The Need for an Audit

If you take an example of a modern large liability company, we can clearly distinguish between the providers of funds and those who control those funds. The providers of funds are the shareholders, creditors, and other third parties who have given loans to the company. Those charged with the responsibility of controlling those funds are usually called directors and management. We can also clearly see that the company has resources, (assets), and claims against those resources, (Liabilities and capital.)

Since the providers of funds are divorced from the control of those funds it would seem logical that the controllers should on a regular basis give a report to the providers of the funds on changes in the resources and claims. This report of the controllers or directors according to the Kenya Companies Act should be in the form of annual accounts which consist of the balance sheet and the profit and loss account. The accounting profession has extended the accounts by requiring that a Cash Flow Statement be also appended to the accounts as part of the accounts.

The report of the directors in the form of accounts lacks credibility, in that:

 
a) It may contain errors;

b) It may fail to disclose frauds;

c) It could be misleading inadvertently;

d) It could be misleading deliberately;

e) It may fail to disclose all relevant information.