TYPES OF AUDITS Audits can be classified in two broad ways according to: a) Terms of engagements i.e.

nature of work done b) Method of approach of work done. a) Terms of engagement-nature of work done. Statutory audits These are carried out as per the requirements of the various statutes e.g. the Companies Act cap 486 requires that all public limited companies must have their financial statements subjected to an independent audit. The objectives of the audit are to express an opinion as to whether the balance sheet and the profit and loss account show a true and fair view. The rights and duties of the auditor are laid out in the Companies Act or the relevant statute. The powers of appointment of the auditor are vested on the shareholders. Private audits These are audits that are not governed by the Act. These are performed by an independent auditor because the owners, members or other interested parties require them and not because the law requires them to be carried out. Private audits are carried out for organisations such as NGOs, partnerships, clubs and charities among others. The appointment of the auditor is usually carried out as a private contract between the auditor and the relevant stakeholder. The scope and objective of the work is determined by the agreed terms between the auditor and the client. The auditors rights and duties are also laid out in the contract. Comparison between private and statutory audits. SIMILARITIES 1) 2) 3) 4) Both are carried out by qualified auditors. They involve the assessment of the internal control system. They facilitate detection of errors and frauds. Reports issued by the auditors can be used by third parties.

Differences. Statutory Audits 1. It is a requirement of an Act of parliament e.g. the Companies Act. 2. The scope and objective of work is defined in the Act 3. The report is addressed to the shareholders. 4. Appointment of the auditor is stipulated in the Act (Sec.159). It can either be by shareholders, directors or registrar of companies. 5. The auditor is liable to third parties. 6. The auditor has full independence. Private Audits 1. It is not a requirement by the Act. 2. The scope is agreed between a client and the auditor therefore it is limited. 3. Report is addressed to relevant stakeholder.

4. Private appointment by the owner. 5. The auditor is not liable to third parties. b) Method of approach to work. Continuos audits This is an approach whereby the audit is carried out throughout the financial period. The audit work is carried out at predetermined intervals usually around three audit visits. This approach is ideal for large organisations with tight reporting deadlines e.g. multinational banks. Assuming that the work is carried out in three-audit visits spread over duration of four months, the first audit visit will mainly entail carrying out detailed planning of the audit. Work carried out will include; a. Obtaining a good understanding of the clients business or updating the business understanding obtained in the previous audits. b. Identifying any developments in the clients business that could have a significant impact on the audit such as new legislation. c. Identifying any changes that have taken place at the clients that could have an impact on the audit such as changes in management. d. Determining the number of staff members to be involved in the audit and the level of experience required and whether there will be need to involve experts. The second audit visit will be carried out usually half way through the financial period work carried out will include; a. Ascertaining, recording and testing the clients internal control systems. b. Concluding on the level of reliance to be placed on the internal control system. c. Carrying out limited analytical review on the interim financial performance of the company. This will include carrying out ratio analysis. d. Deciding on the level of substantive testing and the nature of substantive procedures to be carried out. The final audit visit will mainly entail review of the financial statements at the end of the financial year. Work carried out will include; a. Carrying out substantive procedures on the various account balances b. Concluding whether there are any significant misstatements in the financial statements. c. Final analytical review to verify whether the information obtained is consistent and whether the view presented by the financial statements is consistent with the auditors understanding of the business. d. Forming an opinion as to whether the financial statements show a true and fair view. Advantages 1 2 Accounts are usually kept up to date. Errors and frauds are discovered at an early stage.

3 The auditor gathers sufficient knowledge of the business as a result of his frequent visits. 4 Saves time during final audits. 5 Better report is developed, as time spent is more.

Disadvantages 1. It is expensive to have a continuos audit due to the amount of time spent. 2. Frequent disruptions of the clients work during the audit. 3. The auditors independence may be adversely affected by the continuous presence at the clients premises. 4. Tendencies to over depend on auditing staff to solve accounting problems. 5. Interference of work, which has already been audited by the clients staff.