INTRODUCTION
Auditing is a means of evaluating the effectiveness of a company's internal controls. Maintaining an effective system of internal controls is vital for achieving a company's business objectives, obtaining reliable financial reporting on its operations, preventing fraud and misappropriation of its assets, and minimizing its cost of capital. Both internal and independent auditors contribute to a company's audit system in different but important ways. OR
Auditing is the analysis of the financial accounts/records, by a qualified accountant, and procedures of a firm or organization. This is essential in order to gain a fair perspective on the company's financial statements. With auditing, potential investors and creditors can look at the financial statements to decide whether to invest in a business or not.
Accounting refers the process or work of keeping financial accounts[1]. Under section 151 (1) (a)[2] of the Companies Act proved for the mandatory requirement of company to keep in English or Swahili proper books of accounts which are sufficient to show and explain the companies transactions.
Auditing of an account according to section 151 is mandatory requirement to the company under Companies Act[3]
The audit of company account is the process begins even before the auditor accepts an engagement with a prospective client. Prior to accepting an engagement, the audit firm will make a preliminary review to assess the potential risks, the nature and complexity of the prospective client’s business, and whether the audit firm has the resources and expertise to perform the audit[5].
After accepting the engagement, the audit team meets with management of the company and the audit committee and begins to construct an audit plan based on an understanding of the company’s business, its risks, and its controls to mitigate such risks, with a focus on the likelihood of any material misstatements in the company’s financial statements. The auditors might review the public record, or gather information from outside analysts to learn about the industry and the company.
The auditors’ determination of the company’s significant accounts and the type of transactions the company is involved, upon the prepared group accounts and under section 151(1-4) read together with section 153 in conformity with section 154 of the said Act. The planning process includes identifying the necessary audit evidence and the most effective procedures for collecting it. The amount of time required to complete an audit depends in large part on the complexity of the task[6].
The audit process of account of the company ends with the completion of various quality control procedures prior to the audit firm’s issuance of its report, including review procedures performed by another executive of the audit firm. The examination of the financial statements includes sales, cash receipts, inventory levels and valuation, outstanding bills, liabilities, payroll and other operating expenses. Auditors will typically visit company offices, production facilities and other locations to learn about the business and verify the existence of physical assets or operations reported in the financial statements[7].
Auditors shall report on various fiscal report under section 161(1) of the Companies Act[8] by comparing the company’s experience with industry trends and patterns as they analyze whether the data makes sense. Individual metrics such as margins, inventory levels, uncollected revenues, late payments or debt levels that are out of line with similar companies may be an indicator that something is amiss and that further procedures[9]. There after the auditor is required to give opinion under section 163(1) of the Companies Act (supra)
In designing the audit, the auditor will consider whether certain areas might require special scrutiny because of a company’s business model. For example, examining inventory and inventory controls may be particularly important when auditing a manufacturer or a retailer.
Similarly, examination of loan documentation is important when auditing a financial institution[10]. In examining internal controls over financial reporting, auditors will seek to ensure that the company has established effective procedures to reduce the chances of errors or fraud. Internal controls can be as simple as requiring a second signature on checks over a certain amount or as complex as how and which employees are given access to sensitive information, including company data and computer programs under section 158, 160 and section 161 of the Companies Act (Supra) that the report must be signed by directors and the auditors before it is laid before the annual general meeting.
Auditors report shall be delivered to all members of the company before the annual meeting at leat twenty one days before as provide under section 164(1) of the Companies Act(supra) and in case of default of the requirement providedunder section 164(1)(a-c), the every officer shall be responsible to fine under section 164(2) of the Companies Act.
The auditors report together with the directors report are required to be deliver to the registrar, save for exception to the private company who appoint their auditors under section 171 of the Companies Act
RELEVANCE OF ACCOUNTING AND AUDITING TO THE COMPANY
Having an effective audit system is important for a company because it enables it to pursue and attain its various corporate objectives. Business processes need various forms of internal control to facilitate supervision and monitoring, prevent and detect irregular transactions, measure ongoing performance, maintain adequate business records and to promote operational productivity. Internal auditors review the design of the internal controls and informally propose improvements, and document any material irregularities to enable further investigation by management if it is warranted under the circumstances[11].
It relevance on strong sense of internal control Avoid the risk of Misstatement Auditors In examining internal controls over financial reporting, will seek to ensure that the company has established effective procedures to reduce the chances of errors or fraud. Internal controls can be as simple as requiring a second signature on checks over a certain amount or as complex as how and which employees are given access to sensitive information, including company data and computer programs, assess the risk of material misstatement in a company's financial reports[12].
Without a system of internal controls or an audit system, a company would not be able to create reliable financial reports for internal or external purposes. Thus, it would not be able to determine how to allocate its resources and would be unable to know which of its segments or product lines are profitable and which are not. Additionally, it could not manage its affairs, as it would not have the ability to tell the status of its assets and liabilities and would be rendered undependable in the marketplace due to its inability to consistently produce its goods and services in a reliable fashion. Accordingly, an audit system is crucial in preventing debilitating misstatements in a company's records and reports[13].
Detection and Fraud Prevention Internal audit serves an important role for companies in fraud prevention. Recurring analysis of a company's operations and maintaining rigorous systems of internal controls can prevent and detect various forms of fraud and other accounting irregularities. Audit professionals assist in the design and modification of internal control systems the purpose of which includes, among other things, fraud prevention. An important part of prevention can be deterrence, and if a company is known to have an active and diligent audit system in place, by reputation alone it may prevent an employee or vendor from attempting a scheme to defraud the company.
Reliance to Shareholders In case of joint stock company, the shareholders have no hand in the actual running of the business because the management was in the hands of the directors. So the shareholders are assured in the presence of the process of audit that the directors have not taken any undue advantage of their status and position[14].
Moral Check The process of audit will establish a check on the minds of the staff working in the business and they will not be able to commit any irregularity, as they will have a fear and will also be aware that the accounts will be examined in the near future and that action would be taken against them if any irregularity is discovered. Thus the audit prevents the happening of any irregularity before it starts and the staff hence becomes more active and responsible. The fear of their getting caught act as a moral check on the staff of the company[15].
Reliance by Partners If a new partner is to be inducted in the business; the audited account balance sheet will be a good base to estimate the value of good will. Moreover, the audited accounts of a company by an independent person will minimize the chances among the partners[16].
It is relevance for the owners satisfaction on the accuracy of data for without independent audits, investors would have to rely on management’s word that its financial statements are accurate in respect of sales, cash receipts, inventory levels and valuation, outstanding bills, liabilities, payroll and other operating expenses. This is because thorough audit that the owner will be satisfied about the business operations and working of its various departments. It is the auditing which helps in evaluation of threats economic efficacy and quality vis avis testing out the performance of new technology due to it. It becomes easier to evaluate property etc. If the accounts are audited when the business is disposed off and as a result no dispute whatsoever will arise[17]
It is relevance for the owners satisfaction on the accuracy of data for without independent audits, investors would have to rely on management’s word that its financial statements are accurate in respect of sales, cash receipts, inventory levels and valuation, outstanding bills, liabilities, payroll and other operating expenses. This is because thorough audit that the owner will be satisfied about the business operations and working of its various departments. It is the auditing which helps in evaluation of threats economic efficacy and quality vis avis testing out the performance of new technology due to it. It becomes easier to evaluate property etc. If the accounts are audited when the business is disposed off and as a result no dispute whatsoever will arise[17]
It is relevance in analyzing and understanding financial data hence detection and prevention of Errors The errors whether committed innocently or deliberately are discovered by the process of audit and its presence prevents their occurrence in the future. No one will try to commit an error or fraud as the accounts are subject to audit and hence they will have a fear of being detected.In examining internal controls over financial reporting, auditors will seek to ensure that the company has established effective procedures to reduce the chances of errors or fraud. Internal controls can be as simple as requiring a second signature on checks over a certain amount or as complex as how and which employees are given access to sensitive information, including company data and computer programs[18].
Verification of Books Another advantage of audit is the verification. Of the books of accounts, which helps in maintaining the records up to date at all times. Also up to Date Record Due to the fear of audit the work of accounting always remains up to date and correct[19].
It is relevant in identifying the key areas of improvement in the business via Independent Opinion Auditing is very useful in obtaining the independent opinion of the auditor about business condition. Auditors will typically visit company offices, production facilities and other locations to learn about the business and verify the existence of physical assets or operations reported in the financial statements. If the accounts are audited by an independent auditor, the report of the auditor will be true and fair in all respects and it will be of extreme importance for the management of the company hence this is of the vital significance for the development of the company.
Loan Facility Money can be borrowed easily on the basis of audited balance sheet from financial institutions. If accounts are audited the true picture will be visible to banks and it will be easy for them to issue loans as early as possible. in all respects. Reliance by Outsiders like creditors, debenture holders and banks etc[20]. Will rely on the business accounts if they are audited by an independent authority (external auditor)[21].
It gives a true and fair view of the state of affairs of the company[22]. A balance sheet must not be a mere inventory. It is supposed to be a pictorial representation of trading position of the company[23]. So accounting and auditing helps to know the true and fair view of the state of affairs of the company. This is provided for under section 154 (1)[24]of the Companies Act.
It disclose with reasonable accuracy at any time, the financial position of the company, at that time. The accounts of the company when it is audited it shows the financial position of the company at that particular time. When account is audited it can show the liability and assets of the company. This is provided for under section 151 (1) (a) of the companies Act[25].
Relevance of auditing to the public
Safety from Exploitation The interest of the public and shareholders is safe and guaranteed in the presence of audit. Otherwise they may have been exploited by the management. This is the main reason for which the audit has been made mandatory for public limited companies[26].
Facility for Prospective Investor, Many investors likely would be less willing to risk their assets on data that has not withstood independent scrutiny. Because the auditor follows professional standards in examining the books against established criteria, to determine whether the financial statements provided by management reflect the business’s operations and transactions during the time covered by those statements. The prospective investor can easily analyze the position of the company gaining through the audited financial statements of the company and can make the decision to invest or not in the company[27].
Satisfaction about Business Operations for only by presence of audit to the company account, the public in general and the owner of the business in particular receive the reliable statement of accounts, indicating the true financial position of the concern and they can collect result from it and feel satisfaction about it in every respect. This is because auditors may compare the company’s experience with industry trends and patterns as they analyze whether the data makes sense. Individual metrics such as margins, inventory levels, uncollected revenues, late payments or debt levels that are out of line with similar companies may be an indicator that something is amiss and that further procedures are required. In designing the audit, the auditor will consider whether certain areas might require special scrutiny because of a company’s business model. For example, examining inventory and inventory controls may be particularly important when auditing a manufacturer or a retailer.
Relevance of auditing to the State
Privatization of Industries If the nationalized industries are running in losses, the government may denationalize them after going through the audited accounts of such industries.
Easy Assessment of Tax In the presence of audited accounts the assessment of tax becomes very easy because the tax is imposed on the basis of audited accounts[28]. it is possible for the law require the company to deliver the audited report and the report of the directors to the registrar hence reliable information on fiscal status of the company in term of profit and loss if any[29]. hence quick Recovery of Taxes As the assessment orders can easily be made it will lead to early recovery of taxes.
Leading to economic Progress The joint stock companies play a vital role in giving a boost to the economic progress of a country. The successful operation of the companies would have not been possible without the presence of audit. So we can easily say that presence of audit leads to economic progress of the country[30].
The financial position of the company, at that time. The accounts of the company when it is audited it shows the financial position of the company at that particular time. So there cannot be tax evasion as the financial position of the company is shown by audit report of an account of the company. This is provided for under section 151 (1) (a) of the companies Act[31].
How ever it can be concluded that though auditing plays significant role in the prosperity of the company future prosperity and public concern it it to be taken by caution that it might be irrelevant on the ground that auditing does not take into account the productivity and the skills of the employees of the business. The financial data is never current and does not reveal much about the present financial position of a company. and that different accountants use different techniques, therefore it would be hard to compare audits between companies who have used different accountants and for smaller companies, hiring an accountant firm to carry out an audit can be costly. and the fact that bad audit can discourage investment. is not to be ignored for it can be time consuming to answer the auditor's questions and the business may not work to maximum capacity. However the process of the auditing has much weigh than its cons[32].
[1]Oxford advanced learners dictionary, 8th edition
[2]Act no 12 of 2012
[3]Act no 12 of 2002
[4]Act no 12 of 2002
[5]Charles. W. (1997),Business law,16th edition.
[6]Charles. W. (1997),Business law,16th edition.
[7]Ronald,A. A, (1980), Business law11th edition. pg 339
[8]Act no 12 of 2002
[9]Ashok. K .B,(2007), Company law, 12th edition. pg 79
[10]Ronald,A. A, (1980), Business law11th edition. pg 339
[11]Ronald,A. A, (1980), Business law11th edition. pg 339
[12]Ashok. K .B,(2007), Company law, 12th edition. pg 79
[13]Ronald,A. A, (1980), Business law11th edition. pg 339
[14]Ashok. K .B,(2007), Company law, 12th edition. pg 79
[15]Ronald,A. A, (1980), Business law11th edition. pg 339
[16]Ashok. K .B,(2007), Company law, 12th edition. pg 79
[17]Ronald,A. A, (1980), Business law11th edition. pg 339
[18]Ashok. K .B,(2007), Company law, 12th edition. pg 79
[19]Ronald,A. A, (1980), Business law11th edition. pg 339
[20]Ashok. K .B,(2007), Company law, 12th edition. pg 79
[21]Ronald,A. A, (1980), Business law11th edition. pg 339
[23]Avatar singh, mercantile law 8th edition
[24]Act no 12 0f 2002
[25]Act no 12 of 2002
[26]Ronald,A. A, (1980), Business law11th edition. pg 339
[27]Ashok. K .B,(2007), Company law, 12th edition. pg 79
[28]Ashok. K .B,(2007), Company law, 12th edition. pg 79
[29]Ronald,A. A, (1980), Business law11th edition. pg 339
[30]Ronald,A. A, (1980), Business law11th edition. pg 339
[31]Act no 12 of 2002
[32]Ashok. K .B,(2007), Company law, 12th edition. pg 79
