Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Bachelors of Business Management

Code: ACC 411

Title: Principles of Auditing

Table of Contents
Course Content
...
1
Introduction
...
1
Agency Relationship between Shareholders and The Management
...
2
Agency Relationship between shareholders and Creditors
...
3
Users of Financial Statements
...
4
Objectives of Auditing
...
5
Qualities of an Auditor
...
6
Advantages of an Audit
...
7
Review Questions
...
9
Introduction
...
9
Resolution Relating to Appointment and Removal of Auditors
...
12
Right of Access to Books and Attend Meeting
...
14
Chapter Three – The Accounting Records and the Companies Act
...
15
Books of Accounts and Audit
...
16
General Provisions to Contents and Form of Financial Statements
...
19

ii | P a g e

Form of group accounts
...
21
Financial year of holding company and subsidiary
...
22
Directors’ report to be attached to balance sheet
...
24
Chapter Four – The Auditor and the Professional Ethics
...
25
Profession
...
25
Independence
...
26
Conflict of Interest
...
27
Publicity
...
28
Insider Dealing
...
29
Chapter Five – Engagement Letters
...
31
Purpose of Engagement Letters
...
32
Contents of an Engagement Letter
...
35
Review Questions
...
42
Introduction
...
42
Management’s Interest in Accounting System
...
42
Internal Control System
...
43
iii | P a g e

Importance of Internal Controls
...
46
Chapter Seven – Types of Audits
...
47
Statutory Audits
...
47
Internal Audits
...
49
Management Audits
...
52
Chapter Eight – Stages of Modern Audit
...
54
Outline of Stages
...
54
Audit Plan
...
55
Review of Internal Control System
...
57
Analytical Review
...
58
Review Questions
...
60
Introduction
...
60
Primary Evidence
...
60
Circumstantial Evidence
...
61
Review Questions
...
64
Introduction
...
65
iv | P a g e

Content of the Auditors Reports
...
67
Review Questions
...
69
Introduction
...
69
Internal Controls in a Computerized System
...
70
Application Controls
...
74
Planning The Audit In A Computerized Environment
...
75
Auditing Around the Computer
...
76
Computer Assisted Audited Techniques
...
76
Audit Software Use
...
78
Review Questions
...
H
...
Bixby
Cooper (2002), "Principles of Auditing,” New York, NY:
Text Books for further Reading:
Ray Whittington, (2003) Principles of Auditing and Other Assurance Services, McGraw-Hill College
...
Boynton, Raymond N
...
Kell, (2001), Modern Auditing, Wiley

i|Page

i|Page

Chapter One – Introduction to Auditing
Introduction
Definition

T

he Definition for Audit and Assurance Standard AAS-1 by the Institute of Chartered Accountants of
India(ICAI) -- "Auditing is the independent examination of financial information of any entity,
whether profit oriented or not, and irrespective of its size or

legal form, when suchan examination is conducted with a view to expressing an opinion thereon
...
The term most commonly refers to audits in accounting, but similar
concepts also exist in project management, quality management, and energy conservation
...
The
chapter further explains the need for the audit
...


Agency Theory and Auditing
An agency relationship arises whenever one or more individuals called principals use other people or
individual/s called agents to perform some services on their behalf
...
In case of public limited company, agency relationship may take two
forms:
Agency Relationship Between Shareholders and The Management
Between shareholders and Creditors
More often than not conflicts may arise between the principals and agents
...

The shareholders and other stakeholders are interested in knowing whether their hard earned
resources are managed in more transparent and profitable manner
...


Income statement

ii
...


Statement of financial position

The authenticity of these financial statements must ascertained by an independent and qualified party
...


Agency Relationship betweenShareholders and TheManagement
The shareholders are the real owners of the company through equity capital contribution
...
The
shareholders may not have the necessary skills and expertise to manage the affairs of the business
...
As a
result, they appoint other parties to manage the affairs of the company or business on their behalf
...

Conflict between Shareholders and the Management
There is the assumption that the managers and shareholders left on their own will each attempt to act
in their own self interest
...
The goals would only serve the interest of the managers and therefore conflict
the shareholders’ goals
...

Agency Relationship between shareholders and Creditors
The creditors are contributors of debt capital
...
After the provision of debt finance, the shareholders are expected to

2|Page

manage the finances along with the management on behalf of the creditors
...
The creditors provide the firm the finances for a specific time period
...
On the other hand, the shareholders may take up
projects that have not agreed upon
...

Users of Financial Statements
Financial statements usually three forms namely: Income statement, Cash flow statement and
Statement of financial position
...
The company’s Act recommends that they must be produced annually
...
Their interests differ from one party
to another
...


3|Page

The Purpose of Audit
When the managers report to the owners or shareholders and stakeholders there is the likelihood that
they will try to paint a picture that they delivered as agreed with the stakeholders or shareholders
...

Most business have expanded to extent that they very large operating as multinational
...
The financial statements are required to
conform to international accounting standards issued by IASC
...


Objectives of Auditing
There are two main objectives of auditing: Primary objective and Subsidiary objective
...
The
primary goal of the audit is to enable the auditor to just say “these statements show a true and fair view” or
not
...


To detect errors and fraud

ii
...


To provide spin off effects and services such accounting, taxation and others

4|Page

The Auditor and Other Services
The auditor can from time to time provide other services other the auditing
...
These are:
i
...


Independence and

iii
...

Competence
Any person who intends to practice as an audit must be thoroughly trained and must prove his/her
competence
...
Members
of foreign accounting bodies are also allowed to practice as auditors
...

Independence
An independent auditor is who cannot give biased opinion
...
Independence is the freedom from conditions that threaten
the ability of the audit activity to carry out audit responsibilities in an unbiased manner
...
This
can be achieved through a dual-reporting relationship
...


Integrity
A person of high integrity is a person who is honest, discrete and tactful
...


Provides assurance and credibility to the accounts for the benefit of potential investors
...


Used for detection of errors and frauds which could lead to the failure of an organization
...


Audited accounts are used by the organization to raise finance from both public and other
sources as they boost an organization’s credit rating
...


An audit is used to boost the morale of accounting staff who will keep the accounts to date
and act as source of management information upon which decisions can e made
...


It is used by partnerships as a basis of sharing profits and therefore minimizing disputes
between partners
...


They are used by income tax authorities to ascertain the tax liability and avoid any possible
dispute between the company and income tax department
...


The audited accounts are used to admit partners in a partnership business in that these
accounts will indicate not only the net assets but also the capital the new partner has to
contribute
...


Audited accounts are useful in case of a sale of business, a merger, an acquisition or takeover
of a business as it indicates the fair value of assets to be acquired
...


They are used by insurance companies to settle insurance claims arising out of losses that may
be insured in which case the client cannot have conflicting situations which the insurers would
object
...


It is an expensive operation because audit fees and audit expenses are usually too high for
small companies
...


If the report arising out of audit is bad, it can lead to the failure of the business (a qualified
report)
...


An audit may not be ideal for small business whose transactions are too few
...


An audit may not in most cases be in the interest of the owners, especially if they are the
managers in which case they may end up frustrating the entire process
...
Explain the term auditing
b
...
What are the objectives of auditing

d
...

List down the users of the financial statement explaining clearly the interest of each group
QuestionThree
What are the advantages of auditing?
Question Four
Auditors provide auditing and other services
...
The topic
outlines the rules on the requirement for a company to follow
...


Auditors’ Appointment and Remuneration
Section 159 of the companies Act Cap 486 states:
(1) Every company shall at each annual general meeting appoint an auditor or auditors to hold office from the
conclusion of that, until the conclusion of the next, annual general meeting
...

(3) Where at an annual general meeting no auditors are appointed or are deemed to be reappointed, the registrar may
appoint a person to fill the vacancy
...

(5) Subject as hereinafter provided, the first auditors of a company may be appointed by the directors at any time before
the first annual general meeting, and auditors so appointed shall hold office until the conclusion of that meeting:
9|Page

Provided that–
i
...


if the directors fail to exercise their powers under this subsection, the company in general meeting
may appoint the first auditors, and thereupon the said powers of the directors shall cease
...

(7) (a) The remuneration of the auditors of a company–
i
...


subject to subparagraph (i), shall be fixed by the company in general meeting or in such manner as
the company in general meeting may determine
...


appoint an auditor during the company must annual general meeting

ii
...


the registrar of companies have power to appoint an auditor if the company fails to appoint
one during their annual general meeting

iv
...


the first auditors of the company may be appointed by the directors of company before the
first AGM

vi
...

(2) On receipt of notice of such an intended resolution as aforesaid, the company shall forthwith send a copy thereof to the
retiring auditor (if any)
...

(4) Subsection (3) shall apply to a resolution to remove the first auditors by virtue of subsection (5) of section 159 as it
applies in relation to a resolution that a retiring auditor shall not be reappointed
...


Every limited company must appoint an auditor to audit its books of accounts
...


The directors have powers to fill a casual position or vacancy

iii
...


iv
...


v
...


11 | P a g e

Disqualifications for Appointment as Auditor
Section 161 of Companies Act Cap 486 states:
(1)A person or firm shall not be qualified for appointment as auditor of a company unless he, or in the case of a firm,
every partner in the firm is the holder of a practising certificate issued pursuant to section 21 of the Accountants Act,
2008
...

(b) References in this subsection to an officer or servant shall be construed as not including references to an auditor
...

(4) If any person who is not qualified so to act is appointed as auditor of a company such person and the company and
every officer in default shall each be liable to a fine not exceeding four thousand shillings
...


Any person or person who does not hold a practising certificate disqualified as an auditor

ii
...


A person who is a partner of an officer of the company cannot be appointed as an auditor

iv
...


If a person who cannot be appointed as an auditor is appointed in default then the appointing
authority is liable to a fine of not exceeding five thousands shillings

Right of Access to Books and Attend Meeting
Section 162 stipulates that:
(1) The auditors shall make a report to the members on the accounts examined by them, and on every balance
sheet, every profit and loss account and all group accounts laid before the company in general meeting during their tenure
of office, and the report shall contain statements as to the matters mentioned in the Seventh Schedule
...

(3) Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of
the company, and shall be entitled to require from the officers of the company such information and explanation as he
thinks necessary for the performance of the duties of the auditors
...

Section 162 of the Companies’ Act Cap 486 clearly states the following:
i
...


The auditor must be presented during the annual general meeting of the company

iii
...


It is the right of the auditor to attend the annual general meeting (AGM) of the company

v
...
Explain the tenure of an auditor
b
...
Explain who is disqualified to be appointed as an auditor as stipulated in Companies Act Cap
486
d
...
In their letter you notice the following
statements
“Your duties and rights will be determined by the board of the company strictly
...
Describe your duties as an auditor of Kijana Mdogo Limited
b
...
Explain your rights as an auditor as stipulated in Companies Act Cap 486
d
...
Explain how he may be appointed
b
...
The statutory rights of the auditors

14 | P a g e

Chapter Three – The Accounting Records and the Companies Act
Introduction

T

he chapter details the companies Act Cap 486 requirements on the keeping of accounting records and
books by incorporated companies
...


The auditor must ascertain that the directors of the company have complied with all the necessary
rules and requirements of the companies Act
...
Proper books of accounts must comply with rules and regulation as set out in the
companies Act and the relevant International Accounting Standards
...


(2)

For the purposes of this section, proper books of account shall be deemed not to have been kept with respect to

the matters aforesaid if there are not kept such books as are necessary to give a true and fair view of the state of the
company’s affairs and to explain its transactions
...

(b) The books of account shall only be kept at a place outside Kenya with the consent of the registrar and subject to
such conditions as he may impose; and if the books of account are kept at a place outside Kenya there shall be sent
to, and kept at a place in, Kenya, and be at all times open to inspection by the directors, such accounts and returns
with respect to the business dealt with in the books of account so kept as will disclose with reasonable accuracy the
financial position of that business at intervals not exceeding six months
...

In conclusion Section 147 of the companies Act Cap 486 states clearly the following:
i
...
The books should
be expressed in monetary terms

ii
...


The books should be kept in the registered office of the company and any other place that the
directors may deem fit

iv
...


If the books are kept outside Kenya, the registrar must be informed
If the directors or any other officer fails to keep the books of accounts the director or any
officer shall be liable a fine of not exceeding ten thousands or a jail term not exceeding twelve
months or both

Income Statement and Statement of Financial Position
Section 148 of the companies Act Cap 486 states:
(1) The directors of every company shall, at some date not later than eighteen months after the incorporation of the
company and subsequently once at least in every calendar year, lay before the company in general meeting a profit
and loss account or, in the case of a company not trading for profit, an income and expenditure account for the
period, in the case of the first account, since the incorporation of the company, and, in any other case, since the
preceding account, made up to a date not earlier than the date of the meeting by more than nine months or, in the
case of a company carrying on business or having interests abroad, by more than twelve months:
16 | P a g e

Provided that, if the registrar for any special reason thinks fit to do so, he may–
(i) in the case of any company, extend the period of eighteen months aforesaid, and in the case of any
company and with respect to any year, extend the periods of nine and twelve months aforesaid; and
(ii) in the case of any company, permit the account to be laid before the company after the end of the
calendar year
...

(3) If any person being a director of a company fails to take all reasonable steps to comply with the provisions of this
section, 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:
Provided that–
(i) in any proceedings against a person in respect of an offence under this section, it shall be a defence to
prove that he had reasonable ground to believe and did believe that a competent and reliable person
was charged with the duty of seeing that the provisions of this section were complied with and was in a
position to discharge that duty; and
(ii) a person shall not be sentenced to imprisonment for such an offence unless, in the opinion of the court,
the offence was committed wilfully
...


It is the sole responsibility of the directors of the company to prepare financial statements

ii
...


If the directors fail to take necessary actions regarding preparation and laying down these
financial statements, then they shall be liable to a fine not exceedingten thousands or a jail
term not exceeding twelve months or both

General Provisions toContents and Form of Financial Statements
Section 149 of the companies Act Cap 486 states that:
(1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end
of its financial year, and every profit and loss account of a company shall give a true and fair view of the profit or
loss of the company for the financial year
...

(3) Save as expressly provided in the following provisions of this section or in Part III of the Sixth Schedule, the
requirements of subsection (2) and the said Schedule shall be without prejudice either to the general requirements of
subsection (1) or to any other requirements of this Act
...

(5)

Subsections (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 this 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
...

(7)

For the purposes of this section and the following provisions of this Act, except where the context otherwise
requires (a) any reference to a balance sheet or profit and loss account shall include any notes thereon or document
annexed thereto giving information which is required by this Act and is thereby allowed to be so given;
and

18 | P a g e

(b) any reference to a profit and loss account shall be taken, in the case of a company not trading for profit,
as referring to its income and expenditure account, and references to profit or to loss and, if the company
has subsidiaries, references to a consolidated profit and loss account shall be construed accordingly
...


Statement of financial position should give true and fair view of the state of affairs of the
business at the end of the accounting period

ii
...


iii
...

(2)

Notwithstanding anything in subsection (1)–
(a) 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; and
(b) group accounts need 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; and

19 | P a g e

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
...


(4)

For the purposes of this section a body corporate shall be deemed to be the wholly owned subsidiary of another if
it has no members except that other and that other’s wholly owned subsidiaries and its or their nominees
...


Subject to subsection (2), the group accounts laid before a holding company shall be consolidated accounts
comprising (a) a consolidated balance sheet dealing with the state of affairs of the company and all the subsidiaries to be
dealt with in group accounts;
(b) 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,

20 | P a g e

the group accounts may be prepared in a form other than that required by subsection (1), and in particular 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 of
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
...

(2) 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
...


Financial year of holding company and subsidiary
Section 153 of the Companies Act Cap 486 states that:
(1) A holding company’s directors shall ensure that except where in their opinion there are good reasons against it, the
financial year of each of its subsidiaries shall coincide with the company’s own financial year
...


Accounts and auditors’ Report to be Annexed to Balance Sheet
Section 156 of the Companies Act Cap 486 states that:
(1) The profit and loss account, and, so far as not incorporated in the balance sheet or profit and loss account, any
group accounts laid before the company in general meeting, shall be annexed to the balance sheet, and the auditors’ report
shall be attached thereto
...

(3) If any copy of a balance sheet is issued, circulated or published without having annexed thereto a copy of the
profit and loss account or any group accounts required by this section to be so annexed, or without having attached
thereto a copy of the auditors’ report, the company and every officer of the company who is in default shall be liable to a
fine not exceeding one thousand shillings
...

(2) The said 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
...


23 | P a g e

Review Questions
Question One
a
...
List down the statutory books
c
...
What is the auditor’s interest in these books
Question Two
An auditor is required by the Companies’ Act Cap 486 to carry out such investigation as will enable
him to form an opinion as to whether proper accounting records have been kept by a company
...
You are required to state the records that must maintained and state
the information to contained in these records

24 | P a g e

Chapter Four – The Auditor and the Professional Ethics
Introduction

A

uditing is usually carried out by qualified accountant who must be registered as accountants
...
The rules of
conduct are usually found professional handbooks

issued by member’s body and issued to all registered members
...


Profession
Most dictionaries describe and define profession as a calling or vocation involving some branch of
learning
...
Accountants must tried in various areas
...
The professional accountants are
specifically required to refrain from misconduct which is difficult to precisely but which includes any
act or default which is likely to bring discredit on himself, his professional body or the profession
generally
Several general observations are worth mentioning
...


Professional independence – this is vitally important
...


25 | P a g e

ii
...


Accountants must not only be people of integrity and independence; they must also be seen
to be so
...


When an accountant has difficult or is unsure of what course of conduct to follow, he should
consult his professional body or take legal advice
...

He must approach his in a spirit of independence of mind
...
Fees
It is undesirable that the auditor derives a huge proportion of his income from one single client
...
Personal Relationships
It is desirable to avoid personal relationships with the client and his staff
...
Beneficial Shareholdings
In general, partners, their spouses and minor children should avoid owning shareholding the clients
companies
...

d
...

e
...
Acceptance of undue hospitality may pose threats of independence
...
Commissions
Many auditors receive commissions from financial institutions when they act for the clients
...
The client
should be informed in writing that commission will be received and as far as possible on what terms
...
Specific example conflict of
interest may include among others:
a
...
Preparation of accounting records
c
...
If a
company wishes to appoint an auditor, it is usually the director who approaches one and requests him
to place a quotation for the provision of his services
...
The rules are
now less restrictive but there are still some prohibitions
...
Presumably, an
auditor appearing on talk show and introducing himself as an accountant is acceptable
...

It depends on the nature of the appointment
...

Those appointed by the shareholders, it is the responsibility of the shareholders to determine
the fee
...

In case of a retiring officer payment will be done as in previous years
...

In case of illegal removal of the auditor, he is entitled to a remuneration of one full year by the
employer
...
It is also contrary to ethical rules
...
Auditors may have access to information that only them have
...


28 | P a g e

Review Questions
Question One
a
...
What general ethical rules are there?
c
...
Enumerate the guidelines to independence
e
...
Much to your surprise you find on the main street leading to the hotel a banner inscribed
with the following words
Nora & Norah CPA
Training week 3rd December – 9th December 2011
Required
a
...
Explain to the management of the hotel why accounting firms only advertise their services in
a restricted manner
...
During the course of the audit, a junior member of the team who was recently
commenced training raises a number of questions with you
...
What is an audit?
29 | P a g e

b
...
Why do you have a set list of work to do on the audit? Why can’t you select the work to be
done where you think that there has been fraud?
Question Four
It has been suggested that the most important matter affecting the credibility of the auditor is that of
“independence”
Required
a
...
Comment on the following situations in the context of independence of the auditor, showing
clearly the principle involved
i
...


An audit partner James Kimani of Kimani&Onyango CPA is a personal friend of the
chief accountant of Harfel Company Limited
...
The audit partner is not
involved in the audit of the company

iii
...
The total fee income of the audit firm amounts to Kshs 4,500,000 annually
...


The audit senior in charge of the audit of Margur Bank Limited has a personal loan of
Kshs 2000,000 from the bank of which she is paying at an interest rate of 10% while
the bank’s lending rate is 18% per annum

30 | P a g e

Chapter Five – Engagement Letters
Introduction

T

his topic attempts at explaining the procedure and require of engaging auditor
...
This is to make sure that both

the client and the professional are properly
...
This is usually done an engagement
letter
...
This is auditing guideline is Kenyan
Auditing Guideline number Twelve
...
The auditing guideline gives guidance on one of the procedures to be followed
before commencement of audit
...

The engagement letter provides a written confirmation of the auditor’s acceptance of his/her
appointment, the scope of the audit work and the form of his/her report
...
Furthermore, the auditor may find
that he has entered into an implied contract arising either from article of association or by virtue of
conduct arising from practices that he has adopted over a period of time
...
Therefore
the contents of an engagement letter should be discussed and agreed with the management before it is
sent and preferably prior to the audit appointment
...

The auditor should send an engagement letter to all new clients soon after his appointment as auditor
and, in any event, before the commencement of the first audit assignment
...

Where an auditor is engaged by a client that has subsidiary companies, a separate letter should be sent
by the auditor to the board of directors of each company which he is auditing
...
In the later case,
the auditor’s letter should identify the group companies for which he is appointed as auditor, and the
directors of the holding or parent company should be requested to forward the letter to the board of
director of the subsidiary companies concerned
...
Where more than one firm of auditors is
involved in the audit of the group, the respective responsibilities of the parent or holding company
auditor and the subsidiary auditors should be clearly defined
...
The auditors should agree whether joint or separate letters should be sent to the client
...

Once it has been agreed by the client, an engagement letter will, if it so provides, remain effective,
from one audit appointment to another, until it is replaced
...
If a change has
taken place, including a significant change in management which materially affects the scope or
understanding of the audit, the auditor should discuss the matter with the management and where
appropriate send a revised engagement letter
...
The client’s statutory responsibilities include keeping proper
books of accounts as stipulated by Companies Act Cap 486 section 147
...
The auditor’s professional responsibilities include accounting and
advising the client on compliance to standards, regulation and the necessary legislation
...

1
...
In case of a company, it should be indicated that it is the
statutory responsibilities of the client to main proper accounting records and to prepare financial
statements which a true and fair view and comply with the Companies Act Cap 486 and other relevant
legislation and regulations
...

It should be explained that the auditor has an obligation to satisfy himself whether or not the
director’s report contains any matter that are inconsistent with the audited financial statements
...

The scope of the audit should be explained explicitly
...
It should be indicated that:
i
...


The auditor will expect to obtain relevant and reliable evidence sufficient enough to
enable him draw reasonable conclusion therefrom
...


The nature and extent of the tests will vary according to the auditor’s assessment of the
accounting system and where he wishes to place reliance upon it, the system of internal
system
...


The auditor will report to the management any significant weakness in, or observation on,
the client’s system which come to his notice and which he thinks should be brought to the
management’s attention
...

These could include arrangements in respect of internal auditors, divisions, overseas subsidiaries,
other auditors and (in the case of a small business managed by directors who are the major
shareholders) significant reliance of supervision by the directors
...
Representation by Management
Where appropriate it should be indicated that prior to the completion of the audit, the auditor may
seek written representation from management on matters having a material effect on the financial
statements
...
Irregularities and Fraud
The responsibility for the prevention and detection of irregularity and fraud rests with the
management and this responsibility is fulfilled mainly through the implementation and continued
operation of an adequate system of internal control
...

Furthermore, it should be explained that the auditor will endeavour to plan his audit so that he has
reasonable expectation of detecting material misstatements in the financial statements resulting from
irregularities or fraud, but that the examination should not be relied upon to disclose irregularities and
frauds which may exists
...
Accounting and Taxation Services
The auditor may undertake, for the company, services in addition to carrying out his responsibilities as
an auditor
...
In
this case of accounting services, the letter should distinguish the accountant’s and the client’s
responsibilities in relation to them and the day to day book – keeping, the maintenance of all

34 | P a g e

accounting records and the preparation of financial statements
...

In the case of the provision of taxation services, the responsibilities for the various procedures such as
preparation of tax computations and submission of return to the relevant authorities should be clearly
set out, either in a section of the main letter or in a separate letter
...
If this is case, it
may appropriate for the audit engagement letter to indicate that the auditor is not to be treated as
having notice, for the purpose of his audit responsibilities,of the information given to such people
...
Fees
Mention should normally be made of fees and of the basis on which they are computed, rendered and
paid
...
Agreement of Terms
The engagement letter should include a request to management that they confirm in writing the
agreement to terms of the engagement
...
In
the case of a company, the auditor should request that the letter of acknowledgement be signed on
behalf of the board
...
It is not intended to be used in
relation to every enterprise, as it must be tailored to specific circumstances
...

1
...
1

As directors of the above company, you are responsible for maintaining proper accounting
record and preparing financial statements which give a true and fair view and comply with the
companies Act Cap 486
...
2

We have statutory responsibility to report to the members whether in our opinion the
financial statements give a true and fair view of the state of the company’s affairs and of the
profit and loss for the year and whether they comply with the companies Act cap 486
...

a
...
Whether the company’s statement of financial position and income statement are in
agreement with the accounting records
c
...
3

We have professional responsibility to report if the financial statements do not in any material
respect with International Auditing Standards and Kenyan Auditing Standards

1
...
Furthermore, it will be conducted in such tests of transactions and of the
existence, ownership and valuation of assets and liabilities as we consider necessary
...
We shall expect to obtain such relevant and reliable evidence as we consider
sufficient to enable us to draw reasonable conclusions therefrom
...
We shall report to you any significant weaknesses in, or
observations on, the company’s systems which come to our notice and which we think should
be brought to your attention
...


36 | P a g e

1
...


1
...
We are also entitled to attend all
general meetings of the company and to receive notice of all such meetings

1
...
In the running of your company we
understand that the directors are closely involved with the control of the company’s
transactions
...
Further, we may ask additionally for confirmation in writing that all the
transactions undertaken by the company have been reflected and recorded in the accounting
records, and our audit report on your company’s financial statements may refer to this
confirmation
...
8

The responsibility for the prevention and detection of irregularities and fraud rests with you
...


2
...

We shall:

2
...
2

Provide assistance to the company secretary by preparing and lodging returns with the
registrar of companies
...
3

investigate irregularities and fraud upon receiving specific instructions

37 | P a g e

3
...
1

Our engagement as tax advisors requires us to prepare and lodge with the Income Tax
department provisional and final income tax returns along with their supporting computations
and documents and financial statements and to review and advise you on correspondences or
notices received from the tax authorizes
...
2

We shall be pleased to advise you on matters relating to the company’s tax liability, the
implication of particular business transactions and on other taxation matters you refer to us
...
0

Fees

4
...
Unless otherwise agreed, our fees
will be charged separately for each of the main classes of work described above, will be billed
at appropriate intervals during the year and will be due on presentation
...
0

AgreementofTerms

5
...
We shall be grateful if you could confirm in writing your
agreement to terms of this letter, let us know if they are not in accordance with your
understanding of our terms of appointment
...
Explain Any Five purposes of an engagement letter
b
...
List down the contents of an engagement letter
Question Two
Kamau, a CPA finalist received a call from Ochieng who intends to start a business dealing fish
export
...
Kamau approaches you requesting for
assistance
Required
Draft a simple engagement letter from Kamau to Ochieng
Question Three
Manu Producers Limited is a family company has been in operation for the last ten year
...

Ruth Wanjiku, one of the directors of the company has approached you with a request that your firm
accept appointment as auditors to the company
...
She has also requested whether one your member of staff
would take upon the position of company secretary
...
Steps to be taken to establish your firm’s appointment as auditors
b
...
Your proposed reply, giving your reasons, to the request that you or one of your partners
should accept appointment as a director and that one of staff member should accept
appointment as a company secretary
...
State Four major matters you expect to find in a letter of engagement, showing clearly in each
case the reasons for inclusion of the matter concerned
b
...
Give concise reasons for adopting
such an approach
c
...
List down Six services other auditing commonly provided by firms of professional accountant
...
The
auditor has a lot interest in accounting and internal control systems since their adequacy will be vital
...


Auditor’s Interest in Accounting System
The auditor has a lot of interest in the client’s accounting systems due to:
The auditor should ascertain the enterprise’s system of recording and processing transactions
and asses its adequacy as a basis for the preparation of financial statements
The auditor has a duty, in preparing their report carry out investigations so as to enable them
form an opinion
...


Management’s Interest in Accounting System
The management of a business enterprise requires that complete and accurate accounting books and
other records are maintained due to the following reasons:
The business operations are easy to control when proper books and records are maintained
Day to day records of debtors and creditors are indispensable
Assets and other resources are easily safeguarded
It is easy to prepare reliable and accurate financial statements if and only proper books of
accounts are maintenance
It is a statutory requirements to maintain these accounting records and books
What constitutes an adequate system of accounting depends upon a number of factors such
complexity of the organisation, nature of the business and other factors
...
The purposes of these controls are:
42 | P a g e

To ensure that all transactions are recorded properly
Errors and irregularities are avoided
Assets and liabilities are recorded at their correct values

Internal Control System
Internal control may be defined as “the whole system of control, financial or otherwise, established by
the management in order to carry on the business of the enterprise in an orderly and efficient way,
ensure adherence to the management policies, and safeguard the assets and secure as far as possible
the completeness and accuracy of records”

Types of Internal Controls
The types of internal controls are categorized as follows:
a
...

The enterprise should establish a good plan of organisation popularly known as organisation chart
which should among other things identify lines of reporting
...
The employees should their accountability
and responsibility
...
Segregation of Duties
Of maximum importance from an internal control standpoint is segregation of duties where no one
single person should be given too much powers especially regarding recording, approval and custody
of transactions
...


c
...
Access
may be direct or indirect such as through documentation and other authorization
...


43 | P a g e

d
...
For instance all credit sales must be approved and
authorized before the transaction goes through
...
Arithmetical and Accounting
This involves the physical checking of the arithmetical and accounting accuracy
...

f
...
The personnel must be of high integrity
and high training and expertise
...

g
...
The responsibility and
accountability of both the supervisor and the supervised must precisely stated and known to both
...
Management
These are controls exercised by the management which are outside and over and above the day to
day routine of the system
...


Importance of Internal Controls
Internal control system is of paramount important in any business enterprise
...


44 | P a g e

Ensures adherence to management policies
The controls lay down the procedures to be flowed in the conduct of business
...

Ensures completeness of and accuracy of records
The companies’ Act cap 486 requires that the business enterprise must keep proper books of
accounts besides financial statements
Helps in preventing and detecting errors
Strong internal controls assists in preventing and detecting errors
...
This is achieved through continuous review of the books
of accounts such internal audits variance analysis etc
...


45 | P a g e

Review Questions
Question One
a
...
Explain importance internal control system
c
...
Explain whose responsibility it is to put in
place an internal control system
d
...


Carry on the business of the enterprise in an orderly and efficient manner

ii
...


Safeguard the assets and

iv
...
In respect of management objectives (i) to (iv) above explain their meaning and relevance of
each to the auditor giving an opinion on financial statements
b
...
Detail the auditors interest in the client’s accounting records
b
...
Give reasons as to the importance of internal controls

46 | P a g e

Chapter Seven – Types of Audits
Introduction

G

enerally the audit to be undertaken depends on the reason as to why the auditing exercise is required
...
These are:

i
...


Private Audits

iii
...


Management Audits

v
...

These legislations include Companies’ Act Cap 486, Building Societies’ Act, and Provident Act and
other legal provisions
...
The cost incurred is borne by the shareholders or the stakeholders who
requested the audit
...
There varied
reason why the group or a person is interested in this type of audit
...


Before liquation

ii
...


During take – overs

iv
...
It is an independent appraisal technique or activity used to
review the operations of the business organisation
...

Internal auditing is a catalyst for improving an organization’s effectiveness and efficiency by providing
insight and recommendations based on analyses and assessments of data and business processes
...
Professionals called internal
auditors are employed by organizations to perform the internal auditing activity
...

Internal auditing frequently involves measuring compliance with the entity's policies and procedures
...
As a result of their broad scope of involvement, internal auditors may have a
variety of higher educational and professional backgrounds
...
Carried out by personnel – the internal auditor is appointed by the management and is
expected to be independent in that he/she reports directly to the board of directors to the
auditing committee of the board of directors
...
An appraisal activity – the work of internal auditors is to appraise the work done by the others
within the organisation
c
...
The management requires also that
the company’s assets and resources are well safeguarded
...

d
...
There need to measure and evaluate the
continuous effectiveness and efficiency of the internal control systems
48 | P a g e

MethodsandProceduresofInternalAuditing
The internal auditor’s approach to his/her work depends on how his/her role is defined in
organizational chart but most of the internal audits are included in the following broad definitions

Operational Audits – this means an audit of a specific set of operations such as the ones
carried out on departments
Functional Audits – this implies an audit of specific function within the such as the way the
payroll is prepared
Organizational Audits – this implies audits of the organizational setup
...
The
internal and external auditor must co – operative due to the following reasons:
Internal audit forms part of internal control system which has been established by the
management
...

Before placing any reliance on the work done by the internal auditor, external auditor must assess the
internal auditor and his/her work regarding the following areas of concern:
i
...
If this is possible then the external auditor can
highly rely on the internal auditor’s work otherwise do not rely on it
ii
...


Due professional care – in order for the work of the internal auditor to be of any use it must
have been done professional and in regard to all required standards and guidelines
...


Technical competence – for the work of the internal auditor to useful, the person conducting
the internal audit must technically qualified as per requirements of the companies’ Act Cap
486 of laws of Kenya

v
...


Resources available – an internal audit department that has scarce resources may not be relied
at all and may not be useful to the external auditor’s work

Extent of Reliance
The extent of reliance on the internal audit work depends upon many factors some of which include
the following:
Materiality
Level of audit risk
Judgment level required
Sufficiency of complementary audit evidence
Specialized skills of the internal auditor
In conclusion the scope and objectives of the internal auditing include the following:
Reviewing the accounting systems and internal control systems
Examining financial and operating information for the management
Reviewing the economy, efficiency and effectiveness of operations and of the functioning of
non financial controls
Review and implementation of corporate policies, plans and procedures and
Special investigations as may be needed from time to time

50 | P a g e

Management Audits
A management audit may be defined as an enquiry into the advisability of any of the policies of the
board of directors in furthering the objectives of the business as defined in the memorandum and /or
into the efficiency with which they are securing the execution of the policies
Some of the areas which might be subject of the management audit enquiry include:
The objectives of the business: are these objectives right? Are the objectives being pursued
and met?
The relationship of the business with shareholder, investors and the financial markets
The standing of the company with the public, customers, suppliers and other membersof the
public
Relations with trade unions and the employees, labour turnover, health concerns an safety
matters and issues, training policies etc
Moral of employees
Financial ratios both the trend and industrial
Financial control
Information flow – is the flow of information adequate or not

51 | P a g e

Review Questions
Question One
a
...
Define the term internal auditing
c
...
Compare and contrast the work of the internal and external auditors
QuestionTwo
a
...
In what ways might the internal and external auditor co – operate?
c
...
After the results of the financial year just ended you are invited for a meeting with the CEO
of Mimi Na Wewe limited
...
He felt that internal audit was much more valuable and believed that the firm should be
doing much more to co – ordinate you work with that of the internal auditor
...
Explain what CEO meant by the statement that external auditor needs to add credibility to
financial statements
b
...
Explain to the CEO in what respect you believe the external audit may also be of considerable
value to the management
...
State the reasons why the external auditor may use the work of the internal auditor
52 | P a g e

e
...
Define the term management auditing
b
...
List down the matters that might be included in a management auditing

53 | P a g e

Chapter Eight – Stages of Modern Audit
Introduction

A

n audit can be carried out on the enterprises both large and small, and both new and well established
...
This chapter describes the stages involved in the
audit of an established which is big enough to have a

comprehensive system of accounting and record keeping and a system of controls over those records

Outline of Stages
The stages that are involved in a modern audit consist of the following:
Background research
Audit plan preparation
Review of the accounting system
Review of internal control system
Analytical review
Preparation of the audit report
These stages are explained here under
...
The plan will involve preparation of a
memorandum showing the following aspects:
The staff members who will do the audit work
The outline of the audit work to be done on each part of the client’s system and financial
statements
The location of the audit work
The timing of the work to be done
A budget of the time
A budget of cost
The audit plan must conform to the client’s time requirements and the clients ability to produce
necessary analyses and summaries

Review of Accounting System
The auditor must:
55 | P a g e

Ascertain by asking questions
Record on paper
Corroborate his record and confirm that the record is correct
Review for adequacy and of planning of tests
...

Evaluate
Form a conclusion on the adequacy of the clients system for documenting and recording the
transactions, assets and liabilities of the client in the book of account and other records
...




 The books of account and other accounting records form the basis of the preparation
of the financial statements

Review of Internal Control System
The auditor is required to:
Ascertain
Record
Corroborate the record
Review
Test
Evaluate and
Form a conclusion on the adequacy of the client’s internal control system
The internal control system consists of procedures that ensure that all the transactions, resources and
liabilities are recorded correctly
...

It is important that the auditor vouches each and every transaction recorded in the books of accounts
...
It is also established through investigating the system of internal control
...
Some
transactions and data must be verified by use of direct evidence
...
Substantive testing can be applied to the following situations:
Where internal control system is weak and cannot be relied upon
Unusual or extra – ordinary or one – off transactions
All assets and liabilities at the balance sheet date
In practice the auditor has to consider the grounds of the effectiveness and cost of whether to rely on
the systems of control
...
In
some cases, a combination of internal control reliance, substantive testing and analytical review
provides the necessary and required audit evidence
...
The audit report is a
formal statement showing the following:
The name of the auditor who performed the audit work
The name of the persons to whom the audit report is addressed such as the client’s directors etc
The financial statement being reported on such as income statements, statement of financial
position and cash flow statements
A statement showing the opinion of the auditor whether the statements give a true and fair view
A statement showing the opinion on whether the statement comply with requirements of the
Companies’ Act Cap 486 and other regulations and legislations

58 | P a g e

Review Questions
Question One
a
...
What are background facts must the auditor discover?
c
...
What are the steps in an accounting system review?
e
...
Outline the steps in the review of internal control system
g
...
Outline the contents of an auditor’s report
Question Two
a
...
Describe briefly each of features of an audit
Question Three
You daughter has written to you stating that she is contemplating to follow in you footsteps and
study accountancy
...

Write an appropriate letter, in a simple language describing what an audit is
...

Verification does not exactly mean that there is certainty in connection

with the data and financial statements being audited
...
Sufficient evidence
depends on the experience, knowledge and expertise of the auditor
...
The evidence available to the
auditor varies in reliability, and the auditor must consistently be aware of this fact
...
These types are discussed here below
Primary Evidence
The source of the figures in the financial statements of any business enterprise is the general ledger
...
The auditor has a primary role of ascertaining
whether the financial statements and records agree with the primary source of data
...
He must ascertain the double entry
rules have been followed to the letter
...
The strong the internal control the more reliable the supporting evidence and vice versa
...
These are:
Physical evidence
The physical evidence is somewhat limiting in that it can only be used in tangible assets
...

Documentary Evidence
The type of evidence most commonly consulted by the auditor is documentary evidence
...
Documents vary widely in terms of their
reliability as evidence
...


Externally created documents sent directly to the auditor – these documents prepared by third
parties but sent directly to the auditors such bank statements
...


Externally created documents in the clients possession – these documents prepared by the
third parties but the client has the possession of these documents such as sales orders

iii
...
This evidence may be verbal or written, formal
or informal
...


Internal evidence circulating outside business – information from the client but is the hands of
external parties
...


Internal evidence circulating within the organisation – this is information circulating within
the business only
...
This
form of evidence involves circumstances from which a reasonable inference can be drawn of the
existence of a given fact or occurrence of a given event
...
These methods are:
Physical Examination and counting
Confirmation from third parties either verbally or formally
61 | P a g e

Examination of original documents
Re – computation of figures
Retracing book – keeping records
Scanning
Enquiry
Correction
Correlation
Observation

62 | P a g e

Review Questions
Question One
a
...
Explain the main types of evidence that the auditor is likely to encounter
c
...
your audit you collect different varieties of evidence in order to form your opinion on the
truth and fairness of the financial statements
...


Witnessing of procedures

ii
...


Satisfactory internal control

iv
...


Agreement with expectations

You are required to
a
...
briefly indicate why you would require that piece of evidence in each circumstance

63 | P a g e

Chapter Ten – Auditor’s Report
Introduction

T

he auditor’ report is the final product of the audit work
...
The auditors’ reports should not by any chance be under – estimated
...
The auditors’ report is supposed to show
whether the financial statements comply with the necessary accounting standards and the necessary
legislation and regulations
...
The sixth schedule is reproduced below:
SEVENTH SCHEDULE (s
...
Whether they have obtained all the information and explanations which to the best of their knowledge and
belief were necessary for the purposes of their audit
2
...

3
...

(2) Whether, in their opinion and to the best of their information and according to the explanations given
them, the said accounts give the information required by this Act in the manner so required and give a true and
fair view –
(a) in the case of the balance sheet, of the state of the company’s affairs as at the end of its
financial year; and
(b) in the case of the profit and loss account, of the profit or loss for its financial year,
or, as the case may be, give a true and fair view thereof subject to the non-disclosure of any matters (to
be indicated in the report) which by virtue of Part III of the Sixth Schedule are not required to be
disclosed
...
In the case of a holding company submitting group accounts whether in their opinion, the group accounts have
been properly prepared in accordance with the provisions of this Act so as to give a true and fair view of the
64 | P a g e

state of affairs and profit or loss of the company and its subsidiaries dealt with thereby, so far as concerns
members of the company, or, as the case may be, so as to give a true and fair view thereof subject to the nondisclosure of any matters (to be indicated in the report) which by virtue of Part III of the Sixth Schedule are
not required to be disclosed
...


Give a true and fair view

ii
...


Comply the auditing standards

The auditor is required to state these matters expressly in his/her report
The auditing guidelines requires that the auditor must

i
...


Identify the financial states that the report relates

iii
...


Refer specifically whether in his/ her opinion, the financial statements give a true and a fair
view

v
...


In some instances the auditor is required to make further statements
...
If, in the auditors opinion, proper books of accounts and records have been maintained through
– out the period under study
b
...
If the accounts are not in agreement with the accounting records and returns

65 | P a g e

d
...


Content of the Auditors Reports
The Companies’ Act Cap 486 and the Auditing Guideline give the auditor some specific duty
regarding the content of the auditors’ report
...
Some of this information
includes
Particulars of directors’ emoluments including pensions etc
Particulars of loans to the officers of the business
Particulars of emoluments which the directors waived the right to receive
Particulars of contracts in which the directors have interest
As you may noticed the information is only touching on the directors
...

This section contains to whom the report is made
...

Section Two – What the Auditors have done
This section contains the work the auditors have done and starts with the words “we have audited the
financial statement on page … to page …
Section Three – The Opinion
This contains the opinion of the whether the books of accounts have maintained properly and
whether the financial statements give a true and a fair view of the state of affairs of the business for
the period under consideration
...
These are:
i
...
All the issues that the auditor
may have raised were properly addressed and all the supporting documents provided

ii
...
Explain the contents of the auditor report
b
...
You have received a letter from your cousin in which she informs that
she about to be transferred to a larger branch where she will be involved with customers who are
limited companies
...
The nature and purpose of the audit of a limited company
b
...
No country or

organization can afford to be left behind since by doing so, she risks underdevelopment, isolation and
backwardness
...
This calls for newer and sophisticated ways of auditing
...
This chapter draws its content from International
Standards on Auditing numbers ISA 401 – Auditing in a computer Information System and ISA
1008 – Risk Assessment and Internal Controls

Features of Computerized Systems
There are fundamental differences between manual systems and computerized systems
...
The fundamental differences are:
1
...
The auditor is likely to
spend a few hours to understand a manual system but a computerized system may take a lot
of time to understand besides requiring expert skill and technical know – how
...
A separation between computer and user personnel that may be physical but is also likely to
psychological and due to use of technical jargon and language in speech communication
...

3
...
The information contained in soft records is not easily examined
...
The data in soft copies may be stored for a short period of time as opposed to manual system
where data can be stored for a long periods of time
5
...
Manual systems
lack this capability
...
It is easy to access data and output in computerized systems as opposed to manual systems
where data must be accessed manually
...
Lack of audit trail in computerized systems as opposed to manual systems where one trace a
transaction through the system from initialization up to the end
8
...
Information, protection, and
control, the objective of internal control earlier, are equally applicable to computerized systems
...
These controls usually consist of both manual
systems and in – built procedures
...
General controls relate to the environment within which computerized systems are
developed, maintained and operated
...
They at ensuring proper development and
implementation of application are achieved and that the integrity of both data program is
achieved
...
They apply to all sizes and types of systems
...
These are:
System development controls
The plan of organisation and operation of the computer activity
Access controls
Back – up and recovery procedures
Systems Development Controls
These controls relate those controls that must be exercised by the client when designing new systems
or modifying existing systems
...
The controls that should be exercised during the systems
development can be categorized into four:
Review, testing and approval of new systems
The basic principles of these controls
 The user departments must be included in review and testing
...
Once the user departments are have input considered then



the systems can reflect the need for these user department
 For the proposed system should have a written specification that should be approved by this
management
 Communication between the user department and the computer department should be
established during testing
...


Controls over program
Program change refers to modification made to application program
...
These changes must be check against incorrect or incomplete data input
...
It is important to run the two systems alongside for sometimes while the
same time testing the input and output from the two systems
Documentation procedures
This is collection of information that support and describe the computer application, including
development
...

Plan of Organisation in Computer Activity
The business should have proper segregation of duties and functions and policies and procedures
relating to control within the computerized accounting systems
...

Any person who has unrestricted access to the computer, its programs, and live data could have
the opportunity to both perpetrate and conceal fraud
...

Authority and responsibility must be clearly divided among the following functions:










 Systems administration
 Network management
 Security management
 Change management
 Users
 Systems analysis
 Programming
 Computer operations
 Information system library
 Data control


It is important that different people perform these functions
...

Physical Access Controls
How can physical access security be achieved?






 Place computer equipment in locked rooms and restrict access to authorized personnel
 Have only one or two entrances to the computer room
 Require proper employee ID
 Require that visitors sign a log
 Use a security alarm system
 Restrict access to private secured telephone lines and terminals or PCs
...




 Restrict access of off-line programs, data and equipment



 Locate hardware and other critical system components away from hazardous materials
...

What are some logical access controls?
 passwords



 physical possession identification



 biometric identification



 compatibility tests
Application Controls
Application controls prevent, detect and correct errors in transactions as they flow through the
various stages of a specific data processing program
...
Companies must establish control procedures to ensure that all
source documents are authorized, accurate, and complete and properly accounted for, and entered
into the system or sent to their intended destination in a timely manner
...
These are:
a
...
Processing controls
c
...
Control over master files and standing data
Input Controls
Faulty data input will always results into error and wrong output
...
Completeness
control ensures that all transactions are recorded
...
Data conversion controls ensures that all data
on source documents is properly entered into the system
...
Other input may be put in place
such check overdue transactions and even credit limit
...

Control Over Master Files and Standing Data
These controls ensure that amendments to master file and standing file are complete accurate and
properly authorized
...


Auditing In a Computer Environment
The use modern technology, especially computers in the processing of financial data and information
has totally changed the general approach of the audit by auditors
...
In a computerized environment must be taken in account and
considered
...


The auditors need to be involved in computerized systems at the planning, development and
implementation stages
...


ii
...
The
auditor will need to be present when the data and files are available
...


iii
...
Recent
developments include use of portable laptops and other methods data storage
...


The allocation of suitably skilled staff and personnel to the audit is more vital
...


v
...
These
techniques often require considerable planning in advance
...
There are usually two main approaches that can be adopted
...
Auditing around the computer
b
...
The
approach pays no attention to the control procedures within the information technology (IT)
department
...
This approach is
mainly substantive
...
These are:
The use of test data and
The use computer audit program
These methods are generally referred to Computer Assisted Audit Techniques (CAATs)

Computer Assisted Audited Techniques
CAATs refer to any automated audit techniques such computer software and test data
...
CAATs are mainly categorized into audit software and test data
Audit Software
Any software with that capability of directly reading and accessing data from databases is called audit
software
...
the software assists the auditor in accessing directly the data stored in
computer’s hard – disk and servers
...
These are
i
...


Utility Programs

iii
...


Commercial Software

v
...


Integrated Test Facility

76 | P a g e

vii
...


Program Code Analysis

These are explained here under
...
It may be software available over the shelf or tailor – made
software to specification of the auditor
...

Utility Programs
These are program, which are generally not designed for audit purpose but can be used by the auditor
to perform common data processing functions such as sorting, creating and printing files
Purpose written Programs
These are tailor – made programs specifically written either by auditor or programmers at the request
of the auditor
...
These include the Microsoft
Excel, Microsoft Word etc
...

Embedded Audit Modules
This is CAAT in which a code is prepared by the auditor and embedded in the client’s software
...
The facility ensures that the test data
77 | P a g e

updates auditor’s dummy files
...
The two copies of processed data
are compared to ensure that the processing is identical
Program Code Analysis
This the analysis of the client’s program code to ensure that the instructions given to the computer
are the same instructions that the auditor had identified when reviewing the system development
Audit Software Use
By use audit software, the auditor is able to test huge volumes of data within a very short time
...
The test data is processed separately from client’s normal input data
...
The updated files
are examined to ensure that the transactions were processed in the right and the expected manner
...
However, if audit firms use
laptop computers they risk data being corrupted and appropriate controls must therefore be put in
place to prevent the corruption of data
...
Explain six ways which the auditors can use laptop computers in their audit work
other than computer assisted audit techniques
b
...
Embedded audit facilities
ii
...
Briefly describe two types of software that might be used by auditors in their work
other than Computer Assisted Audit Techniques
d
...
In the context of a computer based accounting systems, explain the meaning of the following
terms
i
...


Application Controls

b
...
A company wishes to change from an old computerized system to a more modern computer
based accounting system
...

Question Three
“Most errors in computer based accounting systems can be traced to faulty input
...
Control over data conversion, control over rejections
and their correction and reprocessing, batch controls and computer edit controls affect both
completeness and validity”

79 | P a g e

Required
a
...
What controls can be established over validity
c
...
Give examples of these controls bringing out clearly
i
...


Description of the control

iii
...
Live running of the new system is
planned to commence on 1 February 2012 and will run parallel with the existing one systemfor a
period of three months thereafter
Required
a
...
On the assumption that the new system will be ran as live from 1 February 2012, briefly
describe what effect this have for the year ending 31 December 2012

80 | P a g e

81 | P a g e

82 | P a g e

83 | P a g e

84 | P a g e

85 | P a g e

86 | P a g e

Appendix I – Companies Act Cap 486

87 | P a g e



---