Audit theory notes 2016

Topic 1
INTRODUCTION
1.1.0 Background
Early Auditing (Vouching Audits)
Auditing began as a vouching process and developed from the word audire, which means
to hear. In early Audits, an auditor was supposed to conduct vouching audit, which
implied checking all transactions so as to detect errors and frauds, which as of then was
the main objective of an audit.
Under this process the auditor was supposed to prove the true and correct view of
company’s financial affairs, which necessitated checking all the transactions, it was
possible because transactions were few and could be audited in one single session.
Modern Auditing (system based audits)
These audits were introduced mainly after 1948. Under these audits, the auditors are
expected to rely on the presence and strength of internal control system of the
organization. In this case the auditor will apply tests on a sample of entries drawn from
population of entries and results of the sample are taken to represent those of the entire
population.
Such audits were necessitated by the fact that transactions of many organizations
increased, making it difficult for an auditor to check for all of them in one session thus
the need for sampling. This also meant that the auditor would no longer prove the true
and correct view but rather the true and fair view of company’s financial state of affairs.
1.2.0 Definition of Auditing
Auditing is an independent examination of books of accounts and underlying documents
of an enterprise by a qualified auditor so as to ascertain: -
• Whether the enterprise has kept proper books of accounts as per requirements of
the Company Act
• Whether financial statements agree with contents of accounts and
• Whether such statements portray the true and fair view of company’s state of
affairs as at a given date.
Key issues in the above definitions
1. Independence
An auditor is an independent person and he should portray an independent attitude during
his/her examinations so as to achieve objective reporting.
It benefits the owners i.e. shareholders and third parties e.g. government, donors,
creditors etc. in that it helps the auditor to form an unbiased opinion hence credible
financial statements. The profession for that reason has given auditors guidelines to
ensure that such independence is observed both during the practice and outside the
practice. For this reason an auditor should not:
a. Give loans to or get from 3rd
parties or owners who will use his opinions.
b. He shouldn’t have blood relations with parties who will use his report.
c. He shouldn’t have any interest in the clients company in form of shares,
etc.
2. Opinion
BBA/DBA -2 – Audit Theory-Lecture Notes by ALLEN NUWAMANYA Page 1

The end product for auditors’ examination is an expression of an opinion by the auditor.
The auditors’ opinion might be negative, technically known as a qualified opinion or it
may be positive, technically known as unqualified opinion.
3. Financial Statements
These include balance sheet, Profit and loss account, cash flow statements, etc. These are
statements on which the auditor has to form an opinion as to whether they show a true
and fair view of the company’s state of affairs.
4. Underlying documents
These are documentary evidence in support of transactions in the books of accounts e.g.
receipts. From vouchers, the auditors try to ascertain whether;
• The transactions are for the current financial period.( cut off test)
• They are for the particular company in question (Client Company).
• They are properly authorized.
• Properly recorded according to generally accepted accounting principles GAAP.
5. True and Fair View
True and fair view implies that the company’s financial statements, assets or liabilities
profit or loss reflects the exact picture of the company’s financial performance.
Objectives of an Audit
These are categorized into three;
i. Statutory objectives
ii. Professional bodies requirements
iii. Incidental objectives
iv. Corporate governance objective

1. Statutory Objectives
i). To prove the true and fair view or otherwise, of the company’s financial state of
affairs. This implies that an auditor must certify the company’s financial position at the
end of the audit as to whether financial statements portray a true and fair view.
ii). The auditor is supposed to ascertain whether the company has kept proper books of
accounts which should be in agreement with the financial statements e.g. cashbook,
ledgers, Journals, Asset registers, etc.
iii). The company Act requires the auditor write a report at the end of his/her audit in
which he should communicate his findings out of his examination.
2. Professional Bodies Requirements
These require the auditor to give advice to the company in the letter of weaknesses or
management letter in which the auditor endeavors to highlight problems in the internal
control systems; budgetary controls etc.
3. Incidental Objectives
An auditor has to detect material errors and frauds so that affect the true and fair view of
the company’s state of affairs. However this duty is the role of the company’s
management and thus incidental to the auditor.
4. Corporate governance objective
There have been an increasing number of companies failing as a result of
mismanagement. There is therefore a new call for auditors to report on how companies
are managed, controlled and directed by those charged with their governance in any
statutory audit.
1.4.0 The Auditors Rights and Duties

The auditor has various detailed duties to perform in order to achieve the overall duty to
report a True and Fair view of the company’s state of affairs. In order to fulfill these
duties various legal rights are given to the auditor.
Duties of an Auditor (S. 162)
1. To report on the financial statements to form an opinion as to:-
o Whether they have obtained all information and explanations necessary
for the audit.
o Whether in their opinion, proper books and returns have been kept.
o Whether the balance sheet and profit and loss account are in agreement
with the books of accounts of accounts and returns.
o Whether the accounts have been prepared in accordance with the Act or
firms constitution.
o Whether the director's report is consistent with the accounts.
o Whether the financial statements show a true and fair view.
2. To qualify the report if the above in (1) are not satisfied.
3. To consider whether the information in the management report
(management representation) is consistent with the financial statements.
4. To include additional information in the report connected with the director's
remuneration and loan to officers, in case it is not provided in the accounts.
Rights of an Auditor (S. 162)
The rights given to the auditor under national legislation are designed to ensure that he is
able to fulfill his duties and responsibilities to the members. These include:-
1. Access to records, books of accounts, and documents at all times. Never use force
or seek court redress when refused access. Simply resign or qualify the report.
2. To get information and explanations from officers necessary for the audit.
3. To attend or get notices of meetings like any shareholder.
4. To speak at the General Meetings as an auditor.
5. To get information from branches or subsidiaries.
6. To get written resolutions proposed.
7. To remuneration if he has completed his work.
8. To sign the audit report.
9. During removal - make representations to shareholders, attend and speak at the
meeting where he is being removal etc.
1.5.0 Parties Who Benefit From Audited Accounts
1. Creditors/Suppliers
These use audited accounts to ascertain the company’s ability to meet their short-term
obligations as and when they fall due. Also if these are long term suppliers they will use
audited accounts to assess the company’s long-term liability.
2. Customers/Debtors
These are interested in company’s long term survival to ascertain whether the company
can fulfill their long term interests e.g. depositors <->bank.
3. Bankers
These use audited accounts to ascertain whether the company can settle their short-term
obligations such as bank over drafts and short-term loans, and long-term obligations such
long-term loans.
4. Government
The government is interested in audited accounts to ascertain tax liability public goods.

5. Competitors
These are interested in company’s profitability and market share and how they can
compete favorably for the markets.
6. Share holders/investors
These use audited accounts to check the capability of the organization in paying their
dividends fully and on time.
1.6.0 Advantages of Audit
1. An audit gives assurance and credibility to the accounts for the benefit of
potential investors. The investors utilize audited accounts to ascertain company’s
performance.
2. Audited accounts are used to detect errors and frauds, which could otherwise lead
to the failure of the organization.
3. Auditing of accounts enables accounting staff to keep their accounts to date and
acts as a source of management information upon which decisions will be made.
4. Audited accounts are used by organizations to raise funds from different financial
institutions.
5. Audited accounts are used by income tax authorities to assess or ascertain
company’s liability and as such avoids any possible disputes between the
company and income tax department/authorities.
6. In case of sale of business, a merger businesses acquisition or take over of
business, audited accounts are useful as they indicate the fair value of assets to be
acquired.
7. In case of partnerships the audited accounts are used;
a). As a basis of sharing profits and thereby minimising disputes between
partners.
b). As a basis of distributing assets and liabilities amongst partners in the
case of dissolution of partnership business.
Disadvantages of an Audit
1. It is usually a very expensive exercise because audit fees and audit
expenses is always too high especially for small companies.
2. If the result of the audit is bad (qualified), this can lead to the failure of the
business.
3. An audit may not be ideal for small business whose transactions are too
few.
4. An audit may not in most cases be in the interest of the owners especially
when these are managers in which case they end up frustrating the entire
process etc.
5. Expectation gap- people always believe that the auditors work is detect
errors and fraud.
1.7.0 Qualities of an Auditor
1. He should be a master of all fields of Accounting such as Financial
Accounting Cost Accounting, Management Accounting, Income Tax, etc.
2. He must be Honest - a person of unquestionable integrity
3. He must be able to ask intelligent questions in order to extract audit
evidence.
4. He must be independent i.e. he must not have interests in the firm he is
auditing.

5. He should grasp quickly the features of the organisation, e.g.
organisational structure, product line, size of the business etc.
6. He must be tactful so as to gather audited evidence according to his
opinion.
7. He should not reveal the secrets of his clients.
8. The person should be accurate, vigilant and cautious during his course of
audit work.
9. He must be able to document his opinion in an audit report .Ability to
write a good report, which is concise and clear is a requirement.
1.8.0 Differences between Auditing and Investigation
1. Auditing is carried out by Certified Public Accountants where as
investigation carried out by competent accountants.
2. Auditing is the examination of books of accounts to prove the true and fair
view where as an investigation is searching inquiry into the affairs of the
organisation.
3. Auditing covers only one financial period where as investigations could
cover more than one financial period.
4. Auditing is guided by professional ethics and guidelines where as
investigations are not guided by any standard guidelines.
5. Auditing is conducted for stakeholders where as investigations are
conducted for the owners of the organisation (investigation is conducted
for particular people and for particular purpose while Auditing is done
generally and carried for benefits of all stake holders).
1.9.0 Differences between Auditing and Accounting
1. Auditing is an examination to firm’s financial statements with the view of
expressing true and fair view of the statements. On the other hand,
accounting is simply the preparation of the books of accounts in order to
aid the management in their decision making process.
2. Auditing is usually conducted at the end of the financial year while
accounting is conducted through out the year i.e. it is a continuous
process.
3. Auditing is guided by auditing standards and guidelines (ISAs) and
supervised by professional bodies (ACCA). As for accounting, it is guided
by accounting standards (IASs or IFRSs) and guidelines and supervised by
management.
4. Auditing is performed by a qualified accountant where as accounting is
conducted by any competent accountant.
5. Auditing is conducted not only for the owners but also other stake holders
where as accounting is concluded by management.
6. Auditing is conducted using tests as an aid to the process of auditing
where as accounting is conducted using vouchers, various books of
accounts e.g. Journals, ledgers etc.
7. Auditing is based on accounting information which implies that
accounting has to be done first and auditing follows.
1.10.0 ERRORS AND FRAUDS
ISA 240 Frauds and errors states that:
An error is an unintentional mistake in financial information such as:-

i. A mathematical or clerical mistake in underlying records or accounting
data.
ii. Incorrect, misreporting of figures e.g. transposition of figures.
iii. Posting figures wrongly which may include errors of commission or
omission?
iv. Misapplication of accounting policies.
A fraud is an intentional misrepresentation of financial information by one or
more individuals among the management or employees. It may involve:-
i. Manipulation, falsification or alteration of records and documents.
ii. Misappropriation of assets usually for personal use e.g. cash.
iii. Misapplication of accounting policies.
Differences between Errors and Frauds
ERRORS FRAUDS
i. They are not
intentional.
ii. They are intentional.
ii They are easier to detect. ii. They are difficult to detect since
most of the information is destroyed.
iii. They are committed
by lower level staff.
iii. They are committed by
knowledgeable persons, in most cases
management.
Instances that Indicate the Presence of Frauds
1. Where a company is managed by one person or a small group of
people. Frauds in this case, exist due to collusion or misuse of
power.
2. Where there is high turnover of key accounting personnel, this will
lead to fraud arising out of lack of accountability.
3. Where the company’s business is collapsing and failures of
business are increasing, this may be due to frauds arising from
misuse of company’s assets.
4. The evasive or unreasonable response of management to audit
questions may be due to cover up of fraud.
5. Transactions between related parties whether they are related by
blood, financial relations or by associations. These collude to cover
up frauds.
6. Where there is inadequate working capital to support the
companies capital requirement e.g. cash.
Detection of Frauds
It’s not the duty of the auditor to detect frauds as per ISA (International Standards
of Auditing) It is the duty of management which must institute a strong internal
control system. However auditors must be aware of the risks of frauds if they are
to prove true and fair view of company’s financial statements. Therefore the
detection of frauds is an incidental duty of auditors. This may be done by the use
of following;
1). Analytical reviews

These are reviews, which involve the computation of key ratios, percentages,
average and investigation of any unfavourable variances or differences.
2). Surprise checks
The auditor may use surprise checks on items such as petty cash, stock etc.
3). Third party confirmation (Circularisation)
This is where circulars are given to creditors and debtors to fill. The replies from
these parties are then compared to company’s own record and the differences
investigated.
4). Searching inquiry
This is an investigation carried out in areas suspected to have frauds e.g. cash,
wages payments etc.
5). In depth Auditing (vouching)
This is an initial examination of selected transactions, which are checked from
initial stages to final stages.
Prevention of Frauds
This can be done through the following ways:
1. Through routine checking and balancing of accounts.
2. Institute strong division (Segregation) of duties in preparation and
interpretation of accounting information.
3. To give reasonable salaries and benefits to employees according to their
qualification experience and sensitivity of their jobs.
4. Employment of qualified staff to handle technical areas or sensitive area
of an organisation.
5. Institute periodical comparisons of the budgeted and actual situations.
6. To use where possible computerized accounting systems so as have
accounts that are computerised.
7. Clear job descriptions which involves allocation of jobs and functions
such that personnel responsibility is clearly defined.
Detection of Errors
This can be done through the following ways:
1. Use of comparative figures e.g. current years figures against previous
figures and investigation carried out, in case of unfavourable variances.
2. The auditor should trace the names of accounts from various ledgers to the
Trial balance and ensure that no account was left out in the positing
process.
3. He should count accounts or items in the current trial balance and compare
them with those of previous year’s trial balance and then investigate the
differences.
4. The auditor should check the total of balances and find out if there are any
differences.
Prevention of Errors
Errors may be prevented as follows:
1. The organization or the company should employ qualified staff within the
technical field.
2. Use of mechanized accounting systems.
3. Use of closer supervision of staff over managing sensitive jobs.
4. Use of surprise checks of items subject to errors such as cash and ledger accounts.

5. Use of automatic transfers or rotation of duties in order to cut continuity of errors
perpetrated.
TOPIC 2
2.0.0 TYPES OF AUDITS
Audits can be classified in two ways, i.e.
a. According to the nature of work done.
b. According to the approach to the work to be done.
2.1 0 According to the nature of work done.
By this classification, the nature of work may be statutory or private, hence resulting to
statutory audit or private audit
2.1.1 Statutory Audit
These are audits that are conducted as per the requirements of the Company Act and
hence they are mandatory. This type of audit is carried out for limited companies. I.e.
public or private ltd.
It is conducted by an auditor appointed as per the Company Act.
The objective of such an audit is to prove the true and fair view of the organization.
Statutory audits are done at the end of a financial year and the report produced is
addressed to the shareholders.
In this case, the duties and rights of an auditor are defined by the Company Act. The
auditor performs pure audit work.
2.1.2 Private Audit
These are audits that are carried out as per the wishes of the directors or owners of the
business hence they are not mandatory. Private audits are carried out for organisations
such as partnerships, clubs, NGOs, sole traders etc, however; the owner of the business
does the appointment of auditors.
The objective of such an audit is to detect errors and frauds, and to ascertain profits for
tax purposes.
These audits can be done anytime during the financial period, and the report produced is
addressed to the stakeholder.
The owners of the business define the duties and rights. The auditor may perform both
auditing and accountancy.
Similarities between statutory and private audits
o Both are carried out by Certified Public Accountants.
o Both are carried out using auditing guidelines and standards.
o In both cases, the auditors may provide management advisory services to
the clients.
o In both cases, reports are used as bases for decision-making
o In both cases, reports are used by income tax authorities and financiers in
determining performance.
o In both cases, the audits will boost the morale of the accounting staff to
keep their accounts up to date.
2.2.0 According to the approach of work to be done.
These include: -
a. Continuous audit
b. Interim audit

c. Procedural audit
d. Management audit
e. Final audit/complete/detailed
2.2.1 Continuous Audit
These are audits, which involve detailed examination of books of accounts at regular
intervals of say three to four months. Such audits are ideal for:-
i. Banking businesses where by virtue of their transactions, the auditor has to
conduct continuous audits to detect and prevent errors and frauds at their
earliest stages.
ii. Companies whose volume of transactions is large and cannot be audited in
one session e.g. manufacturing companies.
iii. Organisations whose internal control systems are weak.
iv. Where the statement of accounts is required to be presented to the
management after every three or four months.
Advantages of Continuous Audit.
1. Errors and frauds can be detected and prevented at their earliest stages before they
have reached advanced proportions.
2. This audit will enable the auditor to have a sound technical knowledge of the
business, which will help him in performing efficient audits.
3. This audit may boost the morale of accounting staff, who will keep their accounts
up to date, lessen the possibility of committing frauds and hence facilitate the
auditors’ work.
4. It enables the auditor to conduct his final audit efficiently because much of the
audit work will have been tackled during the continuous audit and less will be left
for the final audits.
5. This audit will facilitate the preparation of the management letter, since by virtue
of his constant presence in the business he is able to understand it and give advice
on the situation pertaining to the company.
Disadvantages of Continuous Audit
1. The accounts figures audited may be altered by dishonest clerks in a bid to
perpetrate frauds.
2. It is time consuming and hence a tedious exercise on the part of the auditor.
3. It is an expensive audit because of the time used for a given audit assignment.
4. By virtue of his constant presence in the business, the client’s staff may get used
to the audit staff and this may affect the independence and objectivity of the audit
staff leading to a biased opinion.
5. This type of audit will disorganise the clients’ work in so far as books of accounts
will be used for audit purposes.
2.2.2 Interim Audits
These are audits conducted to a particular date within the accounting period e.g. per
quarter or half year, and hence form part of the final audit. These audits help to ascertain
the company interim performance for the purpose of paying interim dividends. The
conditions where these audits are ideal include:-
o Where a company is allowed by its Articles of Association.
o Where a company by law is required to publish its interim performance for
the interests of the various parties.
Advantages of Interim Audits

1. These audits are useful in the determination of the interim condition of the
company. Therefore, the client will know the financial position of the
company for the half-year and plan accordingly.
2. It enables the auditor to detect and prevent errors and frauds perpetrated in
the interim period (at earlier stages).
3. This audit may boost the morale of accounting staff hence enabling them
keep their work up to date, as accounts are checked at regular intervals.
4. It enables the auditor to assess the strengths and weaknesses of an internal
control system, which is necessary for the final audit.
5. It entails less disruptions in the clients work as it is conducted mid
financial period when the company accounts are mid way prepared.
6. Interim audit help to speed up the completion of final audit at the end of
the financial period.
7. This audit is essential for the preparation of interim reports which are
necessary for managerial decision making process in areas like:-
o -Raising additional funds for investment purpose.
o -Ensuring that a company is operating within the laid down policies, etc
Disadvantages of interim audits
1. Dishonest clerks with the intention to commit fraud may alter accounting figures
audited.
2. Errors and frauds detected at this time of the financial period may have reached
advanced stages, hence exposing the organization to serious losses.
3. This audit entails a lot of note taking. In other words, it will mean that the audit
staff will have to prepare notes after the interim audit e.g. interim balance sheet,
records of forecasts, budgeted performance figures etc.
2.2.3 Procedural Audits
These involve the examination and review of a company’s procedures and records so as
to ascertain whether these are accurate, genuine and reliable for decision making
purposes. These audits are ideal for the following conditions.
i. Businesses operating in dynamic situations and environment such as
banks, hotels etc.
ii. Companies whose operations are so technical and need to be updated
overtime e.g. motor vehicle industry.
iii. Companies with several procedures, which affect each other such that if
one were inefficient, it would disrupt others.
Advantages of Procedural Audits
1. This audit may reveal the procedures, which are not working as per laid down
policies and hence may be rectified.
2. This audit will identify procedures, which are not up to date, and this may be
scrapped off or be updated for the benefit of the organisation.
3. It will facilitate the reorganisation of procedures, which will enable the company
to alleviate procedures that lead to duplication of efforts and unnecessary high
costs.
4. This audit will reveal procedures which do not have strong controls and these will
be strengthened to enable the company to operate efficiently.
5. This audit will reveal procedures, which tend to be bureaucratic and measures
then can be taken to rectify the situation. Usually, bureaucratic procedures lead to
delay in operations hence inefficiency.

Disadvantages of procedural audits
1. This audit is time-consuming and tedious in which case it may frustrate or delay
other audit assignments or engagements.
2. It is an expensive audit to conduct because the auditor will spend a lot of time to
ascertain failure of procedures.
3. This audit may frustrate the top management because the failure of procedures is
due to inefficiencies among the top management.
2.2.4 Management Audit
These are audits which involve investigations of the entire management aspects of a
business e.g. decision making process, internal control systems, personal relationships
with employees etc. The main purpose for this audit is to prepare a report on the
effectiveness of the management from the point of view of the profitability and efficient
running of the business.
Advantages of Management Audits
1. It improves the quality of top management in terms of efficient management of
resources, achievement of budgeted goals, effective management of time etc.
2. It reveals the weaknesses in the internal control systems, which is due to
management failure to sustain such strong controls. This will also boost
managerial supervision and motivation.
3. This audit minimizes bureaucracy in a company hence leading to efficient
operations achieved through proper planning, faster implementations etc.
4. It will reveal the management’s weakness to operate a viable company e.g. failure
in credit control policies, financial controls etc.
5. It does not disrupt the client’s work as it deals with human attributes for
organisation, controlling and directing of human resources of the company.
Disadvantages of Management Audits
1. It may lower the morale of the top management.
2. It may lead to biased reports because the attributes of efficiency are difficult to
measure.
3. The audit is time consuming if conducted for large company whose managerial
tasks demand constant reviews.
4. In case of organisation with many subsidiaries (branches) this audit may be
expensive as the auditor will have to visit each of the subsidiaries/branches to
assess the efficiency of each manager in the light of the company’s total
performance.
2.2.5 Final/ Complete/ Periodic Audits
These are audits conducted at the end of the financial period, usually in one session and it
is ideal for businesses which are small and whose transactions can be audited in one
session.
Advantages of Final Audits
1. It is easier to programme, plan and execute as it takes place in one single session
at the end of the year.
2. It eliminates the possibility of alterations of figures, since it is the last audit.
3. It is a less expensive audit as compared to continuous audit because it demands
less time on the part of the auditor.

4. In final audits the auditor is able to give his client a balanced opinion and advice
based on the final circumstances.
Disadvantages of Final Audits
1. If any fraud is committed and detected at the end of the financial period, it will
have reached advanced stages, hence resulting to losses for the company.
2. It may be difficulty to conduct for large company.
3. Due to time constraints, such audits may not be exhaustive so as to enable the
auditor give a balanced opinion.
Revision Questions
1. Write short notes on the following:
i. Continuous audit
ii. Interim audit
iii. Procedure audit
iv. Management audits
v. Final audits
2. Distinguish between statutory and private audits
TOPIC 3
3.0.0 AUDITORS APPOINTMENT AND REMOVAL
Most audit work is conducted for companies and is governed by the rules of the
Company Act 1985 as amended by the Company Act 1989. Cap 110
3.1.0 Appointment of Auditors
This can be done in the following ways:-
a) Appointment by the Annual General Meeting (AGM) s.159
The Co Act requires that the auditors should be appointed by and therefore
answerable to the shareholders. The general rule is that auditors are appointed by
shareholders at the AGM and once appointed holds office till the next AGM.
b) Automatic Appointment
In this case, a retiring auditor is deemed re-appointed without any resolution
passed unless:-
o He is not qualified for reappointment.
o It is stated that he shall not be reappointed.
o He has given a notice in writing that he is unwilling to be re appointed.
c) Appointment by Directors
The directors may appoint the first auditors of a company before the AGM. They
hold office till the first AGM. Shareholders may appoint the first auditors if the
directors do not appoint one before the first AGM.
The appointment by the directors is done under the following circumstances
o When delegated by shareholders
o Before the first AGM
o To fill the casual vacancy .
Casual vacancies may be created by death or incapacitation of the auditor. In such
situations, the directors may fill any vacancies in the office of the auditor,
however if such a vacancy is created by the resignation of the auditor, then such
can only be filled by shareholders at a general meeting.
d) Appointment by the Registrar of Companies

When no auditor has been appointed at the AGM, or in case the directors do not
appoint the first auditor, the Co Act requires the company to inform the registrar
within one week. The registrar may then make an appointment.
3.2.0 Remuneration of auditors s.159
The remuneration of auditors is fixed either by: -
a) Whoever made the appointment, which could be: -
o The shareholder
o The directors
o The registrar of companies.
b) The company in a general meeting or in such a manner determined by the GM.
Note: the auditors’ remuneration is fixed and it must be disclosed in the annual
accounts of the company.
Removal of an auditor s. 160
An auditor can only be dismissed by shareholders in a properly convened G.M.
This safeguards his independence. An auditor can be dismissed at any time at the
end of his term of office. This removal is by ordinary resolution at the meeting
with special notice (28 days) having been served.
Removal Procedure.
i. Special notice is needed for a resolution at the GM appointing another
auditor or expressly stating that the retiring one shall not be reappointed.
ii. A copy of the notice must be sent to the retiring auditor.
iii. Where a retiring auditor makes written representations regarding the
resolution, the shareholders should be sent copies of representations.
iv. If the representations are not sent, they should be read out in the meeting,
unless the court has ruled it out.
v. The auditor has a right to defend himself at the meeting.
N.B. Removal procedures allow members to appoint auditors of choice and it
safeguards the auditors’ independence by not allowing directors to remove
auditors. These procedures ensure that the auditor is not removed for improper
reasons without the knowledge of the shareholders.
Reasons for removal
i. Disagreements on accounting policies, audit findings. Where
directors feel the auditor is taking unreasonable stance.
ii. Rationalization – subsidiaries having one firm with the holding
company.
iii. Incompatibility between management and auditor.
iv. Threat to expose management fraud. Auditor threatens to expose
management fraud or curb management’s unrestricted use
corporate resources (via additional disclosures for instance).
v. Incompetence of the auditor.
vi. Change of ownership of the business.
vii. Change of requirements of the client firm e.g. after expansion.
Resignation of auditors
An auditor may resign due to:
o Ill health
o Expansion of the client firm

o Inadequate fees
o Management fraud etc.
Revision Questions
1. Kent ltd was formed on 1st February 2000 in order to export roses to European
markets. The directors are unsure as to their responsibilities, and the nature of
their relationship with the external auditors. The audit partner has asked you to
visit the client and explain to the directors the more fundamental aspects of the
accountability of the company and their relationship with the auditor.
Explain to the directors;
a) Why there is need for an audit
b) How the auditor of a public co. may be appointed under the Co. Act.
c) What are the auditors’ rights?
d) The responsibilities of the directors to the accounting function of the company.
e) What are the statutory responsibilities of auditors?
2. An auditor must always approach his work with integrity and objectivity. The
approach must be in a spirit of independence of mind.
Briefly explain the matters that may threaten or appear to threaten the independence
of an auditor.
TOPIC 4
4.0.0 INTERNAL CONTROL SYSTEMS (ICS)
Internal Controls
These are processes affected by the entity’s board of directors, management and other
personnel designed to provide reasonable assurance regarding the objectives of an
organization. ISA 315; “Understanding the Entity and its Environment and Assessing the
risk of material misstatements “, requires the auditor to perform risk assessment
procedures to obtain an understanding of the entity its environment, including its internal
controls. This standard defines Internal Control System as comprising of control
environment and control procedures.
It includes all the policies and procedures adopted by management to assist in the
objective of achieving as far as practicable; the orderly and efficient conduct of the
business.
Control Environment
This means the overall attitude, awareness and actions of directors and management
regarding ICS and its importance to the entity. It encompasses personnel policies and
procedures, organization structure etc.
Control Procedures
These are procedure established to achieve the entity’s objectives. These objectives may
include proper authorization, timely and accurate recording of transaction in the correct
period, safeguarding of assets etc. These procedures differ from entity of entity and
depend on the size of the firm.
Internal Control Systems may also be defined as:-
“The whole system of controls, financial and otherwise established by the management in
order to carry on business of the entity in an orderly and efficient manner, safeguard the
assets and secure as far as possible the completeness and accuracy of the records.”
4.1.0 Types of Internal Controls

The types of Internal Controls can be categorized as;
1. Plan of the Organization / Organisation chart
An organisation should have a preplanned organisation chart that should define;
a) Duties and responsibilities of each individual in the organisation.
b) Responsibilities such that it defines lines of reporting for all operations within the
organisation.
c) The flow of authority and responsibility, which should be clearly defined to avoid
conflict in duties, authority and power.
d) How duties should be delegated in particular financial and accounting duties or
assignments.
2. Segregation /Division of Duties
This control means separation/division of duties and all responsibilities which if
combined (i.e. not separated) will enable one single person to process and record the
transactions from the beginning to the end hence exposing such persons to committing
fraud. The main aim is to ensure that no one is responsible for the recording and
processing of a complete transaction.
3. Physical Controls / Safeguarding of assets
These aim at limiting accessibility of companies assets to authorized persons at
authorized times. This control will take the form of physical measures which are also
aimed at limiting direct access to assets using physical barriers e.g. being able to enter the
warehouse. Or indirect limitations using documentation to company assets.
4. Authorisation and Approval Controls
This is a control aimed at ensuring that all the company’s transactions are authorized by
responsible officials whose limits of authority are defined such that they match
transactions they authorise. Approvals should be segregated from authorisation e.g. all
credit sales must be approved by the credit control department, all overtime must be
approved by the works manager.
5. Arithmetic and Accounting Controls
This is used to check the recording function in the organisation and to ensure that figures
in the financial statements are not only genuine but also correct for accounting purposes.
It requires the following measures:
a) Periodic reconciliation.
b) Drawing the trial balance.
c) Periodic balancing of accounts
d) Control accounts, etc.
6. Personnel Controls/ competence of staff
An ICS regardless of its application should be operated by personnel of integrity,
competent and qualified to understand essence of the controls. Such people should have
capabilities to carry out responsibilities assigned to them. It is normally achieved from
the point of recruitment and retraining of staff.
7. Supervision. This has three levels. I.e.
a) Low level supervision. Such supervision should be manned by trained and
competent supervisor who should supervise the company’s day-to-day operations
such that they are carried out smoothly.
b) Middle level supervision. This is done by line managers who should ensure
policies and procedures are adhered to and are in line with the company’s
objectives and goals.

c) Managerial supervision and review. This is a management control done by the
top management using such tools like budgets, standard costing statements,
internal audit feed back, etc. All these aim at checking daily running of the
organisation. It also involves reviews to ensure that all controls are working in
harmony to achieve predetermined goals.
8. Rotation of duties and vacations.
Duties of routine nature should be rotated to avoid continuity of errors and fraud and also
as a means of avoiding routine boredom, which may lead to innocent errors. Employees
should also be encouraged to take leave when it falls due.
9. Routine and automatic checks.
Controls conducted on routine duties and operations are important in that they ensure that
these operations are carried on efficiently and such controls are operated at a surprise
basis to minimize errors and frauds.
10. Recording and record keeping
The system of recording the business transactions at all stages should be complete and
reliable. The records should be kept properly to avoid any losses or alterations.
NB. Any ICS should be operated at such a reasonable cost so as to enable the company
derive maximum benefits which should out weigh the cost of installation and maintaining
such system.
Objectives of an Internal Control System
The main objectives of Internal Controls are to ensure that:-
1. The business is carried in an orderly and efficient way.
2. All business transactions take place according to set procedures. It means that the
management policies are followed strictly.
3. The assets are safeguarded properly. The acquisition usage, and disposal of assets
must be duly authorised and in accordance with the company policies.
4. The records are complete and accurate. It means that all incomes and expenses are
recorded adequately and correctly. These are maintained in such a way that the
possibilities of errors and frauds are minimised.
5. The records provide adequate and reliable information for the preparation of
financial statements.
Advantages of Internal Control Systems
1. It boosts the confidence and gives assurance to third parties or stakeholders in
running the organisations preparations smoothly.
2. It helps the auditor to obtain reliable evidence.
3. It strengthens the financial controls and prevents errors and fraud within the
organisation.
4. It boosts efficiency of staff by segregation of duties, use of qualified staff and
proper use of the organisation chart.
5. It helps the company to have accurate and correct records.
6. It minimizes the cost of an audit as it facilitates an audit through minimization of
errors and fraud.
7. It facilitates accurate decision-making processes with accurate information from
controls, which will lead to the growth of the company.
8. It enables the auditor to avail management with quality advice through the
management letter, which will facilitate the company’s operations.
Disadvantages of Internal Control Systems

1. It is expensive to install and maintain especially in small organisations.
2. It may lead to over reliance on ICS by management team and thus reduce its
supervision and give room to perpetrators and frauds.
3. The integrity, competence and quality of management changes and this will lead
to changes in control.
4. There is possibility that procedures may become inadequate due to changes in
conditions and compliance procedures.
5. There is a possibility that a person responsible for exercising internal control
could abuse that responsibility.
6. Most internal controls tend to be directed at routine transactions rather than non-
routine transactions.
4.3.0 How the Internal Control Systems assist in detecting errors and frauds
1. Plan or the organisation chart.
o In defining the duties effectively, perpetration of frauds can easily be
detected.
o Where powers conflict (duplication of efforts) such an area is grounds for
errors and frauds.
2. Segregation of duties
o Segregation entails interchecking by superior colleagues thus errors and
frauds are identified with ease.
o A person authorizing a transaction may want to perpetrate the fraud but
the executor may block the fraud.
o A person keeping assets (storekeeper) can’t keep a fraudulent asset, which
has either been perpetrated by the executor or authorizer, as it is not a
genuine business transaction. This is important because it prevents
collusion between the authorizers, executors’ custodians and the recording
parties.
3. Physical Control i.e. direct and indirect controls.
o Indirect limitations (use of documentation) will give an idea of the
perpetration of frauds. This is achieved via the serialization of documents.
o Physical barriers such as locked areas, strong rooms, safes etc. will show
actual frauds where there are shortfalls such as shortages and breakages.
4. Authorisation and approval controls
o Exceeding limits of authorisation will serve as a good indication of fraud.
o Unauthorized transactions could be a sign of frauds.
5. Arithmetic and Accounting controls
Trial balances not balancing should reveal
o Frauds and errors,
o Excessive changes of accounting figures.
o Out of balance account is an indication of frauds.
6. Supervision
o Supervisors are people of integrity thus will reveal frauds perpetrated to
avoid being victimized.
o Managerial reviews, out of balance budget/ balance forecasts will give a
clue to frauds.
o Where procedures are not adhered to due to relaxation of supervisor will
give room to frauds.
7. Personnel

o Qualified people will not normally allow frauds to pass their way.
o Properly remunerated personnel will reveal frauds committed by lower
level employees under them.
o High turnover of qualified personnel will serve as an indication of frauds.
8. Rotation of duties and vacations
o Once a person has been rotated, the incoming person will be able to detect
any fraud if any. This also applies for a person gone for leave.
o Reluctance to be rotated or go for leave may indicate presence of frauds.
9. Routine and automatic checks
o Perpetrators of fraud are normally caught unaware with surprise checks.
o Periodic, routine and automatic checks will detect errors and frauds
perpetrated.
10. Control over documents
o Missing pre numbered and serialized documents will reveal frauds.
o Unauthorized documents or forged documents will also reveal frauds.
4.4.0 TECHNIQUES USED TO ASSESS THE STRENGTH OF THE ICS
1. Internal Control Questionnaires (ICQ)
This is a set questions posed by the auditor to be answered by the client directly or
indirectly. These questions require short answers like yes or not. E.g. Was Local
Purchase Order authorized? Yes answers show the strength of ICS, where as No indicates
weakness of ICS.
Illustration of an ICQ
Question nos. Questions Answers Remarks
1 Who raised the LPO None Weak ICS
2 Was it authorized? No Weak ICS
3 Was it recorded? No Weak ICS
4 If so, who recorded it? N/A Weak ICS
2. Use of Systems Notes
It is a record of ICS, which describes operations of entire ICS and outlines where the ICS
is weak and how serious the weaknesses are.
3. Use of third party confirmation (circularization)
An auditor uses a source to gain valuable and reliable information from sources like
debtors, creditors, bankers, lawyers, etc. Any difference between the third party evidence
and evidence from company’s own records is a sign of weak ICS.
4. Use of Compliance tests.
These are tests that analyses the client’s records and recording system to ascertain
whether they are working as expected ICS. The question is ‘Do they comply with the
company’s laid down policies?’ If the results of these tests indicate a strong control
system then the auditor reduces the volume of substantive tests.
5. Observation
This technique reveals deviations from usual conduct of operations. These observations
are made in areas such as wage payments, stocktaking cash counts etc. Any deviations
from laid down policies are an indication of weak ICS.
6. Flow Charts

These are grammatical representations of the company’s procedures designed to show
movement of documents within the organisation. Any destruction in the flow lines or
blocked flow line is assumed to be an indication of weak ICS.
7. Analytical Reviews
These are trend measurements aimed at analyzing company’s performance say by use of
ratios to determine normal changes. If the changes of the deviations are not justified, it
could indicate weakness in the ICS.
8. Use of Depth Tests
This involves the checking of a transaction through various stages of recording ,
analyzing each stage to ascertain whether the controls are working through out such
stages.
9. Use of Walk through tests.
These are limited tests aimed at ascertaining the strength or otherwise of an ICS. In order
to follow a particular sequence relating to a single transaction, it may be best to follow
through a few typical or similar transactions.
4.5.0 Differences between Internal Control Systems (ICS) and Internal Checks
(IC).
An Internal Check System is part of Internal Control System where duties or functions of
an individual are independently checked by his colleagues. The essence of ICS is to
ensure that any given function is counter checked to avoid possibility of frauds and
errors. The differences between ICS and IC include the following:
1. An internal control system is a broad spectrum of controls aiming at ensuring that
the organisation is run efficiently where as an internal check system is aimed at
preventing errors and frauds.
2. The internal control system is necessary for all businesses regardless of their size
where as an internal check system is ideal for large companies, which require
strong segregation of duties.
3. An internal control system is operated by competent and qualified personnel
whereas an internal check can be manned by any person regardless of his
qualifications.
4. The weak ICS may lead to a qualified report where as internal check may not lead
to a qualified report.
Actions to be taken by the Auditor if the ICS is weak
1. He should bring such weaknesses to the attention of the management immediately
and request for corrective measures to this effect.
2. The auditor should increase substantive tests. The auditor should increase the
volume of tests to ensure that he gathers sufficient audit evidence.
3. The auditor should change his audit approach in areas where the ICS is weak .eg
from system-based audit to vouching audit and auditing in depth.
4. If the weaknesses persist year after year the auditor should bring this to the
attention of the shareholders so as to take appropriate action.
5. If ICS are too weak to allow testing, the auditor should qualify his report on the
strength of the fact that he is unable to get all the information and explanations he
considers necessary for the purpose of his opinion.

TOPIC 5
5.0.0 INTERNALAUDITING
Internal audit can be defined as 'an independent appraisal function established by the
management of an organisation for the review of the Internal Control System as a service
to the organisation'.
Internal audit is an element of the internal control system set up by the management of an
enterprise to examine, evaluate and report an accounting and other controls on operations.
Scope and Objectives of IA
1. Review of accounting system and related internal controls.
2. Examining the financial and operating information for management. This may
include review of the means used to identify measure, classify and report such
information.
3. Reviewing the economy efficiency and effectiveness of operations and of the
functioning of non-financial controls. This can be done through routine and
automatic cheeks, periodic reviews and surprise checks.
• Routine and automatic checks - are checks on the procedures and items
prone to misuse or misappropriations e.g. stock, petty cash, wages
payment etc.
• Periodic reviews are conducted on company activities that are subject to
abrupt change. The review is to ensure that they conform to laid down
procedure policies e.g. budgets.
• Surprise checks are checks on sensitive assets that are desirable, portable
and viable to prevent their misuse through unauthorized access.
4. Review of the implementation of corporate policies, plans and procedures.
5. Special investigations.
5.1.0 Functions of Internal Auditors
An Internal Auditor ensures the following:
1. Detection of errors and fraud.
2. An effective system of internal control in place.
3. Continuous effective operation of such systems
4. Adequate management of information flow
5. Asset safeguarding
6. Adequate accounting system in place.
7. Compliance with statutory and regulatory requirements.
Functions of Internal Auditing
1. It acts as a consultant department on matters of controls e.g. financial controls,
personal controls etc.

2. It ensures that the organization has strong ICS, which will enhance efficient and
orderly running of the organization.
3. It serves as a preventive measure against errors and frauds, and as such ensures
safety of the company's resources.
4. IA safeguards the company’s assets through strong controls and as such it ensures
that the company assets are used by authorized persons and for the right purpose.
5. This function conducts special investigations in such areas:-
a. Where frauds and errors are suspected.
b. Where profit margins have fallen for no apparent reasons etc.
6. The department performs routine duties such as verification of assets and liability,
surprise checks etc.
7. IA performs executive duties such as designing of policies and execution or
supervision of board directors, all of which are aimed at ensuring efficient
organization policies.
5.2.0 Limitations to setting up an Internal Auditing function
1. Size of the organization may be too small to warrant the function.
2. The cost of installing and maintaining the internal auditing function may be too
high.
3. If operations are few, the function may not be necessary.
4. The ability of staff (qualified and competent) to operate the function may be
unavailable.
5. Lack of cooperation on the part of management.
6. The company’s technical aspects.
5.3.0 Areas/ ways which in Internal Auditors can assist External Auditors
1. Identify areas in which the ICS’s are weak. This will enable the external auditor
to plan his audit work to concentrate his effort in those areas.
2. The internal auditor will pin point technical matters over which the external
auditor may not have sufficient knowledge e.g. technical assets.
3. The internal auditor will pinpoint areas where there are fundamental changes in
management and ICS.
4. He undertakes routine duties on behalf of the external auditor such as, branch
visits, stocktaking, wage payment etc. all of which will assist the external auditor.
5. The internal auditor may prepare schedules for the external auditor e.g. creditors,
debtors and assets schedules, which are useful for comparison purposes and for
final review.
6. He makes inquiries/queries and undertakes observation over operations on behalf
of the external auditor.
7. The presence of an IA boosts the moral of the accounts staff thereby keeping their
accounts to date.
5.4.0 Factors to consider before the external auditors can rely on the internal
auditors work.
Before placing reliance on the work of an internal auditor, it is necessary to make
assessment of the likely effectiveness and the relevance of the internal audit function.
The criteria for making this assessment should include the following:-
1. Degree of independence: The external auditor should evaluate the organisation
status and reporting responsibility of the IA and consider any restrictions placed
on him. Although an IA is an employee of the organisation, he should be able to

organise his work and have access to the highest level of management. An IA
should also be free to communicate freely with the external auditor.
2. The scope and objectives of the IA function: The EA should ascertain the scope
and objectives of IA assignments. This enables the EA to consider the relevant
assignments.
3. Due professional care: To be useful to an external auditor, the internal auditor's
work must be done in a professional manner. It must be properly planned,
controlled, supervised, recorded and reviewed example of the exercise of due
professional care by internal auditor are:- existence of an audit manual, general
internal audit plans etc.
4. Technical competence: The EA should ascertain whether the work of the internal
audit is performed by persons having adequate training. Indications of technical
competence may be membership of an appropriate professional body or the
possession of relevant practical esp.
5. Reporting standards: The EA should consider the quality of reports issued by
internal audit and ascertain whether management acts upon the reports.
6. Resources available: The EA should consider whether IA has adequate resources
e.g. in terms of staff and computer facilities.
Differences between an Internal Auditor and an External Auditor
Internal Auditor External Auditor
1. Does not have to be a certified
accountant.
1. Should be a certified accountant.
2. An employee of the organization. 2. An independent contractor.
3. Is paid a salary for service. 3. Paid fees.
4. Appointment by management. 4. Appointment as per the Company Act.
5. Report addressed to the
management.
5. Report addressed not only to the management but
also to shareholders and other stakeholders.
6. Main objective is strengthening
controls.
6. Main objective is to prove the true and fair view.
7. Removal of the auditor is by the
board.
7. Removal is as per the Company Act s16o.
8. Not liable to third parties. 8. Liable to third parties.
9. Does not have to attend the
AGM.
9. Has a right to attend the AGM.
10. Report if bad has no effect on
the company.
10. Report if bad may be very disastrous to the
company.
11. Not liable to professional
misconduct unless certified.
11. Liable for professional misconduct.
12. Scope is limited. 12. Scope is open.
13. Has no obligations. 13. Bound by the Company Act.

Revision question
The directors of one of your expanding client have decided to appoint an IA.
Required:
a. Describe the essential similarities and difference between an internal
auditor and an external auditor.
b. State the advantages of this appointment to the co.
c. What factors should the EA consider before he relies on the IA's work?
TOPIC 6
6.0.0 AUDIT MANAGEMENT
6.1.0 Audit planning
An audit plan:
• Is the formulation of the general strategy for the auditor?
• Which sees the direction for the audit
• Describes the expected scope and conduct of the audit, and
• Provides guidance for the development of the audit programme.
Audit planning refers to the arrangement of audit work to be performed in respect to a
particular audit assignment.
Purpose/advantages of Audit planning
1. Helps to define the objectives and scope of the audit.
2. It increases efficiency, in that, the plan will enable the auditor to concentrate his
audit effort in key areas of an audit and avoid wasting time on routine
matters.
3. Audit planning helps the auditor to complete his audit work in time so as to meet
such deadlines as:
a. The AGM
b. Income tax returns
c. Returns to the registrar
d. Financial commitments etc.
4. It enables the auditor to make optimal use of audit staff available so as to enable
him conduct efficient audits in an exhaustive manner and above all, to avoid any
delays in a given part of the audit work.
5. It also enables the auditor to control his audit work, for it is impossible to control
an audit that has not been planned.
6. It facilitates the co-operation between the auditor, his assistant and his client. This
cooperation:
a. Avoids delays
b. Enables the auditor obtain important documents from the client
c. Conduct interviews and reviews of the client’s activities.
7. Audit planning takes into consideration the volume of transactions. The size of
modern business is such that the volumes of transactions are numerous, and as
such, without proper audit planning, an auditor cannot finish his work in time.
8. It ensures that potential problems are identified and given due attention.
Knowledge of the client's business

Audit planning enables the auditor to conduct efficient audits in an effective manner, and
to complete his work in time. For this reason he should have a good knowledge of the
client's business.
Sources of knowledge.
a) Previous experience of the client and its industry.
b) Discussion with contacts within the client management and senior operating
personnel.
c) Discussion with internal audit personnel and review of internal audit reports.
d) Discussion with other auditors and with legal and other advisors who have
provided services to the client.
e) Discussion with knowledgeable people outside the client.
f) Publications related to the industry.
g) Visits to the client’s premises and plant factories.
h) Documents produced by the client.
Audit planning procedures.
This includes the following:
a) Consider the background to the clients business, and attempt to ascertain any
problem for that sector of industry or commerce, which may affect the audit
work. This is more important in case of a new client and is done during the initial
visit.
b) Consider an outline plan of the audit including the extent to which he may wish to
rely upon internal controls and extent to which work can be allocated to interim or
final audit stages where appropriate.
c) Review matters raised in the audit of the previous years, by examining the audit
files and discussing points with staff previously involved in the audit to ascertain
those facts which may have relevance to the current year.
d) Assess the effect of any changes in legislation or accounting practice on the
financial statements of the client.
e) Review any management or interim accounts the client may have prepared as
these may indicate areas of concern in his audit.
f) Meet the senior management of the client to identify problem areas e.g. variances
between the budgeted and actual results, changes in the accounting system,
staffing, management structure etc.
g) Discuss with management the extent to which the client’s employees will assist in
the audit work.
h) The auditor will need to determine the number of audit staff required, their
experience and special skills they need to possess and the timing of their audit
visits.
6.2.0 Audit Programme
It is a detailed approach to an audit showing procedures and relevant items in carrying
out an audit. Its formulation is based on the overall audit plan and the nature of the client.
The audit programme provides the instructions to the audit team in form of tests or
activities to be carried out during the audit.
Factors to consider in developing an audit programme
• Risk of error; high risk detailed programme low risk, less detailed programme.
• The necessary audit evidence needed to fulfill the procedure. Some areas of
audits requires more evidence and therefore more instruction are given for such
areas compared to those whose audit requires little evidence.

• Coordination of audit work with any work on preparing the financial statements.
• Timing of tests of control and substitute procedures.
• Coordination of any assistance from the entity.
• The composition of the audit team.
The involvement of other auditor or experts.
NB: The level of detail in the audit programme will depend on the complexity and size
of the client and the issues there to.
Objectives of an audit Programme
1. It assists in ensuring that the audit work is done efficiently and effectively to meet
the overall audit strategy or plan.
2. It’s intended to provide clear instructions and timing of procedures to audit staff
3. Provides a record of work done and conclusions made and therefore can be used
as a defense against an action for negligence
4. It aids audit control as it forms basis for audit review. (Through cross
examination).
Characteristics of good Audit programme.
• Should describe the nature of audit procedure in detail.
• It should indicate the extent of testing; audit checking
• It should show against each procedure across reference to working papers, initials
of the audit staff, date of completion of the work, exceptions and how they are
cleared.
Note: Each area of the audit must have its own audit programme e.g. audit programme
for payroll, company consumables, Noncurrent assets, investments of the company etc.
Amendment of Audit Programme
The audit programme is prepared before the audit commences and on some assumptions.
On the commencement of the actual audit, these assumptions may have changed and
hence a need to change the audit programme.
Below are some of the factors that may necessitate a change in the audit programme;
• The accounting system or computer software may have been changed by the
client. Eg change to specialized self balancing ledges from general journal and
ledger.
• There may be ground for suspicious of fraud.
• The amount of audit work might have been under estimated.
• The client business may have expanded its operations or contracted part of it or
cutting the size down
• Change in the accounting policies.
Standard audit programme.
Is a pre-prepared audit program for use in the audit firm by all audit staff irrespective of
the client.
Advantages of standard audit programme
• It ensures that all work is completed on time without any omissions.
• Its used to monitor the progress of the audit
• Enhances uniformity of work for audits across periods
• It facilitates allocation of audit work and assessment of staff competencies
• It facilitates the final review as it provides summaries of what is to be checked
(and this done normally by the audit partner).

• It serves as a record of work done and therefore can be used as evidence for any
action of negligence.
Disadvantages of the standard audit programme.
• It may be followed mechanically leaving some areas of importance without
proper understanding of what is done.
• It may destroy the innovativeness of the audit staff and may slow their
development in the audit field.
• It may leave errors and fraud undetected as it may be followed without due
attention and profession skills
• Audit clerks may hurriedly try to finish on time leaving some work unchecked
• Familiarity with the audit program may facilitate fraud by the client staff
Precautions to be taken when the audit programme is standardized
• Encourage the audit staff to point out any defects in the programme
• Encourage the audit staff to use the programme as a guide but to apply
professional judgment
• Revise the audit programme often
• Allocating responsibility for each audit staff who are encouraged to keep the
overall perspective in mind.
• Plan audit checks in such a way as to prevent parts of the programme being
completed in isolation.
6.3.0 Audit risk
When planning the audit, the auditor should assess the risk of the client he is to handle in
order to assess the extent and nature of the work he is to perform. The riskier the client,
the more the auditor will plan to perform.
Audit risk is the chance that an auditor may give a wrong opinion on the financial
statements i.e. he may issue a qualified report when actually there were no
material errors in the financial statements or he may issue an unqualified report
when actually there were material errors. The effect of audit risk is damage to the
audit firm (e.g. in form compensation to third parties) or loss of reputation with
the client or the business community.
Audit risk has three components:
a) Inherent risk
Refers to the risk of material errors in the financial statements arising from characteristics
of the client business and its environment, some of the characteristics include:
o Dominance by a single person
o The experience a unqualified staff
o Unusual pressures on management e.g. tight reporting deadlines. eve.
b) Control risk.
Refers to the risk that the client's controls in place will fail to detect or prevent material
errors or frauds in the financial statements.
Factors to be considered may include:-
o Quality and effectiveness of management (degree or supervision)
o Quality of IC e.g. poor segregation of duties.
o Competence of accounts staff
o Accounting system etc.

c) Detection risk.
Is the risk that audit procedures will fail to detect material errors or fraud e.g.
o Failure to draw proper conclusions in particular audits evidence.
o Failure to perform necessary audit work due to limited time or high cost
e.g. missing stock taking, wages payment etc.
6.4.0 Audit control (Quality Control)
Audit control refers to the steps which are taken by the auditor to ensure that the actual
audit carried out is as per the audit plan.
Quality control refers to the procedures organised to ensure that audits are performed:-
a. In accordance with approved auditing standards.
b. In conformity with statutory and contractual requirements.
c. In conformity with any professional standards.
d. Economically and to time schedules
e. With minimum risk.
Quality control policies and procedures should be implemented both at the level of the
audit firm and at the level of individual audits.
Quality Control at Individual Audit Level
The following ways can be adopted to control the audit:-
i. Allocation of work. Work should be allocated to audit staffs that have
appropriate skills and competence to carry out the assigned tasks.
ii. Proper briefing. Ensure that audit staffs of all levels clearly understand their
responsibilities and the objectives of the procedures, which they are expected to
perform.
iii. Audit completion check list. It is a common experience that in the rush to
complete an audit on time, matters of importance may be overlooked. So it is
necessary to go through the checklist to make sure that everything is covered.
iv. Documentation. All audit work and conclusions reached must be fully recorded
in the working papers.
v. Review. The work performed by each member of the audit must reviewed by
more senior persons in the audit firm. This is necessary to ensure that the work
was adequately performed and to confirm that the results obtained, support the
audit conclusions which have been reached.
vi. Acknowledgement. All audit work and review action should be acknowledged in
writing by the performer.
vii. Supervision. Personnel with supervisory responsibilities should monitor the
progress of the audit to consider whether:-
• Assistants have the necessary skills and competence to carry out their
tasks.
• Assistants understand the audit direction, etc.
Quality Control at the Level of the Audit Firm.
The procedures include:-
1. Acceptance and retention of clients. This involves screening prospective clients
and reviewing existing clients in terms of independence, ability to properly audit
the client and the integrity of the client’s management.
2. Professional Ethics. There should be procedures within the firm to ensure that all
partners and professional staff adhere to the principles of independence,
objectivity, integrity and confidentiality.

3. Skill and Competence. The firm’s partners and staff should have attained the
skills and competence required to fulfill their responsibilities. This involves
procedures relating to
a. Effective recruitment
b. Technical training and up dating
c. On the job training and professional development
4. Assignment. Audit work should be assigned to audit staff who have the technical
training and proficiency needed to do the work.
5. Delegation. Sufficient direction, supervision and review of work at all levels.
This includes the use of audit programme and standard documents.
6. Consultation. There should be procedures for consultation. Individual members
of the firm should not take decisions on problems areas without consultation with
others. Problem areas may be technical or a matter of risk.
7. Monitoring the firm’s quality control procedures. Suitable procedures should
be introduced to monitor the effectiveness of the application of quality control
procedures outlined above.
6.5.0 Audit recording (Audit working papers)
Audit recording refers to documentation of audit work in form of working papers (WP).
WP are the materials the auditors prepare or obtain and retain in connection with the
performance of the audit. WP may be in form of data stored on papers, films, electronic
media etc.
The auditor should document all materials, which are important in providing evidence to
support his/her audit opinion, and should show compliance with audit standards.
In other words, WP should:-
o Record auditor's planning, nature, timing and the extent of audit
procedures performed and conclusions made from evidence obtained.
o Include matters such as auditor's reasoning, judgment and conclusions.
o Acts as evidence of work done to support his conclusion
Importance/ purpose/ advantages of WP
1. WP are used as a basis for planning subsequent years’ audits because the starting
point of a given year's audit (especially for existing clients) is a review of the
previous year's WP.
2. They provide evidence of work done in case of threat of or action taken against
the auditor for negligence. I.e. WP show evidence of appropriate audit
procedures carried out and conclusions reached.
3. They assist the manager in reviewing the audit work and the reporting partners in
reaching an audit opinion i.e. whether the financial statements portray a true and
fair view of the company's performance.
4. They are also used to control audit work, in that the best audit control is effected
through the review of documentation.
5. WP enables the auditor to adopt methodical approach to his audit work and by so
doing, adhere to laid down professional standards and the audit firm's own
standards. This in turn improves quality of audit work.
N.B: Working Papers are the property of the auditor, but at his discretion, he may give
the client extracts or portions of such working papers.
Audit files

Normally an auditor maintains two files of WP for each client i.e.
o The Current Audit File
o The Permanent Audit File
Current Audit File (CAF)
This contains information relevant to the current year's audit.
Contents:
1. A copy of accounts and statements which the auditor is reporting on.
2. An index to the file
3. A description of the internal controls in form of an ICQ, flow charts, etc.
4. An audit programme.
5. A schedule for each item in the balance sheet.
6. A schedule for each item in the profit and loss account.
7. A checklist for compliance with statutory disclosure requirements, accounting
standards and guidelines.
8. A record of questions raised and answers obtained and if not satisfactorily
answered, what course of action to be taken, a qualification of opinion.
9. A schedule of important statistics.
10. A record or abstract from the minutes of the company, directors etc.
11. A copy of the management letter that highlights the weakness of the internal
control system.
12. Letters of representation which are written by the directors or their representatives
to the auditor.
Permanent Audit File (PAF)
This contains information of a long-term nature or matters of continuing importance to
the auditor, which will be used for a period beyond one audit.
Contents of PAF
1. Statutory material governing the conduct of accounts and audit of enterprises.e.g
company act, accounting and audit standards, etc
2. Rules and regulations of the enterprise e.g. the Memorandum of Association,
Articles of Association, Partnership Deed, etc
3. Documents of continuing importance to the auditor. e.g. letters of engagement,
trade licenses, debenture deeds, leases etc
4. Address of the registered office.
5. The organization chart showing principle departments and their sub-divisions.
6. A list of books and other records, which are kept, names, positions and specimen
signatures of people keeping such records.
7. A list of accounting matters of long-term use to the auditor e.g. accounting
policies used by the organization for instance depreciation methods.
8. The clients internal auditing and accounting instructions.
9. A list of directors, their shareholding and service contracts.
10. A list of company properties and investments with a note of verification.
11. A list of company advisors, bankers, insurance brokers etc
12. A list of the company’s insurance on all properties.
Revision Questions
1. You are the manager responsible for the audit of Kent Ltd, which has a number of
branches selling household goods. The company has an annual turnover of Shs. 1200m
Required:

a. Describe the work you would carry out in planning the audit prior to
commencement of detailed audit work.
b. Outline the procedures you would carry to control the audit.
2. You are the audit manager in charge of TLC Co ltd, whose financial year ended on
31st Dec 2000. Due to the tight schedule of your programme, you are unable to devote
any time at the client’s premises; therefore you have delegated the responsibility to the
auditor senior.
Required:
a. State the procedures you would follow to control the audit up to the
completion stage.
b. Explain the matters you would pay attention to in order to achieve your
firm’s quality control targets.
3. The auditing guideline on ‘recording’ requires audit working papers to be sufficiently
complete and detailed so that an experienced auditor who has no previous connection
with the audit is able to ascertain from working papers the work performed and to further
support the conclusions reached.
Required:
a. State four benefits that the auditor will obtain from the working papers.
b. Outline the contents of a typical:
i) Current audit File
ii) Permanent Audit File
4. The auditors’ operational standards require an auditor to adequately record his work.
a. Explain the main purposes, of audit working papers .
b. State four main contents each for a Current Audit File and a Permanent
Audit File.
c. State four main characteristics of good working paper file.
6.6.0 COMMENCEMENT OF AN AUDIT
An audit may be:
o A New clients audit
o An Existing clients audit
6.6.1 Audit of new clients
Before acceptance of an engagement
Procedures carried out by the auditor before accepting new engagements are as follows:-
1. Ensure the audit staff are professionally qualified to act.
2. Ensure that the audit firms existing resources are adequate to handle the new
client i.e. in terms of available time, staff, technical expertise etc.
3. Obtain references in respect to the new client’s status and its directors.
4. Ascertain the degree of independence with respect to the client from the point of
view of:
a. Blood relations
b. Financial relations
c. Goods and services etc
5. Obtain clients permission to communicate to outgoing auditors, which is
necessary for the following reasons:
i. It is the requirement of the professional bodies

ii. It acts as a basis of obtaining the previous years working papers from the
previous auditors.
iii. It helps the auditor to gain assurance about the clients internal control
systems.
iv. To find out why they are no longer the auditors of the client.
v. To obtain the previous years copies of financial statements.
vi. To establish whether or not to accept the engagement.
Procedures after accepting the engagement
1. Ensure that the out going auditors removal or resignation has been in accordance
with the Company Act. This includes a valid resignation notice or proper legal
removal procedures.
2. Ensure that the new auditor’s appointment is valid. Obtain a copy of the
resolution passed at the general meeting.
3. Meet with the client to agree the scope of the audit.
4. Prepare and submit a letter of engagement to the client.
5. The client should be asked to acknowledge the letter.
6.6.2 Audit of existing client
The following steps should be followed when auditing existing clients.
1. Obtain instructions from the client as regards to the scope and objectives of the
audit assignment.
2. Check the audit file to ascertain:
a. The financial position of the client in the previous year.
b. Previous years internal control systems
c. Previous years audit plan, audit programme, etc
3. Request for management information regarding changes in the business, changes
in management, accounting systems, etc.
4. Evaluate the internal control systems of the client.
5. Design audit programme and commence on audit work.
6.6.3 THE ENGAGEMENT LETTER
An engagement letter is a letter of acceptance, prepared by the auditor before
commencing a new audit. It specifies the respective responsibilities of the auditors and
directors, and lays down the scope and objectives of the audit work.
Purpose of the engagement letter
1. It defines the objectives and scope of audit work to be performed by the auditor.
2. It explains the duties of the auditor and existing contract. This minimizes
misunderstandings between the client and auditors.
3. It explains the duties of the directors.
4. It confirms verbal arrangements between the auditors and the client i.e. it provides
written confirmation of auditors acceptance of appointment.
5. It serves to minimize any liabilities as the letter defines clearly the scope of what
is to be done and as such, avoids implied contracts.
6. It is used for audit planning purposes in that any audit plan must take into account
the amount of work that is to be done highlighted in this letter.
Contents of the engagement letter
1. A statement of management’s responsibilities to keep proper accounting records
and to prepare the financial statements.
2. A statement of the management’s responsibility for detection of fraud.

3. A description of the auditors’ responsibilities in forming their opinion on the
financial statements.
4. An explanation on the scope of the audit, stating that it will be carried out in
accordance with auditing standards.
5. An explanation that weaknesses in internal controls will be reported to
management in the management letter.
6. An explanation of the need to obtain written management representations in
certain circumstances.
7. Details of the basis for charging and paying fees.
8. Applicable law governing the letter. e.g. the Co. Act.
9. A request that the directors accept the terms of the letter.
Revision question
1. You have been approached by the management of Equity Co.ltd, a newly formed
private company to undertake the audit of the company for its first complete financial
year. You have held various discussions with the management about the respective
responsibilities of management and the auditor. Consequently you have sent a draft letter
of engagement to the managing director for approval and acceptance.
Required:
1. Briefly set out the procedure for appointment of an external auditor.
2. Explain why a letter of engagement is sent before any new audit
appointment is accepted.
3. Outline the contents of a letter of engagement.
TOPIC 7
7.0.0 AUDIT EVIDENCE
As per the International Auditing Standards, an auditor should obtain relevant, reliable
and sufficient evidence to enable him draw reasonable conclusions.
Audit evidence is that information obtained by the auditor in arriving at conclusions on
which he bases his opinion on financial statements. Audit evidence provides the auditor
the necessary assurance to determine the accuracy and reliability of accounting
statements.
Source of audit evidence:
o Company’s accounting systems
o Underlying documentation.
o Its customers
o Suppliers
o Third parties
o Employees etc
Qualities of audit evidence
a) Sufficiency
It means that audit evidence should be complete and adequate to prove any material fact.
E.g. complete physical counting of stock is sufficient enough to verify the value of stock.
b) Relevance
Audit evidence should be relevant to the purpose for which it is required. E.g.
• Checking the existence of assets or liabilities.
• Ascertaining whether there are no unrecorded assets, liabilities or transactions.

• Ascertaining whether the given asset or liability or transaction has been recorded
at appropriate values etc.
c) Reliability
Evidence is reliable if it is considered correct and accurate. Reliability depends or is
influence by the source, i.e. whether internal or external source. The following should be
noted.
i. External evidence from such parties as bankers, debtors or creditors is assumed to
be more reliable than internal evidence.
ii. Internal evidence is only assumed reliable if the company’s internal controls are
working properly (strong).
iii. Audit evidence obtained by the auditor himself is more reliable than evidence
obtained from the entity because evidence from the entity may be distorted.
iv. Evidence obtained from documents are more reliable than oral representations etc.
7.1.0. Types of Audit Evidence
1. Documentation evidence
This is evidence gathered from the company records and documents .The auditor should
gather such evidence regarding to:
o The accuracy of the records
o Authority of accounting records.
o Accuracy of balances from ledgers.
2. Management and employees
This will provide evidence regarding:-
o The strength or otherwise of an internal control systems.
o The validity of the company transactions.
o Operational efficiently of the company and its adherence the company
policies.
3. Tangible evidence or physical evidence
This will avail evidence regarding the accuracy of the company’s balance sheet entries,
value and existence of company assets etc.
4. Hearsay evidence
This is evidence gathered from such sources as interviews and conversations with the top
management.
5. Circumstantial evidence
This is evidence obtained from the circumstances of the enterprise or situations prevailing
in the organisation such as the position of the ICS, organisation structure, etc.
6. External evidence
This is evidence obtained from third parties e.g. bankers, debtors, creditors etc.
7.2.0 Methods/ procedures of gathering audit evidence.
a) Inspection
This is the examination of records, documents or tangible assets. The reliability of
evidence depends on the nature and source and effectiveness of internal controls over
their processing. The following presumptions are useful as regards documentary
evidence:-
i. Evidence created and held by third parties such as bank statements,
ii. Evidence created by third parties but held by the Company e.g. local purchase
orders, receipts, invoices etc.

iii. Evidence created by the company, but held by third parties e.g. debenture deeds,
share certificates receipts etc.
iv. Evidence created by third parties and held by third parties e.g. bills of exchange,
title deeds, treasury bills etc
b) Observation.
This consists of evidence obtained by looking at the processes or procedures being
performed by others e.g. stock taking, cash counts, wages payment etc. all of which are
designed to assess the strength or otherwise of an ICS. However, observations are done to
ascertain whether the companies laid down procedures are being followed.
c) Inquiries and confirmation
The auditor makes inquiry from persons inside or outside the company in order to
confirm some particular facts and information. E.g the auditor can seek opinion of some
outsider experts to confirm the values of assets shown on the balance sheet. The auditor
can also write to the bank manager and debtors to confirm their amounts due. Reliability
on evidence depends on the competence and integrity of the respondent.
d) Computations
This is the checking of the arithmetical accuracy of source documents and accounting
records or performing independent calculations e.g. adding up ledger balances,
depreciation calculations, stock valuations, payroll deductions etc.
e) Analytical Procedures.
This is the analysis of significant ratios and statistics, averages and percentages and
investigations of any unusual variances.
7.3.0 Problems or limitations of gathering audit evidence.
1. It is usually expensive to gather evidence especially from third parties where such
third parties are numerous and geographically dispersed.
2. There may be lack of co-operation from the staff and to some extent third parties
in availing audit evidence.
3. There are possibilities of collusion between management employees and third
parties leading to distortions of audit evidence.
4. The business entity might be technical and as such difficult to gather evidence and
the auditor has to use experts, which is not only expensive but also tedious.
5. There might be inadequate records or incomplete records, which may limit
internal evidence.
6. There might be a problem of weak ICS especially in the client’s business, which
will compromise the evidence obtained although weak controls among third
parties may also compromise such evidence.
7. There may be changes in the company e.g. changes in the management, etc which
may compromise the ICS and by extension audit evidence to be gathered.
8. Evidence from third parties may delay hence making it difficult to the auditor to
form an opinion. Etc.
Revision Questions
 What is audit evidence?
 What are the techniques of audit evidence?
 What are the factors that influence the reliability of audit evidence?

TOPIC 8
8.0.0 AUDIT OF THE SALES, PURCHASES SYSTEM AND THE PAY ROLL
GENERAL
Control Objectives, Control Procedures and Tests of Control.
Control Objectives.
These show why we need internal controls. Generally the control objectives of all
systems are:-
1. Only authorized transactions are promptly recorded at the correct amount in the
appropriate accounts in the proper accounting period.
2. Access to Assets is only in accordance with proper authorization
3. Recorded Assets are compared with existing Assets.
Control Procedures.
These are individual controls put in place to achieve the control objectives. Both are the
responsibilities of the client. Detailed control procedures are often similar across sales,
purchases and other areas and they include;
1. Sequential numbering of documents with subsequent checking of the sequence for
completeness.
2. The maintenance of controls accounts, which are checked to ensure that they
reconcile with ledgers.
3. Authorization evidenced by the signature responsible of officials for the raising
inputting and distribution of the documents.
Tests of Control
Tests of control involve auditors ensuring that the procedures above have been applied.
This is done by looking for evidence e.g. checking of sequences, control Accounting
reconciliations and authorization. Often the auditor looks for a signature to show that the
procedures have been performed.
Risks Associated with Sales and Purchases
1. Sales and purchases fail to meet the objectives of the organization, resulting in
financial loss and damage to reputation.
2. In appropriate or expensive goods purchased resulting in missed budgets and
financial loss.
3. Failure to purchase goods/services at the right time and therefore failure to meet
required dead lines.
4. Fraudulent purchase or sales transactions resulting in financial loss or damage to
reputation.
5. Poor quality of goods received and dispatched resulting in claims against the
company, failure to achieve company objectives and damaging the reputation.
6. Failure to agree to appropriate terms and conditions with suppliers or customers
resulting in disputes over sales and purchases.
7. Failure to meet regular requirement for goods sold or purchased.
SALES SYSTEM
Control Objectives

1. Sales are made in accordance with companies’ objectives with agreements in
place with all customers.
2. Customers order should be authorized and recorded in order to execute them
promptly and determine any allowance required for losses arising from fulfillment
commitment
3. Goods returned and claims by customers should be controlled in order to
determine the liability for goods returned and claims received but not entered into
the Accounting records e.g. credit not in case of return inwards
4. Invoices and credit notes should be appropriately checked as being accurate and
authorized being entered in accounting records.
5. There should be procedures to ensure that sales invoices are subsequently paid
and that doubtful amounts are identified in order to determine any allowances
required.
ACHIEVEMENTS OF OBJECTIVES ABOVE
In order to achieve above objectives there should be good segregation of duties. There
are three distinct processes of sale system, which should be segregated and performed by
different staff in order to establish effective internal controls. These are:-
1. Accepting customer’s orders. Sequence controlled documents should be used to
acknowledge all orders received. Any uncompleted orders should be regularly
reviewed. Credit limits should be checked by the credit control department selling
prices, special discounts and delivery dates should be fixed by senior members of
sales department.
2. Dispatch department. Sequence controlled documents should be used (goods
outwards or dispatch notes) for all goods leaving the premises. These should be
completed by the gate keeper or the dispatch department, never the accounts staff.
3. Invoicing the goods. Sequence controlled invoices should be raised by sales
department and then passed to the accounts department for recording.
Independent checks should be made to ensure that the invoices have been raised
for all goods (outward notes). For every goods outwards there should be outward
notes.
Control Procedures over Sales and Receivables
There are a number of controls that may be required in the sales cycle due to the
importance of this area in any business.
a) Orders
i. The orders should be checked against the customer’s accounts. Any new
customer should be referred to the credit control department before the
order is accepted.
ii. Existing customers should be allocated a credit limit and it should be
ascertained whether this limit is to be exceeded if the new order is
accepted.
iii. All orders received should be recorded on pre-numbered sales order
documents.
iv. All orders should be authorized before any goods are dispatched.
v. The sales order should be used to produce a dispatch note for the goods
outwards department.
b) Dispatch.
i. Dispatch notes should be pre-numbered and a register kept of them to
relate to sales invoices and orders.

ii. Goods dispatch notes should be authorized as goods leave and checked
periodically to ensure they are complete and have all been invoiced.
c) Invoicing and credit notes
i. Sales invoices should be authorized and referenced to the original
authorized order and Dispatch note.
ii. All invoices should be entered in the:- sales daybook records, the accounts
receivables ledger and accounts receivable ledger control account.
iii. Sales invoices and credit notes should be checked for prices, casts and
calculations by a person other than the one preparing the invoice.
iv. All invoices and credit notes should be serially pre-numbered and regular
sequence checks should be carried out.
v. Credit notes should be authorized by someone not connected with
dispatch.
vi. Copies of cancelled invoices should be retained.
vii. Any cancellation of an invoice should lead to the cancellation of the
appropriate Dispatch note.
viii. Cancelled invoices should be signed by a responsible official.
d) Receivables
i. A receivables ledger control account should be prepared regularly and
checked to individual sales ledger balances by an independent person.
ii. Receivables ledger personnel should be independent of dispatch and cash
receipt functions.(segregation of duties)
iii. Statements should be sent regularly to customers.
iv. Formal procedures should exist for following up overdue debts.
v. Letters should be sent to customers for collection of overdue debts.
d). Returns.
i. Any goods returned by the customer should be checked for obvious
damage, and when accepted, a document should be raised.
ii. All goods returned should be used to prepare appropriate credit notes.
Tests of Control
These should be designed to check that the control procedures are being applied and that
the objectives are being achieved.
i. Carry out sequence test checks on invoices, credit notes, dispatch notes
and orders. Ensure that all items are included and that there are no
omissions and duplications.
ii. Check the authorization for:
 Acceptance of the order.
 Dispatch of goods
 Raising of the invoice or credit note
 Pricing and discounts
iii. Seek evidence of the checking of the arithmetic accuracy of invoices,
credit notes, sales tax, etc. This is often done by means of a stamp
requiring several signatures on the invoice.
iv. Check dispatch notes and goods returned notes to ensure that they are
referenced to invoices and credit notes.

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