the company or of any of its subsidiaries, with any change during the financial year in the nature of the company�s business, or in the company�s subsidiaries, or in the classes of business in which the company has an interest, whether as member of another company or otherwise.

If any person being a director of a company fails to take all reasonable steps to comply with these provisions, he shall, in respect of each offence, be liable to imprisonment for a term not exceeding twelve months or to a fine not exceeding ten thousand shillings.

AUDITOR�S REPORT

An auditor is required to make e a report to the members of the company on the accounts examined by him and on every balance sheet and profit and loss account and every document annexed to the balance sheet or profit and loss account laid before the company in the annual general meeting during his tenure of office.

The report must state whether in his opinion and to the best of his information and according to the explanations given to him, the accounts give the information required by the Act and give a true and fair view of the state of the company's affairs and of the profit or loss. 

The obligation to make an inquiry, imposes an obligation on the auditor to inquire in particular ~ 

a)     whether loans and advances made by the company on the basis of security, have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members; 

b)    whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;  

c)     where the company is not an investment company or a banking company whether as much of the assets of the company e.g. shares, debentures and other securities have been sold at a price less than the purchase price of the company; 

d)    whether loans and advances made by the company have been shown as deposits; whether personal expenses have been charged to revenue account; 

e)     when: any shares have been allotted for cash, whether cash has been received, 

f)      whether the position shown in the books and balance sheet is correct, regular and not misleading.

Matters to be stated in an Auditor�s Report

The auditor's report must state� 

i.             whether he has obtained all information and explanation which to the best of his knowledge and belief necessary purposes of his audit 

ii.            Whether proper books of account as required by law have been kept by the company and proper returns adequate for the purposes of his audit have been received from branches not visited by him; 

iii.          Whether he has proper books of account of any branch office audited by some person other than auditor bas been forwarded to him and how he has dealt with it in preparing his report; 

iv.          Whether the balance and profit and loss account dealt with in report are in agreement with the company books of account and returns; and 

v.            Whether the accounts examined by him, in his opinion, give the information required by the Act and whether the balance sheet and profit and loss account laid before the company in general meeting render a true and fair view of the state of company and of its profits or losses for the financial year for which they have been prepared.

Where any of the above matters is answered in the negative or with a qualification, the report must state the reason for it. 

In the final analysis as observed by Professor Gower, this topic may be summed up in a sentence:  �Anyone involved, either as plaintiff or defendant, in a suit based upon alleged negligence in the preparation or auditing of the annual accounts has stepped into a minefield which, has still not been comprehensive mapped.�

However, it has been shown that the status of company auditors has, in the course of this century, been transformed from that of somewhat toothless strays given temporary houseroom once a year, to that of trained rottweilers, entitled to sniff around at any time and, if need be, to bite the bands that feed them. As a result, the quality of most company audits has improved, even if the likelihood of recovery, in cases where audits are defective, has not.

INVESTIGATION BY THE REGISTRAR (Sec. 164)

Where the registrar has reasonable cause to believe that the provisions of this Companies Act are not being complied with, or where, on perusal of any document which a company is required to submit to him under the provisions of this Act, he is of opinion that the document does not disclose a full and fair statement of the matters to which it purports to relate, he may, by a written order, call on the company concerned to produce all or any of the books of the company or to furnish in writing such information or explanation as he may specify in his order. Such books shall be produced and such information or explanation shall be furnished within such time as may be specified in the order. 

On receipt of thewritten order it shall be the duty of all persons who are or have been officers of the company to produce such books or to furnish such information or explanation so far as lies within their power. 

If any person refuses or neglects to produce such books or to furnish any such information or explanation he shall be liable to a fine not exceeding two hundred shillings in respect of each offence.

If after examination of such books or consideration of such information or explanation the registrar is of the opinion that an unsatisfactory state of affairs is disclosed or that a full and fair statement has not been disclosed the registrar shall report the circumstances of the case in writing to the court.

APPOINTMENT AND POWERS OF INSPECTORS

Appointment of Inspectors (Sec.165)

The court may appoint one or more competent inspectors to investigate the affairs of a company and to report in a manner as the court directs�

(a)          in the case of a company having a share capital, on the application either of not less than two hundred members or of members holding not less than one�tenth of the shares issued;

(b)         in the case of a company not having a share capital on the application of not less than onefifth in number of the persons on the company�s register of members.

Powers of Inspectors 

The appointed inspectors have the following powers:

1.   The inspectors appointed must enquire into the affairs of the company concerned.

2.   The officers of the company and the directors and management etc. must preserve and produce before them all books and documents required. 

3.   They must also give evidence on oath and answer question put to them, by the inspectors. The inspectors may examine any other person on oath, if so authorised by the registrar.

4.   If it is considered necessary, the inspectors may also examine the affairs of the holding company of the company concerned any of its subsidiaries, its managing agents, secretaries and treasuries and their associates and related companies. 

INSPECTORS REPORT (Sec.169)

An inspector may, and, if so directed by the court, make interim reports to the court, and on the conclusion of the investigation shall make a final report to the court. Any such report shall be written or, if the court so directs, printed.

The court shall�

a)     forward a copy of any report made by an inspector to the company and to the registrar;

b)    if the court thinks fit, forward a copy thereof on request and on payment of the prescribed fee to any other person who is a member of the company or of any other body corporate dealt with in the report, or whose interests as a creditor of the company or any such other body corporate to be affected;

c)     where any inspector, furnish, at the request of the applicants for the investigation a copy to them,

ANNUAL RETURN

Section 125(1) provides that every company having a share capital shall, once at least in every year, make a return (referred to in the marginal note as the "annual return") to the registrar of companies. No return need be made in the year of the company's incorporation or, if the company is not required by Sec.131 to hold an annual general meeting during the following year, in that year.

The return must contain the matters, and be in the form specified in Part I of the Fifth Schedule.

The Fifth Schedule matters are:

1.     The situation of the registered office.

2.     The place where the register of members and the register of debenture holders are kept if they are not kept at the registered office.

3.     A summary, distinguishing between shares issued for cash and shares issued as fully or partly paid up otherwise than in cash, specifying�

(a)       the amount of the share capital of the company and the number of shares into which it is divided;

(b)       the number of shares taken from the commencement of the company up to the date of the return;

(c)       the amount called up on each share;

(d)       the total amount of calls received;

(e)       the total amount of calls unpaid;

(f)        the total amount of the sums (if any) paid by way of commission in respect of any shares or debentures;

(g)       the discount allowed on the issue of any shares issued at a discount or so much of that discount as has not been written off at the date on which the return is made;

(h)       the total amount of the sums, if any, allowed by way of discount in respect of any debentures since the date of the last return;

(i)        the total number of shares forfeited;

(j)        the total amount of shares for which share warrants are outstanding at the date of the return and of share warrants issued and surrendered respectively since the date of the last return, and the number of shares comprised in each warrant.

4.     The total amount of the indebtedness of the company as at the date of the return in respect of all mortgages and charges which are required to be registered with the registrar.

5.     A list of present and past members�

a)     containing the names and postal addresses of all persons who, on the fourteenth day after the company's annual general meeting for the year, are members, and  a)    of persons who have ceased t