MODULE 1 THE AUDITOR AND THE AUDIT ENVIROMENT

MODULE 1 THE AUDITOR AND THE AUDIT ENVIROMENT

OUTLINE The Statutory Audit: need, objective, focus, nature and structure Public interest, expectations, interrelationships between auditor, directors(management)and shareholders and other users of financial statements, including their respective roles and the auditor s duties to these parties. The audit profession in Nigeria: Organization and regulation including guidelines and standards of the Association and other regulatory bodies. The audit implication of SAS and Nigerian Statement of Auditing (NSA), International Standards of Auditing (ISAs) and International Accounting Standards (IFRS/IAS) Director s responsibilities versus auditor s responsibilities for financial statements and internal controls; distinction between external and internal audit Corporate governance

The Statutory Audit: Need, objective, focus, nature and structure Statutory Audits: A statutory audit is an audit carried out within the aegis of legislation usually based on the compulsory audit requirements of the CAMA 1990. In this regard, the requirements of the controlling statute should be noted, and preparation made to comply with them. It is a legally required review of the accuracy of a company's or government's financial records. The purpose of a statutory audit is the same as the purpose of any other audit - to determine whether an organization is providing a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records and financial transactions.

For example, a state law may require all municipalities to submit to an annual statutory audit examining all accounts and financial transactions and to make the results of the audit available to the public. The purpose of such an audit is to hold the government accountable for how it is spending taxpayers' money.

Objective of Statutory Audit The principal objectives of the Statutory Audit is to ensure that the financial statements i.e. the Balance Sheet, Profit & Loss Account and Schedules forming part of Balance sheet and Profit/ Loss account, give a true & fair view and are free from any material misstatements. We ensure that the financial statements are drawn up with proper presentation and disclosure requirements as per the applicable laws. We also ensure that the audit has fulfilled all the legal compliances. Under various statutes the business or entities have to get accounts audited.

Inter-relations between auditors, directors and shareholders The shareholders are the owners of the company. They are the members. It is they who have pooled their resources together to fund the activities of the company. They bear the ultimate risk/ in the event of failure. The directors act as professional managers. They are employed by the shareholder to manage the company's resources. Periodically, the directors render account of stewardship. These accounts of stewardship are referred to as the financial statements. The appointment of the auditors is generally made by the shareholders as a body. The auditors primarily, act as agents to the shareholder and are charged with the duty of examining and reporting on the financial statements produced by the directors.

This relationship between the auditors and the shareholders on the one hand, and the auditors and the directors on the other hand, should be constantly borne in mind during the audit. Even though, the auditor is constantly brought into contact with the directors, who conduct the business, he is not acting for them at all. He is appointed to act as a check upon the directors and to report to the shareholders, who are the proprietors of the company, on the truth and fairness of the view shown by the accounts.

Audit Standards and Regulation including Guidelines This Nigerian Standard on Auditing (NSA) deals with the independent auditor s overall responsibilities when conducting an audit of financial statements in accordance with NSAs. Specifically, it sets out the overall objectives of the independent auditor and explains the nature and scope of an audit designed to enable the independent auditor to meet those objectives.

Audit Standards and Regulation including Guidelines The practice of Accountancy worldwide is governed by sets of rules and guidelines. These rules and guidelines are compiled into standards. There are two sets of standards governing accounting practice in Nigeria. They are: (a) International Standards: (i) IAS: International Accounting Standards (ii) SIC: Standing Interpretations Committee. (b) Local Standards: (i) SAS: Statement of Accounting Standards (ii) AG: Auditing Guidelines

International Financial Reporting Standards Each standard discusses the Accounting treatment of a particular item or group of items. A summary of the international standards are as follows: IAS 1 - Presentation of Financial Statement. IAS 2 - Inventories. IAS 3 - (Superseded by IAS 27 and IAS 28). IAS 4 - (Superseded by IAS 16, IAS 22 and IAS 38). IAS 5 - (Superseded by IAS 1). IAS 6 - (Superseded by IAS 15). IAS 7 - Cash flow Statements. IAS 8 - Net profit or loss for the Period, Fundamental Errors and changes in Accounting Policies. IAS 9 - (Superseded by IAS 38). IAS 10 - Events after the Balance Sheet date.

IAS 11 - Construction Contracts. IAS 12 - Income Taxes. IAS 13 - (Superseded by IAS 1). IAS 14 - Segment Reporting. IAS 15 - Information Reflecting the Effects of Changing Prices. IAS 16 - Property, Plant and Equipment. IAS 17 - Leases. IAS 18 - Revenue. IAS 19 - Employee Benefits. IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance. IAS 21 - The Effects of Changes on Foreign Exchange in Rates. IAS 22 - Business Combinations. IAS 23 - Borrowing Costs. IAS 24 - Related Party Disclosures.

IAS 25 - (Superseded by IAS 39 and IAS 40). IAS 26 - Accounting and Reporting by Retirement benefit Plans IAS 27 - Consolidated Financial Statements and Accounting for Investments in Subsidiaries. IAS 28 - Accounting for Investments in Associates. IAS 29 - Financial Reporting in Hyperinflationary Economics. IAS 30 - Disclosures in the Financial Statements of Bank and Similar Financial Institutions. IAS 31 - Financial Reporting of Interests in Joint Ventures

IAS 32 - Financial Instruments: Disclosure and Presentation IAS 33 - Earnings Per Share. IAS 34 - Interim Financial Reporting. IAS 35 - Discontinuing Operations. IAS 36 - Impairment of Assets. IAS 37 - Provisions, Contingent Liabilities and Contingent Assets. IAS 38 - Intangible Assets. IAS 39 - Financial Instruments: Recognition and Measurement. IAS 40 - Investment property. IAS 41 - Agriculture (effective January 1, 2003).

Auditing Standards and Guidelines (AG) AG 1 - Auditing Guideline on Engagement Letters AG 2 - Auditing Guideline: Prospectus and Reporting Accountant

Corporate Governance Corporate governance is defined as the system by which the affairs of companies are directed and controlled by those charged with the responsibility. It is an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders. This is achieved by directing and controlling management activities with good business shrewdness, objectivity, accountability and integrity. Good corporate governance is reliant on a sound internal control system, existing legislation, and a healthy board culture which safeguards policies and processes.

Codes of Best Practices on Corporate Governance The code of best practices on Corporate Governance is treated under the following: (a) Board of Directors; (b) Shareholders; and (c) Audit Committee.

Responsibilities of the Board of Directors The board of directors should be in control of the affairs of the company in lawful and efficient manner such that the company continuously improves on its value creation. The board should, with due regard to the other stake-holders interest, ensure that the value created is shared among the shareholders and employees. The functions of the board should include but not limited to the following: (i) Strategic planning; (ii)selection, performance appraisal and compensation of senior executive; (iii) Succession planning;

(iv) Communication with shareholders; (v) Ensuring the integrity of financial controls and reports; and (vi) Ensuring that ethical standards are maintained and that the company complies with the laws of Nigeria.

Shareholders Rights and Privileges (a) The company through the directors, should ensure that shareholders. statutory and general rights are protected at all times; (b) It should be the responsibility of shareholders to elect directors and approve the terms and conditions of their directorships; (c) The venue of the annual general meeting should be carefully chosen such that the majority of shareholders can attend and vote at the meeting and not be disenfranchised in terms of distance and cost; (d) Before the annual general meeting, notices should be sent at least 21 working days with such details as annual reports, audited financial statements and other information that will enable them vote properly on any issue; (e) A separate resolution should be proposed by the board at the general meeting on each substantial issue in such a way that they can be voted for in an organized manner; (f) The board should ensure that decisions reached at the general meetings are implemented;

(g) There should be at least one director on the board to represent minority shareholders; (h) Unless they are in a competing business or have conflicts of interest, that warrant their exclusion, shareholders holding more than 20% of the total issued share capital of the company should have a representative on the board; (i) The board should ensure equal treatment of all shareholders such that none is given preferential treatment or superior access to information or other materials; and (j) The annual general meeting should be used by the board to communicate with the shareholders and encourage their participation.

Audit Committees (a) Audit committees should be established by companies with the key objective of raising standard of corporate governance. (b) The committee should not be under the influence of any dominant personality on the main board, neither should they get in the way and obstruct executive management. (c) They should not act as a barrier between external auditors and the executive directors or encourage the main board to abdicate its responsibilities in reviewing and approving the financial statements. (d) Audit committees should be made up of strong and independent persons.

Composition of the Audit Committee (a) Audit committee should be established in accordance with CAMA Section 359 (3), with not more than one executive director; (b) A majority of the non-executives serving on the committee should be independent of the company in terms of management or business or other relationship, which could materially interfere with the exercise of their independent judgments as committee members; (c) A non-executive director nominated by members of the audit committee should be the chairman of the committee; (d) Membership of the audit committee should be for a fixed tenure, however any member of the committee should be eligible for re-election after his tenure; and (e) The secretary of the audit committee should be the company secretary, auditor or such other person nominated by the committee.

Review Questions 1. Highlight the standards governing accounting practice in Nigeria. 2. Enumerate the objective and nature of statutory audit. 3. Discuss the roles of Auditors to directors (management) and shareholders. 4. State the audit implications of Nigerian Statement of Auditing (NSA), International Standards of Auditing (ISAs) and International Accounting Standards (IFRS/IAS). 5. What are the basic differences between internal and external audit?

Reference Adebisi.J.F (2009), Auditing, Investigation and Assurance Services, Bee Printing & Publishing Co, Abuja Nigeria. ANAN Study Pack