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