Role of statutory audit in financial statements

In recent times the accountancy profession has come under public scrutiny with the media shinning a spotlight on auditors in particular, highlighting financial accountability challenges in both public and private organisations. Of particular interest has been the perception that auditors have a role to play in stopping the loss of funds through statutory auditors.

So dire is the situation that it drew the attention of both the practitioners and accademia. In a recent article Dr Jim Mcfie, a leading accountant and academic, brought the matter to the fore highlighting that auditors have no magic wand to prevent fraud. To put this perception matter in perspective, I believe it is important to appreciate what statutory audits are and what they are not.

A statutory audit is an independent process of determining whether an organisation’s financial statements give a true and fair view of its financial performance and financial position.

A statutory audit is not, as some would assume, a search for the proverbial needle in a haystack. Simply put a statutory audit is conducted to comply with set ‘statutes’ and to test financial statements for compliance with set ‘standards’.

These ‘standards’ and ‘statutes’ are developed through a consultative process, by an independent global body (the International Accounting Standards Board) that is responsible for issuing and updating standards that support trust and accuracy in accounting. Generally, these standards are known as International Financial Reporting Standards (IFRS) and International Public Sector Accounting standards (IPSAS).

In Kenya, the accountancy profession and Aaccountants are regulated by the Institute of Certified Public Accountants of Kenya (Icpak), which supports local entities by providing guidance as necessary; promoting standards of professional competence and practice amongst its members.

Icpak and the Public Sector Accounting Standards Board (PSASB) have adopted both IFRS and IPSAS standards as global benchmarks.

Beyond this, the International Auditing and Assurance Standards for auditing, quality control, review, other assurance, and related services greatly enhance the quality and uniformity of practice and strengthen public confidence in the global auditing and assurance profession.

An auditor is not a stiff or unfeeling automaton sifting through reams of data in a fluorescent-lit room searching for ways to incriminate management.

They are under more pressure than ever to make a difference while maintaining their independence and upholding ever rising ethical standards. In the near future, as much as Artificial Intelligence will challenge and change the accountancy profession — for the better, I believe — we will still need human auditors to make judgement calls and deliver insight

The creation of common standards makes it easier to compare financial information year on year, across different organisations, sectors and even jurisdictions. Without a common standard it would also be difficult to audit financial information and make a comparative interpretation of the findings of such audits.

A statutory audit is not a formula, as much as it is governed by set international standards and local requirements, the role of the auditor can still be difficult and risky. Auditors must make several judgements in the course of their work. For instance, consider a scenario where the Kenya Revenue Authority (KRA) issues a tax demand notice and an organisation must account for it, in all likelihood the demand notice could result in some payments and therefore affect the organisation’s balance sheet. Such a potential outcome could have a substantial impact over time and it is no small matter to judge how much or when to account for it.

An auditor must cultivate a relationship of trust with the Management and Board Audit Committee whilst maintaining their integrity.

The most effective auditors, I have observed, are those who are trusted and respected by their clients but who can still ‘walk the talk’ and challenge management when necessary. They have a professional obligation, which supersedes any client instructions, to act with and demonstrate non-negotiable integrity — or risk sanctions from Icpak’s elaborate disciplinary process.

The accountancy profession in Kenya is governed and oversighted by Icpak and complimented by industry and market regulators.

There is a rigorous process of certifying, licencing, monitoring and disciplining auditors to ensure compliance with professional standards and delivery of quality services to all clients and the public.

The audit report is a good place for any reader of financial statements to appreciate what an audit is and what the auditor does, and does not, do.

In a world where social media and an ‘always on’ culture increasingly reinforce snap judgements, we would be wise to take a step back and consider carefully who we are blaming for mismanagement and whether that blame is justified. Auditors are not always necessarily innocent, but neither are they necessarily to blame.

Denish Osodo, Vice Chairman of the Institute of Certified Public Accountants of Kenya (ICPAK).