REGULATORY FRAMEWORK ON AUDIT

Regulatory Framework of Auditing

 By: Zakaria Swedi
AC 732

Lecture outline

ü  Professional framework and rules of professional conduct

ü  Relevant laws and regulations regarding auditing in Tanzania 
ü International Standards on Auditing

•         The Constitution of The United Republic of Tanzania

The constitution of the country requires that the public accounts of Tanzania shall be audited by the CAG. Article 143: It is the responsibility of the CAG to at least once in a year, audit and report on the public accounts.

•      Duties of the CAG

•         -Satisfy himself with the withdrawal from the consolidated fund

•         -Moneys have been applied to the purposes so appropriated and conform to the authority that governs it.

•         -To audit and report on the public accounts of the URT, all courts of the URT, the accounts of the clerk of the National Assembly and Public enterprises.

•         To submit his report on the government accounts to the president and the Minister of Finance within nine months. 

•      Removal of CAG from office- Article 144

-A person holding the office of CAG of the URT shall vacate the office when he attains the age of sixty years.

-Removed from office only for inability to discharge the functions of his office e.g. for contravention of legislation in relation to the public leadership code of ethics.

Where the tribunal appointed advises the President that the CAG ought to be removed from the office.

-A person who holds, or has held, the office of the CAG shall not be eligible for appointment to, or to act in, any other office in the service of the URT.

Nothing in this article shall apply to a person acting in this office of CAG.   

 The Companies Act 2002:

Assented by the President on June 27, 2002, came into effect from March 1^st, 2006.

-The New law repealed the Companies Ordinance (CAP 212).

-Section 170: Appointment and Remuneration of Auditors. At general meeting every company shall appoint an auditor to hold office.

•         -Section 171: Exemption from audit for qualifying private companies. A private company shall be exempt from the requirement to appoint an auditor under section 170 in relation if the qualifying conditions set out are met.  

•         The Co-operative Societies Act 2003

The Act requires every registered society other than a primary society to maintain proper accounts and get them audited each year. Every cooperative society must keep proper accounts.

A registered auditor must audit these accounts at least once a year. 

The accounts must then be approved by the members of the society in a general meeting and then sent to the Registrar for scrutiny. If a society fails to prepare accounts within three months of the end its financial year, the Board members of the society may be removed by the Registrar and replaced. Board members removed in this way cannot be elected to the Board again for six years. Society officers are liable to fines for their part in any offence.

The accounts must be audited at least once in every year by Co-operative and Audit Supervision Corporation (COASCO) or any such competent and registered auditor appointed by the general meeting and approved by the Registrar of Co-operatives Societies. 

•         TRA, Banking and Financial Institutions Acts

The Commissioner of Income Tax may require the entity to submit audited accounts to enable the tax assessment.

TRA Act No. 11 of 1995 requires among other things, the use of accounts compiled or certified by accountants for the assessment of taxation.

With a view to meeting the demands of modern business practice and catering for the needs of the local and international banking sector, the government of Tanzania repealed the Banking and

Financial Institution Act 1991, Cap 342 (the “BFIA ‘91”) and replaced it with the Banking and

Financial Institutions Act 2006 (the “BFIA ‘06”). It requires that every bank/Financial Institution to appoint annually an independent auditor approved by the Central Bank. 

•         The Public Finance Act, 2001:  

Was enacted in April 2001, and became effective on July 1^st, 2001

-It emphasizes on transparency in the use of public funds and public property and on the accountability of officers entrusted with public property.

Funds are to be drawn from the consolidated fund based on the appropriation Act, through a grant of credit to the Treasurer by the CAG.

The statement of performance certified by the vote holders are to be submitted to the National Assembly by the Treasurer after being audited by the CAG. 

•         Professional framework and rules of professional conduct:

•         -It defines and describes the elements and objectives of an assurance engagement, and identifies engagements to which ISAs, ISREs, and ISAEs apply

•         Provides a frame of reference for; 

•         (i) Professional accountants in public practice (practitioners) when performing assurance engagements.

•         (ii) Others involved with assurance engagements, including the intended users of an assurance report and the responsible party.

•         (iii) The International Auditing and Assurance Standards Board (IAASB) in its development of ISAs, ISREs, ISAEs. 

INTERNATIONAL ACCOUNTING STANDARDS AND OTHER AUDIT

FRAMEWORKS

The International Federation of Accountants (IFAC)

IFAC’s role is threefold: to establish and promote adherence to high quality international standards, to facilitate collaboration and cooperation with member bodies, and to serve as spokesperson for the international profession on relevant public policy issues.

IFAC’s boards set the following standards:

•         International Standards on Auditing, Assurance Engagements and Related Services

•         International Standards on Quality Control

•         International Code of Ethics

•         International Education Standards

•         International Public Sector Accounting Standards

In addition, IFAC develops benchmark guidance and promotes the sharing of resources to serve professional accountants in business. It has also established groups to address issues pertaining to small and medium practices and enterprises and developing nations, all of which play a critical role in the global economy.

IFAC BOARDS AND COMMITTEES

(a) International Accounting Education Standards Board (IAESB)

The International Accounting Education Standards Board develops and issues in the public interest standards, guidelines, and information papers on pre-qualification education, training of professional accountants, and on continuing professional education and development for members of the accountancy profession. The International Accounting Education Standards Board also acts as a catalyst in bringing together the developed, developing and emerging economies to assist in the advancement of accountancy education programs worldwide, particularly where this will assist economic development. Strengthening Accountancy Education Worldwide

The board’s guidance is focused on enhancing the professional knowledge, values, skills, and ethics of accountancy students and professionals. It works to improve the standards of accountancy education around the world through:

•  Developing, promoting and maintaining standards, guidance and other forms of advice and assistance;

•  Anticipating the future needs of users and the implications of accounting education; and

•  Obtaining endorsement by key regulators of International Education Standards for professional accountants.

(b) International Auditing and Assurance Standards Board

The International Auditing and Assurance Standards Board (IAASB) is a standard-setting body designated by, and operating independently under the auspices of, the International Federation of Accountants (IFAC).

The IAASB’s goal is to serve the public interest by setting high quality auditing, assurance, quality control and related services standards and by facilitating the convergence of international and national standards, thereby enhancing the quality and uniformity of practice throughout the world and strengthening public confidence in the global auditing and assurance profession.

Over 100 countries are using or are in the process of adopting or incorporating International Standards on Auditing (ISAs), issued by the IAASB, into their national auditing standards or using them as a basis for preparing national auditing standards.

 ISAs are intended for use in all audits — publicly traded companies, private business of all sizes and government entities at all levels. 

The ISAs are to be applied in the audit of historical financial information. It is therefore necessary for the auditor to consider the whole text of a standard in order to understand and apply the basic principles and essential procedures. In exceptional circumstances, an auditor may judge it necessary to depart from an ISA in order to more effectively achieve the objective of an audit. When such a situation arises, the auditor should be prepared to justify the departure. NOTE: ISAs do not override the local regulations governing the audit of financial or other information in a particular country.

Ø  To the extent that ISAs conform with local regulations on a particular subject, the audit of financial or other information in that country in accordance with local regulations will automatically comply with the ISA regarding the subject.

Ø  In the event that the local regulations differ from, or conflict with, ISAs on a particular subject, member bodies should comply with the obligations of members set forth in the IFAc constitution as regards these ISAs (i.e encourages changes in local regulations to comply with ISAs)

Current ISAs include ISA 200, 210,230, 240, 250, 260, 300, 315, 320, 330, 402, 500, 501, 505, 510, 520, 530, 540, 560, 570, 580, 610, 620, 700, 701, 710, 720 and 800.

Application of ISAs to smaller entities

Although ISas apply to the audit of financial information of any entity regardless of its size, small businesses possess a combination of characteristics which make it necessary for the auditors to adapt their audit approach to the circumstances surrounding the small business engagement.

(c)    International Ethics Standards Board for Accountants

The International Ethics Standards Board for Accountants (IESBA) is a standard-setting body designated by, and operating independently under the auspices of, the International Federation of Accountants (IFAC).

The International Ethics Standards Board for Accountants develops and issues in the public interest high-quality ethical standards and other pronouncements for professional accountants for use around the world. The IFAC Code of Ethics for Professional Accountants and Interpretations apply to all professional accountants, whether in public practice, in business, education, and the public sector. The Code serves as the foundation for codes of ethics developed and enforced by member bodies. No member body of IFAC or firm issuing reports in accordance with International Auditing and Assurance Standards is allowed to apply less stringent standards than those stated in the Code.

(d)   International Public Sector Accounting Standards Board

The International Public Sector Accounting Standards Board (IPSASB) is an independent standard-setting body designated by, and operating under the auspices of, the International Federation of Accountants (IFAC).

The IPSASB’s goal is to serve the public interest by developing high quality accounting standards for use by public sector entities around the world in the preparation of general purpose financial statements. This will enhance the quality and transparency of public sector financial reporting and strengthen public confidence in public sector financial management. In pursuit of this objective, the

IPSASB supports the convergence of international and national public sector accounting standards and the convergence of accounting and statistical bases of financial reporting where appropriate.

(e)    Small and Medium Practices Committee

The International Federation of Accountants’ (IFAC) Small and Medium Practices (SMP) Committee represents the interests of professional accountants operating in small- and mediumsized practices and other professional accountants who provide services to small- and mediumsized enterprises (SMEs) to international standard setters, IFAC boards and committees, and other international organizations.

In representing the needs of this constituency, the SMP Committee works to:

•         Ensure that IFAC’s boards and other standard-setting bodies are aware of, and give consideration to, issues relevant to SMEs and SMPs when setting standards.

•         Facilitate the communication and sharing of information among member bodies, IFAC boards and committees, and other external groups.

•         Support SMPs that provide accounting and assurance services to SMEs by leveraging the work of member bodies and others.

•         Identify other issues relevant to those providing accounting and assurance services to SMEs and develop guidance on these issues.

•         The Sarbanes –Oxley Act of 2002

The accounting scandals begun by the Enron collapse and extending to such giant companies as WorldCom, Xerox, and Tyco, caused a backlash in the USA, resulting in legislation being signed into law by the US president in July 2002. The Sarbanes- Oxley Act is the first accounting law passed by the US since the securities and Exchange Act of 1934.

New Requirements for Audit Firms and Audit Committees

The Act has new requirements for audit firms and audit committees. Auditors must report to the audit committee, not management. The lead audit partner and audit review partner must be rotated every five years. A second partner must review and approve audit reports. It is a felony with penalties of up to ten years in jail to willfully fail to maintain all audits or review work papers for at least five years. Destruction of documents carries penalties of up to 20 years in jail.

The Act lists eight types of services that are ‘unlawful’ if provided to a publicly held company by its auditor: bookkeeping, information systems design and implementation, appraisals or valuation services, actuarial services, internal audits, management and human resources services, broker/dealer and investment banking, and legal or expert services related to audit service. 

The Public Company Accounting Oversight Board (PCAOB), created by the Act, may also determine by regulation other services it wishes to prohibit. The Public Company Accounting Oversight Board (or PCAOB) is a private-sector, non-profit corporation created by the Sarbanes-Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies. Its stated purpose is to 'protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports'. Non- audit services not banned by the Act must be pre- approved by the audit committee. Management must assess and make representations about the effectiveness of the internal control structure and their auditor will be required to attest to the assessment and describe the tests used.

•     COSO

In 1992, the committee of sponsoring organizations of the Treadway Commission (COSO) issued a landmark report on internal control. Internal Control—Integrated Framework, which is often referred to as "COSO" provides a sound basis for establishing internal control systems and determining their effectiveness.

Enterprise Risk Management — Integrated Framework (2004)

In response to a need for principles-based guidance to help entities design and implement effective enterprise-wide approaches to risk management, COSO issued the Enterprise Risk Management – Integrated Framework in 2004. This framework defines essential enterprise risk management components, discusses key ERM principles and concepts, suggests a common ERM language, and provides clear direction and guidance for enterprise risk management. The guidance introduces an enterprise-wide approach to risk management as well as concepts such as: risk appetite, risk tolerance, portfolio view. This framework is now being used by organizations around the world to design and implement effective ERM processes.

According to COSO, the three primary objectives of an internal control system are to ensure (1) efficient and effective operations, (2) accurate financial reporting, and (3) compliance with laws and regulations. The report also outlines five essential components of an effective internal control system:

° THE CONTROL ENVIRONMENT, which establishes the foundation for the internal control system by providing fundamental discipline and structure.

° RISK ASSESSMENT, which involves the identification and analysis by management—not the internal auditor—of relevant risks to achieving predetermined objectives.

° CONTROL ACTIVITIES, or the policies, procedures, and practices that ensure management objectives are achieved and risk mitigation strategies are carried out.

° INFORMATION AND COMMUNICATION, which support all other control components by communicating control responsibilities to employees and by providing information in a form and time frame that allows people to carry out their duties.

° MONITORING, which covers the external oversight of internal controls by management or other parties outside the process; or the application of independent methodologies, like customized procedures or standard checklists, by employees within a process.

•     BENEFITS OF COSO-BASED AUDITS

Effectiveness

Testing all five COSO control components provides a solid foundation for determining the degree of assurance provided by controls.

Efficiency

Focusing on one COSO objective category guards against costly "scope creep."

Comparability

Using a common audit framework and rating system enables the controls in different business segments to be contrasted.

Communication

Integrating COSO criteria in discussions with clients enhances their understanding of control concepts.

Audit Committee

Reporting in terms of the COSO framework helps to portray strengths and weaknesses of the internal control system.

DISCUSSION QUESTIONS

1.       Discuss the advantages and disadvantages of auditing standards to auditors and the consequences of them being enforceable by statute

2.       Outline the advantages and disadvantages which the National Board of Accountants and Auditors (NBAA) it might have experienced after adopting international standards and ethical guidelines set by the IFAC.

3.       Why do you think Tanzanian accountants in professional practice need to know The Sarbanes- Oxley Act and COSO frameworks? Discuss at least five reasons for each framework.

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