AUDITORS’ APPOINTMENT AND REMOVAL

Most audit work is conducted for companies and are governed by the rules of the Company
Act 1985 as amended by the Company Act 1989.

APPOINTMENT AS AN AUDITOR

Eligibility as an auditor (S. 161)

[Link] partner in audit firm must be a member of the professional bodies listed in schedule 5
to the Accountants, Statute 1992 or must be a member of Certified Public Accountants of
Uganda (CPAU),
2. Practicing accountants holding valid practicing certificates issued by the registration of
accountant’s board in accordance to section 21 of the Accountant Act Chapter 531 of July
1977.
3. An audit firm recommended and approved by the institute of certified public accounts of
Uganda
4. He must have at least 2 years of postgraduate experience in auditing environment.
Who to be Disqualified/People not allowed to be appointed as Auditors of the
organization (S.161)
The following people are not allowed to be appointed as auditors of a company.
a. An officer or servant an employee of the company e.g. directors
b. A person who is a partner for or an employee of an officer or servant of public
company. Any person who has been in employment or in partnership with an officer,
a servant
c. Body corporate limited liability of a company would expose clients to risk limited
companies cannot express a personal opinion
 They have limited liability which when allowed to practice can put the client to
heavy financial loss which may not be warranted.
d) An audit firm which has been disqualified to act as the auditors of the branch or the
subsidiary of the client company in any manner under section 161(2)
Other persons disqualified by virtue of relationships for ethical reasons include:
e) A person who is indebted to the company for quite large sum of money or given or
obtained guarantees to/from the company
f) A person who is a director of a private company which is managing agents, secretaries, or
treasurers of the company
Procedures for appointing the Company Auditor
(Extract by the Companies Act Chapter 486)
The procedures of appointing the company auditor are provided by section 159(1)-(6) of the
Act. The provisions are:
a. Appointment by the members during the AGM
b. Appointment by the Board of Directors
c. Appointment by the registrar of companies

Appointment by the members /shareholders during the AGM

 Auditors are appointed by shareholders in a general meeting (general rule).
 The office of an auditor should never be vacant therefore when appointed he has the
rights of office till another AGM. If the Auditor is in breach of the code of ethics,
he/she can be disqualified. For regulated entity e.g. Banks-Central Bank, insurance ,
the term of office is limited to 3 - 4 years.

a) Special notice of appointment by shareholders (S.160)

Special notice of 28 days is required for a resolution at a company's GM appointing as
auditor person other than a retiring auditor providing expressly that retiring one shall not be
reappointed.
Exceptions to the general rule:
Automatic Appointment
In this case, a retiring auditor is deemed re-appointed without any resolution passed unless: -
 He is not qualified for reappointment.
 It is stated that he shall not be reappointed.
 He has given a notice in writing that he is unwilling to be re-appointed

b) Appointment by the Registrar of Companies

If the directors have failed to appoint the auditor the company's act give registrar powers to
appoint one.
Notice of at least 28 clays should be given in case of a special resolution. This is so to
protect the rights of the auditor.
When no auditor has been appointed at the AGM, or in case the directors do not appoint the
first auditor, the Co Act requires the company to inform the registrar within one week. The
registrar may then make an appointment.
Failure to do this, the company and every officer of the company are liable to a default fine.
Section 159(3) and (5) empowers the registrar of companies to appoint the auditor in the
following situations;
i. Seven days after the conclusions of the annual general meeting where the members
have failed to appoint the auditor
ii. Seven days after the 30 days where the Board of directors have failed to appoint the
auditor in case of the first auditors.

c) Appointment by Directors
The first auditors of a company may be appointed by the directors before the first AGM.
They hold office till the first AGM. Shareholders can appoint another auditor other than the
first one appointed by the directors by giving notice of 14 days.
Shareholders may appoint the first auditors if the directors do not appoint one before the first
AGM. Special notice of 28 days is required for a resolution at the entity’s GM
Filling the Casual Vacancies
Directors may also fill any casual vacancy in the office of the auditor. Casual vacancy may
be created by death and being incapacitated.
A casual vacancy may also be filled by shareholders at a GM. Until such appointment, the
continuing or surviving auditors may carry out the duties of auditors.

Casual vacancies may be created by death or incapacitation of the auditor in such situations,
the directors may fill any vacancies in the office of the auditor, however if such a vacancy is
created by the resignation of the auditor, then such can only be filled by shareholders at a
GM
A casual vacancy is a temporary vacant position that arises in the auditor’s office in between
the AGM's as a result of the following
a) Sudden resignations of the auditor
b) Sudden incapacitation of the auditor
c) Sudden death of the auditor
A casual vacancy is filled in by the adopting the following
 1. Notify the deceased auditors’ firm over an intention to remove them in the next
annual general meeting within a period of not less than 28 days
2. Nominate another audit firm intended to replace the present auditors.
3. The quest for extra ordinary annual general meeting to discuss about their
appointment to fill in a casual vacancy.
4. Ensure that the appointment of the auditors is done by the members passing votes of
ordinary resolutions or resolutions of simple majority of those members present.

Remuneration of the Company Auditor (Section 159(1))

The remuneration of auditors is fixed either by: -
a. Whoever made the appointment, which could be: -
 The shareholder
 The directors
 The registrar of companies.
b. The company in a general meeting or in such a manner determined by the GM
c. In practice, shareholders usually delegate to directors to fix remuneration in case (a)
above. Their remuneration must be disclosed in the financial statements separately.

Removal of an auditor ISA 160

Auditor’s removal is a situation whereby the management and the shareholders of the
company are not willing to continue acting as the company's auditors.

Special resolution has to be passed by the general meeting where a notice of 28 days is given
sitting auditor (an auditor holding the office), retiring auditor (when leaving the office and
incoming auditor (firm coming in).
Removal Procedures by the Company
Procedures by the auditor or the audit firm
1. The auditor of the audit firm to receive a special notice of not less than 28 days over
the intention to remove them in the next annual (general) meeting. Special notice is
needed for a resolution at the GM appointing another auditor or expressly stating that
the retiring one shall not be reappointed
2. Upon the receipt of a special notice, the retiring auditor circulates a written copy of
his representation to reach the co members before the AGM intended to discuss about
their removal.
 3. If the representations are not sent, they should be read out in the meeting, unless the
court has ruled it out.
4. The auditors to attend the AGM discussing about their removal and to exercise the
following rights during the AGM (removal)
5. The auditor has a right to defend himself at the meeting.

a) Reasons for removal

The following can lead to removal of an auditor;
i. Disagreement on accounting policies, audit findings. Where directors feel the auditor
taking unreasonable stance.
ii. Rationalization-subsidiaries (the parent company) having one firm with the holding
company
iii. Incompatibility between management and auditor
iv. Threat to expose management fraud. Auditor threatens to expose management fraud
or curb management's unrestricted use corporate resources (via additional disclosers
for instance)
v. Incompetence of the auditor
vi. Change of ownership of the business
vii. Change of requirements of the client firm e.g. after expansion,

Wrongful removals (dismissal of the company Auditor)

At times the company auditor may view to be removed wrongfully from the office and
therefore he/she can exercise the following actions
1. The auditor can claim whole year remuneration where the removal is prejudicial to his
interest.
2. The auditor can sue the company for a breach of contract and claim damages where
the removal is wrongfully done.
3. The auditors can exercise the right of lien (possession right) over all information,
records and documents in respect to the working papers where his removal is
prejudicial to his working statement.
4. The auditor should decline to provide professional clearance and official handing over
to the incoming auditor.
Resignation of auditors
Auditor’s resignation is a situation where by the auditor himself is not willing to continue
acting as the company auditor.

An auditor may resign due to:

i. Health problems (sickness)
ii. Expansion of the client firm (business becomes bigger)
iii. Inadequate fees (low salary)
iv. Management fraud etc.
The circumstances surrounding the auditor’s resignation are:

b) An auditor can resign due to: -

 Conflict with management e.g. due to not discovering fraud
 Management fraud
 Lack of capacity to handle the client e.g. after a take over
 Where the auditor himself is not qualified for appointment
 Where the auditor has disagreed with the directors because has qualified his report
and his certain for a replacement in the next AGM.
 Where the auditor is not willing to be reappointed in the next annual general meeting
 Where the auditor’s scope of work has been restricted by the board of directors.
Procedures of Auditor’s resignation
 Procedures by the auditor
 Procedures by the company
Procedures by the auditor
1. The auditor should tender his resignation letter stating the date and time he/she is
resigning as the company auditor and deposit the same at the company's head office.
2. The auditor should accompany the resignation letter with the statement of
circumstances of either.
 Those matters he/she would want to be brought to the attention of the
shareholders with regard to his resignation or
 None of such matters if any
3. The auditor should requisition for the extra ordinary annual general meeting for
members to discuss about his resignation. During the AGM the auditor can be
reinstated and the directors can be removed if the auditor’s resignation was
contributed to by the directors.
Procedures by the company
1. The company to receive the auditor’s resignation letter stating the date and the
time they are resigning as the company's auditors within a period of not less than
28 days.
2. The company to accept the auditor’s resignation letter only when it is
accompanied by the statement of circumstances of either
 Those matters that should be brought to the attention of the members in respect to
the auditor’s resignation or
 None of such matters if any.
3. The company to ensure that the auditor's requisition for the ex-AGM to discuss
about their resignation from office.
RIGHTS/POWERS OF AN AUDITOR
Statutory Rights of a Company Auditor (Section 163 of the Companies Act)
With reference to the company's act provision the statutory rights of the auditor are?
a) Right of access to the books of accounts and vouchers of the company at all times
b) Right to receive a notice of and to attend to any annual general meeting
c) Right to speak during the annual general meeting in matters that concerns him as the
company’s auditor
d) Right to receive returns from the branches or subsidiaries in case of proper counts at
all times.
e) Right to call for information and explanations from the company officers.
f) Rights associated to his removal and resignation from office.
Rights of outgoing Auditor
1. Right to receive a notice and to attend the AGM discussing the removal
2. Right to speak during the AGM discussing about removal
3. Right to read their written representation to their co member during the AGM where
time did not allow for them to be circulated well in advance.
4. Right to call for the next annual general meeting discussing about the appointment
replacing the present auditors
5. Right to call for the next annual general meeting discussing about the appointment
replacing the present auditors

Rights (S.162)
 i. Access to record books, document and accounts at all times. Never use force or seek
court redress when refused access. Simply resign or quality the report
ii. To get information and explanations from officers necessary for that audit
iii. It extends to subsidiary companies and their auditors when carrying out holding
company audit.
iv. To attend or get notices of meeting like any shareholder
v. To speak at the general meeting as auditor
vi. Get information from subsidiaries or branches
vii. Get written resolutions proposed
viii. Right to remuneration if he has completed his work
ix. Right to sign the Audit Report,
x. Rights during removal
xi. Right to call for the annual general meeting discussing about audited accounts and
adoption of the auditors’ reports
Rights of the Auditor during resignation
1) Right to requisition for the extra ordinary annual general meeting.
2) Right to call for the next annual general meeting where his terms of office would have
ended but for resignation.
3) Right to call for the next annual general meeting for the appointment of the auditor
4) Right to call for the next AGM for discussion of audited accounts and auditor's report.

Right to access books of accounts and vouchers of a business at all times.

Under this right the auditor has the following sub-rights
i. Right of access to statutory books of accounts
ii. Right of access to returns from branches
iii. Right to vouchers and books kept by third parties on behalf of the company egg title
deed memorandum/ articles of associations bearer bonds, shareholders registers,
registers of contracts, debentures etc
1) Right to call for information and explanation which the auditor considers
necessary for the purpose of forming an opinion on financial statements.
i. Right to obtain all information from company books and vouchers
ii. Right to obtain information in form of management representations which is
contained in a letter of representations which contains matters for which the auditor
could not readily get documentary evidence.
 iii. Right to obtain information from third parties which would have dealings with the
company
2) Right to receive notices of and attend the AGM
Under this right the auditor has the following sub-rights
i. Receive notice of not less than 21 days before an ordinary AGM
ii. Receive ma notice of between 7-14 days before an extraordinary AGM
iii. Receive notice of between 14-28 days before his/her removal.
3) Right to attend the AGM
An auditor has the following sub-rights
i. Attend the AGM regardless of whether accounts are subject of discussion or not
ii. Right to read his representations at the AGM unless they are received too late for the
company to send them to each shareholder invited to the meeting because of the
company's default
iii. Right to answer questions at the AGM which have been channeled through the
chairman of the AGM
iv. Right to make clarifications or to add to his/her knowledge after his report has been
dispatched but before the AGM (post -audit/post-balance sheet events KAG 14)
nevertheless an auditor does not have the right to make up for any omissions in his
report during an AGM.
4) Right to make a statement at the AGM
Under this right the auditor has the following sub-rights
i. To correct wrong impression given to the shareholders by the board
ii. Right to make a statement in connection with the events subsequent to the balance
sheet events
iii. Right to make a statement on the condition of the company's internal control system
in particular if this has been weak.
5) Right to indemnity
An auditor has a right to be indemnified out of the company's assets if he has been injured
during the course of his audit in so far as such injuries may have occasioned actual loss to his
name or person or to his/her profession.
6) Right to visit branches
An auditor has the following sub-right
i. Right to information and to explanation relating to activities of branches in so far as
they affect the company's affairs.
 ii. Right to examine branch accounts and to question returns submitted to the
headquarters (office).
iii. Right to communicate and receive information from third parties to such branches.
iv. Right to receive representations from branches over those matters for which the
auditor did not have sufficient documentary evidence.
7) Right to remuneration/pay
Under this right the auditor has the following sub ri
i. To have his audit fees as and when they are due.
ii. Right to seek the whole year's fees if dismissed wrongly as held in
iii. Right to withhold the report until his fees are PAID. (exercising lien on report)
8) Right to sign audit report
This also includes the right to sign any other document that may have to be appended to the
report such as notes to the accounts or managements letters.
9) Right during removal
The auditor has the following sub-rights
i. Right to send his representations to the share holders
ii. Right to read his representations at the AGM, if these was not sent in time because of
company to do so.
iii. Right to receive notice of between 14-28 days during his removal
iv. Right to speak at the AGM discussing his removal
v. Right to take legal action against the board if the auditor's removal is wrongful or if
he has been denied the right to send read representations

DUTIES/ OBLIGATIONS OF AN AUDITOR

Duties, Rights and Remuneration of a Company Auditor
Statutory Duties of the Company (Section 162 of the Company Act)
The statutory duty of the company auditor is provided for by section 162 of the company act
and modified by the seventh schedule of the same act.
The main duty of a company auditor is for the auditor to report on the financial statements
and state the following in his report
Duties (S162): -
1) Duty to make a report
An auditor has a duty to make a report arising out of his examination of the books of accounts
which is a requirement of the companies Act. Such a report is essential before an AGMK is
convened. He has a duty to submit returns on behalf of the company in form of income tax
returns to the registrar.
2) Duty to state the following in an audit report
a) Whether the auditor has received all the information and explanation which to the best
of his knowledge is necessary for his report (IAS 700)
b) Whether the profit and loss account portray the true and fair view of the company's
state of affairs (profits or losses of the period)
c) Whether the balance sheet portrays the true and fair view of the company's assets or
liabilities
d) Whether the auditor has received adequate returns submitted from branches and
whether the company has kept proper books of accounts.
e) Whether the profit and loss account and the balance sheet portray the true and fair
view of the company's state affairs

3) Duty to call for information

a. Securities of the company and whether they cover its loans adequately i.e. the
company’s loans should not exceed 70% of the value of securities especially
depreciable assets.
b. Whether the company's securities in form of investments such as shares and bearer
bonds have been sold loss or below par value such as shares and bearer.
c. Whether personal expenses have been charged company's profit and loss account.
4) Duty to provide work in paper
An auditor has a duty to provide working paper in particular to assist investigators in the
Company's affairs and this working paper as contain significant audit information should
facilitate investigations.
5. Duty to certify statutory report regarding
a) Number of shares sold
b) Cash received in respect of the allotment made
c) A certificate of the amount in (a) above
6. Duty to certify the profit and loss account and the balance sheet in a prospectus
If a company is to issue new shares such a company will prepare a prospectus that must
contain audited statements of not less than five years of the performance and the auditor will
need to certify the state and accounts.
7. Duty to certify the profit and loss account and the sheet when the managing agents
resign
If the company's managing agents especially the boards resign, the auditor has a duty to
certify the company's records the date of this resignation to the beginning of financial period
This is necessary to prevent frauds usually of large which may have been perpetrated by the
company's managing agents.
8. Miscellaneous duties
The auditor has other duties that include:
a) To ensure that the terms of the loans advance by a company are not prejudicial to
interests of shareholders.
b) To certify the company's financial accounts/transactions so as to ensure that they are
not fictitious and they represent the true performance/operations of the company.

AUDITOR'S LIABILITY
The auditor is considered and looked upon as a trustworthy individual. He performs audits
and signs audit reports. These reports are the auditors' opinions of the truth and fairness of the
financial statements. This makes parties such as management, government tax authorities,
financial institutions, insurance company, suppliers, the public etc to have faith and rely on
such reports.
For this reason, the auditor has responsibility to do his work independently with integrity and
confidentiality. Like was in the case of:
The London and General Bank (1895)
It was held that, "He must be honest i.e. he must not certify what he does not believe to be
true, and he must take reasonable care and skill before he believes what he certifies is true".
Hence a auditor who commits any wrong in the course of his duties is liable for the same.
The liability of an auditor may arise under civil law or criminal law and he may be held liable
by the client or third parties.

Civil liability
This mainly arises due to the negligence of the auditor, violations of the provisions of the
Company Act and non-compliance of the duties laid down as per the Company Act, auditing
standards and guidelines etc.
In order to hold the auditor liable for negligence it must be proved that: -

 He was negligent.
 As a result of his negligence the client suffered loss.
 Loss was suffered by the person to whom the auditor owed a duty.
Criminal liability
This arises out of an act committing a crime e.g. when an auditor intentionally makes a false
statement either in the balance sheet or any other document. The auditor is criminally liable
for the following acts: -
 Fraudulently inducing persons to invest money
 Destroying altering, falsifying any documents.
 Making false statements in any report, certificate, and balance sheet etc knowing it
to be false
 Any action with intent to deceive others

In order to hold the auditor criminally liable the following must be proved: -
 That the statement made was false in material facts.
 That the auditor willfully made the false statement
 That the statement complained of has been made in any document required to be
made under any provision of the Company Act.

Auditor’s liability to third parties

Third parties like tax authorities, bankers, government etc rely on the certificates, reports and
statements of the auditor. Hence the auditor must exercise a fair, reasonable care and degree
of skill in his audit work.
Third parties can hold the auditor liable for damages in case of fraud or gross negligence, or
if he has pressed an opinion with the intention to deceive.
An auditor’s liability to third parties may-arise in the following cases:
1. Where the auditor has been proved negligent and any third party has suffered a
financial loss due to his negligence.
 2. Where the auditor did not attach a disclaim to his report to the effect that the report
was not intended to be relied upon by third parties
3. Where the auditor was made fully aware that the third parties were going to rely on
his report.
4. Where the third parties can prove that no other external factors influenced their
decision making except the auditors' report.
5. Where the auditor owed a duty of care to third parties
6. Where the auditor gives reference regarding his client's credit worthiness
The auditor may be liable generally to the following third parties. -
1. Any person to whom he owes duty of care e.g. debtors or creditors of his clients.
2. Persons who may rely on his work provided the auditor knew that those persons
would rely on his work e.g. bank managers, tax authorities etc.
3. Any person who is affected due to his audit report e.g. the employers of his client.
Steps to minimize auditor's liability
1. By following ISA issued by professional bodies.
2. By agreeing the duties and responsibilities in an engagement letter. This should
specify the specific tasks to be undertaken and exclude specifically those that are not
to be undertaken by the client and specify any limitations on the work to be done.
3. By defining in their report, the precise work to undertaken, the work not undertaken
and any limitations to the work. This is so that any third party will have
knowledge of the responsibilities accepted by the auditor for the work done.
4. By stating in the engagement letter the purpose for which the report has been prepared
and that the client may not use it for only other purpose.
5. By limiting or excluding liability by a term in the engagement letter or to third parties,
by a disclaimer in a report.
6. By ensuring that an independent attitude is maintained at all times and objectivity is
kept throughout his work.
 CHAPTER THREE
CLIENT SCREENING AND THE ENGAGEMENT LETTER
CLIENT SCREENING
1. When an auditor is approached by a new client, he or she has to make a decision whether
or not accept the client. Client screening should be done and this serves the following
purpose:
a. An assessment of risk of accepting a new client is made.
b. It establishes whether the auditor has the expertise to handle the client approximately.
c. It establishes whether the auditor is eligible to handle the client. Large Audit firms
have well laid down screening procedures for big clients that will be described here
although they are adapted by smaller audit firms for smaller audits.
Before and after acceptance of the engagement, the auditor should get knowledge about
the client in the following area
a) General economic factors
b) Industry conditions affecting the client’s business
c) The entity itself
d) The entity's products, market, suppliers, expenses and operations
e) The entity's financial performance and condition
 f) The report environment
g) Legislation
Client acceptance procedures
A partner is usually allocated to a new client who has approached the audit firm. He carries
out client acceptance procedures.
When the client is accepted, then this becomes the engagement partner.
3. Factors considered in determining whether to accept a prospective client
a. Risk factors
Risk in a new client is considered, as there is danger of damaging the audit firms’ reputation
and therefore costs may exceed audit fees.
Considerations which are relevant in deciding whether a client is high risk include:
i. Evidence of client management in fraudulent or illegal activities
ii. The state of the economic sector in which the client operates’ e.g. declining industry
may indicate high risk.
iii. The natures of the industry and the client's product lines e.g. basic industries have
long term prospects
iv. The clients previous audit history e.g. frequent changes of external auditors, qualified
reports,
v. The general abilities of the client management e.g. ability to install a strong
accounting system or prepare FS
vi. Understanding of the directors of their own role and that of the auditor
vii. Management permission or refusal to examine significant documents such as minutes
of meeting
viii. Evidence of management intentionally failing to record a material transaction

b. Non-risk factors
i. The audit firm may have made a strategic decision to concentrate on certain types of
clients based on-Size or expected| growth rates of the client. A large audit firm may
reject small client.
ii. Clients in certain business sectors e.g. banking have audit requirements in respect, of
specialized audit staff and the firm is not expertise unless it plans to obtain more audit
clients in that level of audit fees.
c. Relationship
 i. A long-term relationship is expected in order to earn continuous annual fees and to
gain better knowledge about the client so as provide better service
ii. The new relationship should not result in conflict of interest with existing clients
accepting Crown Bottles Limited may conflict with Century Bottling Limited as they
are competitors.
d. Ability to perform the work
i. Resources to do the work properly
ii. Required specialist knowledge or skills e.g. computer audit
iii. International trade
iv. Effect on existing engagements e.g. if they have similar accounting periods, the audits
may be finalized at the same time.
4. Investigations
a) Some clients require through investigation before being accepted as clients.
These include the following: -
i. Financial institutions like banks
ii. Business whose receipts are mainly in cash e.g. UTODA
iii. Other industries considered very risk like construction firms, unions, NGOs etc.

b) Where no investigation is necessary, this fact should be documented giving reasons for
doing so. The investigation covers following areas.

Back ground information

i. Nature of business - major customers/suppliers
ii. Time spent in operation.
iii. Financial information for the last 2 years - total assets, total debt, shareholder's, funds,
total turnover, profit/loss, key rations.
iv. Key officer, director’s major shareholders
v. Percentage ownership
vi. Other business owned by the above
vii. Bankers, lawyers
viii. Any investigation by parliament, IGG, NEMA
Predecessor Audit
i. Time spent with client
ii. Type of audit report(s) issued in previous year
 iii. Prospective client’s reasons for change
iv. Any disagreements with client
v. Any material weakness in internal control
vi. Predecessors’ reasons for changing auditors
vii. Integrity of management
viii. Have the predecessors’ fees been paid, if not why?
Other Considerations
i. Conflicts of interests with existing clients
ii. Independence issues
iii. Need for specialized skills
iv. Any major related party transactions
v. Has management got a proven track record in the business?
vi. Good prospects
vii. Going concern problems
viii. Special problems e.g. non -performing loans

c. An investigation request should be documented and standard forms may be used

information may be obtained form;
a. Confidential inquiries of prospective clients, bankers, lawyers, other auditing handling
other aspects
b. Reviewing documents like the most recent annual accounts, interview statement,
credit rating reports from specialists’ firms like check
c. Previous auditors. When permission is granted by the client. They give information on
fundamental disagreements or events that have led to intervention by statutory bodies
e.g. Bank of Uganda
d. Review of regulations pertaining to the industry and accounting standards applicable
to the industry.

Approval:
1. LETTER OF ENGAGEMENT (LAS 300)
. It is a contract between the auditor and the client. It is written by the auditor, sent to the
client for approval, agreement and signature by a senior person the ISA. “Terms of audit
engagements” gives the following guidance
 a. The auditors and the client should agree on the terms of engagement which should be
recorded in writing.
b. Auditors should regularly review the terms of engagement and is appropriate agree
any updating in writing.
c. Separate letter is needed for non-audit work
d. If auditor considers that it is appropriate to change the terms of engagement they
should obtain written agreement to the revised terms.
2. TERMS OF AUDIT ENGAGEMENT (ISA 210)
When an auditor is approached by a prospective client, the auditor must adopt the following
procedures
1. Hold discussions with the responsible person of the prospective client regarding
the legal and professional i.e. requirements for a valid audit appointment to take
place.
2. Obtain ethical clearance from the retiring or last appointed auditor of the company
3. If ethical clearance is given carry out your own evaluation of your client's such as
whether you would be willing to be associated with that client, notify the client
your willingness to be nominated.
4. After the general meeting at which the appointment takes place, obtain a certified
extract of the relevant minutes from the management.
5. Hold discussions with the management to agree the detailed terms of the
engagement
6. Document the detailed terms of the engagement

7. Language in the engagement letter should be limiting in its descriptions of

services, objectives, and, responsibilities. The engagement letter is not the place to
embellish or market the firm's capabilities. The practicing firm wants to limit, not
expand, its risk exposure in the letter,

8. The audit engagement letter should also clarify: the auditor's responsibility to
detect only material fraud, and the degree of responsibility assumed by the auditor
in providing services.
9. It is also extremely important for practicing accountants to document
conversations, advice, decisions, actions, and events. Equally important is the
client selection process, an area where “prevention is better than cure”.
 10. Practicing accountants can further minimize their exposure to risk by accepting
only those engagements they fully understand. As soon as an accountant begins to
dabble in specialized areas or offer off-the-cuff advice without thoroughly
researching the client's situation, the liability exposure increases significantly

Functions/purpose/use/of letter of engagement:

1. It defines the scope of audit work to be performed by the auditor
2. It serves to minimize any misunderstanding between the client and the auditor.
3. It provides a written confirmation of the auditor's acceptance of this appointment, the
nature of his audit work and above all it will form the basis of his report.
4. It serves to minimize any liabilities as the letter defines clearly the scope of what is to
be done and as such, avoids implied contracts / engagements with unlimited liability.
5. It is used to remind the client of his responsibilities in a given audit e.g. maintaining
of proper records, Internal Control System and the need to give a letter of
representation.
6. It acts as a means of informing the client as to which areas the auditor will require the
client’s assistance and co-operation e.g. in case of internal auditing and areas where
the internal auditor can cover.
7. It is used for planning purposes because any audit plan must take in to account the
amount of work that is to be done highlighted this letter or where he may need co-
operate

Why should an auditor send another engagement letter to existing clients?

a. A significant change in the nature or size of the client's business.
b) Changes in management or board of directors or audit committee.
c) Changes in auditing standards.
d) Changes in company in company's Act or any other law.
e) Changes in information technology systems by either party.
f) Merging of audit firms and changing the name.
g) Any indication that the client misunderstandings the objective and scope of the audit
h) A major change in ownership e.g. anew holding company
a. Draft engagement letter serves the following purposes
 i. Puts on record all the oral communications made between the auditor and the client
management previously
ii. Defines the auditor's scope of work and responsibilities for the audit
iii. Reminds the client management about their prime responsibilities with regard to the
accounting function of their entity
iv. Creates a contractual obligation between the auditor and the audit client,
v. Minimizes any misunderstanding between the auditor and client management in
future audit.
b. The matters you would expect to find in the draft engagement letter are listed
below:
i. Explanation for the term audit
ii. Scope of work and responsibilities for the audit
iii. Objectivity of the audit of the financial statement
iv. Responsibilities with regards to the detections and preventions of errors and frauds
v. Provisions of accountancy, taxation and consultancy services
vi. Fees
vii. Management representation
viii. Information relating to the legal and professional requirements of the audit
ix. Agreement of terms

c. Circumstances under which an engagement Letter is sent

a. On or before the commencement of audit
b. After a period of 3 years
c. To all new clients
d. To all existing clients who have not received one before

d. Re-affirmation of the draft engagement Letter

a. It is the process of by which the management of the entity accepts and approves the
draft engagement letter.
b. However, the management may fail to reaffirm the letter if
i. The contents of the letter are not clearly understood by the management
ii. The terms and conditions of the engagement letter have not been agreed upon
iii. The management has decided to have the letter revised
 c. Where the management have not responded to the draft engagement letter the auditors
should undertake the following steps:
- Do the follow up with the management about their refusal.
- Check whether such refusal would amount to the limitations of the scope of the
audit
- For a private audit decline the appointment for a statutory audit qualify the report.

NATURE/CONTENTS OF AN ENGAGEMENT LETTER

1. Highlights responsibility and scope of audit work and also reminds the client of the
need to ensure strong controls and keep proper books of account.
2. Statutory requirements to govern the conduct of the audit of the client.
3. The approach to audit work (system based and vouching)
4. Reliance on Internal Control Systems to apply tests.
5. Requirement for a letter of Representation.
6. Need to give a management letter.
7. Consent of the client to obtain external audit evidence.
8. Responsibility of the client in keeping records, books of accounts and preparation of
financial statements.
9. Auditor's responsibility for detection of errors and frauds.
10. Other services that the auditor could offer (tax, accounting management consultancy,
company registrar, acting as the company's secretary, etc.
11. Audit fees and basis upon which these fees may be computed.
12. Definition of the audit.
13. Scope of work and responsibilities for the audit.
14. Accountancy, Taxation and other services
15. Fees.
16. The objectives of the audit of financial statements.
17. Management responsibilities for the financial statements.
18. The scope of the audit including references to applicable legislation or
pronouncements of professional bodies to which the auditor adheres.
19. The form of any reports or other communications of the results of the engagement.
20. The fact that because of the test nature of auditing and other inherent limitations of an
audit, together with the inherent limitations of accounting or internal control systems
 there is an unavoidable risk that even some material misstatements may remain
undiscovered.
21. Details of the basis for charging and paying fees. Normally it does not include the free
payable.
22. Applicable law governing the letter i.e. the Uganda Companies Act and the statement
that neither part has the right to object to any action in the courts.
23. A request that the directors accept of the letter

Documenting the terms of engagement

The authoritative documents are the ISA 210 Terms of Audit Engagement. It makes the
following provisions: The auditor and the management of the client should agree on the terms
of the engagement. The agreed terms would need to be recorded in an audit Engagement
letter or some other suitable form of contract.

Background information about the Client

An audit firm may be approached by a client company to become their auditor for the next
financial period. As a first audit of the client company by the firm, the audit manager may
require to obtain information relating to the background of the client. To be able to do this,
the audit manager should undertake the following.
1. Identify the location of the clients' premises, offices, buildings, branches, go downs,
and factory.
2. Obtain the previous years' audited accounts to review these for the previous account
balances and ensure that the balances carried down are exactly the balances brought
forward.
3. Read through the meeting minutes of the board of directors to identify for the
authority and approval of the transactions.
4. Inspect the memorandum and articles of association of the company.
5. Carry out interviews and questionnaires with the management and employees of the
client companies to obtain more about them.

Overview of the Audit process

1. Planning for the audit field visits
2. Reviewing the accounting system and the related forms of controls
 3. Preliminary Review procedures on (lie financial statements
4. Carrying out compliant testing and substantive testing
5. Analytical review procedures on transactions
I. the audit, supervision and review of audit work and above all, act as evidence of work
done to support his conclusion/opinion.
PROFESSIONAL ETHICS AND CODES OF CONDUCT
The code of ethics in Uganda
Rules of professional conduct and the code of ethics
In Uganda, the ICPAU, which was established by the accountants’ statute in 1992, has a code
of conduct. Schedule 4 to the Accountants’ Statute covers the professional Code of Conduct
whose details are in the code of ethics of the ICPAU.
The fundamental principles (rules) as laid down by IFAC code of ethics (and ICPAU in
Uganda) are the following:
1. Integrity: - This means members should be straightforward, air dealing, truthfulness
and honest in all business professional relationships. Integrity implies not merely
being honest but fair dealing, be straight forward and truthfulness.
2. Objectivity: - Members should not allow bias, conflicts of interest or undue influence
of others to override professional or business judgments.
3. Due care; A member should carry the work with due skill, care, diligence,
knowledge and expedition and with proper regard for technical and professional
standard when providing professional services.
4. Competence; A professional account should not undertake or perform work which he/she
is not competent, unless he/she has obtained such assistance that will enable them to
competently carry out the work.
5. Confidential; Members should respect the confidentiality of information acquired as a
result of professional and business relationships and should not disclose any such information
to third parties without proper or specific authority or unless there is a legal or a professional
right or duty to disclose.
6. Professional behavior; A member should comply with relevant laws and regulations and
should avoid any action that discredits the profession. A member should conduct him/herself
in a manner that portrays the positive image of the profession.
Statement one; Integrity, objectivity, and independence
This applies to all members practicing accountancy and those in employment. In order to
safeguard their objectivity, members to consider the following before they decide to accept
any appointments; -
a. Relationships that may threaten objectivity, these should be disclosed before the
work commences, where the threat is great the member may not accept the
appointment.
b. The public interest in the work that is done.e.g. the global funds audit.

c. Threat to objectivity includes;

(i) The self-interest threat; a member may have interest in the client or may fear losing
the client.
(ii) Self-review threat; a member may not be objective in reviewing the report that he /she
has issued in order to make fresh recommendations.
(iii) The advocate threat; the member may not be objective when advocating for or
against a client.
(iv)The familiarity threat; a member may sympathize with the staff that are known to
her/him.
(v) The intimidation threat; a member can be intimidated by a threat of a dominant
personality.
Safeguards against threats
a. The code of ethics
b. The ethical support provided by the institute
c. The disciplinary proceedings of the institute
d. Having strong internal procedures within the audit firm like training or audit reviews.
e. Rotation of the audit staff
f. Assessing the integrity of the client’s management and accountancy competence
Statement 2- professional Independence/objectivity:
A member should be objective in order to issue a proper report. Objectivity of the report can
only be assured if the member is and is seen to be independence. The Auditor should consider
the following factors that may affect his/her independence.
a. Fees
An Audit firm should not derive a substandard part of its income from one client or group of
connect clients since it may be financially dependent on one another source of the income.
However, the audit firms that are new, or whose business is declining may be financially
dependent and Auditors are advised to be careful. The firm should not depend on the client
for more than 10%of the income.
b. Family and personal relationship
There may be potential self-interest of familiarity threat. These include
 A partner handling the client for many years
 Someone in the audit firm may have business interest with an officer or employee of
the client or do business with the client
 Close relationship or friendship. The following persons are regarded to be closely
related a spouse, minor child and a company which has at least 20% interest
 Mutual business interest. Where some interests exist, the engagement should not be
accepted or continued unless there are safe guards put in place. However, the conflict
of interest should be disclosed.
a. Holding shares in client’s firm
 An audit firm should not audit a client where the partner, his spouse or minor child of
such a partner owns a share
 Where such shares are owned through inheritance or takeovers, they should be sold at
the earliest time possible
b. Owning shares in client where the audit firm reports other than audit
 Where an auditor for example is a consultant of a client, the audit partner or audit
staff should not participate in the consultancy if he or his spouse or minor child owns
the share in the client firm.
 The only exceptions allowed include holding deposits in a financial institute or
investments in a building society on terms available to the general public
c. Voting on audit appointments
Where an employee of an auditor firm holds shares in a client’s firm he or she should not
vote on the appointment, removal or remuneration of the auditors. There would conflict of
interest.
d. Practice loans
e. Individual loans
Neither the partner in the practice nor the spouse or child of the partner should make a loan to
a client or guarantee a client’s borrowing or accept a loan from a client or have the
borrowings guaranteed by the client.
f. Goods and services
These should not be accepted by a partner his spouse or minor child or by the staff of the
audit firm if they are on terms that are more favorable than those available to all the
employees of the client
 They should be modest
 Undue hospitality is a threat
 Gifts, favors and hospitality should be avoided
i) Commission
 Where a commission is to be earned by an auditor, the client should be informed so in
writing by the auditor
 The amount and terms should be known and the client consent in writing
 Audit fees should not be a charged as a percentage of profits made by the client firm
ii) Provision of other services to the client
Where there are other services that are provided by the audit firm to the client like tax
advisory services etc the following should be observes
- The client accepts full responsibility for the accounting records
- Auditors should not perform the management functions or even take management
decisions
- Where the accounting records have been prepared by the auditor appropriate tests
should be performed
NB Large firms have different departments for the various functions while in the small firms
different people do the work clients also different audit firms for different services that are
needed
k. Employment in the audit firm
- An audit firm should not report on a company if its partner is an officer or employee
of the company
- An auditor should not be on a ream if they are auditing a former employer unless two
years have elapsed
Importance of the auditor’s independence/objectivity
- Gives credibility to the F/S
- Enhances objectivity
- An audit as an agent of the shareholders should be independent of directors in order to
carry out his duties properly

Importance of the auditor's independence

It gives credibility to the FS.
i. An auditor an agent of shareholders should be independent of directors in order to
carry out his duties properly.
ii. Enhances objectivity
Codes of Ethics require a professional auditor/accountant to handle independence in a series
of steps:
1. Step. l: Identify threats to independence.
2. Step.2: Evaluate whether the threats are significant
3. Step.3: If threats are not significant, identify and apply safeguards to
eliminate risk, or reduce it to an acceptable level.
Threats to independence:
There are five general sources of threat to independence identified in the IFAC code of ethics.
a. Self - Interest threat (personal interests)
b. Self - review threat (review of your own work)
c. Advocacy threat
d. Familiarity threat
e. Intimidation threat
Safe guards to audit independence:
There are three general categories of safe guards identified by the Code of ethics:
i. Safeguards created by the profession, legislation or regulation;
ii. Safeguards within the audit client and
iii. Safeguards within the audit firm’s own systems and procedures.
Safeguard created by the profession, legislation or regulation:
 Educational, training and experience requirements for entry into the profession i.e.
ensuring that staffs are adequately trained
 Continuing professional development requirements;
 Professional standards and monitoring and disciplinary processes;
 External review by a legally empowered third party of the reports, returns,
communication or information produced by a professional accountant and
Safeguards within the audit client:
 The audit client has competent employees make managerial decisions; and to adhere-
to fair financial reporting
 A corporate governance structure, such as audit committee, that provides appropriate
oversight and communications regarding.
Safeguards within the audit firm's own systems and procedures
 Firm leadership that stresses the importance of independence and the expectation
those members of assurance teams will act in the public interest;
 Policies and procedures to implement and monitor quality control of assurance
engagements;
 Having internal policies and procedures to identify the threats, institute safeguards
and to monitor compliance to such policies and procedures
 Rotation of staff: Using different partners and teams with separate reporting lines for
the provision of non-assurance service to an assurance client.
 Peer reviews.
 Chinese walls between audit function and other services.
Statement three: confidentiality
a. Information confidential to the client or employer acquired in the course of
professional work should not be disclosed unless where consent has been obtained
from the client, employer or other proper sources or where there is a legal duty to
disclose such information.
b. This ensures that the auditor does not use the information to his or her advantage. An
auditor should accept appointment at the client to make full disclosure of all the
available information. Full disclosure can only be done by the client if the clients are
certain that the auditor will comply with confidentiality.
c. Where there are two client; A and B it would be breach of confidence to reveal
information to B without getting permission from A.
d. An auditor has neither a general right not duty to make unauthorized disclosure to tax
authorities the police or any body
An auditor is only obliged to disclose under the following circumstances,
a. Where the courts do order him
b. The client commits offences or terrorism.
c. The client deals in drug trafficking or money laundering.
d. Under the banking or financial institution law to the appropriate regulators the client
is considered reckless.

Statement five:
Professional competence
An auditor should not undertake work or continue professional work which he himself is not
competent to perform unless he obtains such advice and assistance as will enable him
competently carry his work.
Auditor's professional responsibilities
An auditing profession has a code of ethics or professional standards. These are standards of
behavior or a member or student must abide with. They help maintain the reputation of the
profession and the confidence in which it is held. To become a member of the audit.
Profession a candidate
a) Must pass the subscribed exams
b) Must have the required amount and quality of experience preferably in reputable
auditing- firm.
c) Once admitted must abide with code of ethics
Statement six: advertising and publicity
a. No accountant shall advertise a professional service Solicitation of any kind is
forbidden.
b. Excessive contribution of articles in the non-professiona1 press may be deemed to be
some form of publicity.
c. Circulation of books showing the services offered should be restricted to the clients
and for those who have requested them.
d. Changes in the partnership or address, opening of an office or recruitment may be
published in the press provided the advert is of appropriate size and presentation.

Statement 8: changes in professional appointment

a. No accountant shall accept any professional engagement as an auditor which was
previously held by another auditor without first communicating with him in writing.
This would help the incoming auditor judge whether to accept or reject the
appointment. Communication ensures that all the relevant facts are known to the
incoming auditor and later to the shareholders and other stake holders.
b. When nominated the incoming auditor should ask the client to inform the retiring
auditor of the proposed change and give the retiring written authority to discuss the
client affairs.
c. The incoming auditor writes to the retiring auditor seeking information on whether or
not to accept the appointment.
 d. If the clients fail or refuse to give permission to the retiring auditor or communicate to
the prospective auditor should be informed and nominated/appointment should be
rejected.
If there are no matters to communicate, the retiring auditor should say so. The incoming
auditor may complain to ICPAU where the retiring auditor does not reply letters, fax or
telephone.
The matters to be discussed include
- Reasons for the change advanced by the client that are inconsistent with facts known
to the retiring auditor
- If his replacement is due to opposition or by evasion by the client
- Any unlawful act or default by the client, directors or employees e.g. when under
investigations
- Default URA
- Any serious doubts regarding the integrity of directors or the senior managers
- Withholding information from the auditor
- Where the auditor intends to report to the shareholders or creditors the proposed
change of auditor
NB. Unpaid fees of retiring auditor are not a reason for rejecting appointment by the
proposed auditor
a) The retiring auditor should not be malicious
b) The retiring auditor should surrender all the accounting records of the client
c) He may not exercise a lien on these records as this would make the company fail to
fulfill their legal obligation
FEES
a. An accountant shall not charge fees which are based on percentages of profits or
which are based on results except for professional employment in solvency or
receivership. The fees should be appropriate for the auditor. Fees are normally
computed basing on the;
- The skill and the knowledge needed
- The seniority of the people involved
- The time required
- The nature of the responsibility which the work entails
b. Charges are computed basing on appropriate rates per day or per hour. The rates
depend on the salary scales of the auditors and the related overhead expenses.
 c. Out of pocket expenses are charged to the client in addition to the professional fees.
A provider of assurance services (professional accountant) must "be, and be seen to be"
independent. This requires:
i. Independence of mind - a state of mind that (permits the provision of an opinion
without being affected by influences that compromise professional judgment,
allowing an individual to act with integrity, and exercise objectivity and professional
skepticism
ii. Independence of appearance - the avoidance of facts and circumstances that are so
significant, would reasonably conclude a firm, integrity objectivity or professional
skepticism had been compromise.
iii. It is quite possible that an auditor objective when auditing a company owned by a
close relative but he would not be "seen to be independent"

Code of Ethics: confidentiality

A professional accountant should respect the confidentiality of information acquired as a
result of professional or business relationships and should not disclose any such information
to third parties without proper and specific authority unless there is a legal or professional
right or duty to disclose

Professional behavior: - A professional accountant should comply with regulations and

should avoid any action that discredits the profession.

The professional duty confidence requires that a member acquiring information in the course
of his professional work should not use or appear to use, that information for his personal
advantage or for the advantage of a third party. This requires the auditor to make it clear to
the client that he may only act for him if the client agrees to disclose in full all the
information relevant to the engagement.

a. Recognized Exceptions to the rule of confidence.

 Obligatory disclosure:
If the auditor suspects that the client has committed an offence of treason, Terrorism, Drug
trafficking, and money laundering he is obliged to disclose all information at his disposal to a
competent authority.
  Voluntary disclosure: In certain cases, voluntary disclosure may be made by the
auditor where:
o Disclosure is reasonably required to protect the auditor's interests.
o Discloser is required by process of Law
o There is a public duty to disclose: there is no court definition of public interest’. This
is left to the personal judgment of the auditor. It is therefore appropriate for
information to be disclosed to certain authorities, for example:
 The police
 A regulatory of the client
 Government department

CHAPTER FIVE
AUDIT PLANNING AND CONTROL OF AN AUDIT ISA: 300
Planning: states that the auditor should plan the audit work so that the audit will be
performed in an effective manner
An audit plan: is a general strategy to the audit which setting out of direction, describing the
expected scope and conduct of the audit and provides guidelines for the development of audit
program.
Typical Audit planning procedure:
. Audit-planning procedure will generally include the following stages.
1. Updating knowledge of the client business:
This will involve reviewing the current operation; ascertain any problem in the industry or
sector which might affect the audit work. This is important whether it is a new audit or
continuous one as the operational environment in dynamic.
2. Determining the risk level
3. Establishing materiality level
4. Developing an audit approach i.e. whether to rely on the clients internal control system
- system based approach or vouching approach (read about balance sheet approach,
risk based vouching)
5. Review matters raised in the previous year's audit by examining the audit file and
discussing points with staff previously involved in audit to ascertain those facts which
may have relevance to the current year audit.
Planning the Audit of the Client (ISA 300)
(ISA 300) requires the auditor to adequately plan control and record his audit work. Planning
process is the initial stage in the audit exercise upon which controlling and documentation are
based. Planning process is the responsibility of the audit manager
Auditing guideline on planning recognizes planning to be the focal point of the audit
independent examination. It means that:
(1) Effective planning is necessary for the effective completion of the audit:
(2) Proper planning is inevitable in the achievement of the audit objective
(3) To be able to understand the audit command effective planning
(4) In order to identify the potential problems in the Audit, effective planning is necessary.
(5) To be able to control and record the audit work planning is necessary
(6) Effective planning process helps the auditor to identify the potential risk exposures

Planning therefore is defined as the process of developing the general strategy necessary for
the auditor to understand the audit of the client, access risk and materially, pay keen attention
on the important areas of the audit, identify the potential problems and perform the audit in
an expeditiously manner.
Stages involved in planning
There are four main stages involved in the planning process namely:
1. Acquiring knowledge about the client business and industry.
2. Preparing a comprehensive overall audit plan.
3. Preparing audit programs for the audit.
4. Drawing up time, usage and cost budget.
Acquiring knowledge about the client business and industry
To be able to plan the audit work effectively the audit manager must have thorough
knowledge about the client business and its industry. To be able to acquire this knowledge,
the auditor should undertake the following:
1. Visit the client premises to identify location of the departments, factories and go-
downs.
2. Obtain the legal documents, agreements and contracts governing the client activities,
its operations and establishments.
3. Review the accounting system of the client and related forms of controls to be able to
understand the system.
4. Carefully read through the Memorandum and Articles of Association of the company.
 5. Re-visit the meeting minutes of the board of directors to be able to understand the
resolutions made in the previous period.

Purpose of audit planning (ADVANTANGES)

1. It helps to define the objective and scope of audit.

2. Enables audit work to be controlled e.g. facilitate audit review in accordance to plan
3. It increases efficiency in that the plan will enable the auditor to concentrate his efforts
in key areas of an audit and avoiding wasting time on routine matters.
4. Audit planning helps the auditor to complete his work on time so as to meet deadlines
such deadlines like annual general meeting (AGM)
5. It enables the auditor to make optimal use of staff available so as to be able to conduct
efficient audits in an exhaustive manner and above all to avoid any delays in a given
part of audit work.
Limitations in planning
1. The accounting system of the client may be complicated to the auditor to understand
and operate and this may make it difficult for the planning of the audit work.
2. The auditing standards on planning gives guidance on the planning process, of
existing client ignoring the planning procedures to the audit of the new client.
3. Even though an audit can be properly planned for. The achievement of the objectivity
still requires the auditor to supervise the audit.
4. It is difficult for the auditor to plan for audit of the small business.
5. Planning the audit involve budget in which is an element of cost and therefore the
audit firm may not be able to service the entire cost for the planning process.
Planning procedures for the audit of the client
When planning for the audit of a new client. The auditor should undertake the following steps
1. Review the previous years audited accounts to determine any changes in the balances
that may call for explanations.
2. Discuss with the client management the terms and conditions of the audit and take
proper instructions about the scope of work and responsibility for the audit.
3. Ascertain for the stating requirement for the audit necessary to carry out the audit of
the client.
4. Check whether the audit firm does have technical expertise knowledge and skills that
is necessary to carry out the audit of the client.
 5. Consider the timing for the audit of the client field visit and ensure that the time
budgets prepared are in line with the audit of the client.

WHERE AUDITOR CAN GET KNOWLEDGE OF THE CLIENT’S BUSINESS

Sources of information for the auditor about a client
1. Discussion with the client management.
2. Discussion with the internal audit personnel
3. Discussion with knowledgeable people outside the organization
4. Publication related to the industry.
5. Visits to the client's premises and plant or factories
6. Documents produced by the client.

AUDIT RISK ASSESSMENT ISA: 315

Audit risk ISA 200 Defines audit risk as a situation when the auditors issue an inappropriate
opinion when the financial statements are materially misstated i.e. it qualifies the financial
statements yet they ought to have issued an un qualified report or vice versa.
Audit risk has 3 components i.e.
 Inherent risk (IR)
 Control risk (CR)
 Detection risk (DR)

Audit risk model/ formula

AR=IRxCRxDR
ISA 200: requires that auditors plan and perform the audit to reduce audit risk to an
acceptably low level that is consistent with the objective of an audit. Hence the auditor will
attempt to reduce audit risk through the design and execution of audit procedures.

Audit risk can never be eliminated but the auditor should be cautious to minimize it. The
auditor should use professional judgment to assess the component of the audit risk and design
audit procedures that ensures that risk is reduced to acceptable levels.
The level of acceptable may be stated as 5% which is the same as 95% confidence level in the
accuracy.
1. Inherent risk:
It is the risk that has material errors in the financial statements arising from the characteristic
of the client and his environment, (the possibility of material error regardless of internal
controls)
Inherent risk is assessed in relation to financial statements assertions. To decrease inherent
risk much audit work substantive testing (firm basis in reality) must be done. For much
organization inherent risk is high and tends to be 100%
Factors to consider when assessing inherent risk
These are normally classified in 2 broad categories i.e.
 At the entity level
 At account balance and transaction level
a. At entity level
I. Integrity and attitude to risk by directors and management for example dominance by
a single person who may easily override controls.
II. Management experience, knowledge and changes in management during the
accounting period, inexperience of new staff may result to errors and staff
manipulating ignorance.
III. Unusual pressure to directors or management for example light reporting deadlines,
market expectations which may force management to manipulate financial statements
to appease shareholders and financial position that may lead profit smoothening.
IV. The nature of the entities business for example technologies obsolesces, for example
software industry leading to subjective valuations, the number of locations and
geographic spread leading to control problems, over dependence on one product
subject to going concern problems and other financial signs of stagnations.
V. Factors affecting the industry for example economic cycles and competitive
conditions, regulatory requirements and changes in technology, customer demand and
accounting practices common to the industry.
VI. Small and new firms
With small firms segregation of duties is difficult and owners tend to override internal
controls.
b). At accounting balance and transaction levels.
 I. Accounts likely to be misstated for example accounts which requires adjustments in
the previous period or which require high estimations such as stock are risky (NRV
Net Realizable Value estimated) IAS, inventory valuations.
II. Complexity of underlying transactions and other events which might require the use
of an expert for example valuation of work in progress, aid valuation of fuel in
underground tanks.
III. The degree of judgment involved in determining the account balance for example
provision for bad and doubtful debts (Debt age analysis)
IV. Susceptibility (being influenced) for an asset to loss or misappropriation for example
high value desirable and moveable assets for example cash.
V. The quality of the accounting system, the poor system may be a sign of high-risk for
example single entry accounting system. The desired system is specialized ledger
and General with control accounts available.
2) Control risk:
Is the risk that, the controls in the entity's accounting system will fail to prevent or detect
material errors or fraud.
Control risk is normally assessed when evaluating the control environment later by
performing test of controls. However, a preliminary (more important) assessment should be
done at the planning stage.

Where there are effective controls as confirmed by tests of controls, the control risks will be
low and normal as substantive tests will be carried.

Factors to consider in assessing control risk

i. Quality and effectiveness of management for example degree of supervision adoption
of recommendations by external and internal auditors
ii. Quality of internal controls for example poor segregation of duties, this is common in
small firms.
iii. Competence of accounts staff, their experience, turnovers and remuneration
iv. Existence and effectiveness of internal audit which provide a supervisory role as a
service to the organization
v. Computerization which implies more or less error for example during the changeover
season
 vi. Degree of subjectivity involved in measuring an item for example stock valuation,
depreciation of fixed assets.
vii. Existence of an audit committee on the board.
3) Detection risk
This is the risk that auditor’s substantive procedures fail to detect a material misstatement and
it may arise because of the following;
1. The use of inappropriate audit procedures in particular situation for example
conducting only manual tests instead of complementing with computer assisted
audited techniques (CAAT) yet the accounting system is computerized.
2. Failure to draw proper conclusions in particular audit evidence for example failure to
detect teeming and lading or (carrying over's) in the cash book and sales ledger and
mistaken it as a clerical error.
Teeming and Lading is the practice where organizations attempt to hide a cash loss in one
customers account by moving money from another account.
3. Failure to perform necessary audit work due to limited time or high costs for example
missing stock taking and accepting inflated stock figure.
Detection risk may be reduced by,
1. Recruiting, training and allocating staff (audit)
2. Planning audit work so as to handle audit risk and time progress
3. Encourage positive communication between audit manager, audit staff and client
personal.
4. Use appropriate manuals and documentation.
5. Ensure access to technical specialists (experts) in technical areas.

AUDIT MATERIALITY (ISA: 320 )

Materiality is the expression of the importance or significance of a particular matter in the
context of the financial statements as a whole.
A matter is material if its omissions or misstatements would reasonably influence the
economic decision of users taken on the basis of financial statements.
MPORTANCE OF MATERIALITY TO THE AUDITOR
1. It acknowledges the fact that accounts are not 100% accurate or there are some small
errors therefore paves away for sampling.
2. It determines the nature and size of the audit tests
3. It guides on the item to be examined and whether to use a sample or not
 4. Provide guidelines on necessary adjustments for errors.
5. It determines whether the auditor should rely on work provided by internal auditor or
carryout the work for himself.

ASSESSING MATERIALITY
This is done by the use of the balance sheet and income statement. An error is not material if
it is 5% or less and it is material if it’s 10% or more of their profit before tax (PBT or EBT)
or the total assets of the business. If it's between 5-10%, it may or may not be material.

Materiality is viewed in terms of;

 Profit before tax of the entity
 Turnover of the entity
 Total assets the entity
Available formulae to assess materiality
 Materiality = (Misstatement/profit before tax) x 100%
 Materiality = (Misstatement / Turnover) x 100%
 Materiality = (Misstatement / Total Assets) x 100%
Note:
Assessing Materiality from the perspective of Profit and Loss Account and the Balance Sheet
b. Materiality on the basis of profit and loss account (P & L A/C)
When assessing materiality on the basis of profit and loss account (income statement) the
auditor should as well consider the following matters.
i. Normal profit:
Generally, an error is material if it is more than or equal to 10% of the profit before tax.
ii. Critical points:
If the effect an error is to turn a profit into a loss or vice versa, then the error is likely to be
material even through it is less than 10% of normal profit (profit before tax)
Degree of estimation:
Any error in the value of an item that can be measured precisely would normally be material
e.g. stock of some items and dividends. An item that is normally estimated may not
necessarily be material if misstated since its valuation is a subject of misstatement.
 iii. Trend:
A small error reversing a trend in the profit may be regarded as material
iv. Legal requirement:
If an item required by law to be treated in a particular way, and it is treated to the contrary,
then it's a material misstatement e.g. Director's fees emolument as a special line item in the
financial statement is a requirement of the company's Act.

c. Assessing Materiality On The Basis Of the Balance Sheet

The principles are similar to those above in the P & L A/C with few differences here and
there:
i) Accuracy in measurement:
Items like cash, bank balance and share capital should be stated accurately and therefore no
error may be acceptable any misstatement may be regarded material.
ii) Reporting frame work:
a. The companies Act. An item that is required to be disclosed by the company’s Act
should be disclosed, unless the item is very small. Share capital should be disclosed as
authorized share capital, called up share capital; failure to disclose this is considered
material as it violates the companies act.

b. Accounting standards:
There should always be compliance, and non-compliance should be reported in the audit
report. The departure from an accounting standard e.g. not depreciating some assets may have
a material effect on the profit; the departure may or may not be reported in the audit report. A
small error in an item required to be disclosed is considered material.
iii) Materiality collectively:
An error may not be material, individually, but the total of several immaterial errors may be
material. Therefore, the auditor should record these individual errors and aggregate them
before applying the 10% principle.
iv) Uncertainties:
An auditor should detect a large uncertainty before this is considered material as to warrant
qualification in the audit report.
v) Prudence (self-discipline) and auditor's liability.
Auditor may accept a large material error that under states profit than one that overstates
profit. Likewise, the auditor may regard an error as immaterial or material after assessing

AUDIT PROGRAMME
It is detailed approach to an audit showing procedures and relevant items in carrying out an
audit. Or it is step by step breakdown of the audit work that should be carried out by the
auditor and members of the audit team from the beginning of the audit up to completion of
the audit programs are prepared by the auditor to
1. Serve as a guidance to the professional audit work
2. Ensure that the audit is conducted properly
3. Potential risks promptly identified
4. No part of the audit work has been overlooked and the objectivity for the audit has been
achieved.
An audit Program provides the following typical contents
1. Nature of the transactions to be tested
2. Date and time of carrying out the audit
3. Nature, extent and timing of the audit procedures to be carried out.
4. Specific objectives of each audit procedure carried out.
5. Initials of the audit staff who have carried out the test
However, an audit Program would also indicate the following details
1. Name and address of the Audit firm
2. Name and address of the client company
3. Accounting period under audit
4. Initial of the audit staff who has prepared the audit program
5. Initials of the audit staff who have reviewed the audit program
6. Initials of the audit staff who have approved the program
7. Initials of the audit staff who have checked the Program
8. Date and time when the programs were prepared, checked reviewed and approved
An audit Program is the form of the audit working papers.
Audit programs are of two categories namely
1. Standard, pre-prepared and pre-determined programmes
2. Progressive audit programmes
The advantages and disadvantages of audit programmes are
Advantages
(a)Programs facilitate the competition of the audit work
(b)Effective programmes ensures that no part of the audit work is overlooked
(c) Through programmes the auditor is able to allocate the duties among the staff
(d)New recruits can be trained using the programmes
(e)Programmes sever are a means of documenting the audit work
(f) The audit senior is able to utilize the audit staff optimally throughout the field visit as a
result of suing the programmes.
(g) Audit programmes minimizes supervision in the conduct of the audit.
(h)Well prepared audit programmes enables the audit firm to attend to more than one client
with similar financial ends.

Disadvantages
a) Inefficient audit staff may rely on the programs to complete the little work delegated
to them making them not to be effective in other areas.
b) Some programs prepared by the auditor are technical to be understood by the juniors.
c) The audit staff program prepared by the auditor may be based by the experience on
the audit therefore may not lead to the objectivity of the client audit.

DIAGRAMMATIC REPRESENTATION OF A PROGRAMME

ITEM CREDITORS STOCK DEBTORS CASH REMARKS
DATE 1-3 2-5 3-6 4-7
B.Y John & Jane Peter& Njau Ahamed peter

Thus the programme indicates how the work has been distributed, to whom, when and how it
will be done.
WAYS OF PREPARING AN AUDIT PROGRAMME
1. There could be a ready, complete programme prepared by the audit manager or
partner and give to the audit clerks to follow during the course of work
2. The audit manager may write up a programme for each clerk at the beginning of audit
work.
1. The senior audit clerk may prepare programme and allow to be used
2. The organization chart. It is usually the basis of the flowchart.
 3. It must be simple and clear and should not contain any writing.
4. Charts should not congested with flow lines which may not serve any purpose.
5. Use horizontal or vertical flow lines when preparing a flowchart.
Factors to consider in developing an audit programme
1. Risk of error, high risk detailed programme low risk, less detailed programme
2. The necessary audit evidence needed to fulfill the procedure. Some areas compared
to those whose audit requires little evidence.
3. Coordination of any assistance from the entity
4. The composition of the audit team
5. The involvement of other auditor or expert
Objectives of an audit programme
1. It assists in ensuring that the audit work is done efficiently and effectively to meet the
overall audit strategy or plan.
2. It’s intended to provide clear instructions and timing of procedures to audit staff.
3. Provides a record of work done and conclusions made and therefore can be used as a
defense against an action for negligence.
4. It aids audit control as it forms basis for audit review. (Through cross examination)
Characteristics of good Audit programme
1. Should describe the nature of audit procedure in detail
2. It should indicate the extent of costing; audit checking.
3. It should show against each procedure across reference to working papers, initials of
the audit staff, date of completion of the work, exceptions and how they are cleared.
Amendment of Audit Programme
The audit programme is prepared before the audit commences and on some assumptions. On
the commencement of the actual audit, these assumptions may have changed and hence a
need to change the audit programme.
Below are some of the factors that may necessitate a change in the audit programme
1. The accounting system or computer software may have been changed by the client.
E.g. change to specialized self balancing ledges from general journal and ledger.
2. There may be ground for suspicious of fraud.
3. The amount of audit work might have been under estimated.
4. The client business may have expanded its operations or contracted part of it or
cutting the size down.
5. Change in the accounting policies.
STANDARD AUDIT PROGRAMME
Is a pre-prepared audit program for use in the audit firm by all audit staff irrespective of the
client
Advantages of standard audit programme
1. It ensures that all work is completed on time without any omissions.
2. It’s used to monitor the progress of the audit
3. Enhances uniformity of work for audits across periods
4. It facilitates allocation of audit work and assessment of staff competencies.
5. It facilitates the final review as it provides summaries of what is to be checked (and
this done normally by the audit partner).
6. It serves as a record of work done and therefore can be used as evidence for any
action of negligence.
Disadvantages of the standard audit programme
1. It may be followed mechanically leaving some areas of importance without proper
understanding of what is done.
2. It may destroy the innovativeness of the audit staff and may slow their development in
the audit field.
3. It may leave errors and fraud undetected as it may be followed without due attention
and profession skills.
4. Audit clerks may hurriedly try to finish on time leaving some work unchecked.
5. Familiarity with the audit program may facilitate fraud by the client staff.

Precautions to be taken when the audit programme is standardized

1. Encourage the audit staff to point out any defects in the programme
2. Encourage audit staff to use the programme as a guide but to apply professional
judgment.
3. Revise the audit program often.
4. Allocating responsibilities to each audit staff who are encouraged to keep the overall
perception in mind
5. Plan audit checks in such a way as to prevent parts of the programme being completed
in isolation.
STAFFING
For every audit, manpower is a resource that cannot be ignored and therefore the audit
manager or partner has to carefully determine the staffing requirements for a particular audit.
Factors to be considered in determining the staffing requirement
1. Number, knowledge, experiences, skills
2. Position in the previous year's audit e.g. overtime worked, and over running the
budget
3. An expected problem in the previous audit and their likelihood of re-occurring
4. Previous relationship with the client e.g. disagreement over accounting policies
5. Familiarity with the client or similar firms
6. Proximity of accounts publications date to year end
7. Size and geographical spread of the client
8. Complexity of the computerized system or accounting system of the client
9. Periodic rotation of audit personnel,
Standard Audit program
1. Pre-prepared audit programme
2. A form of working paper used by the audit firm
3. Constitutes standardized audit working paper
4. Commonly used by the auditors in the audit of the client’s activities
Advantages of Standard audit program
1. Efficiency
2. Economical
3. Complete
4. Cross reference
5. Evidence
6. Facilitators completion of the audit work
7. Documentation of the audit work
8. Minimizes risk exposures
Disadvantages
1. Mechanical for the audit staff to understand and operate
2. Not necessary for the audit of small businesses
3. May not cover all the areas of the audit
4. Requires to be altered for the audit of the new client

Audit Programe for the Audit of Fixed Assets

During the examination, candidates may be required to prepare audit programs for the audit
of fixed assets
Please Note
1. Do not draw any diagram
2. Outline the audit procedures to be corrected by the audit programmes
Matters to be covered by the programme
1. Obtain the schedule of the fixed asset prepared and maintained by the company and
examine this in detail to obtain evidence about the fixed assets descriptions,
valuations and existence.
2. Obtain the policy of the company in case of the first audit over acquisitions and
disposals of the fixed assets and agree such a policy with the memorandum and article
of association, ensure that such as policy has been practiced consistently over the
years.
3. Obtain the previous annual accounts in particular the previous years balance sheet to
determine for the closing balances of the fixed assets which should be the opening
balances in the current period.
4. Perform analytical review procedures for any changes in the value of the fixed assets.
5. Read through the meeting minutes of the board of directors to determine for any
authority for any purchase or disposals of the fixed assets.
ADVANTAGES OF AUDIT PROGRAMMES TO AN AUDITOR
It ensures that all work to be done has been completed on time.
1. It enables the auditor to monitor the progress of a given audit.
2. The auditor can follow the same programme in subsequent audits which facilitates
uniformity of audit work.
3. It facilitates allocation of audit work to their different audit clerk according to
qualification experience, and competence.
4. It facilitates smooth flow of audit work as absentee audit clerk will indicate how far
they had gone and others can take over easily in so far as they know where he had
stopped.
5. It assists the auditor to access which audit clerks are negligence and can be
reprimanded accordingly.

DISADVANTAGES / LIMITATIONS OF AUDIT PROGRAMME

 1. A programme may be followed mechanically without giving attention to items
leading to a bias opinion.
2. It may destroy the initiatives of audit clerks to think and work on their own.
3. It may leave error and frauds undetected as clerks may follow the programme without
attention.
4. The audit clerks may do the work hurriedly so as to finish their work in time leaving
some work unchecked which may increase the auditors liabilities.
5. Inefficient or lazy audit assistants may shelter behind the programme and do little
work leaving other work undone.
6. There is no single programme may be rigid in so far as it may be followed year after
year without regard to changes that took place.

SOLUTIONS/SAFEGUARDS TO PROBLEMS OF AUDIT PROGRAMMES

1. The audit clerks should be instructed to pinpoint defects audit programmes which can
be rectified immediately.
2. Audit assistants should be instructed that the programme is a mere quid line and as
such they should use their initiatives and skill in auditing to conduct an efficient audit.
3. The audit clerks should give suggestions aimed at boosting the efficiency of the
programme.
4. The programme should be updated from time to time so as to accommodate changes
in the client's business.
AUDIT EVIDENCE AND DOCUMENTATION: ISA 500
As per the International Auditing Standards, an auditor should obtain relevant, reliable and
sufficient evidence to enable him draw reasonable conclusions.

Audit evidence is all that information obtained and used by the auditor in arriving at
conclusions in which he bases his opinion and includes the information contained in the
accounting records underlying the financial statements and other information.
Audit evidence provides the auditor the necessary assurance to determine the accuracy and
reliability of accounting statements.
Sources of audit evidence:
1. Company's accounting systems
2. Underlying documents /Source documents
3. Third party’s customers, suppliers, Bankers etc
 4. Employees etc
QUALITIES OF GOOD AUDIT EVIDENCE
a. Sufficiency
 It means that audit evidence should be complete and adequate to prove any the
material fact e.g. complete physical counting of stock is sufficient enough to verify
the value of stock.
b. Relevance
Audit evidence should be relevant to the purpose for which it is required e.g.
Audit evidence is relevant if it exists in the assets or liabilities.
 The evidence should be able to ascertain whether there are no unrecorded assets,
liabilities or transactions and
 Should be able to ascertain whether the given asset or liability or transaction has been
recorded at appropriate values etc.
c. Reliability
Evidence is reliable if it is considered correct and accurate. Reliability depends or is
influenced by the following factors; source i.e. whether internal or external and nature i.e.
visual, documentary or oral.
SOURCE OF THE EVIDENCE
External sources
 External evidence includes from such parties as
 bankers,
 debtors
 creditors are assumed to be more reliable than internal evidence
Internal sources
i. Internal evidence is only assumed reliable if the company's internal controls are
working properly (strong)
ii. Audit evidence obtained by the auditor himself is more reliable than evidence
obtained from the entity because evidence from the entity may be distorted.

TYPES OF AUDIT EVIDENCE

1. Documentary evidence.
This is evidence gathered from the company records and documents. The auditor should
gather such evidence regarding to:
 The accuracy of the records
  Authority of accounting records
 Accuracy of balances from ledgers
2. Management and employees/ internal evidence This will provide evidence
regarding
 The strength or otherwise of an internal control system
 The validity of the company transactions
 Operational efficiently of the company and its adherence to the company policies
3. Tangible evidence/physical evidence
This will avail evidence regarding the accuracy of the company's balance sheet entries, values
and existence of the company assets etc
4. Hearsay evidence:
This will avail evidence gathered from such sources as interviews and conversations with the
top management.

5. Circumstantial evidence
This evidence obtained from the circumstances of the enterprise or situations prevailing in the
organization such as the position of the ICS, organizational structure, etc
6. External evidence
This is evidence obtained from third parties e.g. bankers, debtors, creditors etc

METHODS/ PROCEDURES OF GATHERING AUDIT EVIDENCE

a) Inspection
This is the examination of records, documents or tangible assets. The reliability of evidence
depends on the nature and source and effectiveness of internal controls over their processing,
b) Observation
This consists of evidence obtained by looking at the process or procedures being performed
by others e.g. stock taking, cash counts, wages payment etc. all of which are designed to
assess the strength or otherwise of an ICS.
However, observations are the one to ascertain whether the company’s laid down procedures
are being followed
c) Inquiries and confirmation
The auditor makes inquiry from persons inside or outside the company in order to confirm
some particular facts 'and information E.g. the auditor can seek opinions of some outsider
experts to confirm the values of the assets found on the balance sheet.
Computations
This is the checking of arithmetical accuracy of source documents and accounting records or
performing independent calculations e.g. adding up ledger balances, depreciation
calculations, stock valuations, payroll deductions etc.
d) Analytical procedures
This is the analysis of significant ratios and statistics, averages and percentages and
investigation of any unusual 'variances.
e) Scrutinizing of documents
This involves in depth checking of documents to ascertain such information or evidence
which the auditor would not otherwise ascertain at glance. The auditor can complement this
with inquiry made from management.
f) Cutoff tests
This procedure or technique carried out to ascertain evidence as to whether all transaction and
events took place in the year under consideration or in the correct accounting period.

1. Control account reconciliations

This technique is aimed at obtaining evidence as regarding accuracy in recording of
accounting information especially in cases where control accounts are involved

Problems or limitations of gathering audit evidence

1. It is usually expensive to gather evidence especially from third parties where such
third parties are numerous and geographically dispersed.
2. There may be lack of cooperation from the staff and to some extent third parties in
availing audit evidence
3. There possibilities of collusion between management, employees, and third parties
leading to distortions of Audit evidence.
4. The business entity might be technical and as such difficult to gather evidence and the
auditor has to use an expert which is not only expensive but also tedious.
5. There might be inadequate records, or incomplete records, which may limit internal
evidence.
 6. There might be a problem of weak ICS especially in the client’s business, which will
compromise such evidence.
7. There may be changes in the company e.g. changes in the management, which may
comprise the ICS and thus extortion of the audit evidence to be gathered

Documentation/Recording ISA 230 - Working Papers

230 Contains extensive guidance in relation to content of audit documentation and retention
of notes on queries arising from review.
Audit Documentation refers to recording of audit work in form of working papers (WP)
working papers (WP) are the materials the auditors prepare or obtain and retain in connection
with the performance of the audit
ISA 230 states that the auditor should adequately plan, control and record his audit work.
Audit recording refers to;
1. The process of documentations of the audit work.
2. The process of maintaining audit papers.
With reference to ISA 230, the term documentation means
(i) Booklets
(ii) Manuals
(iii) Information
(iv) Records maintained to provide evidence for the audit
Documentation of the audit evidence is a continuance process throughout the audit

Purposes of Documentation
1. To assist in future reference
2. To provide evidence
3. To ensure that the audit work is performed systematically
4. To ensure compliance with the standards requirements.
5. To minimize the possibilities of risk exposures to the audit.

Audit working papers

The term audit working papers refers to
i. Information
ii. Documents
 iii. Records, all used by the auditor to support the conclusions reached on the financial
statements.
CATEGORIES OF WORKING PAPERS
(i) working papers prepared by the auditor
(ii) Clients schedule used as working paper
(iii) Audit programes

WP may be in form of data stored on papers, films, electronic media etc. The auditor should
document all materials, which are important in providing evidence to support his/her audit
opinion and should show compliance with audit standards.
ROLE/USES OF WORKING PAPERS (AUDITOR’S RECORDINGS)
AUDIT RECORDING (IAS 230)
Auditor operational standards state that “the auditor should adequately plan, control and
record his/her audit work...
Recording refers to documentation inform of working papers prepared/obtained by the
auditor and retained by him/her in connection with the performance of his/her audit.
1. Record auditor's planning, nature, timing and the extent of audit procedures
performed and conclusions made from evidence obtained.
2. Include matters such as auditors reasoning, judgment and conclusion
3. Auditor should document in their working papers matters which are important in
supporting the audit opinion and evidence that the audit was carried out in accordance
with the International Standards on Auditing.
4. The auditor should prepare documents which are sufficiently complete and detailed to
provide an overall understanding of the audit.
5. The auditor should adopt appropriate procedures for maintaining confidentiality and
safe custody of the documents and for retaining them for a period sufficient to meet
the needs of the practice in accordance with the legal and professional requirements of
record retention.
6. Working papers may be in the form of data stored on papers e.g. schedules,
statements, photocopies of important documents concerning the clients business,
correspondences, films, electronic media or any other form of media of recording
audit evidence.
7. They should record the auditor's planning, nature, timing and the extent of audit
procedures performed and conclusions made from evidence obtained.
 8. Also they should include all matters such as auditors' reasoning, judgment, and
conclusions therein. Thus they should record the auditors planning and performance
of the audit, supervision and review of audit work and above all, act as evidence of
work done to support his conclusion/opinion.
Typical contents of the audit working papers
1. Information relating to the legal framework and organizational structure of the entity.
2. Copies of the important legal documents, agreements, contracts between the entity
and third parties.
3. A brief history of the entity and the summary of its annual results (prospectus)
4. Extracts of the memorandum of association and the articles of association of these.

QUALITIES OF GOOD WORKING PAPER

Working papers, to be a good record of work done, should have the following qualities. i.e.
1. Essential of good working papers
2. They should be properly indexed to facilitate cross reference.
3. Symbols used should be clearly explained.
4. They should be kept in hard cover files and retained for sufficiently long periods of
time e.g. at least six years of CAF after that particular audit and 15 years for PAF to
facilitate investigation after the auditor is no longer the clients’ auditors. This is
necessary not only to act as source of evidence in courts of law but also in case of
investigations that may come up from time to time.
5. They should be periodically updated in particular PAF which is long-term in nature.
6. Such papers should be properly labeled to facilitate reference and cross-reference.
7. Personal judgment, where this has been made should be clearly explained.
8. They should be sure (properly store) in inaccessible cupboards to avoid not only loss
of data but confidential data which may lead to loss of the clients information to
competitors.
NB:
CAP - stands for current Audit file.
PAF - for permanent audit file

Importance/purpose/advantage of WP
 I. WP are used as a basis for planning subsequent year's audits because the starting point
of a given year's audit (especially for existing clients) is a review of the previous
year's WP.
II. They provide evidence of work done in the case of threat of or action take against the
auditor for negligence, i.e. WP show evidence of appropriate audit procedures carried
out and conclusions reached.
III. They assist the audit manager in reviewing the audit work and the reporting partners
in reaching an audit opinion i.e. whether the financial statements portray a true and
fair view of the company’s performance.
IV. They are also used to control audit work, in that the best audit control is affected
through the view of documentation.
V. WP enable the auditor to adopt methodical approach to his audit work.
VI. To provide assurance and credibility to the reporting partner (engagement auditor that
the audit work delegated by him to the audit assistance has been carried out in
accordance to the audit programs.
OWNERSHIP OF AUDIT WORKING PAPERS
N.B: WHO OWNS THE WORKING PAPERS?
1. WP are the property of the audit, but at his discretion, he may give the client extracts
or portions of such working papers.
2. WP should detailed and complete.
3. WP should be up-to- date to show the progress of the audit at any point in time.
4. WP should indicate facts available at particular point in time and justify
reasonableness of the auditor's conclusions from those facts
Originally, it was believed that working papers belonged to the client and this belief was
based on the following claims.
1. That the auditor obtained working papers belonged to the client schedules and based
on the following claims.
2. That an auditor is an agent of the client and as such is bound by the laws of agency to
hand them over to the principle i.e. the client.
3. That the working paper contains secrets of the client and as such they should be kept
by the owner to preserve such secrets.
4. That after paying his fees the client has a right not only over all the work in papers but
any other information the auditor may have obtained by virtue of his appointment.
On the other hand the auditor claims ownership of working papers the following [grounds.
1. That working papers will act as a defense in case he issued by the client in future.
2. That the outgoing auditor has a professional duty and obligation to hand over these to
the incoming auditor to enable him/her understands his / her client better.
3. That they are used for future reference to facilitate future audits
4. That an auditor has in fact gathered such papers and little if any is original document
of the client.
5. That an auditor has lien over the working papers especially his audit repor6t in case
he is not paid his fees in which case has a right to retain the report and other working
papers until such fees are paid.
Nevertheless the ownership of working papers has been resolved through legal and
professional channels as follows.
1. In the case of Stockinsky V Bright Graham 1938 UK. The court gave the ruling in
favour of the auditors as the bonafide owner of working papers on the grounds that an
auditor is an auditor is an independent contractor and not an agent of the client but at
his discretion the auditor may give his client such partition of papers as:
a) Correspondence between him and third parties.
b) Income tax returns
c) Returns to the Registrar.
2. IAS 230 paragraph 4, states that "the auditor is the bonafide owner of the working
papers but at his discretion, he may give to the client extracts, or portions of such
working papers"
AUDIT FILES
Normality an auditor maintains two files of WP for each client i.e.
 The Current Audit File
 The permanent Audit File
Current Audit file (CAF)/ Working file, this contains information relevant to the current years
audit.
Contents of the CAF
1. A COPY of accounts and statements which the auditor is reporting on
2. An index to the file
3. A description of the internal controls informs of an ICQ, flow charts etc.
4. An audit program
5. A schedule for each item in the balance sheet
 6. A schedule for each item in the profit and loss account
7. A checklist for compliance with statutory disclosure requirements, accounting
standards and guidelines
8. A record of questions raised and answers obtained and if not satisfactorily answered
what course of action to be taken, a qualification of opinion,
9. A schedule of important statistics
10. A record or abstract from the minutes of the company, directors etc.
11. A copy of management letters than highlights the weakness of the internal control
System.
12. Letters of representation which are written by the directors or their
representatives to the auditor

PERMANENT AUDIT FILE (PAF)

This contains information of a long-term nature or matters of continuing importance to the
auditor, which will be used for a period beyond one audit.
Contents of PAF
1. Statutory material governing the conduct of accounts and audit of enterprises for
Example Company act, accounting and audit standards etc.
2. Rules and regulations of the enterprise for example the memorandum of Association,
Articles of Association, Partnership Deed etc
3. Documents of continuing importance to the auditor, for example letters of
engagement, trade licenses, debenture deeds, leases etc.
4. Address of the registered office
5. The organization chart showing principles departments and their sub-divisions,
6. A list of books and other records, which are kept, names, positions and specimen
signatures of people keeping such records
7. A list of accounting matters of long-term use to the auditor for example accounting
policies used by the organization for instance depreciation methods.
8. The clients internal auditing and accounting instructions (Manuals)
9. A list of directors, their shareholding and service contracts.
10. A list of company properties and investments with a note of verification.
11. A list of company advisors, bankers, insurance brokers etc
12. A list of company's insurance on all properties.
13. Supplier list
LIMITATIONS OF GATHERING AUDIT WORKING PAPERS
1. Third parties may delay in replying to circularization (lack of Co-operation on the part
of third parties.
2. Some symbols used might be vague and difficult to comprehend.
3. Incompetent audit assistants may also compile inadequate working papers which may
not be easy to review.
4. Personal judgment may be relative, in some cases leading to biased opinion.
5. The client may have weak internal control systems which may compromise records as
a source of evidence especially primary evidence.
6. There may be lack of co-operation on the part of management to avail information not
only information not only in form of documentation but also interviews and
questionnaires.
7. The nature of the clients' business may be technical, thus the need to engage experts
in compiling working papers which may lose professional touch.
8. Collusion between management staff and third parties may limit gathering of working
papers.
9. Changes in the clients' business may render working papers obsolete.
10. Change in audit staff may also make it difficult to obtain consistent and properly
arranged working papers.

CHAPTER SEVEN
AUDIT SAMPLING ISA:530
Audit sampling is the application of compliance or substantive procedures to less than 100%
of items with in an account balance or class of transactions to enable the auditor obtain and
evaluate the evidence) of some characteristic of the balance or class of items to assist him/her
form conclusions concerning those characteristic Internal Control Systems. “ISA 530.
The reasons for Audit Sampling
 It is cheap to audit few items as compared to 100% check.
 Less time consuming
  Psychological reason i.e. a complete check would bore the audit staff and hence
becoming ineffective and material errors would be missed.
There are two approaches to audit sampling.
a. Judgment Sampling
b. Statistical Sampling

Judgment Sampling
This means selecting a sample of an appropriate size on the basis of the auditor’s judgment of
what is desirable i.e. it is a method where the auditor uses his own experience and knowledge
of the client's circumstances to select a sample without using any mathematical or statistical
tools.
The method is ideal under the following conditions: -
 In deciding which tests to apply.
 When deciding the degree of reliability to be placed on a given sample
 When deciding whether or not an item is material or not.
 In deciding whether or not to accept the results of the sample

Advantages of Judgment sampling

 Being a traditional method and having been used by auditors for quite some time, it is,
easy to use and understand.
 The auditor can use his professional judgment and experience in which case it occurs
with the process of' auditing which is basically an exercise of professional judgment.
 No mechanical knowledge of statistics is required.
 It saves time on the part of the auditor as it avoids tedious computations, which are a
characteristic of mathematical oriented scientific statistical sampling.

Disadvantages of Judgment Sampling

 This method allows for personal bias in sample selection and as such may lead to
biased judgment.
 It is wasteful in that it may lead to selection of samples which arc too large as
compared to obtained using scientific statistical sampling.
 There may no logic to the selection of the sample or its size. And as such conclusions
reached on the sample may not hold for the entire population.
 No quantitative results are obtained.
  Conclusions reached on the evidence from samples are usually vague, since the
samples selected where not scientific in the first place.

NB. Despite the above limitations, it is still a preferred method because it gives a chance to
the auditors to use professional judgment in auditing and minimizes the use of mechanical
conclusion.

Statistical Sampling
This is a method by which an auditor selects sample using statistical tools involving
mathematical manipulation in which a sample is tested to ascertain whether the tests (result)
of the sample hold the population. This is ideal under the following conditions: -
 Where the population is sufficiently large,
 Where entries to be tested run the same risk of having error and frauds
 Where the population is homogeneous in materiality, nature of items, and the time
period
 Where items are coded to facilitate random selection
 Where entries can be stratified and in particular, where there is a definite materiality
level.
Advantages of Statistical sampling
 The method being scientific defensible since conclusions reached may be objective
 It provides precise mathematical statements about the probabilities of being correct.
 It saves time since it leads to selection of small samples as compared to judgment
sampling.
 It leads to uniformity of standards among different auditing firms and hence objective
sample sizes for different firms.
 It can he used by lower grade staff who due to lack of experience and knowledge may
be unable to use judgment sampling

Disadvantages of Statistical Sampling

 As a technique, it is not always fully understood so false conclusions may be drawn
from the results.
 The method time consuming especially in large organizations as it involves a lot of
mathematics.
  Being scientific it calls for trained audit assistants and as such increasing the auditors
training costs.
INTERNAL CONTROL SYSTEMS (ICS)
Definition of Internal Controls
These are processes affected by the entity's board of directors, management and other
personnel designed to provide reasonable assurance regarding the objectives of an
organization.
ISA 400 Risk assessment and Internal Control, defines Internal Control System as comprising
of control environment and control procedures.
It includes all the policies and procedures adopted by management to assist in the objective of
achieving as far as practicable; the orderly and efficient conduct of the business.

Control Environment
This means the overall attitude, awareness and actions of directors and management
regarding ICS and its importance to the entity.
It encompasses personnel policies and procedures, organization structure etc.

Control Procedures
These are procedures established to achieve the entity's objectives. These objectives may
include proper authorization, timely and accurate recording of transactions in the correct
period, safeguarding of assets etc.
These procedures differ from that of entity and depend on the size of the firm.

Internal Control Systems may also be defined as:

The whole system of controls, financial and otherwise established by the management in
order to;
i. Carry on business of the entity in an orderly and efficient manner, safeguard the assets
and secure as far as possible the completeness and accuracy of the records.
ii. Ensure the adherence to management policies.
iii. Safe guard the assets.
iv. Prevent and detect frauds and errors.
v. To secure as far as possible the completeness and accuracy of the records".

Types of Internal Controls

The types of Internal Controls can be categorized as;
1. Plan of the Organization / Organization chart
An organization should have a preplanned organization chart that should define;
a. Duties and responsibilities of each individual in the organization.
b. Responsibilities such that it defines lines of reporting for all operations within the
organization
c. The flow of authority and responsibility, which should be clearly defined to avoid
conflict in duties, authority and power.
d. How duties should be delegated in particular financial and accounting duties or
assignments.
2. Segregation /Division of Duties
This control means separation/division of duties and all responsibilities which if combined
(i.e. not separated) will enable one single person to process and record the transactions from
the beginning to the end exposing such persons to committing fraud. The main aim is to
ensure that no one is responsible for the recording and processing of a complete transaction.
3. Physical Controls/Safeguarding of assets
These aim at limiting accessibility of company’s assets to authorized persons at authorized
times. This control will take the form of physical measures, which are also aimed at limiting
direct access to assets, using physical barriers e.g. being able to enter the warehouse. Or
indirect limitations using documentation to company assets
4. Authorization and Approval Controls
This is a control aimed at ensuring that all the company's transactions are authorized by
responsible officials whose limits of authority are defined such that they match transactions
they authorize.
Approvals should be segregated from authorization e.g. all credit sales must be approved by
the credit control department; all overtime must be approved by the works manager.
5. Arithmetic and Accounting Controls
This is used to check the recording function in the organization and to ensure that figures in
the financial statements are not only genuine but also correct for accounting purposes. It
requires the following measures:

a. Periodic reconciliation.
b. Drawing the trial balance. Periodic balancing of accounts
c. Control accounts, etc.
Personnel Controls/competence of staff
6. An 1CS regardless of its application should be operated by personnel of integrity,
competent and qualified to understand essence of the controls. Such people should
have capabilities to carry out responsibilities assigned to them. It is normally achieved
from the point of recruitment and retraining of staff

7. Supervision. This has three levels. I.e.

b. Low level supervision. Such supervision should be manned by trained and competent
supervisor, who should supervise the company's day-to-day operations such that they
are carried out smoothly.
c. Middle level supervision. This is done by line managers who should ensure policies
and procedures are adhered to and are in line with the company's objectives and goals.
d. Managerial supervision and review. This is a management control done by the top
management using such tools like budgets, standard costing statements, internal audit
feedback, etc. All these aim at checking daily running of the organization. It also
involves reviews to ensure that all controls are working in harmony to achieve
predetermined goals.
8. Rotation of duties and vacations.
9. Duties of routine nature should be rotated to avoid continuity of errors and fraud and
also as a means of avoiding routine boredom, which may lead to innocent errors.
Employees should also be encouraged to take leave when it falls due.
10. Routine and automatic checks.
Controls conducted on routine duties and operations are important in that they ensure that
these operations are carried on efficiently and such controls are operated at a surprise basis to
minimize errors and frauds.
11. Recording and record keeping
The system of recording the business transactions at all stages should be complete and
reliable. The records should be kept properly to avoid any losses or alterations.
NB.
Any ICS should be operated at such a reasonable cost so as to enable the company derive
maximum benefits which should outweigh the cost of installation and maintaining such
system.
The Objectives of the Internal Control System
The principal/main objectives of an internal control system are:
1) To enable the management of the entity to carry on the business in an orderly and
efficient manner
2) To detect and prevent errors and frauds
3) To ensure for the safeguarding or adequacy of the accounting system necessary to
provide the basis upon which the true and fair view financial statements can be
prepared and presented.
4) All business transactions take place according to set procedures. It means that the
management policies are followed strictly.
5) To ensure the assets are safeguarded properly against misuse, theft or
misappropriation. The acquisition usage, and disposal of assets must be duly
authorized and in accordance with the company policies.
6) The records are complete and accurate. It means that all incomes and expenses are
recorded adequately and correctly. These are maintained in such a way that the
possibilities of errors and frauds are minimized.
7) The records provide adequate and reliable information for the preparation of
financial statements.
Advantages of Internal Control Systems
1. It boosts the confidence and gives assurance to third parties or stakeholders in running
the organizations preparations smoothly.
2. It helps the auditor to obtain reliable evidence.
3. It strengthens the financial controls and prevents errors and fraud within the
organization.
4. It boosts efficiency of staff by segregation of duties, use of qualified staff and proper
use of the organization chart.
5. It helps the company to have accurate and correct records.
6. It minimizes the cost of an audit as it facilitates an audit through minimization of
errors and fraud.
7. It facilitates accurate decision-making processes with accurate information from
controls, which will lead to the growth of the company.
8. It enables the auditor to avail management with quality advice through the
management letter, which will facilitate the company's operations.
Disadvantages of Internal Control Systems
1. It is expensive to install and maintain especially in small organizations.
2. It may lead to over reliance on ICS by management team and thus reduce its
supervision and give room to perpetrators and frauds.
3. The integrity, competence and quality of management changes and this will lead to
changes in control.
4. There is possibility that procedures may become inadequate due to changes in
conditions and compliance procedures.
5. There is a possibility that a person responsible for exercising internal control could
abuse that responsibility.
6. Most internal controls tend to be directed at routine transactions rather than non-
routine transactions.
Role of (How the) Internal Control Systems assist in detecting errors and frauds.
1. Plan or the organization chart
 In defining the duties effectively, perpetration of frauds can easily be detected.
 Where powers conflict (duplication of efforts) such an area is grounds for errors and
frauds.
2. Segregation of duties
 Segregation entails inter checking by superior colleagues thus errors and frauds are
identified with ease.
 A person authorizing a transaction may want to perpetrate the fraud but the executor
may block a fraud
 A person keeping assets (storekeeper) can't keep a fraudulent asset, which has either
been perpetrated by the executor or authorizer, as it is not a genuine business
transaction. This is important because it prevents collusion between the authorizers,
executors' custodians and the recording parties.
3. Physical Control i.e. direct and indirect controls.
 Indirect limitations (use of documentation) will give an idea of the perpetration of
frauds. This is achieved via the serialization of documents.
 Physical barriers such as locked areas, strong rooms, safes etc. will show actual frauds
where there are shortfalls such as shortages and breakages.
4. Authorization and approval controls
 Exceeding limits of authorization will serve as a good indication of fraud
 Unauthorized transactions could be a sign of frauds.
 5. Arithmetic and accounting control
Trial balances not balancing should reveal
 Frauds and errors
 Excessive changes of accounting figures
 Out of balance account is an indication of frauds
6. Supervision
 Supervisors are people of integrity thus will reveal frauds perpetrated to avoid being
victimized.
 Managerial reviews, out of balance budget/ balance forecasts will give a clue to
frauds.
 Where procedures are not adhered to due to relaxation of supervisor will give room to
frauds.
7. Personnel
 Qualified people will not normally allow frauds to pass their way.
 Properly remunerated personnel will reveal frauds committed by lower level
employees under them.
 High turnover of qualified personnel will serve as an indication of frauds.
8. Rotation of duties and vacations
 Once a person has been rotated, the incoming person will be able to detect any fraud
if any. This also applies for a person gone for leave.
 Reluctance to be rotated or go for leave may indicate presence of frauds.
9. Routine and automatic checks
 Perpetrators of fraud are normally caught unaware with surprise checks.
 Periodic, routine and automatic checks will detect errors and frauds perpetrated.
Control over documents
 Missing pre numbered and serialized documents will reveal frauds.
 Unauthorized documents or forged documents will also reveal frauds.

ASSESSING THE STRENGTH OF INTERNAL CONTROLS

TECHNIQUESUSED TO ASSESS THE STRENGTH OFTHE ICS
1. Internal Control Questionnaires (ICO)
This is a set questions posed by the auditor to be answered by the client directly or indirectly.
These questions require short answers like yes or not. E.g. Was Local Purchase Order
authorized? Yes answers show the strength of ICS, where as No indicates weakness of ICS.

Illustration of an ICQ
Question nos. Questions Answers Remarks
I Who raised the LPO None Weak ICS
2 Was it authorized? No Weak ICS
3 Was it recorded? No Weak ICS
4 If so, who recorded it? N/A Weak ICS

2. Use of Systems Notes

It is a record of ICS, which describes operations of entire ICS and outlines where the ICS is
weak and how serious the weaknesses are.
3. Use of third party confirmation (circularization)
An auditor uses a source to gain valuable and reliable information from sources like debtors,
creditors, bankers, lawyers, etc. Any difference between the third party evidence and
evidence from company's own records is a sign of weak ICS
4. Use of Compliance tests.
These are tests that analyses the client's records and recording system to ascertain whether
they are working as expected ICS. The question is 'Do they comply with the company's laid
down policies?' if the results of these tests indicate a strong control system then the auditor
reduces the volume of substantive tests.
Observation
This technique reveals deviations from usual conduct of operations. These observations are
made in areas such as wage payments, stocktaking cash counts etc. Any deviations from laid
down policies are an indication of weak ICS.
5. Flow Charts
These are grammatical representations of the company's procedures designed to show
movement of documents within the organization. Any destruction in the flow lines or blocked
flow line is assumed j be an indication of weak ICS.
6. Analytical Reviews
These are trend measurements aimed at analyzing company's performance say by use of
ratios to determine normal changes. If the changes of the deviations are not justified, it could
indicate weakness in the ICS.
7. Use of Depth Tests
This involves the checking of a transaction through various stages of recording; analyzing
each stage to ascertain whether the controls are working through out such stages.

8. Use of Walk through tests.

These are limited, tests aimed at ascertaining the strength or otherwise of an ICS. In order to
follow a particular sequence relating to a single transaction, it may be best to follow through
a few typical or similar transactions.

Differences between Internal Control Systems (ICS) and Internal Checks (1C)
An internal check system is part of Internal Control System where duties or functions of an
individual are independently checked by his colleagues. The essence of ICS is to ensure that
any given function counter checked to avoid possibility of frauds and errors. The differences
between ICS and 1C include the following:
1. An internal control system is a broad spectrum of controls aiming at ensuring that the
organization is run efficiently where as an internal check system is aimed at
preventing errors and frauds.
2. The Internal Control System is necessary for all businesses regardless of their size
where as an internal check system is ideal for large companies, which require strong
segregation of duties.
3. An internal control system is operated by competent and qualified personnel whereas
an internal check can be manned by a person regardless of his qualifications.
4. The weak ICS may lead to a qualified report whereas internal check may not lead to a
qualified report.

Actions to be taken by the Auditor if the ICS is weak

1. He should bring such weaknesses to the attention of the management immediately and
request for corrective measures to this effect.
 2. The auditor should increase substantive tests. The auditor should increase the volume
of tests to ensure that he gathers sufficient audit evidence.
3. The auditor should change his audit approach in areas where the ICS is weak e.g.
from system-based audit to vouching audit and auditing in depth.
4. If the weaknesses persist year after year the auditor should bring this to the attention
of the shareholders so as to take appropriate action.
5. If ICS are too weak to allow testing, the auditor should qualify hi report on the
strength of the fact that he is unable to get all the information and explanations he
considers necessary for the purpose of his opinion.

Features of a strong/sound Internal Control System

For an external auditor to satisfy himself that the client internal control system is effectively
operational, he or she would try to find out the following salient (important) features
1. Plan of Organization
There should be an organization chart or structure. The chart should be horizontal or vertical.
The departments and sections must be provided for in the chart. The directions and flow of
the controls clearly indicted in the chart.
2. Authorization and approval
There should be authorization and approval. Transaction must be authorized and approved.
The officer authorizing the transaction must be on lower level, the officers approving the
transactions. The duties and authority and approval must be properly segregated.
3. Segregation of duties
Duties and responsibility must be properly suggested so that no single office is allocated to
carry on transaction from the beginning up to and proper segregation minimizes the
occurrence of errors and frauds.
4. Typing and arithmetical count
Acting machines should be introduced in recording of the transaction, arithmetical check
should also be instituted to and mathematical mistake, if possible, the sue of computers and
be introduced.
5. Physical controls
The physical controls should aim at limiting accessibility to the fixed asset.
6. Supervision
There should be proper supervision instituted both at-lower and upper level of the
management. The supervision must be close and contact to minimize any possibilities of
errors and fraud.
7. Personnel
The company should employ qualified and competent personnel. The qualified and
competent personnel should be reliable. Proper incentives should be introduced to the
qualified and competent personnel. The reliable personnel should be regarded s the
company's asset.
8. Management
There should be managerial review procedures to ensure that all the activities undertaken are
in agreement with the policies and procedures, budgets and budgetary controls. Variances
should be disclosed by the managerial review procedures and unfavorable variances must be
properly investigated.

9. Internal Check system

There should be independent automatic routine check whereby the work performed by one
officer or employee is cross checked by another for authority and recording. The employee
checking the work of the other must be on a higher ranking than the one whose work is being
checked. This system would detect and prevent error and fraud.
10. Internal audit
There should be internal audit department which should be responsible for the programming
and review of controls to ensure that the control remains effective throughout.

Inherent limitations to the Internal Control System

1. Inherent means “unavoidable risk of weakness in the controls”.
2. Inherent limitations mean "the possibility of internal control system failing to
achieve the desired objective”.
An internal control system of the client however strong it might be may not guarantee
efficiency in operation - this is because:
1. Every internal control system has weaknesses
2. Control are set up and maintained by the management and therefore in some
circumstances the management may evidence the controls.
3. Control over rotational of duties can be carried out in a biased manner by the
authority's entrusted with the responsibilities.
4. Controls over internal check system can also be avoided by the employees to
practice the exercise.