CHAPTER 0: INTRODUCTION TO AUDITING

Auditing is the examination of the records underlying a financial

statement as will enable the auditor to report whether, in his opinion, the
statement gives a true and fair view of what it purports to show. For this
opinion to be authoritative, and thus of value to those who rely on it, the
auditor has to be skilled and independent.

1. THE NEED FOR AN AUDIT

The “why of auditing” can be understood using the concept (practice) of
incorporation, the problem of reliability in reports and accounts and financial
reporting requirements.

1.1. Incorporation and the need for an audit

In most cases, it is possible for businesses to be operated as
companies. This process of operating businesses as companies is known as
incorporation. Incorporation has two implications:

✓ The creation of a distinction between the owners of the business and

the business itself. This in turn leads to the business being run by
managers who are distinct from its owners.
✓ The granting of limited liability status so that if the business fails,
the owners only stand to lose a specific amount of money invested in the
business.
A legal framework is therefore required for how companies should be
operated to protect business owners from unscrupulous managers and to
protect the business world and the public at large from owners taking unfair
advantages of limited liability status.
Incorporation has two results:

- The legal requirement for accounts to be produced by management on

a regular basis to account to the shareholders for their stewardship of the
business.
- The recognition of the need for these accounts to be checked in some
way by some one who is independent of the managers – the auditor.

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i. The notion of stewardship
Stewardship is the responsibility to take good care of resources. A
steward is a person entrusted with the management of another person’s
property, for example when one person is paid to look after another person’s
house while the owner goes abroad on holiday.

Owners who appoint managers to look after their property will be

concerned to know what has happened to their property. The process
whereby the managers of a business account or report to the owners of the
business is called Stewardship accounting and stewardship is the name
given to the practice by which productive resources owned by one person or
group are managed by another person or group of persons.

This relationship, where one person has a duty of care towards

someone else is known as a “Fiduciary relationship”.

ii. The notion of fiduciary relationship

A fiduciary relationship is a relationship of “good faith” such as that
existing between the directors of a company and the shareholders of the
company. There is a “separation of ownership and control” in the sense that
the shareholders own the company, while the directors take the decisions at
the company. The directors must take their decisions in the interests of the
shareholders rather than in their own selfish personal interests. This
fiduciary relationship leads to the stewards being accountable for the way
they carry out their roles of stewards.

iii. The concept of accountability

Accountability means that people in positions of power can be held to
account for their action; that is, they can be compelled to explain their
decisions and can be criticized or punished if they have abused their
position. This works in a company as follows:

- The shareholders of the company own the shares in the company and
thus indirectly own the assets of the company.
- The directors are accountable to the shareholders and to society at
large for making decisions on behalf of the company’s owners (the

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 shareholders) and for using the assets of the company effectively and
efficiently.
- The shareholders in turn have the right to remove the directors by
voting in a general meeting and are likely to do this if they are not
satisfied with the decisions taken.
- In addition, if the directors have acted illegally while running the
company, they can be fined or even sent to jail.
The idea of the directors being employed by the shareholders leads to
an agency relationship.

iv. The concept of agency

An agency relationship occurs when one party, the principal, employs
another party, the agent, to perform a task on their behalf. Organizations
today are viewed as a network of various interest groups known as
stakeholders.
The relationships between the various stakeholders in a company are
often described in terms of agency theory. For example, directors can be
seen as the agents of shareholders, employees as the agents of directors
and external auditors as agents of shareholders.
Each principal needs to understand that although he is employing the
agent, the agent will have interests of his own to protect and thus may not
carry out the requirements of the principal – a conflict of interests may arise.
1.2. The Problem of Reliability and the Need for an Audit
Directors as managers of the company often are required to produce
annual reports and accounts to the various stakeholders of the company.
The following persons are likely to want to see and use financial statements:

- Actual or potential persons; that is the owners, lenders and debenture

holders, employees, customers and suppliers.
- Persons who advice the above persons; that is accountants,
stockholders, credit rating agencies, financial journalists, trade unions,
statisticians.
Competitors and persons interested in mergers, amalgamations and
takeovers.

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 - The government, including tax authorities, price control departments
and consumer protection agents.
All these persons want to be sure that the financial statements can be
relied upon. But the problem which has always existed when managers
report to owners is
“can the owners believe the report?” This
is because the report may:
- Contain errors,
- Not disclose fraud,
- Be inadvertently misleading,
- Fail to disclose relevant information.
The solution to this problem of credibility in reports and accounts lies
in appointing an independent person to investigate the reports and accounts
and report on his findings.

1.3. Financial Reporting and the Need for Audits

As modern companies are becoming larger and larger, with
multi-national activities, the preparation of their accounts becomes more and
more complex. The examination of such accounts by independent experts
trained in the assessment of financial information is required.

Also, financial statements are to conform to the requirements of the

Uniform Act on Accounting Law and Financial Information and the
OHADA Accounting System (new uniform act Adopted on the 26 th of
January 2017 and published in the official gazette of OHADA on the
15th of February 2017). These statements are equally required to conform
to the requirements of International Accounting Standards, the many
statements of Standard Accounting Practice and International Financial
Reporting Standards. It is therefore essential that an audit should be carried
out on these statements to ensure that they conform to these requirements.

2. The conduct of an audit.

The conduct of an audit is governed by three sets of rules:

✓ Auditing standards – International Auditing Standards (ISAs)

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 ✓ Codes of conduct
✓ Company law (OHADA Uniform Act on Commercial Companies and
Economic
Interests Groups).

In addition to these rules, governments always try to ensure that

audits are conducted by people who are suitably qualified and whose work is
of satisfactory quality. This process of the government is known as Audit
Regulation.
3. The Setting of Auditing Standards.
The accounting profession is globally organized under the International
Federation of Accountants (IFAC). The overall mission of IFAC is to serve the
public interest, to strengthen the worldwide accountancy profession, and to
contribute to the development of strong international economies by
establishing and promoting adherence to high – quality professional
standards.

International standards on auditing are set by the International Auditing and

Assurance Standards Board (IAASB), which is a subsidiary to IFAC. However,
because IFAC is simply a grouping of accountancy bodies, it has no legal
standing in individual countries. National regulatory bodies are therefore
formed in different countries to regulate the audit profession and implement
auditing standards.

There are two possible ways of carrying out this regulation at the national
level:

✓ Using self regulation by the audit/accountancy profession (e,g ONECCA

for Cameroon),
✓ Regulation by the government or by some independent body set up by
the government for that purpose (OHADA for instance).
These regulatory bodies at the national level may set their own
auditing standard and/or may modify, adopt, and implement ISAs to suit
their national needs.

4. The Domain of Statutory Audits.

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 Statutory audits are only required by companies in most countries ;
with small or owner manage businesses often exempt from this. The reasons
for exempting small businesses are that:

✓ For owner-manage businesses, those receiving the audit report are

those running the business, and hence those who prepare the accounts.
✓ The advice or value which accountants can add to a small company is
more likely to concern other services such as accountancy and tax, rather
than audit and which may also give rise to a conflict of interest under the
ethics rule.
✓ Finally, the audit fee for small businesses and related disruptions are
seen to be too great a cost as compare the benefits to auditor might
bring.
5. Auditing and the accounting law
Companies have to keep accounting records based on the
requirements of the OHADA Uniform Act on Accounting Law and
Financial Reporting and the OHADA Accounting System (new
uniform act Adopted on the 26th of January 2017 and published in
the official gazette of OHADA on the 15th of February 2017) and the
fiscal law of the state. An auditor must know these requirements because he
has to carry out investigations to enable him to form an opinion on whether
the company has kept “proper” accounting records. Note should be taken
here that the responsibility for keeping proper accounting records lies wholly
with the directors.

Accounting to Article 17 of the OHADA Uniform Act on Accounting

Law and
Financial Reporting, the accounting system should carry the following
main features:

✓ Accounting records should be kept in the official language and in

the official monetary unit (CFA Francs) of the country.
✓ The use of the double entry principle in recording transactions.
✓ The basing of accounting records on source documents.

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 ✓ The recording of transactions in chronological order.
According to Article 19, the following obligatory books are to be kept
by a company:

✓ The journal for the chronological recording of all transactions,

✓ The general ledger to show all the accounts used by the

company during the period,
✓ The trial balance to summarise the accounting records in the
journal and the general ledger,
✓ An inventory book that carries the financial statements.
This article further states that the keeping of the journal and the
general ledger can be facilitated by the keeping of auxiliary or special
purpose journals. In such cases, the totals of the subsidiary books have to be
centralised in the main book at least once a year.
Article 26 requires the following financial statements to be presented
by companies:

✓ A balance sheet;
✓ The profit and loss account; A statement of cash flows; ✓
Notes to financial statements.
The auditing principles includes that the amounts to be included of all
items showed in a company’s accounts shall be determined in accordance
with accounting principles.

6. Departure from the accounting law

If a company fails to comply with any provision of this law, every
officer of the company who is in default is guilty of an offence unless he
shows that he acted honestly. If it appears to the directors of a company that
there are special reasons for departing from any of the principles stated in
preparing the accounts in respect of any financial year, they may do so.
However, the reasons for the departure, the particulars of the departure and
its effects shall be given in a note to the accounts.

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7. International auditing standards and guidelines
The professional accounting bodies are very anxious to improve and
maintain high standards in the conduct of audits. To that end, they have set
up the Auditing Practices Board (APB). This authoritative body issues
Statements of Auditing Standards (SASs) which are mandatory and Practice
Notes which are helpful and indicative of good practice.

In addition, there is an International Auditing Practices Committee

(IAPC), which is a Committee of the International Federation of Accountants
(IFAC). This committee issues International Standards on Auditing (ISAs) and
International Auditing Practice Statements. Generally, the Cameroon SASs
covers the same ground as the ISAs.

Each SAS has two types of material:

✓ Basic principles and essential procedures with which auditors are

required to comply. These tend to be general.
✓ Explanatory and other material which, rather than being prescriptive is
designed to assist auditors in interpreting and applying auditing
standards.
The APB also issues Practice Notes which are designed to assist
auditors in applying Auditing Standards of general application to particular
circumstances and industries. They are persuasive rather than prescriptive
and have similar status to the explanatory material in the SASs.

8. Basic concepts guiding the practice of auditing

The concepts which underline the practice of auditing are:

– Truth and fairness;

– Evidence;
– Independence; – Responsibility
8.1. Truth and fairness
The presentation of truth and fairness depends upon a number of
judgments and conventions, which include:

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i. Cost Convention. The cost convention for preparing accounts must
be acceptable. The commonest conventions used for preparing accounts
are the historic cost convention and the current cost convention.
ii. Fundamental accounting concepts. A true and fair view implies
that the financial statements are prepared with due recognition of the
fundamental accounting concepts recognised in SSAP2 which are:

✓ The going concern concept: The enterprise will continue to

operate for the foreseeable future, meaning that the profit and loss
account and balance sheet assume no intention or necessity to
liquidate or curtail significantly the scale of operation.
✓ The accruals concept: That is, revenues and expenses should
be linked to their various periods of realisation and incurrence.
✓ The concept of Prudence: i.e. gains and losses should neither
be overstated nor understated in financial statements. Implying that
revenue and profits are not anticipated, but are recognized by
inclusion in the profit and loss account only when realised in the form
either of cash or of other assets.
✓ The consistency concept: There is consistency (no change of
method) of accounting treatment of like items within each accounting
period and from one period to the next (over the short or medium run).
✓ Separate determination concept: That is, potential gains
and losses on the same asset should not be netted off.
✓ Concept of substance over from: Some transactions have a
real nature (substance) that differs from their legal form. An example
is a hire purchase transaction. Ownership in an asset being acquired
on hire purchase does not pass until the last installment is paid, but it
could be misleading to present a balance sheet in which such assets
did not appear until the end of the contract. Whenever it is legal
possible then, the real substance prevails over the legal form.

[Link]. That is, financial statements should be made comparable

by accepting and respecting generally accepted accounting principles.

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 [Link]: that is, the exercise of judgment to disclose what needs
to be disclosed and to omit what is trivial or irrelevant to the reader of a
set of accounts. Materiality may also represent a threshold quality. That
is:
- One that needs to be studied before considering the other
qualities of that information
- A cut-off point – if any information does not pass the test of the
threshold quality, it is not material and does not need to be
considered further.
v. Adherence to statute: Lastly, a true and fair view assumes that the
financial statements will show those facts and amounts which are
required to be disclosed under the companies’ acts.
8.2. Evidence
An auditor cannot express an opinion unless that opinion is based on
evidence.

8.3. Independence
It is assumed that the auditor possesses true independence.
Independence here means professional remoteness from his client,
independence of status, and independence of mind and outlook.

8.4. Responsibility
An auditor must be clear about his responsibilities in carrying

out his duties. He is not responsible for:

– Preparing accounts;
– Guaranteeing their accuracy;
– Maintaining control over the business;
– Assessing the efficiency of business operations.
These tasks are quite properly responsibility of the directors.

The auditor is responsible for:

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 – Preparing a report stating whether, in his opinion, the financial
statements give a true and fair view of the state of affairs of the business;
– Discharging any specific obligations imposed upon him by legal
implication (companies act);
– Carrying out his duties with reasonable skill and care.
9. The objectives of auditing
The primary aim of an audit is to enable the auditors to say “these
accounts show a true and fair view” or of course to say they do not. The
objectives of an audit are:

• Primary: to produce a report by the auditor of his opinion on the truth

and fairness of financial statements so that any one reading and using
them can have a belief in them.
• Subsidiary: To:
✓ Detect errors and fraud,
✓ Prevent errors and fraud by the deterrent and moral effect of the
audit,
✓ Provide spin-off effects as the auditor may assist his client with
other services as accounting, systems, taxation, financial and other
problems.
✓ Report on internal control deficiencies noted during the course of
the audit.

9.1. Auditing and errors

The main errors to be of concern during an audit are those which
cannot be disclosed in a balanced financial statement. The errors which are
not disclosed by the trial balance occur in situations where the debit entry or
total matches the credit entry or total. They consist of:

• Error of omission: Transaction completely omitted from the ledger:

i.e. omitted from both accounts
• Error of commission: Wrong personal account is used: e.g. wrong
debtor account, for instance: a sale to Walters is debited against Wilson.

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 • Error of principle: Wrong class of account is used: e.g. an expense
debited to an asset account.
• Reversal error: The account which should be debited has been
credited, and vice versa.
• Compensating error: Errors which cancel each other out: e.g. credit
entry total is overstated by 10 000 CFAF and the debit entry total is also
overstated by 10 000 CFAF.
• Error of original entry: The original figure is entered incorrectly in
both accounts. For instance, 500 000 CFAF is entered as 50 000 CFAF.
• Transposition error: The wrong sequence of the individual digits of a
number is entered. For example, 142 000 CFAF entered instead of 124
000 CFAF.
One way to help remember the seven errors is to memorise the
acronym “COPCORT”. This is a “word” constructed by taking the first letter
of the name of each error:

- Commission
- Omission
- Principle
- Compensating
- Original entry
- Reversal
- Transposition.
Many such errors will be disclosed during the normal work of an audit
and careful checking of vouchers and original documents, an enquiry from
those possessing technical knowledge of the facts is necessary.

9.2. Auditing and Fraud.

Fraud may consist of:

• Misappropriation of cash; for instance, by entering fictitious payments

or failure to enter cash receipts,
• Misappropriation of tangible assets,

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 • Falsification of accounts, for instance fictitious sales is entered by a
manager who is entitled to a commission on sales.
Merely checking the entries in books and final accounts usually fails to
disclose any fraud, but comparisons with source documents or statistical
books will generally disclose any existing fraud.

CHAPTER 1: FUNDAMENTAL CONCEPTS OF AUDIT

SECTION 1: DEFINITIONS OF THE AUDIT

1. GENERAL DEFINITION

Audit comes from the Latin " audire " which means "to listen "; the
English verb " to audit " is considered as " check , monitor , inspect ".
Economic organizations have always been forced to be controlled. In general,
the audit consists of an examination carried out by an independent
professional on the way in which an activity is carried out, and on the
information drawn up by the managers, in relation to assessment criteria
relating to this activity.

The financial audit is without question, the best known and oldest
aspect of the audit. The audit activity then spread to all aspects of the
operation of the company: social audit, legal audit, industrial audit, etc.

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 a) Audit is a professional examination

Auditing is a critical examination process, the professional character of

which is demonstrated by:

•The competence of the professional resulting from relevant training and

experience;
•The use of a methodology, techniques and tools to conduct the
examination.
b) The audit is related to information
The concept of information is broadly conceived. The audit covers:
• Analytical or synthetic information;
• Historical or forecast information;
• Information internal or external to the issuing entity;
• Quantitative, qualitative or technical information etc.

b) The expression of a responsible and independent opinion

The opinion formulated by the auditor is a responsible opinion because it

commits him personally. It can be supplemented by the formulation of
recommendations.

c) Reference to quality criteria

The expression of an opinion always implies the reference to quality criteria:

•Regularity , which is compliance with rules, procedures and principles
which may be internal or external to the entity issuing the information
(this is also called compliance audit). Example : accounting rules, tax
law, social law, etc.
•The sincerity (or fidelity) with which the facts are translated into the
information. It is objectivity and good faith in the application of rules
and procedures.
•Efficiency : this is a set of criteria which are themselves capable of
being combined with the criteria of regularity and sincerity. They are
generally broken down into three (03) elements (sometimes referred to
as "the three E's")
- Economy : in the acquisition of human and material resources
implemented in a project;
- Effectiveness : the extent to which the intended goals or the
desired effects have been achieved;

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 - Efficiency : relationship between the goods or services
produced on the one hand and the resources used to produce them
on the other.

d) Increasing the usefulness of information

The main contribution of the audit is the credibility and security that can be
attached to the information audited.

2. DEFINITION OF FINANCIAL AUDIT

a) Institutional definitions

According to the publications of the various professional organizations, we

can retain:
• In France, according to the Order of Chartered Accountants
(OEC): The financial audit is an " examination by a competent and
independent professional in order to express a reasoned opinion on
the regularity and the sincerity of the balance sheet of the account of
results and information annexed to the annual accounts of a company
".
• According to the National Company of Statutory Auditors (CNCC):
an audit consists in examining, by sampling the convincing elements
justifying the data contained in the accounts. It also consists of
assessing the accounting principles followed and the significant
estimates used to close the accounts and assessing their overall
presentation.
• Internationally, in IFAC standards: " The objective of (financial)
auditing is to enable the auditor to express an opinion that the
financial statements have been prepared, in all material respects, in
accordance to a defined accounting framework. "

b) Statutory financial auditing and contractual financial auditing

In the French context, the external financial audit takes place in two distinct
situations:

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 • The contractual external financial audit, carried out at the
request of an entity, for purposes which are defined in the contract
with the auditor.
• The statutory auditor (sometimes referred to as a statutory
financial audit), prescribed by company law, which consists of two
distinct elements:
- An external financial audit mission;
- A set of specific obligations borne by the statutory auditor by
legal and regulatory provisions (resulting in the preparation of a
special report).

c) Internal audit and external audit

Large companies have often sought to strengthen their own control

system by creating an internal audit service within them. The latter reports
to general management in order to maintain its independence from other
departments.

Its role is to define, disseminate and ensure the correct application of

internal control procedures within the company. The internal auditor is a
manager who is part of the staff of the company, as opposed to the external
auditor (legal or contractual) who is mandated by the bodies, but
independent and not employed by the company.

The various professional recommendations therefore provide for coordination

between the work carried out by the internal auditors and that of the
external auditors.

3) DISTINCTION OF THE AUDIT WITH NEIGHBORING DISCIPLINES

a) Audit and accounting expertise

The chartered accountant generally having the quality of statutory

auditor, may be entrusted by a company with the task of establishing or
examining the annual accounts. Three types of mission can be entrusted to
the chartered accountant: presentation, examination (limited) and audit of

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the annual accounts. He must respect professional rules and provide a
certificate at the end of his work for the first two types of mission.

The presentation mission is a simple formatting of the financial

statements. The review mission also includes general checks on the
consistency of the established accounts; the third is a full audit mission.

A company can have an accountant to assist it in developing its

financial statements and an auditor (who may be a different accountant)
to audit its accounts.

b) Audit and management control

The purpose of management control is to assess the results based on

the objectives that have been set and to ensure that resources are used
effectively and efficiently to achieve the objectives of the company.

The responsibilities of management control services are defined as follows:

• Contribute to the design of the company's management structure and

information system;
• Operate the information system correctly;
• Ensure the efficiency (ie productivity) of the company's functions,
assess their effectiveness in relation to the objectives;
• Define rules, management criteria and performance measures using as
tools: budgets, dashboards, and other decision support tools.

Management control and internal audit are complementary. The validity of

performance checks is based on the sincerity and reliability of the various
information systems (accounts, budgets, statistics). Management control
cannot function without a minimum guarantee as to the quality of the
information transmitted to it, which is the domain of auditing. Management
control as part of the internal control environment will be examined by the
auditor.
The management control will examine for the internal audit (as for any
service) the validity of its budgets and the comparison with its
achievements.

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 c) Management audit

This is probably the best known audit among the general public, given the
revelations that conclude it. The management audit aims either to provide
evidence of fraud, embezzlement or waste, or to make a critical judgment on
a management operation or the performance of a person or 'a group of
people.

SECTION 2: THE AUDIT OBJECTIVES OR ASSERTIONS

Apart from the general audit criteria mentioned in section 1 (d), the
purpose of the financial audit mission is divided into seven (07) audit
objectives listed below, also called audit assertions.

Assertions are criteria used by management in the preparation of

financial statements.

The auditor, throughout his mission, must ensure that the transactions
and the elements that constitute the accounts meet one or more audit
assertions. These are also criteria to be applied by those preparing the
financial statements. They are also called assertions underlying financial
statements.

VS Completeness Completeness -
Completeness
AT Accuracy Accuracy
V Valuation Valuation (evaluation)
E Existence Existence
VS Cut off Separation of exercises
O Rights & Obligations Rights and Obligations
D Presentation & Presentation and
disclosure Information

1. Completeness (Completeness)

The auditor must check whether all operations (assets, debts and
transactions) have been recorded in the annual accounts, and that all
important facts have been mentioned there.

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 2. Accuracy

The objective of accuracy means that all the operations carried out by
the company must be recorded in the accounts for their exact amounts
(arithmetically and in accordance with accounting principles).

3. Evaluation

This valuation objective means that all transactions recorded must be

valued in accordance with generally accepted valuation principles and
methods. (Good method, application consistently).

4. Existence or reality

This objective means:

- For material elements (fixed assets stocks ...) a reality or
physical existence ;
- For the other elements (assets, liabilities, charges and income),
the translation of actual operations carried out (as opposed to
fictitious operations).

5. Separation of exercises (Cut off)

It aims for a good demarcation between successive exercises. It is a

question of attaching to each financial year all the income and expenses
which concern it (arising from the activity of this financial year) and only
these.

6. Rights and obligations

The assets or debts relate to the entity at a given date (by virtue of
rights actually acquired or obligations actually dependent on it. (Check title
deeds, deeds and agreements).

7. Presentation and information

This presentation and information objective means that the

transactions are presented in the accounts in accordance with generally

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accepted accounting rules in the matter, applied consistently. In addition, it
means that the financial statements are accompanied by all the information :
- Required by the texts, and
- Necessary for their understanding.
Thus, presented the audit approach is qualified as " Audit Objective Driven
".

SECTION 3 : AUDIT STANDARDS

1. Need for auditing standards

The performance of any audit assignment, whatever its objectives, implies
the prior existence of precise, formalized, known and accepted rules of the
issuers and receivers of the information subject to the audit : standards. IFAC
has issued international auditing standards (ISAs) that are expected to
establish global standards for auditing financial statements and auditing
other information and related services.
The main standards used by auditors are:
• Auditing standards, among which we generally distinguish:
- General or behavioral standards;
- Labor standards (which govern the nature and extent of
work); - Reporting standards.
• Financial reporting standards or accounting principles;
• Possibly standards specific to certain sectors: banking, insurance, etc.
International auditing standards include general or behavioral standards
(2) labor standards (3) and reporting standards (4).

2. General or behavioral standards

The auditor must respect the code of professional ethics published by IFAC,
in particular the following rules of ethics:
➢Completeness
➢Objectivity
➢Independence
➢Professional competence, care and diligence
➢Confidentiality

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 ➢Professionalism
➢Compliance with technical and professional standards.
a) Professional competence

The audit team must collectively have the required skills and experience:
adequate technical training and sufficient professional experience .
Assistants can participate in an audit mission, but they must be well aware of
the standards, supervised and controlled. The auditor must supplement his
initial training with continuous training contributing to the strengthening
of his competence.

b) Independence

The auditor and his team must be relieved of all constraints and of any
personal, professional, financial or even political link that could be
interpreted as constituting an obstacle to his integrity or their objectivity.

c) Professional secrecy

Duty of discretion in the use of any information of which they become aware
within the framework of their mission.

3. Labor standards

The audit work must be carried out with care, with good planning, scrupulous
respect of the calendars and supervision of the collaborators, the correct
maintenance of the files and working papers as means of proof of the audit
conclusions. (ISA 220 and 230).
The audit must include an assessment of internal control, quality control of
the audit engagement, consideration of the risk of fraud and error: (ISA 240),
of legislative and regulatory texts: (ISA 250), the collect sufficient evidence
etc.

4. Reporting standards

• Need to write opinion reports (certification or not);

• Report of recommendations on internal control and sometimes on
compliance with applicable laws and regulations;

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 • Special report for statutory auditor missions;
• Quality of the reports: dated and signed and discussed with the
managers of the audited entity.
5. Team work

Any audit mission is carried out by a hierarchical team of employees led by a

mandated manager. Each employee must be careful to work with the other
members by communicating the points of interest
identified and the difficulties encountered. Supervision of
employees' tasks by superiors is necessary. The structure of an audit team is
as follows:
• Responsible partner (or mandated manager);
• Supervisor (or Director)
• Head of mission
• Collaborators
• Assistants.
SECTION 4: THE CONCEPTUAL FRAMEWORK OF AUDIT MISSIONS

1. Repository for audit missions and related services

The conceptual framework of international auditing standards (ISA) lists the

different missions defined by the IFAC (International Federation of Chartered
Accountants). He distinguishes:
• Auditing (financial statements or other information);
• The related services that the auditor is required to perform.

Related services include:

• ISA 910 limited review engagements;
• Examination missions on the basis of agreed procedures ISA 920;
• Review of ISA 810 forecast information;
• ISA 800 special audit assignments;
• ISA 930 financial information compilation assignments.

a) Auditing the financial statements

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 In an audit engagement, the auditor expresses high assurance
(reasonable, but not absolute). This assurance is formulated in a positive way
(eg the financial statements give a true picture (or present sincerely in all its
significant aspects, the fair picture) of the financial situation.
ISA 120 defines the mission of auditing the financial statements as
having "the objective of enabling the auditor to express an opinion according
to which the financial statements have been established, in all material
respects, in accordance with an identified accounting framework "
The level of assurance provided by the accounting professional's
conclusion is high, but not absolute, assurance.
Absolute assurance in audit cannot exist, due to many factors, such as
the use of judgment, the use of survey technique, the inherent limits of any
accounting and internal control system and the fact that most of the
Evidence available to the auditor leads, by its nature, more to deductions
than to certainties.
This definition calls for the following remarks:
The auditor can be a public sector auditor or an independent
professional (auditor).
The audit can be completed:
• Within the framework of the country's legal provisions, or
• Under a contract: a company can submit to an audit performed
by an external auditor, for example at the request of a banker, a buyer
or an investor.

b) The limited examination (ISA 910)

The purpose of a limited review mission is to enable the auditor to

conclude, on the basis of procedures that do not implement all the due
diligence required for an audit, that no fact of significant importance has
been identified to him. suggesting that the financial statements have not
been prepared, in all material respects, in accordance with the accounting
framework identified.

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 The limited review implements investigations and analytical
procedures designed to assess the reliability of information intended for
another party.

In a limited review engagement, the auditor gives moderate assurance,

expressed in the form of negative assurance. (Ex. We have not noted any
facts which lead us to believe that the attached financial statements do not
give a true picture of the financial situation …)…

" Although the limited review involves the application of audit

techniques and procedures, as well as the collection of audit
evidence, as a general rule, it does not include the assessment of
accounting and internal control systems, the control of accounts
and responses to requests for information on the basis of
corroborative elements collected through inspections, observations,
confirmations and calculations, which are generally procedures
applied during an audit . ”

2. The accounting framework used

The basic accounting framework for auditing the financial statements is

constituted by the International Accounting Standards IAS / IFRS.

3. Related services

a) Examination on the basis of agreed procedures (ISA 920)

The auditor implements audit procedures defined by mutual

agreement between the auditor, the entity and the third parties concerned to
communicate the findings resulting from his work.
In the agreed procedural assignments, the auditor does not express
any assurance. The auditor simply draws up a report on the facts noted (or
factual observations), supplemented by the following formula:
" Given the fact that the procedures mentioned above do not
constitute an audit or a limited examination carried out in
accordance with international auditing standards, we cannot assure
you that the problems which could have been detected by an audit

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or a limited examination in accordance with international auditing
standards, have all been identified ”.
The users themselves assess the procedures implemented and the
facts presented and draw their own conclusions.

b) Compilation (ISA 930)

In a compilation mission no assurance is expressed. The opinion is expressed

with the following terms: “ On the basis of information provided by
management, we have prepared the balance sheet of ABC as of
December 31, 20xx. These statements have been prepared in
accordance with the international auditing standard relating to
financial information compilation assignments. Management is
responsible for these financial statements, which have not been
audited or reviewed by us. We therefore do not give any insurance
on these. "

4. Special audit missions

ISA 800 establishes fundamental procedures and principles for special audit
assignments relating to:
• Financial statements drawn up according to an accounting
reference different from International Accounting Standards or
National Standards;
• Accounts or headings of financial statements;
• Compliance with contractual clauses, and
• Condensed financial statements.
The auditor must collect and examine the audit evidence that can
serve as the basis for his opinion.

a) Report on financial statements drawn up according

to an accounting framework different from International
Accounting Standards

The basic accounting framework for auditing the financial statements is

constituted by the International Accounting Standards IAS / IFRS. Financial

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statements can be prepared to meet other specific objectives and be based
on a different accounting framework, namely:
• The one used by an entity to prepare its tax declarations; •
That of accounting on the basis of receipts / disbursements;
• Provisions enacted by a government authority.
The auditor's report must specify the accounting framework used or
indicate the note attached to the financial statements providing this
information.
The opinion must indicate whether "the financial statements have been
prepared, in all material respects, in accordance with these accounting
standards".

a) Reports on a section of the financial statements

The auditor may be asked to express an opinion on one or more

sections of the financial statements, for example trade receivables,
inventories, the calculation of a profit sharing paid to an employee, a
provision for tax on profits.
The report must indicate the section (s) concerned. It must take into
account the headings of the interdependent financial statements, which may
have a significant impact on the information concerned by its opinion. For
example sales and receivables, inventories and trade payables.
To avoid giving the user the impression that the report relates to all of
the financial statements, the auditor will inform the client that his report on
the item audited cannot be attached to the entity's financial statements.

b) Report on compliance with contractual clauses

An auditor may be asked to verify compliance by the entity with certain

contractual terms of an agreement, for example bond issue contracts or loan
contracts.
These agreements generally oblige the entity to comply with provisions
relating to the payment of interest, the maintenance of specified financial
ratios, the limitation in the payment of dividends or the re-use of the sale of
goods.

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 The auditor must express in his report an opinion as to whether the
entity complies with the specific clauses of the agreement.

c) Report on condensed financial statements

The condensed financial statements are presented in much less detail

than the annual financial statements. In his report, the auditor will warn
readers that for a better understanding of the financial situation and the
results of the entity, they should be read in conjunction with the audited
financial statements which provide all the information required by the
applicable accounting standards.
It will indicate the audited financial statements from which the
condensed financial statements were prepared.
Since the condensed financial statements do not contain all the
information required by the accounting standards used, the expressions
"fairly presented" or fairly present, in all their significant aspects, are not
used by the auditor to express an opinion on these statements.

d) Missions to examine forecast financial information

The ISA 810 standard applies to the examination of forecast financial

information and not to the examination of information expressed in general
or narrative terms (Management speeches, analyzes contained in the annual
report).
In a mission to review forecast financial information, the auditor must
gather sufficient audit evidence enabling him to assess whether:
 The assumptions used by management are not unreasonable
and that the theoretical assumptions are consistent with the objective;
 The forecast financial information is prepared satisfactorily on
the basis of the assumptions adopted;
 Significant forecast financial information is correctly described in
the notes to the financial statements and if it is indicated that these
are the most plausible hypotheses or theoretical hypotheses; and
 The forecast financial information is prepared in a manner
consistent with the historical financial statements.

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 Forecast financial information can take the form of forecasts,
projections or a combination of both, for example a one-year forecast
combined with a five-year projection.

SECTION 5: AUDIT RISK AND MATERIALITY

When issuing an opinion on the annual accounts, the auditor runs the
risk that one of the objectives previously defined is not (in whole or in part)
fulfilled and that this results in an undetected significant error.
This risk is due, on the one hand to the peculiarities of each company,
on the other hand to the auditor himself.
The final audit risk describes the risk of the auditor expressing an
inappropriate opinion on the financial statements. It is the risk that
significant errors remain in the accounts and that the auditor, not having
detected them, formulates an erroneous opinion. For example, the auditor
does not make reservations in his report (or certify) financial statements with
material inaccuracies.

The components of audit risk are:

1. The inherent risk (IR)

It is the possibility that the balance of an account or a category of

transactions contains inaccuracies due to:
• The (complex) nature of the company's activity and sector of
activity, for example, the case of a bank or an insurance company;
• Its environment and the regulations applicable to it.

2. The risk of control (RC)

It is the possibility that the balance of an account or a category of

transactions may contain material inaccuracies that the company's internal
control system cannot prevent or detect in a timely manner. Control risk is a
function of the effectiveness of the company's internal control. If the internal
control system is efficient, the risk of control is therefore reduced.

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 3. The risk of detection (RD)

It is the possibility that the procedures used by the auditor do not allow
him to detect inaccuracies which are present in the balance of an account or
in a category of transactions, (inaccuracies which may be significant). This
risk depends on the level of effectiveness of the auditor's verification
procedures.

4. The overall mission risk (GR)

The application of the overall risk level of the mission is expressed by

the formula :

Overall risk = inherent risk x control risk x detection risk

RG = RI x RC x RD
The auditor assesses the inherent risk and the control risk in order to
determine the degree of detection risk required to minimize the overall risk
of the mission and bring it down to an acceptable level.
The overall audit risk management model is given in the table below,
leading to the same result as above:
Auditor's assessment of control risk
Assessment of inherent
risk by the auditor Student Way Low
Student Maximum Student Way
Way Student Way Low
Low Way Low Minimum

The audit approach thus developed is called a risk-based approach or

"Risk Based ".

5. Materiality in audit

The auditor cannot conduct a full audit of the business.

The main purpose of the audit is to obtain reasonable assurance that
the financial statements are free from material misstatement.
It is in this perspective that the auditor must set the materiality (or
materiality) threshold in the context of the conduct of his work.

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 In audit, the materiality threshold refers to the degree of information
that the auditor must obtain in order to reach a certain level of confidence
linked to the fact that the financial statements do not contain significant
errors.
It is said that the materiality threshold is reached when the importance
of an omission or an inaccuracy in financial information is such that it could
have the probable consequence of influencing the judgment of a user of the
financial statements or of change his decision.
The auditor assesses the materiality threshold at different levels:
• When determining the nature, scope and schedule of its audit
work;
• When assessing the impact of the identified adjustments on the
financial statements;
• When assessing the appropriateness of the presentation of
financial information (in the accounts, in the report).
The materiality threshold is defined in relation to its impact on the
financial statements.

CRITERIA FOR ESTABLISHING THE MEANING THRESHOLD

According to two types of criteria, quantitative and qualitative.

1. Quantitative criteria

It consists in measuring the impact of an element compared to a baseline.

Some references :
• Final or intermediate result (net profit, gross profit, total
assets).
• Restated profit (profit not taking into account extraordinary
and exceptional items).
• Average result or normal result (average net profit for the
last five (05) years).
• An item in a financial statement with which the item is
associated (turnover by financial year).
• The balance of the account to which the item belongs.

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 • The effect of the element on certain financial coefficients
(FR, net earnings per share).
Can be considered significant, any element alone or with others:
• Which changes the previous result ≥ 10%
• Which changes the amount of the item concerned ≥ 10%.
These thresholds can be lowered or raised to take into account the
amounts involved.

2. Qualitative criteria

• Characteristics of the environment (socio-economic political context).

• Characteristics of the business (nature of operations, trends in results).

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 CHAPTER TWO: STATUTORY REGULATIONS ON
AUDITORS
A good number of statutory regulations have been put in place to regulate
the auditing profession. The aim of these regulations is to ensure that:
✓ Only persons who are properly supervised and appropriately
qualified are appointed auditors, and
✓ Audits by persons so appointed are carried out properly and with
a proper degree of assurance.
QUALITIES REQUIRED OF AN AUDITOR Auditors describe
themselves as Chartered Accountants, or Certified
Accountants,
or just as Accountants. An auditor refers either to a Sole
Practitioner holding a valid practising certificate or a member of a
partnership qualified to act as auditors.
Individuals who are authorised to conduct audit work may be sole
practitioners, partners in a partnership, or directors of an audit firm. To be
qualified to act as an auditor, a person must be:
✓ A member of a Recognised Supervisory Body (RSB), for instance
ONECCA, ACCA, CIMA, ICPAK ..., and
✓ Be allowed by the rules of that body to be an auditor, or ✓ Someone
directly authorised by the state.
To be eligible to act as auditor, a firm must be:

✓ Controlled by members of a suitably authorised supervisory body, or

✓ A firm directly authorised by the state.

The law in most countries excludes those involved with managing the
company and those who have business or personal connections with them to

32
act as auditors of the company. For instance, the following are excluded by
law from acting as auditors of a company:

✓ An officer of the company (Director or Secretary),

✓ An employee of the company,

✓ A business partner or employee of the above,

✓ Those whose objectivity and independence might be questioned by

external parties because of business relations, personal relationships,
long association with the client, fee dependency, or non audit services
provided.

An auditor needs to possess four main qualities: independence,

competence, integrity, and confidentiality.

Independence
An auditor cannot give an unbiased opinion unless he is independent
of all the parties involved. Total independence is impossible in that the
auditor receives his fees from the client. Nonetheless, independence is very
important. Not only must the auditor be independent in fact and in attitude
of mind, but must also be seen to be independent.
Competence
An auditor must have been thoroughly trained and proven his
competence before he can sign an audit report. By law, only members of
certain professional bodies can become auditors of limited companies. These
professional bodies include:

✓ The Association of Certified Chartered Accountants of CEMAC, The

National Council of Auditors and the National Order of Chartered Certified
Accountants of Cameroon
(ONECCA) – for Cameroon and the CEMAC zone)

✓ The French Order of Chartered Accountants and the French Association

of Auditors – for France,

✓ The Chartered Institute of Management Accountants (CIMA), the

Association of Chartered Certified Accountants (ACCA) – for the United
Kingdom.

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 ✓ The American Institute of Chartered Public Accountants (AICPA) – for
the United
State
s, ✓ Etc.

These professional bodies have developed competence in their

members by using difficult examinations, post qualifying education, the
publication of auditing standards and guidelines and the insistence of at
least a certain number of years of practice before a practising certificate is
given.
Integrity
Qualified accountants are renowned for their honesty, discretion and
tactfulness.
Auditors authorised by their professional bodies to conduct audits are known
as Registered Auditors. Registered Auditor firms are supervised and
inspected by their professional bodies acting as supervisory bodies.

Confidentiality
According to this rule of professional conduct, information acquired in
the course of professional work should not be disclosed except where
consent have been obtained from the client or other proper source to do so,
or where there is a public duty to disclose, or where there is a legal or
professional right or duty to disclose. A member acquiring information in the
course of professional work should neither use nor appear to use that
information for his personal advantage or for the advantage of a third party.
The Appointment of Auditors
In most jurisdictions, auditors are only appointed by members or
shareholders in general meetings.

✓ Appointment at General Meetings: at each general meeting at

which the accounts of a company are to be laid before the members, the
company shall appoint an auditor to hold office from the conclusion of
that meeting until the conclusion of the next general meeting at which
accounts are laid before the members. A retiring auditor may be
reappointed at the general meeting.

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 ✓ Appointment other than at general meetings: Directors can
appoint the first auditor, or should the office of auditor become vacant
during the year, then the directors may appoint someone to fill what is
described as the “casual vacancy”. This needs the approval of members
at the next AGM.
Once appointed, it is the auditor’s duty to report to the members of
the company on the accounts examined by him and laid before the company
in general meetings. To enable him to carry out this duty, the law gives the
auditor a right of access to the records of the company and the right to
require information and explanations from the directors and other officials of
the company.
To be qualified for appointment as auditor, the person must be:

✓ A member of an established and recognised body of accountants.

✓ Authorised by the Minister of Economic or the competent authority as

eligible for appointment.
The following persons are not qualified to act as auditors:

✓ An officer or servant of the company; where in this connection an

officer of the company includes a director, manager or secretary.

✓ A person who is a partner of, or is the employee of, an officer or

servant of the company.

The removal of an auditor

The provision for removal of the auditor places the authority for
removal with members in general meeting.
The aims of this provision are:

✓ To preserve the right of the members to appoint the auditor of their

choice;

✓ To preserve the auditor’s independence of the directors by not

permitting directors who may be in disagreement with the auditor, to
dismiss him.

Resignation of Auditors
In practice, if the auditor and management find it difficult to work
together, the auditor will usually resign. To prevent the circumstances of the

35
resignation being hidden from the members of the company, the auditor
have to submit a statement of the circumstances surrounding his
resignation.
The responsibility of auditors
The auditor has the following responsibilities on appointment or on
removal / resignation:

✓ On appointment:

– To obtain clearance from the client to write to the existing

auditor, if denied, the appointment should be declined.

– To write to the existing auditor asking if there are any reasons

why the appointment should not be accepted.

✓ On removal / resignation:

– To deposit at the company’s registered office a statement of the

circumstances connected with the resignation or removal; or

– A statement that there are no such circumstances.

– To deal promptly with requests for clearance from new auditors.

The rights of auditors

The auditor is given the following rights by law:

✓ A right of access at all times to the accounting records, accounts and

vouchers of the company and any such information and explanations as
the auditor considers necessary for the performance of his duties.

✓ A right to attend any general meeting of the company and to receive

all notices of, and communication relating to, any general meeting which
any member of the company is entitled to receive.

✓ A right to be heard at any general meeting which he attends on any

part of the business of the meeting which concerns him as auditor.

✓ On resignation, a right to request an EGM of the company to explain

the circumstances of the resignation and to request the company to
circulate the notice of circumstances relating to the resignation.
These rights are given to the auditor to enable him to carry out his
duties to the members. He can visit his client’s offices at any time, without

36
formal prior notice, inspect the company’s accounting records or to carry out
surprise checks. The matters on which the auditor has a right to require
information and explanations are left to the direction of the auditor rather
than that of the directors.
The Remuneration of Auditors
The remuneration of the auditor shall be fixed by the company in general
meeting, or in such manner as the company in general meeting may
determine. However, if appointed by the directors, this may be fixed by the
directors.

The Duties of Auditors

The fundamental duties of the auditor are;

✓ To form an opinion on whether the financial statements give a true and

fair view and are prepared in accordance with applicable reporting
framework, ✓ To issue an audit report.
Matters implicit in the audit report and which the auditor has a duty to check
are
that:
✓ The company’s financial statements agree with the underlying
accounting records, ✓ Proper accounting records have been kept.
✓ All necessary information and explanation have been obtained.

✓ Information issued with the financial statements is consistent with the

financial statements.

✓ Other information required by law if not included in the financial

statements is included in the audit report.

Auditors rules of professional conduct

Auditing is carried out by accountants in public practice. Accountancy
is a profession. Professions have certain characteristics including an ethical
code and rules of conduct.

37
 The rules are found in the handbooks issued to all members. These
handbooks are known as the Rule Book. The rules of professional conduct
are treated under two headings:
✓ The fundamental principles, and

✓ Professional ethics or general rules.

Fundamental Principles
The fundamental principles generally apply to all members of
professional bodies. The four fundamental principles are:

a. Members should behave with integrity in all professional, business and

personal financial relationships. Integrity implies not merely honesty but
fair dealing and truthfulness.

b. Members should strive for objectivity in all professional and business

judgments. Objectivity is the state of mind which has regard to all
considerations relevant to the task in hand but no other. It presupposes
intellectual honesty.

c. Members should not accept or perform work which they are not
competent to undertake unless they obtain such advice and assistance as
will enable them competently to carry out the work.

d. Members should behave with courtesy and consideration to all with

whom they come into contact during the course of performing their work.
Professional Ethics – General rules
Professional accountants are required to observe proper standards of
professional conduct whether or not the standards required are written in
the rules or are unwritten. They are specifically required to refrain from
misconduct which is difficult to define precisely but which includes any act or
default which is likely to bring discredit on himself, his professional body or
the profession in general. Integrity is vital. Synonyms for integrity include
honesty, uprightness, probity, moral soundness, or rectitude. Generally, the
professional codes of conduct to be highlighted include:

✓ Independence,

✓ Conflicts of interest,

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 ✓ Advertising,

✓ Obtaining professional work,

✓ Remuneration,

✓ Insider dealing,

✓ Money laundering, ✓ Whistle blowing.

Independence
An auditor’s objectivity must be beyond question when conducting an
audit. An auditor must always approach his work with integrity and
objectivity. The approach must be in a spirit of independence of mind. The
following matters will threaten or appear to threaten the independence of an
auditor:
a. Undue dependence on an audit client.
Also known as fee dependency, public perception of independence
may be put in jeopardy if the fees from any one client or group of connected
clients exceed 15% of the gross practice income or 10% in the case of listed
or other public interest companies.
b. Family or other personal relationships.
It is desirable to avoid professional relationships where personal
relationships exist. Examples of personal relationships include mutual
business interests with members of the group comprising the client, the
audit firm, officers or employees of the client, partners or members of staff
of the audit firm.
c. Beneficial interests in shares and other investments.
In general, partners, their spouses and minor children should not hold
shares or have other investments in client companies. An audit staff member
should not be employed on an audit if the staff member or some person
connected with him has a beneficial interest in the audit client. Some
company articles require the auditor to have a qualifying shareholding. In
such cases the minimum only should be held and the holding should be
disclosed in the accounts.

d. Loans to from clients.

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 An auditing practice or anyone closely connected with it should not
make loans to its clients nor receive loans from clients. The same applies to
guarantees. Overdue fees may in some circumstances constitute a loan.
e. Acceptance of goods and services.
Goods and services should not be accepted by a practice or by anyone
closely connected with it unless the value of any benefit is modest.
Acceptance of undue hospitality poses a similar threat. A bottle of scotch at
Christmas is acceptable but a weekend in Paris would probably not be.
f. Actual or threatened litigation.
Litigation or threatened litigation (e.g. on auditor negligence) between a
client company and an audit firm would mean the parties being placed in an
adversarial situation which clearly undermines the auditor’s objectivity.
g. Influences outside the practice.
There is a risk of loss of objectivity due to pressures from associated
practices, bankers, solicitors, government or those introducing business.
h. Rewards from client
Auditors should not allow their judgment to be swayed by the receipt
of a commission, fee or other reward from a third party as a result of
advertising a client to pursue one course rather than another. If a
commission is to be received, the accountant should either give it to the
client or, with the client’s express or implied consent, retain it. If it is to be
calculated, should be disclosed to the client, preferably in the letter of
engagement. The client must assent to retention.
Audit firms should review on an annual basis every client to determine
if it is proper to accept or continue an audit engagement, bearing in mind
actual or apparent threats to audit objectivity. The rules of the Financial
Services Act must always be followed.
Conflicts of interest
Conflicts of interest can arise between an accountant and his client.
Conflicts of interest can arise between a client and another client, and an
accountant should not act for both parties if the parties are in dispute. For
example the accountant may be called upon to advice two clients who are

40
tendering for the same contract. Or he may be advising a company and one
of its directors who are in dispute. In all such cases, the accountant should
not accept assignments where he is put in a position where he must advise
both sides. On the other hand, he may well be able to put forward proposals
to settle the dispute.
Specific examples of conflict of interest include:

a. Provision of other services to audit clients. It is customary for

auditors in many cases to provide other services as well as the audit,
for example preparing accounts. This is perfectly acceptable providing
the service does not involve performing executive functions or making
executive decisions. For example discussing the annual dividend
decision with the board would be an executive action and hence
acceptable.

b. Preparation of accounting records. Care should be taken that the

client takes responsibility for the work done and that objectivity in
auditing is not impaired. The accounting records of public company
clients should not be prepared by the auditor.

c. A practice should not report on a company if a company

associated with the practice is the company secretary to the client.
However, it is acceptable to provide assistance to the company
secretary.

d. No person in an accounting firm should take part in the reporting

function (i.e. take part in the audit) if he or she has in the accounting
period or in the previous tow years been an officer or employee of that
company.

e. Receivership, liquidation and audits. In general auditors should

not accept receiverships or liquidator ships of client companies without
a three year gap between the assignments. Clearly a liquidator of a
company would be inhibited from taking a negligence action against
the auditor if he had himself been the auditor.

41
 Advertising and publicity
There are still considerable restrictions on advertising including the facts
that any advertisement should not:

a. Bring into disrepute himself, any member of his professional

body, his firm or the accountancy profession in general.

b. Discredit the services of others by for example claiming

superiority;

c. Contain comparisons with other members or firms;

d. Be misleading, either directly or by implication;

e. Fall short of the Advertising Standards Authority as to legality,

decency, honesty and truthfulness.

f. Adverts may refer to the basis on which fees are calculated.

However, no hourly or other charging rates are permissible. This
month’s special cheap offer’ will not appear in accountants’ adverts.
None of these means that accountants’ advertisements need be dull or
unimaginative. Many firms have put out exciting adverts but whether they
are also
‘attractive’ or not yet clear.
In the past, accountants were required to be very anonymous in public
matters. The rules are now less restrictive but there are still some
prohibitions. A general prohibition is on any publicity which would bring the
accountant, his professional body or the profession, into disrepute.

Obtaining professional work

Accountants may now advertise for work and engage in other forms of
publicity, for example by posters or hoardings or motor vehicles, on
sportswear or by sports sponsorship. However, accountants may not give
any commission, fee or reward to a third party for introducing clients. Such
commissions may, however, be paid to his employees or other practicing
accountants.
Remuneration
The normal basis for charging for professional work is on the time
spent on the work calculated at appropriate hourly rates. The hourly rate

42
may vary according to the difficulty or complexity of the work involved. It is
up to the accountant to decide upon his hourly rates depending on his cost
structure, greed, market conditions, etc. It is not permissible to charge :

a. On a percentage basis except where statute or custom allows; e.g. in

liquidation and receivership work. Many accountants are jealous of the
percentage charging method of estate agents, architects, solicitors, etc.,
but these professional people generally do not have recurring work from
clients and continually need to see new clients. In any event other
professionals also charge flat rates nowadays.

b. On a contingency basis. This means accountants cannot accept work

on a percentage of tax save basis or any similar.
It is possible to charge on a contingency basis where the client’s
capacity to pay is dependent on the success or failure of the venture.
Examples could be advising on a dependent on the success or failure of the
venture. Examples could be advertising on a management buy-out or the
raising of venture capital.
Accountants who receive commissions from stockbrokers, insurance
brokers, etc. for transactions effected for clients or for trusts of which the
accountant is a trustee should either:
a) Pass on the commissions to the client or trust by deducting the
amounts received from his fee invoice and showing the deduction.

b) Keep the commissions if he has been specifically authorized to do so

by the client.

Insider dealing
Insider dealing is illegal and contrary to the ethical rules. People who during
the course of their work come across unpublished price sensitive information
are prohibited from dealing in securities to which that information relates.
Unpublished price sensitive information covers specific matters not generally
known to those who normally deal on the stock exchange but which if it
were known to them would alter the prices of those securities to which the
information relates.

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 Money laundering
Money laundering is the process by which criminals try to make the
proceeds of their crimes appear ‘clean’. To do this, they need the services of
others such as banks, accountants, and lawyers. Accountants may not assist
others to retain the benefit of criminal conduct and they must report
knowledge or suspicion of money laundering relating to drug trafficking or
terrorism.
Accountants normally have procedures to identify clients and to ensure
they are what they purport to be. Partners and staff need training to
recognize suspicious clients and transactions. Evidence of identity of clients
should be kept for at least five years and many firms have a ‘Money
laundering Reporting Officer’ to deal with the whole matter.
Whistle blowing
Whistle blowing means informing the proper authorities of some breach of
law or regulation. It is an issue for any employee who feels compelled to tell
the proper authorities of some wrongdoing by his employers but fears being
dismissed if he does. It is also an issue for auditors. There are three issues
for auditors.

a. Breaches of law or regulation may have an impact on the financial

statements.
b. Breaches of law or regulation may need to be reported to the proper
authorities in the public interest.

c. Breaches of law or regulation may in certain circumstances need to be

reported immediately to the proper authorities as a statutory
requirement.
The rulebook spells out requirements for b. and c. and SASs 120 and
620 have detailed requirements.
There are statutory duties to report immediately any breach of law or
regulation in connection with money laundering and to regulators under the
financial services act. Failure to report may be a criminal offence.
Where the auditor comes across a situation where a breach of law or
regulation has occurred and she feels that this should be reported to the

44
proper authorities in the public interest but there is no specific statutory
duty report, the auditor should:

a) Take legal advice ;

b) Discuss the matter with the Board of Directors ;
c) Request that the Board disclose the matter to the proper
authorities ;
d) If they fail to do so, inform the proper authorities themselves.

CHAPTER THREE : INTERNAL CONTROL

1. NATURE OF INTERNAL CONTROL

Internal control in defined by the Auditing Practices Board (APB) as
« the whole system of control, financial or other wise, established by the
management in order to carry on the business of the
company/enterprise in an orderly and efficient manner, ensure
adherence to management’s policies, safeguard the assets and secure
as possible the completeness, accuracy and reliability of records ».
The important elements of this definition can be considered in detail as
follows:

45
- The whole system: internal controls can be perceived as single
procedures (for
e.g clerk A checks the calculations performed by clerk B) or as a
whole system

- Financial or otherwise: includes both the putting in place of means

of financial and other control. For example financial would include the
use of control accounts and otherwise may include physical access
restriction to data processor terminals

- Established by the management: Internal control system are

established by the management either directly or by means of
external consultants, internal audit, accounting personnel, or external
auditors may be asked to advice on the setting up of system.

- Management Policies: particularly envisaged here are policies on

costs, expenses, and revenues which are expressed in the form of
budgets. Adherence to the budget is achieved by procedures such as
variance analysis.

- Safeguarding of assets: it is unacceptable to allow assets to be

broken, lost or stolen and as such procedures to safeguard them have
to be devised. For example locks and keys, keeping assets registers
regularly reviewing debtors balances, overseeing that payment are
only made or liabilities are only set up where benefits have been
received.

- Completeness, Accuracy and Reliability of Records: all

transactions should be recorded and processed. Procedures which do
this include checks that all goods leaving the warehouse have delivery
notes, followed by regular comparison of invoices with notes to see
that no goods sold (evidenced by a delivery note) have failed to result
in an invoice. Accuracy can be achieved by; checking the clerks, inter-
checking their works, the use of control accounts, and independent
comparison of two sets of records such as stock records and stock.
“Internal controls are methods or procedures adopted in a
business to:
✓ Safeguard its assets

46
 ✓ Ensure financial information is accurate and reliable

✓ Ensure compliance with all financial and operational requirements

✓ And generally assist in achieving the businesses' objectives”.

2. SCOPE OF INTERNAL CONTROL

Many organizations have adopted the internal control concepts
presented in the report of the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Published in 1992, the COSO report
defines internal control as:
“ process, effected by an entity's board of directors, management and
other personnel, designed to provide reasonable assurance regarding
the achievement of objectives in the following categories:

• effectiveness and efficiency of operations,

• reliability of financial reporting, and
• compliance with applicable laws and regulations”.
In the nutshell, internal control is the set of processes put in place to
make sure things stay on the right track.
It is for management to determine the extent to which internal
controls are to be applied within the organization. There are numerous
factors to be considered:
a) the nature, size and volume of transactions;

b) the geographical distribution of the enterprise;

c) the controls exercised personally by individual members of

management; and
d) the cost of setting up controls and the benefits obtained thereby.
Thus the auditor’s approach to evaluating the internal control
system will depend on the type of business. The following factors will
need to be considered:
i. Smaller businesses
Are the proprietors able to intervene directly? This will assist in
preventing and detecting errors.

47
 However, if this is the case, there is the risk that internal controls
may be overridden for the proprietor’s benefit, to the detriment of the
business.
Therefore, the auditor may decide not rely on internal controls.
ii. Larger businesses
The prevention of errors and fraud is of paramount importance.
Procedures are likely to be more formalized than for a smaller
business, so that direct intervention, with its attendant benefits and
risks, is less likely.

3. THE PURPOSE OF INTERNAL CONTROL

The purpose of internal control is implied by the definition given
earlier, to help management achieve the entity’s objectives, especially in
terms of ensuring:

• the orderly and efficient conduct of the business

By creating internal controls, managers establish protocols and
procedures their staff must follow in performing their day-to-day work
duties. These established protocols help bring order and cohesiveness to
companies, as everyone knows what's expected, as outlined in the internal
controls.

• the safeguarding of assets

Not allowing assets to be broken, stolen or lost. Procedures are
always devised to safeguard them, such as: usage of cameras, locks,
physical barriers, keeping of a plant register, regular reviews of debtor
balances, having firewalls and protective devises on computer systems,
etc.

• the prevention and detection of fraud and error

Establishing internal controls can help companies prevent or reduce
fraud and theft within their organizations. Internal controls can include
activities such as reconciling bank statements and internal audit reviews,
which can uncover whether the company's money is being
misappropriated by management or employees.

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 • the accuracy and completeness of the accounting
records
Ensuring the financial statements accurately reflect the affairs of the
business:
all assets and liabilities actually exist, all rights and obligations are
included through the following types of controls: number documents such
as cheques sequentially to avoid duplication, regular reconciliation of
accounts, etc

• the timely preparation of reliable financial information

Compliance with the adequate financial reporting framework which defines
the time and manner of reporting.

• Uphold Sarbanes-Oxley Act

The Sarbanes-Oxley Act stresses the importance of public companies

maintaining internal controls when it comes to their financial reporting.
The act requires that public companies, small and large, include details on
the company's internal controls inside of their annual reports. This
information is beneficial to investors and helps prove the integrity of a
company's financial data and the management of it.
4. TYPES OF INTERNAL CONTROL
Internal control can be said to be:
• Detective: Designed to detect errors or irregularities that may have
occurred.
• Corrective: Designed to correct errors or irregularities that have
been detected.
• Preventive: Designed to keep errors or irregularities from occurring
in the first place.
Internal control may be classified under two headings:

- internal accounting controls: those controls that are relevant to

the expression of an audit opinion on financial account;

- Operational control: those control which are not relevant to the

expression of an audit opinion on financial accounts. For example,
procedures to monitor actual procedures against the procedures
plan.

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The operational auditing guideline on internal control puts forward eight
features or categories of internal control.
i) Organizational Controls: An enterprise should have a plan of
organization which should define and allocate responsibilities. That is,
there must be a well-defined organizational structure showing how
responsibilities and authority are delegated.

ii) Segregation of Duties: A foundation form of control in any

enterprise is the segregation of responsibilities so that no one person
can fully record and process a transaction. The involvement of several
people reduces the risk of intentional manipulation or accidental error
and increase the element of checking of work.

iii) Physical Control: There are concerned with the custody of assets and
records are concerned with insuring that assets and records is only
permitted to authorized personnel. These controls are especially
important in the case of valuable, portable, exchangeable or desirable
assets. Examples are the locking of securities (share certificates etc) in
a safe and keeping of bills in billfolds with procedures for the custody
of use of the keys use of passes to restrict access to the warehouse,
use of passwords to restrict access to particular computer files. iv)
Authorization and Approval: This is a special case of organizational
control. All transactions should require authorization or approval by an
appropriate person and the limits to these authorizations should be
specified for example: - The credit control departments should approve
all credit sales.

- All overtime must be approved by the works manage.

- All individual office stationery purchases may be approval by

the office manager up to a limits of XCFAF, higher purchases
must be approved by the chief accountant
v) Arithmetical and Accounting: This control include those that
check the arithmetical accuracy of records such as control, cross
totals, reconciliations, sequential controls over documents
(accounting for documents) and trial balance. Example

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 - Clerk a checking the extensions of a sales invoices the extensions
having been made by clerks B;

- An official in the accounting department independent of the cash book

officials, making a bank reconciliation:

- An accountant independent of the sales ledger function making sales

ledger control account;

- A clerk in the purchases department examining purchase requisitions

to ensure that they are correct complete and authorized before
making out the order

- A clerk in the accounting department comparing incoming purchases

invoices with copy order forms and goods received/inwards notes

- An accounting official going through the goods outward/ issue records

to verify that all have been followed by an invoice

- Checking that the internal source document are in numerical

sequence (if a cash sales invoice is missing for instance a clerk may
have made a sale and misappropriated the cash received)

vi) Personnel: The proper functioning of a system depends upon the

employment of well motivated, competent personnel who posses the
necessary integrity for the talk measures include appropriate
remuneration, promotion and career development prospects,
assignment to talk of the right level.
vii) Supervision: An important aspect of any control system is the
existence of supervisory procedures by the management. All action,
by all levels of staff should be supervised. The responsibility for
supervision should be clearly laid down and communicated to the
person being supervised.
viii) Management Control: These are controls exercised by the
management outsides the day to day routine of the system. These
include the use of monitoring procedures through the use of
budgeting control and others management accounting techniques as
well as the provision of internal audit procedures

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 In addition to the above categories of control which appear in the
guideline, two other important categories of controls are;

- Acknowledgement of performance: persons performing data

processing operations should acknowledge their activities by means of
signature, initials and stamps etc
- Budgeting: The use of budgets is a common control technique.
Agreed budgets (quantitative plans of actions) can be compared with
actual turn out and differences investigated.

5. THE FIVE COMPONENTS OF INTERNAL CONTROL

In 1992, COSO published the report Internal Control--Integrated
Framework as a
"basis for developing business control systems and assessing their
effectiveness" (Internal Control Issues). This report provides the
following five components of internal control:

• Control Environment;
• Risk Assessment;
• Control Activities;
• Information and Communication;
• Monitoring.
i. The control environment: The control environment relates to the
control consciousness of the people within the organization. The
control environment is the basis (foundation) for all other components
of internal control, providing both discipline and structure to the
organization.
The following meaning is equally attached to the control environment:
“The control environment is concerned with the actions, policies, and
procedures that reflect the overall attitude of the client’s top
management, directors, and owners of an entity about internal control and
its importance”.
The control environment is all about management having a right
attitude. (ISA 315).
The following values play key parts in the control environment
component:

52
 - Communication and enforcement of ethical values;
- commitment to competence;
- participation by those charged with governance (board of
directors and audit committee);
- management’s philosophy and operating style;
- management need to have awareness and action in place;
- organizational structure;
- assignment of responsibility;
- human resource policies and practices – staff training,
recruitment procedures etc.

ii. Risk Assessment - refers to the organization's identification, analysis,

and management of the risks that are related to financial statement
preparation, in order to ensure that financial statements are presented
fairly and in compliance with generally accepted accounting principles
(GAAP).
iii. Control Activities - the organization's policies and procedures which
help ensure that necessary actions are taken to address the potential
risks involved in accomplishing the entity's objectives (including
financial reporting objectives).
Control activities simply referred to as “measures put in place by
management to prevent irregularities”.
In essence, control activities are established in response to
perceived risks. The table below summarises control activities:
S/ Nature of control
Meaning / further explanation / example
N° activity
A senior employee like a manager to sign off an
action. e.g. and employee wants to do overtime, a
manager should authorise this in advance.
There two types of authorisaton: general and
specific.
❖ General authorization is permissible for
routine events for which there are policies to
follow.
Approval also known ❖ For some transactions specific authorization is
1 as authorisation needed on a case-by case basis.

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 2 Computer controls Having passwords, backups, virus checks.
Looking at budget versus actual and reviewing for
variances, any variances should then be
3 Comparison investigated.
Check procedure: recalculating an employee work,
4 Arithmetic controls sequence checking.
Maintain and review Like receivables, wages, PAYE, bank.
5 control accounts
Account
6 reconciliations
Physical controls Restricted access, either through locking doors, or
7 code entry, CCTV (closed circuit TV), safes.
Separation of the functions of authorization,
❖
recordkeeping, and custody to reduce the
risk of fraud. E.g. one person dealing with
ordering, processing purchase invoices and
bank payments is a lack of segregation of
8 Segregation of duties duties, different people should process
different stages of a system.
Splitting the responsibility on a transaction
stream.
❖ Separating IT duties from User Departments
The above control activities can be easily memorised while making use of
the mnemonic “ACCAMAPS”. This is made up of the first letters of the
eight above control activities. Some other control activities include:

a. Adequate documents and records consisting of:

i. Prenumbered consecutive documents so missing items are noticed

ii. Prepared as near to transaction time as possible

iii. Good design with instructions and appropriate spaces*

b. Independent checks on performance: Personnel are likely to

forget or intentionally fail to follow procedures, or they may
become careless unless someone observes and evaluates their
performance.

iv. Information and Communication - focuses "on the nature and

quality of information needed for effective control, the systems used to
develop such information, and reports necessary to communicate it
effectively" (Internal Control Issues).

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 Methods used to initiate, record, process, and report an entity’s
transactions and to maintain accountability for related assets.
❖ For a small company with active involvement by the owner, a
simple computerized accounting system that involves one honest,
competent accountant may provide an adequate accounting
system.
❖ A larger company requires a more complex system that includes
carefully defined responsibilities and written procedures.
v. Monitoring - involves assessing the quality and effectiveness of the
organizations internal control process over time. It includes assessing
the design and operation of controls, and assessing compliance with
policies and procedures. It also provides for the implementation of
appropriate actions when necessary.
❖ For many companies, especially larger ones, an internal audit
department is essential for effective monitoring.
❖ To maintain internal audit independence, it is imperative that
they be independent of operating and accounting departments; and
that they report to a high level of authority, preferably the audit
committee of the board of directors.

To conclude, it is a CRIME not to have good internal controls. The

word CRIME enables the memorization of the five components of internal
control. The letters it carries stand for:
C = Control activities
R = Risk assessment
I = Information and communication
M = Monitoring of controls
E = Environment
6. RESPONSIBILITY FOR INTERNAL CONTROL
Everyone in the organization has a responsibility in the internal control
structure. The COSO designates each party’s role and responsibility as
follows:

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i. Management – the chief executive officer (the top manager) of the
organisation is ultimately responsible and should assume “ownership” of
the system. He has overall responsibility for designing and implementing
effective internal control to:
• safeguard the company’s assets;
• enable financial statements which give a true and fair view to be
produced;
• prevent and detect fraud.
More than any other individual, the chief executive sets the “tone at
the top” that affects integrity and ethics and other factors of a positive
control environment. ii. Audit Committee – management is accountable
to the audit committee which provides governance, guidance and
oversight.
iii. Internal Auditors – internal auditors play an important role in
evaluating the effectiveness of control systems and contribute to ongoing
effectiveness. The internal audit function also plays a significant
monitoring role.
iv. Other personnel – internal control is, to some degree, the
responsibility of everyone in an organization and therefore should be part
of each person’s job description. Virtually all employees produce
information used in the internal control system or take other actions
needed to effect control. All personnel should be responsible for
communicating problems in operations, noncompliance with the code of
conduct, policy violations or illegal acts.

7. THE EXTERNAL AUDITOR AND INTERNAL CONTROL

The external auditor does not assume any level of responsibility for
internal control. They measure the effectiveness of internal control
through their efforts. They assess whether the controls are properly
designed, implemented and working effectively such that the risk of
material misstatement in the financial statements is reduced, and make
recommendations on how to improve internal control. They equally test
controls in the systems to determine the extent of the procedures they will
carry out in the conduct of the audit.

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 8. LIMITATIONS OF INTERNAL CONTROLS
No matter how well internal controls are designed, they can only
provide reasonable assurance (not absolute assurance) that objectives
have been achieved.
Some limitations are inherent in all internal control systems. These
include:
a) Judgment
The effectiveness of controls will be limited by decisions made with
human judgment under pressures to conduct business based on the
information at hand.

b) Breakdowns
Even well designed internal controls can break down. Employees
sometimes misunderstand instructions or simply make mistakes. Errors
may also result from new technology and the complexity of computerized
information systems.
c) Management Override
High level personnel may be able to override prescribed policies and
procedures for personal gain or advantage. This should not be confused
with management intervention, which represents management actions to
depart from prescribed policies and procedures for legitimate purposes.
d) Collusion
Control systems can be circumvented by employee collusion.
Individuals acting collectively can alter financial data or other
management information in a manner that cannot be identified by control
systems.
It should not be misconceived that internal controls can prevent all
risks from occurring. Internal controls are simply and merely a means of
minimizing risk. They may not be able to:

• prevent an earthquake from destroying a factory;

• Prevent a competitor coming up with a new product which makes
your product obsolete.
But they may be able to:

57
 • reduce the risk that financial statements contain material errors
• reduce the risk of theft of the company’s assets
• reduce the risk that your business secrets might be handed over
to a competitor.
9. ACCOUNTING SYSTEM AND INTERNAL CONTROL
The auditors operational standard states that: “the auditor should
ascertain the enterprise’s system of recording and processing transaction
and assess, it adequacy as a basis for the preparation of financial
statement” The responsibility for maintaining an adequate accounting
system therefore lies with the management of an enterprise who requires
complete and accurate accounting and other records to assist in

- Controlling the business

- Safeguarding the assets

- Preparing financial statement

- Complying with legislation

What constitutes an adequate accounting system will depends on the

size, nature and complexity of the enterprise, although usually
management will need to incorporate internal control to provides
assurance that:

- all the transactions and other accounting information which should

be recorded have in fact been recorded

- errors or irregularities is processing information will become

apparent

- Assets and liabilities recorded is the accounting system exists and

recorded at the correct amounts.
In practice, there is usually a strong communication between the
accounting system and internal controls. The more complex a business,
the more complex will be the accounting system and the greater will be
the need for internal control.

10. INTERNAL CONTROL ON SPECIFIC AREAS OF A BUSINESS

10.1. Cash and Cheques Received
The objectives are;

58
- to ensure that all cash cheques received are accounted for and
accurately recorded in the book ;
- To ensure that all cash receipts are promptly and intactly deposited in
the bank.
The measures to be employed include :

• All cheques( and other negotiable instruments) should be given a

restrictive crossing such as account payee only, not negotiable,

• Details of receipts ( date, payer, amount, cash, cheque, or other)

should be immediately entered in a rough cash book and signal by
both parties present

• All cash should be paid in or cheques received should be accompanied

by a receipt ;

• Regularly independent control of the accounts with bank records

should be done.

10.2. Cash Sales and Collections

The objectives are to ensure that:

- All cash, to which the enterprise is entitled is received

- All such cash is properly accounted for and entered in the records

- All such cash is promptly and intactly deposited.

The measure to be employed includes:

- Prescribing and limiting the number of persons who are authorized to

receive cash. Example cashiers, rounds men, sales assistants ;
- Establishing a means of evidencing cash receipts. Examples pre-
numbered duplicates receipts forms, cash register. The issue of these
duplicate receipts forms should also be control ;
- Making customers to be aware that they must received a receipts
form for cash transactions ;
- Immediate and intact baking

10.3. Payments into Banks

The objectives here are ensure that:

- All cash and cheques received are baked intact

59
- All cash and cheques received are banked without delay at prescribed
intervals preferably daily
- All Cash and cheque received are accounted for and recorded
accurately.
The measures to be taken include:

- Cash and cheques should be banked intact and without delay

- The bank paying in slip should be prepared by an official with no access

to cash collections points bought or sales ledgers

- For large cash sums, banking should be made with security in mind
example use of security guards

- Those should be a constants records and sales ledger records

10.4. Cash Balances

The objectives here are to present impropriation of cash balances
and to prevent unauthorized cash payment.
The measures to be employed here include:
- The establishment of cash floats of specific amounts and locations

- Arranging special security measures including the use of safes and

restricting access to it

- Appointment of official responsible for each cash balance

- The use of ineptest system with rules on reimbursement only against

authorized vouchers

- Placing strict rules on the authorization of cash payment.

- Carry out independent physical cash count on a regular and surprise

basis

10.5. Bank Balances

The objective is to present misappropriation of bank balances.
The measures are:

- Preparations of reconciliation at prescribed frequency and by

independent personnel

- The balances at the banks should be independently verified with the

bank at intervals.

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 10.6. Cheques Payment
The objectives are to prevent unauthorized payment made from bank
accounts.
The measures to be taken should include:

- Control over custody and issue of unused cheque books with register
being kept if possible

- Appointment of an official to be responsible for the preparation of

cheques

- Rules should be established for the presentation of supporting

documents before cheque can be made out such payment orders and
invoices.

- No cheques should be made out to bearer except for the collection of

wages or reimbursement of funds

- All Cheques should be restrictively crossed

- The signing of blank cheques must be prohibited

- Special rules for authorizing and checking direct debits and standard
order should be set out

10.7. Wages and Salaries

The objectives are to ensure that: wages and salaries are paid only
to actual employees at authorized rates of pa.

- All wages and salaries are competed in accordance with records of work
performed whether in respect of time, output, sales made or other
criteria

- Payrolls are corrected calculated

Payment are made only to the correct employees

- Payroll deductions are correctly amounted for and paid over to the
appropriate 3rd parties

- That all transactions are correctly recorded in the books of account.

The measures to be employed include:

- The keeping of separate records for each employee with such

information as dates of engagement, age, agreed deductions,

61
 department, specimen signature. These records should be maintained
signature. These records should be maintained by a separate personnel
department.

- Procedures for and specific official responsible for engagement,

retirement, dismissal, fixing and changing rates of pay should be put in
place and notified to the wage roll preparation department.

- The keeping of time records and the authorization of overtime

- The payroll should be prepared by personnel unconnected with other

wage duties and should be checked by separate personnel, with all
these being initiated and approved by a senior official.

- Wage envelops should be made up by personnel independent of the

wage roll preparation team.

- Unclaimed wages should be subject to special procedures.

- Payment by cheques and credits transfer should be subject to special

procedures.

- Payroll deduction should be subject to prompt payment over to the

institution concerned.

- Regular independent comparisons between personnel records and

wages records and special visits by internal auditor or senior official
should be made.
10.8. Purchases and Trade Creditor
The objectives here are to ensure:

- That goods and services are only ordered in the quantity, of the
quantity and at the best terms available after appropriate requisition
and approval,

- That goods and services received one inspected and only acceptable
items are accepted

- That all purchase invoices are checked against authorized orders and
receipt of the subject matter in good conditions
- That are goods and services invoiced are properly recorded in the
books.
The measures to be used include:

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- Procedures for only specific personnel on specific forms should make
the requisition of good and services should be prenumbered and kept in
safe custody. The issue of blank order formbooks should be controlled
and recorded.

- Orders procedures should include requirement for obtaining tender,

estimates or competitive bids,

- Sequence checks of order forms should be performed regularly and

missing items investigated
- All goods received should be recorded on pre-numbered goods received
notes or in a special book.
- All goods should be inspected and counted on receipt

- Procedures for dealing with rejected goods or services should involved

the creation of debit notes ( pre-numbered ) with subsequent checks
and follow up of supplier credit notes

- Invoices should be checked for arithmetical accuracy, pricing, correct

treatment of
VAT and trade deduction and agreement with order and goods received
records. These chucks should be acknowledged. Preferable by rubber
stamps on the invoices.

- Invoices should have numbers put on them

- Responsibility for purchases ledger entries should be vested on

personnel separate from personnel response for ordering, receipt of
good and the invoices register

- Ledger account balances should be regularly companied with supplier

statement of accounts.

10.9. Sales and Debits

The objectives are to ensure that;

- All customer orders are promptly executed

- Sales on credit are made only to bona fide good credit risks

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- All sales on credit are invoiced, that authorized prices are charged and
that before issue, all invoices are completed and checked as regard
prices , trade discount and VAT

- All invoices raised are entered in the books

- All customers claims are fully investigated before credit notes are
issued
Every effort is made to collect all debts

- No unauthorized credits are made to debtors’ accounts.

The measures to be taken include:

- incoming orders should be recorded on pre-numbered form and should

be matched with invoices and lists prepared at interval for outstanding
orders

- credits control should be carried out by laying down procedures for

verifying the credit worthiness of all persons requesting goods on
credit. Credit limits should also be set up bored on specific customers

- selling prices should be prescribed and policies laid down on credit

term. Trade and cash discounts and special prices

- Dispatch of goods should be evidence and where appropriate,

acknowledgment of receipt of goods should be made by customers on
copy dispatch notes.

- Invoicing should be carried out by a separate department or by sales

staff. Invoices should be pre-numbered and the custody and issue of
unused invoices controlled and recorded.

- All invoice should be independently checked for agreement with

customer order, with dispatched records for pricing, discounts, VAT and
others details accounting for sales and debtors should be segregated by
employing separate staff for cash invoice, register, sales ledger entries
and statement of preparation

- Sales invoices should be pre-listed before entry into the invoice register
or day books and the prelisted total should be independently compared
with the day book total.

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- A control account should be regularly and independently prepared.

- Debtors statement should be prepare by personnel separate from the

sales ledger personnel

- Bad debts should only be written off after the investigation and
acknowledgement by management.

10.10. Stocks and Work-in Progress

The objective is to ensure that stock is adequately protected against
loss or misuse.
Measures include:
- Separate arrangement for each type of stock by keeping separate stock
accounts
- Control over the receipt of goods ( if purchases)

- Stocks should be stored under conditions which later deterioration due

to physical causes and safeguarded against loss by theft by appropriate
physical control including restriction to assets.

- Stock records should be maintained and entries should be made by

personnel independent of staff responsible for purchasing and custody
of stocks.

- Stock records should be continuously compared with actual stocks held

by independent official and all differences recorded, investigated and
convected

- Ideally, all stock items should be subjected to established max and min
stock level, with reorder level.

- Whether or not a continuous inventory is maintained, those should at

least be an annual stock take, fro and procedures prescribed for this
with emphasis on identifying damages, slow moving, and obsolete
stock.

10.11. Fixed Assets

The objectives are to ensure that:

- Fixed assets are only acquired with proper authority

- Fixed assets properly maintained and used only in the business

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- Fixed assets are properly accounted for and recorded

- Disposal are properly authorized and proceeds of these account for and
recorded The measure includes:

- Capital expenditure should be subject to authorization, be evidenced,

and subject to budget limits
- Capital investment appraisal techniques should be applied to
acquisition of Fixed assets

- Allocation of expenditure between K and revenue should be approved

- Details register of fixed assets should be maintained and constantly up

dated

- Disposal of Fixed assets whether by scrapping, sales or exchanging

should be subject to authorization.

- Arrangement to see that fixed assets are properly maintain by regular

inspection, reporting of locating operation and condition should be
combined with physical verification of assets registers
Depreciation policy should be laid down in accordance with the
requirement of SSAP12

10.12. Investments
The objectives are to ensure that

- investment are acquired only after proper evidence authorization and

properly accounted and records

- disposal are properly authorized and that proceeds are accounted for
and recorded,

- Investment title deeds and certificates are properly contributed and

recorded Measures:

- There should be segregation of duties such that separate official are

responsible for initiating transactions, custody of the document of title
and recording the transaction

- Documents and little deeds should be subject to safeguarding

techniques such as the use of safes with appropriate procedures for
access to key.

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- A register of investment should be maintained

- Disposals should be authorized only after proper investigation of the

disability of the disposal.

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