Auditing & Investigations I Statutory Audits and Regulation

Key issues Regulatory Framework of statutory audits. Appointment of Auditors and vacation of office Duty of Directors. International Standards of Auditing (ISA) Regulation of Auditors Features of an Audit Audit Reports Limitation of Statutory Audits

1. Regulatory Framework of statutory audits Statutory audit governance is primarily provided through legislations and legal instruments. Most companies are required to conduct audits under the Companies Act. Small companies are exempted in most cases. Secondarily, statutory audits are governed through instruments or requirements provide from legislation promulgated in the setting up of regulatory body. For example, legislation set out to govern members of the stock exchange who are listed companies. Additional framework is provided through auditing standards.

2. Appointment of Auditors Who Appoints When How Members (a) At AGM when Reappointing retiring auditor Appoint auditor other than retiring auditor (b) Private companies No AGM necessary To fill a casual vacancy ( if auditor dies) Ordinary resolutions Ordinary resolution with special notice. Elective unanimous resolution. Ordinary resolution with special notice Directors To fill a casual vacancy Appoint auditor for the first time Reappointment by members at next AGM by ordinary resolution with special notice. Government Where no auditor is appointed at AGM Company must inform Govt of the situation

2.2. Auditor Vacation of Office Reason for Vacation Method Auditor’s Rights Removal (before expiry of term of office) Ordinary resolution with special notice. Notice of resolution to state the fact that the auditor has made representations. To have written representation of a reasonable which should be read at a meeting. Resignation The auditors must submit a written notice to the company. The company must notify The Registrar of companies All parties entitled to receive copies of accounts. Request an extraordinary general meeting to consider the reason for resignation. Company to circulate statement on circumstance

2.3. Duties of Auditors ‘to report to the company’s member on every set of accounts of which a copy is laid before the member in respect of the accounting period’. State whether the financial statement give a true and view. Requirements = RAPID R = Returns from branches received A = Agreements of accounts with record and return P = Proper accounting records kept I = Information and explanations from mgt received. D = Directors report is consistent

2.4. Auditor’s rights Have right to: have access to the books, accounts and vouchers of the company. require from the officers of the company any information and explanations which he thinks necessary for the purposes of the audit. receive notice of and attend any general meeting of members. Speak at any general meeting on business which concerns him/her as auditor.

3. Duties of Directors Key duties in respect of company accounts: To keep books of accounts and proper accounting records. To produce an income statement and balance for each accounting period in such a fashion as to show a true and fair view. To produce a directors report which is consistent with financial statement and contains certain specified information.

4. International Standards of Auditing Standards set by International Auditing and Assurance Standards Board (IAASB) of IFAC: 200 - Overall objectives of the independent auditor and the conduct of an audit in accordance with International Standards on Auditing. 210 - Agreeing the terms of audit engagements 230 - Audit documentation 240 - The auditor's responsibilities relating to fraud in an audit of financial statements 250 - Consideration of laws and regulations in an audit of financial statements 260 - Communication with those charged with governance 265 - Communicating deficiencies in internal control to those charged with governance and management

300 - Planning an audit of financial statements 315 - (Revised) Identifying and assessing the risks of material misstatement through understanding the entity and its environment 320 - Materiality in planning and performing an audit 330 - The auditor's responses to assessed risks 402 - Audit considerations relating to an entity using a service organisation 450 - Evaluation of misstatements identified during the audit 500 - Audit evidence 501 - Audit evidence – specific considerations for selected items

505 - External confirmations 510 - Initial audit engagements – opening balances 520 - Analytical procedures 530 - Audit sampling 540 Auditing accounting estimates, including fair value accounting estimates, and related disclosures 560 - Subsequent events 570 - Going concern 580 - Written representations

610 - (Revised) Using the work of internal auditors 620 - Using the work of an auditor's expert 700 - Forming an opinion and reporting on financial statements 705 - Modifications to the opinion in the independent auditor's report 706 - Emphasis of matter paragraphs and other matter paragraphs in the independent auditor's report 720 - The auditor's responsibilities relating to other information in documents containing audited financial statements

5. Regulation of auditors Auditors in Zimbabwe are regulated under the PAA Act. Governments can pass statutes that must be followed. These typically provide the broad framework e.g., which companies must be audited, how auditors must be appointed, how they can be removed. Companies Act Stock exchanges can impose requirements on companies seeking a listing on the exchange. Stock exchanges are keen to improve the transparency and efficiency of their market, so typically might require a company’s auditors to report on the standards of corporate governance in the company.

6. Features of an Audit 6.1. The Auditors ‘The Auditor’ include all members of the team

6.2. The auditing process

6.2.1 Process of auditing Engagement letter - Every auditor should send his client an engagement letter which sets out the auditor’s duties and responsibilities (ISA 210). Planning - The auditor must plan and control the audit work if the work is to be done to a high standard of skill and care (ISA 300). Ascertainment of systems - An auditor must enquire into and ascertain the client’s system of accounting and internal control in order to understand how accounting data is prepared and to gain an impression as to whether systems are reliable, as it is the information generated from these systems which is summarised in the financial statements (ISA 400).

6.2.2. Process of auditing Testing of controls - The auditor should test the controls if he intends to rely on them and he must test the records in order to obtain evidence that they are a reliable basis for the preparation of accounts (ISA 500). Verification - The auditor must verify the figures appearing in the financial statements (ISA 500). Review - The auditor must reviews the financial statements to see if overall they appear sensible (ISA 520).

6.2.3. Process of auditing Management representations - The auditor asks the management to confirm formally the truth and fairness of certain aspects of the financial statements. (ISA 580). Signing of report - The auditor signs the auditors’ report once the directors have approved the accounts.(ISA 700). Re-appointment - The end of the Annual General Meeting signifies the end of the auditor’s term of office. The members of the company may decide by a majority to re-appoint the auditor if he wishes to continue to act for the company.

7. Audit Reports

7.2. Audit Reports An “unmodified” audit report is where the auditor is happy that the accounts give a true and fair view and has no reservations about his opinion that he wishes to share with the readers of the audit report. A “modified” audit report is any other report where the auditor cannot unreservedly say that the accounts give a true and fair view as they stand. “Unqualified” modified audit report is where the auditor believes that the accounts give a true and fair view, but he wishes to draw attention to some fundamental uncertainty surrounding the accounts. “Qualified” audit report is where the auditor is therefore unable to give an opinion that the accounts give a true and fair view.

8. Limitation of statutory audits the use of sample testing rather than checking every transaction. the inherent limitations of accounting and internal control systems. the fact that most audit evidence is persuasive rather than conclusive. the use of judgement by the auditor in deciding on the nature and extent of audit procedures to be carried out.

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