Modern world is now more connected through the adoption of technology. The world now is now being viewed as a global village. In recent times the world has witnessed many serious corporate scandals. This has put into question the effectiveness of the existing models of auditing. Reviews that have been undertaken in the aftermath of these scandals have not found substantial evidence to put blame on auditors for failure in the execution of their professional responsibilities. However there has been concerns by many in the business world that the audit function has not done enough in forewarning stakeholders of, or preventing the corporate scandals from occurring. The issue of review of the role of audit and audit methodology has been discussed for a while now. The real issue for many professional, professional bodies and other regulators; has been whether the scope of an audit engagement should be reformed with the view of providing more information relevant to the needs of managements and shareholders. Quality annual audits are now a requirement in many jurisdictions. Different regulators are now guiding auditors on key areas to audit and report on. Modern day audit is experiencing drastic changes at a very high rate.
The word “audit” is derived from the Latin word “audire, which means to hear. Financial auditing is the independent examination/ or review of the financial statements of an enterprise by an appointed auditor to give an opinion/ or assurance whether its financial statements comply with the relevant statutory obligation and appliable standards. This assurance is meaningful to external parties that rely on the financial statements, such as customers, investors, lenders, revenue authorities, regulatory authorities and suppliers. In fact, many lending organizations require annual audits as part of their loan covenants. The balance sheet, the income statement, and the statement of cash flow are the core three financial statements.
The Institute of Certified Public Accountants of Kenya (ICPAK) defines auditing as 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. According to the International Standard on Auditing (ISA) No. 200 Objective and General Principles Governing an Audit of Financial Statements; the objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The phrases used to express the auditor’s opinion are “give a true and fair view” or “present fairly, in all material respects,” which are equivalent terms. This objective applies to the audit of financial information prepared in accordance with appropriate criteria.
Auditing is designed as a safeguard to companies’ assets, resources, and capital from misuse by various parties. It is said that during mediaeval times, when books were maintained manually, auditors in Great Britain used to hear the financial reports read out to them to determine whether the organization’s personnel were not fraudulent or negligent. During the 18th century auditing was viewed mainly as verification of bookkeeping.
The International Auditing and Assurance Standards Board (IAASB) is an independent standards body that issue standards, like the International Standards on Auditing, International Standards on Quality Management, and other services, to support the international auditing of financial statements. It was founded in March 1978 as the International Auditing Practices Committee (IAPC). The IFAC (International Federation of Accountants) Board established the IAASB to develop and issue, under its own authority, high-quality standards on auditing, assurance, and related services engagements, related practice statements and quality control standards for use around the world. The leadership of the IAASB is appointed by the IFAC Board. The IAASB’s pronouncements govern audit, assurance, and related service engagements that are conducted in accordance with the International Standards on Auditing. The IAASB develops a set of international standards generally accepted worldwide.
In Kenya the Companies Act Cap 486 gives guidelines on how audit of public companies should be carried out. The Companies Act gives guidelines on duties of an auditor, the rights, powers, qualifications for appointment, dismissal, remuneration, removal and resignation of an auditor. The current Companies Act was enacted during the year 2015. The new Act introduced modern company and insolvency laws which were long overdue.
Audits are classified into two types: statutory audit and non-statutory audit. Statutory audits are compulsory under statute in the case of a large number of undertakings. Non-statutory audits are carried out by independent auditors because the owners, proprietors, members, trustees, professional and governing bodies, or other interested parties desire them, not because the law requires them. The non statutory audits are carried out at the mercies of the management.
Due to the increasing number of regulations and need for transparency, organizations are adopting risk-based audits that can cover multiple regulations and standards from a single audit event. This is a very new but necessary approach in some sectors to ensure that all the necessary governance requirements can be met without duplicating effort from both audit and audit hosting resources.
Auditing is a key part of good corporate governance, but the directors are responsible for maintaining a system of control that safeguards the company’s assets: thus, it gives guidelines of the facts that auditors must be aware of as part of their planning for carrying out an audit engagement. Governance and ethics in an organization are also scrutinized during an audit engagement. It is believed that entities that adopts best corporate governance practices are industry leaders in their sectors.
Auditing as a profession ensures that organizations present a true and fair view of the financial statements to the different stakeholders. The mandatory audit engagement acts as a means of control. An audit makes stakeholders comfortable to work with a company as it gives an assurance that the company’s financial statements are accurate and give a true and fair view of the company’s financial performance. Also, by a company being audited shows that it upholds transparency and financial integrity, making it easy for customers and suppliers to have confidence in doing business with the audited company.
An audit exercise of a company helps in ensuring that it is in compliance with the requirements of all the applicable regulators. Non-compliance tarnishes the reputation of a company to its relevant stakeholders. Non-compliance can also attract heavy fines and penalties, which can consequently affect negatively the going concern of an enterprise.
By conducting an audit, any inefficiency in a company can be identified, and proper ways to handle the inefficiencies shall be recommended by the auditor, which will improve the company’s performance. This will result to operational efficiency, which is every company’s goal. Companies that operate optimally guarantees maximum returns to their shareholders.
Auditors play a crucial role in identifying opportunities for a company to enhance its accounting operations. Through their objective assessment, auditors provide actionable recommendations to improve accuracy and the choice of accounting software that is good for the organization. Auditors will also advise on best practices for maintaining robust accounting records.
Audits assess the effectiveness of the company’s internal controls and recommend improvements in areas with weaknesses. When a company has strong internal controls, it makes it possible to prevent fraud and will help in the preparation of financial statements, which will present the true and correct position of the business. It is common for financial audits to review internal controls and assess their efficiency.
Although every audit engagement is unique, the audit process is similar for most engagements and normally consists of four phases: planning (survey or preliminary review), fieldwork, audit report and follow-up review. Client involvement is critical at each phase of the audit exercise. Auditors review the accounting data using substantive testing, within the context of materiality and risk assessed during the planning phase, as well as the overall effectiveness of the control environment. Substantive testing involves sampling transactions and gathering evidence to support the accounting data. Substantive testing is basically the review of events and transactions. Evidence from third parties is preferred, such as bank statements, confirmation letters from customers and suppliers, as well as invoices, receipts, and statements.
At the end of the audit process the auditor can give four different types of opinions. The nature and content of the report will be determined by the information that was provided during the audit exercise. The auditor will use his judgement and also apply applicable standards before issuing his report. Prior to issuing his report any matters, questions and explanations to the management of a company which he deemed necessary for the audit must be answered or explained.
Unqualified opinion means that the financial statements are correct and give a true and fair view of the financial position of an enterprise. It is sometimes called the “clean” opinion. It indicates that the financial statements present fairly the correct position, in all material respects. The auditor is satisfied that an entity has complied with accounting standards and other relevant guidelines.
Qualified opinion means that the financial statements are, to a large extent, fairly presented. However, there are specific discrepancies which could include: an incorrect accounting policy, unrecoverable debts, misstated inventories, or a discrepancy not recurring in the financial statements. Due to the discrepancies the auditor is unable to give a "clean" report.
Adverse opinion means that the financial misstatements are material and pervasive to the financial statements. Simply put, the report is bad. The report is given where there exists material misstatements and the financial statements do not conform to applicable accounting standards and other guiding principles. An adverse opinion is more serious than a qualified opinion.
Disclaimer of opinion means that the auditor was unable to obtain sufficient audit evidence upon which to base an opinion. In short, the available financial statements and accounting records could not be relied upon to warrant an opinion. This is the worst form of opinion an auditor can give. This issued after the auditor has exhausted all avenues to get evidence needed to form an opinion on the financial statements.
Annual audited reports and financial statements which are prepared by auditors registered and approved by ICPAK, is a requirement for every company listed in the Nairobi Stock Exchange. The report must disclose all matters which are set by different regulators and other applicable standards. Auditors must ensure that the audited report discloses all matters as per the guidelines of the IFRS (International Financial Reporting Standards) and IAS (International Accounting Standards). The two standards are major accounting standards that guide in the preparation of financial statements. Companies reports which are most compliant with these standards are awarded at the annual Fire awards. The coveted award is awarded to companies that adopts best practices in financial reporting and other disclosures requirements.
CGA Consult CPAK is a registered and approved (by ICPAK) audit firm offering audit and assurance, tax consultancy, accounting, finance, and human resources services to clients in different industries. We enable enterprises attain their goals in the economy through measuring performance, risks management, business advisory, prudent tax planning and leveraging knowledge. The financial statement audit is the backbone of audit services. Our audit methodology is comprehensive, integrated and risk-based. Our audit services go beyond analyzing data and verifying documents. Our professionals are equipped with comprehensive knowledge on industry trends and the business issues that increases risk to operations. We believe that managing risk appropriately is key to business success.
