The Accountant-May-June 2017

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Financial reporting and assurance By Stephen Obock, sobock@kpmg.co.ke The Auditor’s Role and Public Expectations Long Time Coming The role of the auditor has been dynamic over the years to suit the changing needs and expectations of society. The public has put the auditor on the spot regarding their role following the recent company bankruptcies and fraud cases reported in the country. The auditor is seen by the public as a watchdog acting as a protector and guardian against inefficiencies and illegal practices. This creates a perception that a clean audit opinion guarantees good financial health. This perception creates an expectation gap, i.e. the difference between the purpose of an audit under the International Standards on Auditing (ISAs) and what the public understands as the auditor’s role. To understand the role of the auditor and the public expectation, it is necessary to appreciate the history of auditing. An audit is an objective examination and evaluation of the financial statements of an organization to make sure that the records are a true and fair reflection of the transactions that happened. Auditing has existed since the beginning of human civilization. In the late nineteenth century, audits focused on detection of fraud and involved a review of all transactions (Lee, 1988). Fraud was a great concern as is today and the main objectives of auditing were the prevention and detection of fraud and errors. In the late nineteenth century, businesses grew rapidly in the United States (USA) and England. People began to invest monies into large corporations. The volume of transactions increased making a complete examination of all transactions expensive and inefficient. To make audits more efficient and less expensive, the USA and England introduced sampling around 1885. Auditors performed selected tests on accounts rather than examining all transactions as had been the norm (Staub, 1942). After World War I, Governments increased income taxes necessitating improvement of accounting principles to mitigate the increase in taxes (Staub, 1942). Financial advice and tax planning emerged leading to periodical auditing of companies. Review of Internal controls was introduced in 1920s- 1930s ushering in modern day auditing approaches. The auditors evaluated controls and reduced detailed testing if the controls were effective, making audits affordable and efficient. Even with introduction of sampling and reliance on internal controls, the general public still understood the objective of an audit as being the prevention and detection of fraud and errors (Staub, 1942). This increased the expectation gap. According to ISAs, the objective of an audit is to obtain reasonable assurance whether the financial statements as a 4 MAY - JUNE 2017
Financial reporting and assurance The primary responsibility for the prevention and detection of fraud and error rests with those charged with governance i.e. directors and management. This involves a commitment to creating a culture of honesty and ethical behaviour, enhanced by a strong control environment and an active oversight by those charged with governance. whole are free from material misstatements, whether due to fraud or error. Reasonable assurance is achieved when the auditor obtains sufficient, appropriate audit evidence to reduce the risk of material misstatements. Reasonable assurance is not an absolute level of assurance, there are inherent limitations of an audit which result in the audit evidence on which the auditor draws conclusions and bases opinion being persuasive rather than conclusive. The auditors’ work involves designing procedures to obtain sufficient, appropriate audit evidence about whether the financial statements are free from material misstatements. This requires the auditor to maintain an attitude of professional skepticism, apply professional judgment and take due care to ensure detection of material misstatements due to fraud or error. The primary responsibility for the prevention and detection of fraud and error rests with those charged with governance i.e. directors and management. This involves a commitment to creating a culture of honesty and ethical behaviour, enhanced by a strong control environment and an active oversight by those charged with governance. Owing to inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the ISAs. The risk is particularly high in the case of fraud because fraud may involve carefully organised schemes designed to conceal it, or intentional misrepresentations made to the auditor. Stakeholders should hold those charged with governance and management accountable since they have the primary responsibility of prevention and detection of fraud and error. The auditors are in most cases the last line of defence. Nonetheless, gross negligence in the auditor’s work would subject them to disciplinary actions by regulators. The auditors’ role will keep changing. The existence of expectation gap is inevitable as the natural time gap between the changing expectation of the public and the response by the profession remain. However, Flint (1998) advises that auditors should be sensitive to the changing expectation of the public while at the same time containing these expectations within the constraints of what is possible. There are inevitably economic and practical limitations on what an auditor can do. Honesty, transparency and accountability must be the building blocks of true and fair presentation of financial statements. The writer is an Audit Senior Manager with KPMG Kenya. The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG. MAY - JUNE 2017 5
Page 1 and 2: JOURNAL OF THE INSTITUTE OF CERTIFI
Page 3 and 4: TABLE OF CONTENTS 26 COVER STORY Wi
Page 5: EDITORIAL Dear Reader, The matter o
Page 9 and 10: Financial reporting and assurance T
Page 11 and 12: Business Practice and Development I
Page 14 and 15: Business practice and development O
Page 16 and 17: Economy THE IMPACT OF HYPERINFLATIO
Page 18 and 19: Management THE POWER OF PERSUASION
Page 20 and 21: MANAGEMENT UNDERSTANDING THE RISK M
Page 22: MANAGEMENT Gor Mahia fans engaging
Page 25 and 26: Finance and Investment will also ne
Page 27 and 28: Information Technology DATA GOVERNA
Page 29 and 30: COVER STORY Daniel Susskind, a lect
Page 31 and 32: CPA Centre TO LET Structure • Ele
Page 33 and 34: governance the generation of a plan
Page 35 and 36: Public Policy Auditor General Edwar
Page 37 and 38: Public Policy and ensure government
Page 39 and 40: WORK PLACE If you are in the catego
Page 41 and 42: WORK PLACE Wherever, you find yours
Page 43 and 44: WORK PLACE Does this thought ever c
Page 45 and 46: WORKPLACE working remotely and bein
Page 47 and 48: WORK PLACE Being self-employed mean
Page 49 and 50: INSPIRATION don’t always come tru
Page 52 and 53: SOCIETY POSTPARTUM DEPRESSION IS A
Page 54 and 55: SOCIETY immediate family members an
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ENVIRONMENT Society in collaboratio
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HEALTH DEALING WITH CONSTIPATION Co
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TID BITS Below are selected article
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BOOK REVIEW Reviewed by Angela Muti
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TRAVEL By Clive Mutiso, clivemutiso
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KAMPALA ««««« PICTORIAL PROGRE
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ACCOUNTABLE RECIPES By Sharon Gaton
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The Accountant-May-June 2017

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