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This article touches on reports by external, internal and forensic auditors and their use at law, especially in disciplinary proceedings, criminal or civil litigation.

Godknows Hofisi Types of auditors
Independent external auditors are engaged to audit an entity’s books of accounts and express an opinion on whether the audited financial statements fairly present, in all material respects, the financial position of the entity and the results of its operations for a period.  Conversely, internal auditors are usually an entity’s employees and focus on reviewing and improving internal systems. Forensic auditors, who are usually outsiders, are specialist auditors hired to carry out financial investigations.

Types of audit reports and their use
Reports by independent external auditors

The auditors test certain systems of accounting and internal controls, vouch some transactions by referring to source documents and also perform analytical reviews.

They verify if the financial statements comply with International Financial Reporting Standards (“IFRIS”). Independent external auditors, do not certify the financial statements but may express one of the following audit opinions:

•  Unqualified audit opinion, commonly known as a clean audit opinion.
•  Negative audit opinion in the form of a qualified opinion, adverse opinion or disclaimer of opinion.
• If auditors observe material weaknesses during their audit, they normally prepare a report to management. They detail their observations, recommendations and management responses thereto.

The reports by the independent external auditors may be used by:

•  The organisation for decision making, annual general meetings, compliance, etc.
•  Regulators, lenders, analysts, etc.

Negative audit opinions or management reports may trigger changes to the board, management or staff including employee internal disciplinary proceedings.

Internal audit reports
Internal audit reports usually cover:

• Adequacy and effectiveness of internal policies, systems and internal controls and standard operating procedures (“SOPs”).
•  Non- compliance with approved policies and procedures.
•  Implications of non-compliance.
•  Recommended corrective action.
•  Management responses.

Internal auditors may also carry out audit investigations on suspected irregularities. Internal audit reports may be used for the following purposes:

•  To improve systems and internal controls as they include important recommendations.
•  As the basis or evidence in staff disciplinary proceedings.
•  In criminal matters where such reports allege intentional non-compliance and prejudice.
•  In civil litigation if they allege intentional or negligent non-compliance and prejudice.

Forensic audit reports

These reports may contain evidence of violations, prejudice and possible reasons for the violations and may be used for staff disciplinary proceedings, criminal or civil litigation.

Key considerations at law

Audit reports can therefore be used by parties to legal processes. For example, an employer will attempt to use the internal or forensic audit report to prove that:

•  There was non-compliance with or violation of policies and procedures,
•  Which was due to intent or negligence by the employee,
•  The non-compliance caused financial prejudice to the employer.
• Conversely, the employees or their lawyers will fight to rebut the allegations and adduce evidence to prove otherwise.

Further considerations

•  Entities should adequately prepare for external audits to avoid negative audit opinions or reports.
•  Internal audit function is key for improving systems and internal controls in an organisation. Internal auditors should resist influence or bias and ensure factual and objective reports.
• They should be adequately trained, experienced and recognised. The value of internal or forensic audit reports can be eroded if the reports are manipulated, conclusions are not supported by probative evidence obtained e.g. on intention or negligence or inaccurate drafting language is used.
•  Internal auditors normally give affected employees an opportunity to respond to draft reports. This good practice limits disputes. Employee responses should be practical and complete.
•  Audit reports should be interpreted correctly and not be abused to achieve predetermined positions.
•  For grey areas functionaries should seek written approvals for use on a rainy day.
•  Policies and procedures should be reviewed regularly and approved copies distributed.

Godknows Hofisi is a legal practitioner, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected].