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Question 1. Why is an external auditor necessary for companies registered under the companys act?

External auditors are hired by and report to a companys audit committee. Their historical objective has been to express an opinion on the fair presentation of the company financial statements in conformity with generally accepted accounting principles (GAAP) or International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). Their audit is completed in accordance with generally accepted auditing standards or International Auditing Standards (ISA). To protect shareholders equity Company structure is divided into two parts; the shareholders who have invested their equity and the management who are meant to use resources to make profit for the shareholders. The management may hide crucial operation information that should be unearthed by external auditor. Ensures Compliance External auditors help companies to determine whether the business is in compliance with all applicable standards. An external auditor is not affiliated with the company and thus can redirect the company's behavior without fear of repercussions if the company may not like what auditor finds out. An external auditor can catch small problems before they become serious and help the business get back on track. Provides Credibility The companys financial statements will be more credible if an external auditor evaluates them and agrees that they are accurate. Because external auditors don't work directly for the company, they are less biased. Thus, an external auditor's approval of the companys financial statements is more credible than that of an internal auditor. Internal Processes Internal auditors can't effectively critique the company's internal processes because they are part of the company. External auditors, however, can observe operations from the outside and determine where the company is wasting resources. External auditors often critique accounting practices and general operations. They can make recommendations that can enhance greater efficiency. Double-Check Internal Audit Internal auditors may be too close to the business because of their positions within the company. Some internal auditors also don't have enough accounting experience to accurately audit their company's financial statements. External auditors can look at the same factors as internal auditors and double-check their work. They can also train internal auditors in accounting principles by explaining how their analysis differs from the analysis the internal auditor performed.

Question 2: Under what circumstances is one ineligible for appointment as an auditor of a firm? Auditors are not allowed by law to audit firms under such circumstances as; i. When he or she is a present or past director, officer or employee of the company during the preceding three years. ii. When his/her spouse is a director of the company. iii. When he or she is indebted to the company. iv. When he or she or his spouse or minor children, are partners of the firm he is auditing. v. When he or she is already disqualified for appointment as auditor of the company by the directors vi. When he or she is not licensed by the Accountancy Board of his or her country e.g. Institute of Certified Public Accountants of Kenya (ICPAK) Question 3: Explain the procedure a company has to follow when changing its auditors There are many valid reasons why a firm decides to change auditors. These include the cost of the audit, the timing of the audit procedures, conflicts among firm personnel and audit staff, or disagreements about the application of accounting principles. Changing auditors may not be an easy process. The firm should allow sufficient time to find a new auditor and allow the new auditor to fully perform audit procedures. The members of a company may remove an auditor from office at any time during his (or her) term of office or decide not to re-appoint the auditor for a further term. They must give the company 28 days' notice of their intention to put a resolution to remove the auditor, or to appoint somebody else, to a general meeting. A copy of the notice of the intended resolution must be sent to the auditor, who then has the right to make a written response and require that it be sent to the company's members If an auditor ceases for any reason to hold office, he must deposit a statement at the company's registered office. The statement should set out any circumstances connected with his ceasing to hold office that he considers should be brought to the attention of the members and creditors of the company. If there are any such circumstances, the company must send a copy of the statement to all the members of the company unless a successful application is made to the court to stop this. If the auditor does not receive notification of an application to the court within 21 days of depositing the statement with the company, the auditor must within a further 7 days send a copy of the statement to Companies House for the company's public record. If there are no such circumstances, the auditor must deposit a statement with the company to that effect. This statement need not be circulated to the members.

1. Select A Successor Auditor


Document your reasons for leaving. Although this is not legally required, the successor auditor will likely ask why you're leaving the "predecessor auditor," in accordance with professional standards. You should be able to provide a valid reason.

Identify public accounting firms in your area that provide audit services. You can use your local phone book, perform an Internet search or access a link on the American Institute of Certified Public Accounts website that allows you to "Find a CPA. Contact the audit firms you have identified. Make sure these firms are local--the auditors will likely need to travel repeatedly to your place of business. Ask the audit firms for references or current clients in your industry. Your audit firm should have expertise in the industry. A lack of industry familiarity could result in delays and add cost to the audit. Ask for estimates from the audit firms with expertise in your industry. The estimate should include both price and anticipated timing. You want an audit that's conducted within a reasonable period of time and that meets your deadline requirements. The audit firms may want additional information, including your prior year financial statements, copies of some accounting records, and interviews with you and your staff. Interview the audit firms that have submitted attractive estimates. Make sure you meet with the partner or person who will manage your audit. Choose your successor auditor. Base your selection on the price and time estimates, and your comfort level with the company. Sign an engagement letter. This is your contract with the successor auditor. You should ensure that key terms and deadlines are spelled out in the engagement letter.

2. Part Ways with the Predecessor Auditor


Inform your predecessor auditor of the decision to change audit firms. The successor auditor will contact the predecessor auditor.

Negotiate the change of auditors with your predecessor auditor. The successor auditor will likely ask to review the predecessor auditor's working papers to facilitate the audit. The working papers of the predecessor auditor are his property. He does not have to allow the successor to review them, but will usually do so out of professional courtesy. Pay the predecessor auditor any fee you have negotiated. The predecessor auditor may ask to be reimbursed for time and costs, such as copies, during the successor auditor's review of the working papers. These fees should be reasonable and paid in a timely manner.

Question 4: List the rights and duties of an independent auditor 1.Rights of an auditor i. An auditor has right of access to the books, papers, accounts and vouchers of the company, whether kept at registered office of the company or elsewhere. ii. He is entitled to enquire from the company and the directors and other officers of the company such information and explanation as he thinks necessary for the performance of the duties of the auditor. iii.The auditor of a company is entitled to attend any general meeting of the company and to receive all notices and any communications relating to any general meeting which any member of the company is entitled to receive. iv. He is entitled to be heard at any general meeting which he attends, on any part of the business concerning him as auditor. Duties of an auditor i. The auditor is required to make a report to the members of the company on the financial statements and books of account of the company and on every balance sheet and profit and loss account or income and expenditure account. ii. His report shall cover all other documents forming part of the balance-sheet and profit and loss account or income and expenditure account, including notes, statements or schedules annexed with the financial statements and which are laid before the members of company in general meeting during his tenure of office. iii. It is his duty to protect the companys information without divulging to unauthorised access. iv. It is his duty to communicate to the directors the laws requirement by the auditing governing bodies, register of companies and tax agencies about the accounting procedures. v. It is his duty to prepare any documentation required by the bank in relationship to the accounting activities of the organization. E.g. the bank requires an external auditor to prepare the company cash flows in case of credit application.