Chapter seven

OVERVIEW OF AUDITING AND AUDITORS IN ETHIOPIA

 Introduction

In Ethiopia, there are three bodies that are providing auditing services. These are the
Office of the Auditor General, the Audit Service Corporation and Private auditors.
Besides these there are internal revenue auditors and government auditors employed by
local, regional and federal government agencies. At each regional state, there is an
Office regional of audit bureau, which is responsible to audit the office of regional
government offices and usually perform compliance audit and operational audit. The
internal revenue auditors have the responsibility for the enforcement of the tax laws. A
major responsibility of the internal revenue auditors is to audit the returns of tax payers
to determine whether they have complied with the tax laws.
The first of this unit focuses on the establishment, duties and responsibilities of the
Office of the Auditor General. You will also study the types of services offered by the
audit service corporation. Finally the role of privet audit firms will be discussed.

After completing this unit, you will be able to:

 Describe the objectives of the office of the Auditor General
 Identify the duties and responsibilities of the office of the Auditor General
 Identify the professional, auditing and ethical standards issued by the office of the
Auditor General
 Describe the objectives and types of services offered by the Audit Service
Corporation
 Identify the Articles of the Commercial Code of Ethiopia that are relevant to
Auditing
 Describe the role of private audit firms in Ethiopia.
7.1 The Office of Auditor General (OAG)

In 1942, a financial regulation was issued prescribing modern financial and

accounting responsibilities of government ministries and audit of government receipts
and payments including budgeting. Subsequent to this requirement, the audit and
control department was established by proclamation Number 68/1946, under the prime
minister headed by the Auditor General.
A separate Auditor general’s Office was established in 1958. This proclamation has
been revised continuously with the change in government, the last being the 1997
proclamation. According to this proclamation Number 68/1997, the office of the
Auditor general is established with the following objectives:
 To strengthen an audit system required for reliable information necessary for the
proper management and administration of the plans and budget of the federal
government
 To ascertain that all receivable money and property of the federal government are
allocated, preserved and used properly in accordance with the laws and regulations
of the federal government, and report same to the council.
 To undertake financial and performance audits of the offices and organizations of
the federal government.
 To make efforts in cooperation with concerned organs to promote and strengthen
accounting and audit profession.
 To give professional assistance and advice to regional and federal civil servants and
organizations engaged in accounting and audit professions.
 To draw up a standard of auditing by which accounts of the offices and
organizations of the federal government shall be examined and follow up the
implementation of the same.

The Federal Auditor General is appointed by the council of Peoples’ Representatives

upon the recommendation of the Prime Minister. The Deputy Auditor general is also
 appointed through the same procedures. The federal auditor general is accountable to
the Council of Peoples’ Representatives. Each regional state has also its own Audit
Bureau.
According to Art 7 of proclamation Number 68/1997, the federal office of the auditor
general has the following authorities and duties.
 Audit or cause to be audited the accounts of the federal government offices and
organizations
 Audit or cause to be audited accounts involving budgetary subsidies and any special
grants extended by the federal government to regional governments.
 Audit the accounts of private contractors relating to the federal government
contractual work, which involves a sum exceeding Br 500,000.
 Carry out or cause to carry out as may be necessary program and efficiency audit or
performance audit in order to ensure that the performance of Federal government
offices and organizations is in accordance with the law, economically sound, and
has attained the desired objectives.
 Report audit findings to the head of the audited federal government office and
organization
 Issue directives in cooperation with other offices concerned, regarding accounts and
property auditing procedures and standards.
 Issue certificates of competence to internal auditors to be employed by any federal
government offices and organizations.
 Give necessary advice on the financial and accounting regulations to be prepared by
the Ministry of finance.
 Promote the accounting and auditing profession, take appropriate measures to
ensure that the development of the accounting and auditing profession of the federal
government is in the right direction.
 Issue, renew, suspend and cancel certificates of the competence of private auditors
and accountants who provide auditing and accounting services.
Charges fee for the issuance and renewal of such certificates in accordance with
regulations issued by the council of peoples' Representatives.
The federal auditor general is also required to submit a consolidated annual report to the
council of peoples’ representatives. Moreover, the office of auditor general is entrusted
with the responsibility of reviewing the annual report which the ministry of finance
submits concerning the federal government receipts and expenditures, assets and
liabilities as well as the financial statistical data. In addition to its regular activities, the
courts and other agencies frequently request the office of federal auditor general to audit
and review complex financial information.
The main objective of the Office of auditor general is to conduct operational and
compliance audit. The auditors of the office of the auditor general perform their duties
in accordance with international auditing standards and according to the financial audit
manual prepared by the office.

Q-Explain the duties and responsibilities of Office of the auditor general

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Professional standards: The existence of professional standards helps to measure

the quality of performance of auditors. Recognizing this fact, the office of auditor
general has established accounting, auditing and ethical standards.

The accounting standards classify accounts as commercial type accounts and

government accounts. The commercial type accounts should be prepared in accordance
with the commercial accounting standards. These standards include going concern
concept, the accrual concept, the consistency concept, and the prudence concept. The
government accounts are prepared in accordance with the government accounting
standards. These standards focus on the principle of accountability based on budgetary
appropriations.
One of the auditors’ responsibilities in auditing either the commercial type entities or
the central government accounts would be to ensure that the financial statements are
prepared in accordance with the accounting standards.
Auditing standards –all the audit staff of the office of auditor general are required to
plan, control, and record their work. Moreover, auditors have to evaluate the internal
control system of the client to determine the extent of reliance they could place on such
internal controls. To arrive at reasonable conclusions, auditors should gather sufficient,
relevant and reliable audit evidence using the various techniques including the review of
the financial statements.
Ethical standards- The office of the auditor general require all the auditors to be
professionally independent, to possess the professional knowledge, skills and
disciplines necessary for the proper performance of audit. The standards of due care and
professional secrecy or confidentiality are also included in the ethical standards of
office of auditor general

The office of the federal auditor general has issued Ethiopian code of ethics for
professional accountants in January 2004. This code consists of rules of conduct
applicable to all professional accountants and authorized auditors.
The code of conduct applicable to all authorized auditors are rule of independence,
professional competence and responsibilities, fees and commissions, activities
incompatible with the practice of accountancy and advertising and solicitation.

Rule-9: Independence.
A professional accountant member of the assurance team sand firms should be
independent both in mind and in appearance in the performance of professional service
for the client.
Rule-10: professional competence and responsibilities regarding the use of non
accountants
Professional accountants should refrain from agreeing to perform professional services
which they are not competent to carry out unless competent advice and assistance is
obtained so as to enable them to satisfactorily perform such services.

Rule-11: fees and commissions

Professional accountants, who undertake professional service for a client, assume the
responsibilities to perform such services with integrity and objectivity and in
accordance with the appropriate technical standards. That responsibility is discharged
by applying the professional skill and knowledge which professional accountants have
acquired through training and experience. For the services rendered the professional
accountants are entitled to remuneration. This rule further emphasizes that the
professional fees should be a fair and reflection of the value of the professional services
performed for the client.

Rule-12: Activities incompatible with the practice of public accountancy

Professional accountants should not concurrently engage in any business, occupation or
activity that impairs or might impair integrity, objectivity or independence, the full
reputation of the profession and there fore would be incompatible with the rendering of
professional offices.

Rule-13: Relations with other professional accountants

This rule contains several articles explaining how the auditor should handle new audit
assignments and advisory services and his relationship with other professional
accountants.
Rule-14: Advertising and solicitation
According to this rule of conduct, advertising and solicitation should be aimed at
informing the public in an objective manner and should be decent, honest, truthful and
in good taste. It is clearly desirable that the public should be aware of the range of
services available from professional accountant. Accordingly, there is no objection to a
member body communicating such information to the public on an institutional basis.
Activity 22 Briefly describe the duties and responsibilities of the
Office of the auditor general

This activity helps you to test your understanding of the duties and
responsibilities of the office of the auditor general
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7.2 The Audit service corporation

As stated earlier the office of the auditor general was given the responsibility to audit or
cause to be audited all the federal government offices. How ever, the 1974 revolution,
when the then Ethiopian government nationalized a number of private enterprises, the
office could not satisfy the need for audit with in the country due to the limited number
of manpower. Thus, there was a need to establish a semi-independent audit services
corporation. As a result, audit Service Corporation was established in 1977 pursuant to
proclamation 126/1977.
According to the proclamation 126/1977, the objectives of the corporation were:
 To render audit service to production, distribution and service giving organization,
of which the government is the owner or major shareholder.
 To render management consultancy services to the organizations specified above
 To find way and means for further development of audit profession and try to make
Ethiopia self-sufficient with in a short-period, with respect to audit profession.
The corporation was established as an independent entity with powers to sue and be
sued, enter in to contracts, determine terms and conditions of recruitment as well as to
charge fees for its services.
The objective of audit rendered by the audit service corporation is the same as that of
private auditing firms. The audit service corporation audits public enterprises on a fee
basis, to examine if their financial statements present fairly the true picture of their
activities. Thus, the type of audit rendered by the service audit corporation is a
financial statement audit.

Q-describe the responsibility of the audit service corporation

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7.3 The private auditing firms in Ethiopia.

The private auditing practice was started in Ethiopia with the opening of a branch office
of Price Waterhouse peat &co in Addis Ababa following the establishment and growth
multinational British companies like A. Bessie and Co.,, Mitchell Cots Ltd and the
issuance of the Commercial code of Ethiopia in 1960. The demand for commercial
audit has increased as the commercial code of Ethiopia required the multinational
companies to present audited financial statements for renewal of trade license.
As discussed earlier, the office of auditor general audits or cause to be audited the
accounts of the federal government offices and organizations. On the other hand, the
audit service corporation provides auditing services to public enterprises. The private
businesses also need audited financial statements for various purposes such as for bank
loan and for tax purposes. Thus private auditing firms provide auditing, accounting, tax
services and management advisory services on fee basis primarily to the private
businesses. The type of audit conducted by private auditing firms is financial statement
audit.

Activity-23 Identify the difference between the office of the federal

auditor general and the audit service corporation.
Dear student, this activity helps you to differentiate between office of the
auditor general and audit service corporation, and to understand the types
of audits being conducted by each.

7.4 commercial code of Ethiopia:

The commercial code of Ethiopia contains articles that are related to duties and
responsibilities of auditors in Ethiopia. The commercial code of Ethiopia contains
provisions requiring partnership and corporation to keep books and accounts, related to
corporations specifically about appointment of auditors, competency of auditors,
professional secrecy and liabilities of auditors.
Further more, the code specifies persons who are founders and beneficiaries of a
company or its subsidiary, persons related by blood to the fourth degree or persons who
receive remuneration from company founders and persons who act as directors of the
company are not to engage in auditing that company (principles of independence).
In addition, according to the code, an auditor is liable for breach of professional
secrecy, for negligence in the performance of professional services and for breach of
contract.
According to the commercial code auditors are liable to client and third party
beneficiary for losses they cause, for issuing inappropriate report, for failure to inform
the laws for any offences that they knew were committed by the client that affects the
public.

Relevant articles from commercial code of Ethiopia

Art.368: appointment of auditors
The following points are included in this article:
 The general meeting of every company limited by shares shall elect one or more
auditors and one or more assistant auditors.
 Shareholders representing not less than 20% of the capital may appoint an auditor
selected by them
 Where there is more than one auditor, they may exercise their duties jointly or
separately.
 A body corporate may act as auditor.

Art 369: Nomination and term of appointment

According to this article, auditors are elected by the meeting of subscribers and
thereafter by the annual general meeting. Auditors elected by the meeting of subscribers
would hold office until the first annual general meeting. But auditors elected at annual
general meeting may hold office for three years.

Art 310: persons not competent

As per Art 310 the following persons may not be elected as auditors.
 Founders, contributors in kind, beneficiaries holding special benefits, directors of
the company or of its subsidiaries or of its holdings company
 Spouses or relatives to the fourth degree inclusive, of founders, contributors in kind,
beneficiaries holding special benefits, directors of the company or of one of its
subsidiaries or of its holdings company.
 Persons who receive salary or periodical remuneration in connection with duties
other than those of an auditor from the founders, contributors in kind, beneficiaries
holding special benefits, directors of the company or of one of its subsidiaries or of
its holdings company.
Auditors may not be appointed as directors or managers of the company, which they
audit, nor of one of its subsidiaries or its holding company with in three years from the
date of the termination of their company.

Art 372: Remuneration

The remuneration of auditors shall be fixed by the general meeting on their
appointment. Where the general meeting fails to agree on the remuneration of the
auditors, the Ministry of commerce and industry may on the application of any
interested party fix the remuneration.

Art 373: Professional secrecy

Auditors shall be liable to the penalties prescribed in Art 407 of the Pe4nal Code for
breaches of professional secrecy.

Art 374: Duties of the auditors

The auditors shall have the following duties:
 To audit the bond and securities of the company
 To verify the correctness and accuracy of the inventories, balances sheets and profit
and loss accounts
 To certify that the report of the board of directors reflects the correct state of the
company’s affairs.
 To carry out such special duties as may be assigned to them

Art 375: Report to general meetings

According to this article, the auditor has to submit to the annual general meeting a
written report that show how they have carried out their duties and their comments on
the report of the board of directors.

Art 378: Auditors to inform directors of irregularities

According to this article, the law requires the auditor to inform the dire4ctors when they
find irregularities or breaches of legal or statutory requirements. If they find serious
irregularities or breaches, they have to inform the general meeting. The auditor has also
the legal responsibility to inform the public prosecutor of any matter which would
appear to disclose the commission of an offense.

Art 378: Powers

As per this article the auditors have the powers to make audits and check at any time as
may be necessary, and may request for nay information, agreement, books, accounts,
minutes books and such other documents as may be required for the proper execution of
auditors’ duties.
Art 380: Liability of the auditors
According to this article, the auditors are liable to the company and third parties for any
fault in the exercise of their duties which resulted in loss. The auditor will also be
punished under Art 438 or Art 664 of the penal code, if they knowingly give or confirm
an untrue report concerning the position of the company or if they fail to inform the
public prosecutor of an offense which they know to have been committed.

Activity-24 Identify the articles of commercial code of Ethiopia that

are relevant to the profession of accountancy and auditing.

The purpose of this activity is to help you identify the relevant articles
from the commercial code of Ethiopia
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