Audit Staff Workshop Coast Branch, Mombasa and responsibilities of:-Those charged with governance The independent auditor The regulators Expectation from client, regulators & users

Audit Staff WorkshopCoast Branch, Mombasa

11 and 12 February 2016

12/02/2016 Uphold Public Interest

SESSION 1

OVERVIEW AND GENERAL CONSIDERATIONSFOR ISA AUDIT: THE REGULATOR’S

PERSPECTIVE

SESSION 1

OVERVIEW AND GENERAL CONSIDERATIONSFOR ISA AUDIT: THE REGULATOR’S

PERSPECTIVE

12/02/2016 Uphold Public Interest 2

Roles and responsibilities of:- Those charged with governance The independent auditor The regulators

Expectation from client, regulators &users of financial statements Client Acceptance Conduct audit of small to medium-

sized engagements - generalconsiderations

Roles and responsibilities of:- Those charged with governance The independent auditor The regulators

Expectation from client, regulators &users of financial statements Client Acceptance Conduct audit of small to medium-

sized engagements - generalconsiderations


Governance is the term used to describe the role ofpersons entrusted with the supervision, control, anddirection of an entity.

Depending on the jurisdiction, different bodies mayhave responsibility for corporate governance: Board of Directors Audit Committee Other supervisory committees

No governance system, no matter how well designed,will fully prevent greedy, dishonest people from puttingtheir personal interests ahead of the interests of thecompanies they manage.

Governance is the term used to describe the role ofpersons entrusted with the supervision, control, anddirection of an entity.

Depending on the jurisdiction, different bodies mayhave responsibility for corporate governance: Board of Directors Audit Committee Other supervisory committees

No governance system, no matter how well designed,will fully prevent greedy, dishonest people from puttingtheir personal interests ahead of the interests of thecompanies they manage.


But many steps can be taken to improvecorporate governance and therebyreduce opportunities for accountingfraud.

The auditing profession has an importantrole to play.

International Standard on Auditing (ISA)260: - Communications of Audit Matterswith Those Charged with Governance

But many steps can be taken to improvecorporate governance and therebyreduce opportunities for accountingfraud.

The auditing profession has an importantrole to play.

International Standard on Auditing (ISA)260: - Communications of Audit Matterswith Those Charged with Governance


Those who are charged with the governance of the entityshould ensure that:- those entrusted with running the entity have sufficient expertise and

integrity adequate policies, practices and procedures related to the different

activities of the entity are established and complied with appropriate management information systems appropriate risk management policies and procedures; statutory and regulatory directives, including directives regarding

capital management, are observed; the interests not only of the shareholders but also of the customers

and other creditors are adequately protected

Those who are charged with the governance of the entityshould ensure that:- those entrusted with running the entity have sufficient expertise and

integrity adequate policies, practices and procedures related to the different

activities of the entity are established and complied with appropriate management information systems appropriate risk management policies and procedures; statutory and regulatory directives, including directives regarding

capital management, are observed; the interests not only of the shareholders but also of the customers

and other creditors are adequately protected


Auditing standards require that independent auditors providereasonable assurance that the financial statements are freefrom material misstatements, whether caused by error or fraud,to render an unqualified opinion on the financial statements.

External auditors are not and should not be expected toprovide absolute assurance regarding reliability of financialstatements, but the public expectations concerning externalauditors performance are high.

Users of audited financial statements generally expect externalauditors to detect financial statement fraud and employees’illegal acts and fraud, which affects the integrity of financialreports. External auditors, however, are more concerned withmaterial misstatements in the audited financial statements.

Auditing standards require that independent auditors providereasonable assurance that the financial statements are freefrom material misstatements, whether caused by error or fraud,to render an unqualified opinion on the financial statements.

External auditors are not and should not be expected toprovide absolute assurance regarding reliability of financialstatements, but the public expectations concerning externalauditors performance are high.

Users of audited financial statements generally expect externalauditors to detect financial statement fraud and employees’illegal acts and fraud, which affects the integrity of financialreports. External auditors, however, are more concerned withmaterial misstatements in the audited financial statements.


1. Professional competencies. To audit public companies,auditors should register with/ seek approval of the primaryregulator ‘s prior to accepting a client.

2. Technical competencies. Auditors should be knowledgeablein professional standards, rules, laws and regulations, andunderstand their clients’ industry and business, corporategovernance, financial reporting process, and internal controls.

3. Process competencies. Auditor’s ability to choose appropriateevidence-gathering procedures (tests of controls, substantivetests) and execute auditing procedures.

4. Reporting competencies. Reporting competencies refer toauditors’ ability and willingness to discover and report materialmisstatements.

1. Professional competencies. To audit public companies,auditors should register with/ seek approval of the primaryregulator ‘s prior to accepting a client.

2. Technical competencies. Auditors should be knowledgeablein professional standards, rules, laws and regulations, andunderstand their clients’ industry and business, corporategovernance, financial reporting process, and internal controls.

3. Process competencies. Auditor’s ability to choose appropriateevidence-gathering procedures (tests of controls, substantivetests) and execute auditing procedures.

4. Reporting competencies. Reporting competencies refer toauditors’ ability and willingness to discover and report materialmisstatements.


The extended oversight responsibilities for the auditcommittee are:

1. Appointment, compensation, and retention ofregistered public accounting firms

2. Pre-approval of audit services and permissible non-audit services

3. Review of the independent auditor’s plan for anintegrated audit of both ICF and annual financialstatements

4. Review and discussion of financial statements auditedor reviewed by the independent auditor

5. Monitoring the auditor’s independence6. Auditor rotation requirement

The extended oversight responsibilities for the auditcommittee are:

1. Appointment, compensation, and retention ofregistered public accounting firms

2. Pre-approval of audit services and permissible non-audit services

3. Review of the independent auditor’s plan for anintegrated audit of both ICF and annual financialstatements

4. Review and discussion of financial statements auditedor reviewed by the independent auditor

5. Monitoring the auditor’s independence6. Auditor rotation requirement


Communications from the committee to theindependent auditor:

Communications from the independent auditor tothe audit committee:

1. Appointment and retention approval of theindependent auditor

2. Formal approval of audit and permissible nonauditservices

3. Formal approval of fees for both audit and nonauditservices with a keen focus on improving the qualityof audit and nonaudit services

4. Any concerns or risks threatening management’sreputation and integrity, and etc.

5. Allegations of financial statement fraud

1. Seeking committee preapproval of all audit andnonaudit services in a timely manner

2. The critical accounting policies and practices usedby management in the preparation of financialstatements

3. All alternative treatments of financial informationwithin the applicable reporting framework(IFRS/IPSAS)

4. Any accounting disagreements between theindependent auditor and the company’smanagement

5. Any material written communications betweenthe independent auditor and the company’smanagement throughout the course of the audit

6. Significant deficiencies and material weaknessesof ICF

7. The audit report on annual financial statements8. Financial risks associated with financial reports


1. Appointment and retention approval of theindependent auditor

2. Formal approval of audit and permissible nonauditservices

3. Formal approval of fees for both audit and nonauditservices with a keen focus on improving the qualityof audit and nonaudit services

4. Any concerns or risks threatening management’sreputation and integrity, and etc.

5. Allegations of financial statement fraud

1. Seeking committee preapproval of all audit andnonaudit services in a timely manner

2. The critical accounting policies and practices usedby management in the preparation of financialstatements

3. All alternative treatments of financial informationwithin the applicable reporting framework(IFRS/IPSAS)

4. Any accounting disagreements between theindependent auditor and the company’smanagement

5. Any material written communications betweenthe independent auditor and the company’smanagement throughout the course of the audit

6. Significant deficiencies and material weaknessesof ICF

7. The audit report on annual financial statements8. Financial risks associated with financial reports

The supervisor monitors the present and future viability ofthe entity and uses their financial statements in assessingtheir condition and performance. The external auditor isprimarily concerned with reporting on the entity’sfinancial statements.

The supervisor is concerned with the maintenance of asound system of internal control and the external auditoris concerned with the assessment of internal control.

Both must be satisfied that there are adequate records,the supervisor to determine profitability(viability/continuity) and the external auditor withmaterial misstatements.

The supervisor monitors the present and future viability ofthe entity and uses their financial statements in assessingtheir condition and performance. The external auditor isprimarily concerned with reporting on the entity’sfinancial statements.

The supervisor is concerned with the maintenance of asound system of internal control and the external auditoris concerned with the assessment of internal control.

Both must be satisfied that there are adequate records,the supervisor to determine profitability(viability/continuity) and the external auditor withmaterial misstatements.


Adherence to the code of ethics for professionalaccountants:- Fundamental principles - Integrity, objectivity,

professional competence and due care,confidentiality, and professional behaviour

Conceptual framework approach - Threats,safeguards, and residual risk

Independence - Independence of mind andindependence in appearance

Compliance with applicable laws andregulations

Reporting unethical behaviour (among peers) tothe Institute and/or relevant regulator(s)

Adherence to the code of ethics for professionalaccountants:- Fundamental principles - Integrity, objectivity,

professional competence and due care,confidentiality, and professional behaviour

Conceptual framework approach - Threats,safeguards, and residual risk

Independence - Independence of mind andindependence in appearance

Compliance with applicable laws andregulations

Reporting unethical behaviour (among peers) tothe Institute and/or relevant regulator(s)


Audit matters that need reporting include only thosematters that have come to the attention of the auditoras a result of the performance of the audit.

Certain audit matters of governance interest are likely tobe of interest to the supervisors, particularly where thosematters may require urgent action by the supervisor.

When required by the supervisory, legal, or regulatoryframework, or by a formal agreement or protocol,auditors communicate directly to the supervisor

The auditor considers communicating such matters tothe supervisor when management or those chargedwith governance do not do so.

Audit matters that need reporting include only thosematters that have come to the attention of the auditoras a result of the performance of the audit.

Certain audit matters of governance interest are likely tobe of interest to the supervisors, particularly where thosematters may require urgent action by the supervisor.

When required by the supervisory, legal, or regulatoryframework, or by a formal agreement or protocol,auditors communicate directly to the supervisor

The auditor considers communicating such matters tothe supervisor when management or those chargedwith governance do not do so.


◙ Examination of the proposed client todetermine if there is any reason to rejectthe engagement (acceptance OF theclient) and convincing the client to hirethe auditor (acceptance BY the client)

◙ Decide on acquiring a new client orcontinuation of the relationship with andexisting client

◙ Determine the type and amount of staff

◙ Examination of the proposed client todetermine if there is any reason to rejectthe engagement (acceptance OF theclient) and convincing the client to hirethe auditor (acceptance BY the client)

◙ Decide on acquiring a new client orcontinuation of the relationship with andexisting client

◙ Determine the type and amount of staff


Evaluate the clients background andreasons for the audit.

Determine whether the auditor is ableto meet the ethical requirementsregarding the client

Determine need for other professionals. Communicate with predecessor

auditor. Prepare client proposal. Select staff to perform the audit. Obtain an engagement letter.

Evaluate the clients background andreasons for the audit.

Determine whether the auditor is ableto meet the ethical requirementsregarding the client

Determine need for other professionals. Communicate with predecessor

auditor. Prepare client proposal. Select staff to perform the audit. Obtain an engagement letter.


Knowledge of a client’s business helps theauditor to:-o to evaluate the engagement risks

associated with accepting the specificengagement and

o to help the auditor in determiningwhether all professional and ethicalrequirements (including independence,competence, etc.) regarding this clientcan be met.

Knowledge of a client’s business helps theauditor to:-o to evaluate the engagement risks

associated with accepting the specificengagement and

o to help the auditor in determiningwhether all professional and ethicalrequirements (including independence,competence, etc.) regarding this clientcan be met.


New and existing clients visiting their premises, reviewing annual reports, having discussions with client's

management and staff accessing public news and public

information databases, usually via theInternet.

For an existing one, prior years'working papers should be reviewed.

For a new client, consult priorauditors and increase preliminaryinformation search.

New and existing clients visiting their premises, reviewing annual reports, having discussions with client's

management and staff accessing public news and public

information databases, usually via theInternet.

For an existing one, prior years'working papers should be reviewed.

For a new client, consult priorauditors and increase preliminaryinformation search.


Publicly availableinformation

• Search media andgovernmentdatabase

• Client industry andgovernmentwebsites

Audit FirmExperience

• Reviewdocumentationwith client lawyers,bankers, prioraudit manager etc

• Prior periodworking papers,financialstatements,managementletter etc

Information fromclient

• Review clientdocumentation,discussions withmanagement

• Client pressreleases, minutes,governmentcorrespondences,people associatedwith the entity etc

• Search media andgovernmentdatabase

• Client industry andgovernmentwebsites

• Reviewdocumentationwith client lawyers,bankers, prioraudit manager etc

• Prior periodworking papers,financialstatements,managementletter etc

• Review clientdocumentation,discussions withmanagement

• Client pressreleases, minutes,governmentcorrespondences,people associatedwith the entity etc


Changes in management, organizationalstructure, and activities of the client.

Current government regulations Current business developments Current or impending financial difficulties or

accounting problems. Susceptibility of the entity’s financial statements

to material misstatement due to error orfraud.(ISA 240 & ISA 315)

Existence of related parties. (ISA 550) New or closed premises and plant facilities. Recent or impending changes in technology,

types of products or services and production ordistribution methods.

Changes in the accounting system and thesystem of internal control.

Changes in management, organizationalstructure, and activities of the client.

Current government regulations Current business developments Current or impending financial difficulties or

accounting problems. Susceptibility of the entity’s financial statements

to material misstatement due to error orfraud.(ISA 240 & ISA 315)

Existence of related parties. (ISA 550) New or closed premises and plant facilities. Recent or impending changes in technology,

types of products or services and production ordistribution methods.

Changes in the accounting system and thesystem of internal control.


publicly availableinformation,

past company financialstatements,

reports to stockholders, government financial reports company premises via tour previous auditor relationship

publicly availableinformation,

past company financialstatements,

reports to stockholders, government financial reports company premises via tour previous auditor relationship



Independence of auditor (personalinvestments, client business relationships,non-audit services, unpaid fees)LitigationTechnical training and proficiency required in

the circumstancesPartner rotation/ firm rotation

Independence of auditor (personalinvestments, client business relationships,non-audit services, unpaid fees)LitigationTechnical training and proficiency required in

the circumstancesPartner rotation/ firm rotation


An outside specialist such as IT, environmental or taxspecialist, may be needed to properly audit the client.

ISA 600 applies when an auditor, acting as a groupengagement partner, decides to use the work of acomponent auditor in the audit of group financialstatements. Component auditor – An auditor who, at the request of the

group engagement team, performs work on financialinformation related to a component for the group audit.

The group audit partner is solely responsible for thedirection, supervision and performance of the groupaudit engagement and whether the auditor’s reportthat is issued is appropriate in the circumstances.

An outside specialist such as IT, environmental or taxspecialist, may be needed to properly audit the client.

ISA 600 applies when an auditor, acting as a groupengagement partner, decides to use the work of acomponent auditor in the audit of group financialstatements. Component auditor – An auditor who, at the request of the

group engagement team, performs work on financialinformation related to a component for the group audit.

The group audit partner is solely responsible for thedirection, supervision and performance of the groupaudit engagement and whether the auditor’s reportthat is issued is appropriate in the circumstances.


IESBA Code of Ethics recommends that thenew auditor communicate directly with theprevious auditor.

The proposed accountant should requestpermission from the client to communicatewith existing accountant.

When the prior accountant receives thecommunication, he should ordinarily replyadvising of any reasons why the proposedaccountant should not accept theappointment.

First time engagements require evidence thatopening balances are not misstated, priorbalances are correctly brought forward, andproper accounting applied. (ISA 510)

IESBA Code of Ethics recommends that thenew auditor communicate directly with theprevious auditor.

The proposed accountant should requestpermission from the client to communicatewith existing accountant.

When the prior accountant receives thecommunication, he should ordinarily replyadvising of any reasons why the proposedaccountant should not accept theappointment.

First time engagements require evidence thatopening balances are not misstated, priorbalances are correctly brought forward, andproper accounting applied. (ISA 510)


A review on how the auditingfirm can add value Plans for further improvement

in value added A description of the audit

team Fee proposal

A review on how the auditingfirm can add value Plans for further improvement

in value added A description of the audit

team Fee proposal


OTHER GENERAL CONSIDERATIONSOTHER GENERAL CONSIDERATIONS



$ the skill and knowledge required for thetype of professional services involved

$ the level of training and experience of thepersons performing the services

$ the time necessarily to perform services;$ the degree of responsibility that performing

those services entails.$ No contingency fees

$ the skill and knowledge required for thetype of professional services involved

$ the level of training and experience of thepersons performing the services

$ the time necessarily to perform services;$ the degree of responsibility that performing

those services entails.$ No contingency fees


i. the objective and scope of the audit;ii. the responsibilities of the auditor;iii. the responsibilities of management;iv. identification of the applicable financial

reporting framework; andv. reference to the expected form and

content of any reports to be issued by theauditor and a statement that there may becircumstances in which a report may differfrom its expected form and content

Sample engagement letter

i. the objective and scope of the audit;ii. the responsibilities of the auditor;iii. the responsibilities of management;iv. identification of the applicable financial

reporting framework; andv. reference to the expected form and

content of any reports to be issued by theauditor and a statement that there may becircumstances in which a report may differfrom its expected form and content

Sample engagement letter


The engagement letter should also include:- access to all information of which management

is aware that is relevant to the preparation of thefinancial statements such as records,documentation and other matters;

additional information that the auditor mayrequest from management for the purpose of theaudit; and

unrestricted access to persons within the entityfrom whom the auditor determines it necessary toobtain audit evidence.

The engagement letter should also include:- access to all information of which management

is aware that is relevant to the preparation of thefinancial statements such as records,documentation and other matters;

additional information that the auditor mayrequest from management for the purpose of theaudit; and

unrestricted access to persons within the entityfrom whom the auditor determines it necessary toobtain audit evidence.


One of the purposes of agreeing the terms of theaudit engagement is to avoid misunderstandingabout the respective responsibilities ofmanagement and the auditor. For example, whena third party has assisted with the preparation ofthe financial statements, it may be useful toremind management that the preparation of thefinancial statements in accordance with theapplicable financial reporting framework remainsits responsibility.

One of the purposes of agreeing the terms of theaudit engagement is to avoid misunderstandingabout the respective responsibilities ofmanagement and the auditor. For example, whena third party has assisted with the preparation ofthe financial statements, it may be useful toremind management that the preparation of thefinancial statements in accordance with theapplicable financial reporting framework remainsits responsibility.


Any Questions?

Documents

Audit Staff Workshop Coast Branch, Mombasa and responsibilities of:-Those charged with governance The independent auditor The regulators Expectation from client, regulators & users