1. Lecture 3 The Auditor

2. Appointment of an auditor Principle Basic principle of the appointment of an auditor is that the auditor is always appointed under a contract. Elements of normal law of contract; offer and acceptance operate with both parties giving some valuable consideration. Consideration; Party appointing agree to pay a fee. Auditor agrees to conduct the audit and to present his report.

3. Private/statutory audit appointment In the case of private audit, appointment is made by person or persons in authority who are usually those running the affairs of the business. In statutory audit, contract is between the auditor and the company but the appointment is made by the owners of the business, i.e., shareholders who are not necessarily involved in the management of the company. The appointed auditor in statutory audit is not responsible to the directors but to the shareholders.

4. Exceptions to the appointment Directors may get the opportunity to appoint an auditor; when a newly incorporated company requires the auditor for the first time; When a casual vacancy has been created and there is the need to fill it;

5. If members and directors cannot appoint auditors If both members and directors of a company cannot appoint auditors under the company’s regulations, the company is duty bound to inform the Secretary of State. In Ghana, the Registrar of Companies will exercise special powers to appoint an auditor for the company. Old practice was the reappointment of the retiring auditor without passing any resolution however, today every company appoints an auditor at each AGM to hold office until next AGM. A common feature in the “notice of meeting” is ‘As special business, to appoint auditors and to authorise directors to fix remuneration. Section 134 of the Code spells out the person who can be appointed. 270 & 296 for private and public respectively.

6. Appointment Section 134 of the Act states; (1) No person shall be appointed as auditor of a company unless. (a) he shall prior to such appointment have consented in writing to be appointed; and (b) he is duly qualified in accordance with the provisions of section 270 & 296 for private and public companies respectively (2) Partnership firm (partners) even if body corporate. (3) First auditors of a company incorporated within 3 months. (4) (a)Directors to appoint first auditors and fill casual vacancy and (b) Registrar to appoint for 1 st 3 months.

7. Term of office Section 134 (5) states that; “Every existing auditor shall continue in office until, (a) he ceases to be qualified for appointment; or (b) he resigns his office by notice in writing to the company; or (c) an ordinary resolution is duly passed at an AGM in accordance with section 135 removing him from office or appointing some other person.

8. Qualification of the auditor (Ltd) Section 270 (1) states that; “A person shall not be qualified for appointment as auditor of a private company unless, (a) He is, under the ICA Act 1963, (Act 170) a member of the ICA, or (b) He is a practicing accountant within the meaning of the said Act, and is not disqualified under subsection (3) of this section”.

9. Section 296 (1) of the Act states that: “A person shall not be qualified for the appointment as an auditor of a public company notwithstanding that he may have been appointed thereof while it was a private company, unless he is, under the ICA Act, 1963 (Act 170) a member of the ICA; and is not disqualified under subsection (2) of this section”. Qualification of the auditor (plc)

10. Qualifications A member of a professional body recognised by a companies legislations of the country as competent to do statutory audit. Eg ICAG Experienced accountants were granted special license by the Ministry of Trade to practice and was imported into Co’s Code but it does not exist. Accountants with foreign qualification could be appointed provided their qualification is registrable with the local body and a reciprocal arrangement exists between the 2 countries.

11. Disqualification Technical training and proficiency as well as independence are the key elements in the duties of an auditor. Hence one disqualified is; A person who is not a member of a recognised professional body. An officer of the company or any associated company. A partner or employee of an officer or servant of the company.

12. Disqualification Section 296 (2) of the Act states as follows; “The following persons shall be disqualified for appointment as auditor of a public company, namely, An officer of the company or any associated company. A partner or employee of an officer or servant of the company. An infant Any person found by a competent court to be a person of unsound mind Anyone in respect of whom an order shall have been made. (186) An undischarged bankrupt. Body corporate unless members of incorporated partnership.

13. Duties of an auditor The auditor in reporting on the financial statements of the company should satisfy himself that; i. The SOFP gives a true and fair view of the state of the company’s affairs at the B/S date. ii. The P/L a/c gives a true and fair view of the profit or loss for the period ended on that date. iii. The accts have been prepared in accordance with the applicable reporting framework (Co.s Code & standards). iv. Proper accting records have been kept by the company, and also that the auditor has received proper returns. v. The entity’s FS are in agreement with the books of account.

14. Remuneration Auditors fee is his remuneration. It is based on; The time spent on the audit Volume of work done Skill needed to conduct the audit

15. Fixing of the fee It is agreed upon by the person(s) who made the appointment and the auditor. Directors are given the authority to fix the fee.

16. Remuneration issues as per Sect 134 (10) of Co’s Act (i) In the case of an auditor appointed by the Director or by the Registrar, remuneration may be fixed by the Director or the Registrar, as the case may be, for the period expiring at the conclusion of the next AGM of the company. (ii) Subject as aforesaid, remuneration shall be fixed by an ordinary resolution of the company or in such manner as the company by an ordinary resolution may determine. Auditors adopt several practices including price bidding Contingent fee approach is prohibited by the profession and it is unethical.

17. IFAC on fees (i) Fees should be mentioned in the letter of engagement. (ii) Fees should be charged in accordance with (a) Seniority and expertise of personnel used (b) Time spent, (c) Degree of risk of responsibility involved, (d) Urgency of work, (e) Apportionable overheads and (f) Importance of the work to the client. (iii) Percentage of turnover or profit and contingency fees should not be charged except where customary (for eg in insolvency work)

18. Avoiding contentious issues on fees (i) Fees should always be charged in accordance with the rules including code of ethics of the profession (ii) As quoted or tendered (iii) As agreed in the letter of engagement Other issues Explanation should always be given to clients when fee is for extra work, different from previous years or in excess of quotation, estimates or tender.

19. Removal of Auditor Appointed auditor can be removed before expiring of his term of office by members at a GM where appropriate resolution will be passed to that effect. Directors cannot automatically sack auditors under the Code (Section 135) In practice, directors are usually instrumental in the removal of the appointed auditor, especially where there are irreconcilable differences of opinion between them

20. Removal of Auditor (contd) The company must send to the auditor a copy of the special notice to the GM at which the removal of the auditor will be sought from members. Auditor can make representation in writing upon receipt of the notice. The company is duty-bound either to circulate the auditor’s representation or have them read at the meeting apart from the auditors right to be heard orally. These give the auditor the opportunity to put across his position to guide members in their voting direction.

21. Rights of auditor after removal To attend a GM at which his term of office would have expired and other meetings to fill the vacancy created by his removal. This is to have the opportunity to explain if directors want to discredit him.

22. Resignation of auditor Auditor can only pursue his appointment and comply with relevant statutory obligations if there are no impediments in his way. It is unprofessional if he continues to act knowing that certain circumstances make it impossible for him to do so. The law recognizes the auditor to resign before his term of office instead of expressing unwillingness to seek reappointment.

23. Resignation of auditor (contd) Auditor wishing to resign should give adequate notice and attach a statement to his notice of resignation to explain things (if any) which he deems fit to be made known to members or creditors. Auditor may request directors to arrange general meeting for the purpose of his resignation. Resignation right enables auditors to assert his independence and to exhibit fairness and flexibility.

24. Rights and Powers of the auditor. Section 136 of the Act 1. Section 136(1) of the Companies Code stipulates: “The auditors under this Code shall not be deemed to be officers or agents of the company, but shall in a fiduciary relationship to the members of the company as a whole and shall act in such manner as faithful, diligent, careful, and ordinarily skilful auditors would act in the circumstances”

25. Rights and powers of auditors (2). Right of access at all times to all books, documents and vouchers. It is an offence punishable by a term of imprisonment, fine or both, if any officer or a company makes a materially false statement either orally or in writing to the auditor or does not give the auditor the much needed freedom from all sorts of hindrances when he conducts his audit. (3) (3) the right to demand from the directors and officers such information and explanations as he thinks necessary for the performance of his statutory duties.

26. Rights and powers of auditors Section 136 (3) states; “every auditor shall have a right at all times to the books and accounts and vouchers of the company such info and explanation as he thinks necessary for the performance of his duties”

27. Rights and powers of auditors (4) The right to receive notices to attend and speak on matters that concern him as auditor. (4) (5) May apply to the court for directions in relation to any matter arising in connection with the performance of their functions under the Code. (6) May expressly or impliedly undertake obligations to the company in relation to the detection of defalcation, and advice on accounting, costing, taxation, raising of finance and other matters.

28. (7) Primary auditor has the right to require subsidiaries and their auditor to provide such information and explanation as may be needed. (8) The right to be independent and it is provided in the Act Question; Can the appointed auditor compel a company to keep proper books of accounts? Rights and powers of auditors

29. Professional responsibility towards the audit client. Ethical requirements (Fundamental principles). Professional skepticism Professional judgement

30. Fundamental principles Integrity Objectivity Professional competence and due care Confidentiality, Professional behaviour

31. The Fundamental Principles INTEGRITY: Members shall be straightforward and honest in all professional and business relationships. OBJECTIVITY: Members shall not allow bias, conflict of interest or undue influence of others to override professional or business judgements. 31

32. The Fundamental Principles PROFESSIONAL COMPETENCE AND DUE CARE: Members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on current developments in practice, legislation and techniques. Members shall act diligently and in accordance with applicable technical and professional standards. 32

33. Confidentiality Members shall respect the confidentiality of information acquired as a result of professional and business relationships and, therefore not disclose any such information to third parties without proper and specific authority, or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships must not be used for the personal advantage of the professional accountant or third parties. 33

34. Professional Behaviour. Members should comply with relevant laws and regulations and should avoid any action that discredits the profession. 34

35. Professional scepticism Professional scepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

36. Professional judgement. Professional judgement is the application of relevant training, knowledge and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit.

37. Personal qualities required of the auditor (i) Independence; He should be independent of the client. Should be free from pressure and personal bias. Credibility is enhanced if they are and are seen to be free of any interests. (ii) Objectivity; This is a state of mind. All considerations relevant to the tasks on hand should be regarded. He should be aware of personal relationships, financial involvement, conflict of interests, etc.

38. Personal qualities required of the auditor (contd) (iii) Integrity; He should maintain a high standard of conduct at all times. Should be honest and not mislead or misrepresent facts. (iv) Competence; He must be technically competent