CHAPTER -7

External audit in Ethiopia

In Ethiopia there are three bodies that are providing auditing service. These are:
1. The Office Of The Federal Auditor General
2. The Audit Services Corporation and
3. Private auditors.
THE OFFICE OF THE FEDERAL AUDITOR GENERAL (OFAG)
In 1942 a financial regulations was issued prescribing modern financial and accounting
responsibilities of government ministries and control, and audit of government receipts
and payments including budgeting. Subsequent to this requirement, the audit and control
department was established by proclamation 68/1946 under the prime minister headed
by the auditor General.
In 1958 a separate Auditor General’s office was established. This proclamation has been
revised continuously with the change in government the last one being the 1997
proclamation.
According to the proclamation Number 68/1997, the Office of the Auditor General is
established with the following objectives.
 Information necessary for the proper management and administration of the plans
and the budget of the federal Government.
 Undertake financial and performance audits of the offices and organizations of
the federal Government.
 Make efforts, in cooperation with concerned organizations, to promote and
strengthen accounting and auditors profession
 Give professional assistance and advices to regional and federal civil servants
and organs

AUDIT I CHAPTER 7 1
The commercial code of Ethiopia
The commercial code of Ethiopia contains articles that are related to duties and
responsibilities of auditors in Ethiopia. Summary of the relevant articles is given below.
The commercial code of Ethiopia contains provision requiring partnerships and
corporation (Share Company) to keep books accounts, related to corporation 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 company founders, and persons who act as directors of the
company are not to engage auditing that company.
In addition, according to this 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 parties for losses
they cause, for issuing inappropriate report, for failure to inform the law any offences that
they knew were committed by the client that affects the public.
OFAG is appointed by the council of people’s representatives upon recommendation of
the prime Minister.
OFAG, is accountable to the council of the people’s representatives, and between
sessions, shall be accountable to the president of the federal republic. Each regional state
has also its own audit Bureau. According to art 7 of orientation 68 1997, the OFAG, has
the following austerities and duties,
 Draw up a standard of auditing by which accounts of the offices and organization
of the federal government shall be examined and follow up the implementation
of the same federal auditor General.
 Audit or cause to be audited the accounts of the federal government offices and
organizations. The OFAG is also required to submit a consolidated annual report
to the Council of Peoples’ Representatives and between sessions and to the
president of the Federal Democratic Republic of Ethiopia.

AUDIT I CHAPTER 7 2
  Moreover, the OFAG is entrusted with the responsibility of reviewing the annual
report which the Ministry of Finance and Economic Development (MOFED)
submits concerning the federal Government receipts and expenditures, assets and
liabilities as well as the financial statistical data.
In addition to its regular activity courts and other agencies frequently request the OFAG
to audit complex financial in formation.
The OFAG performs
 Financial
 Program
 Regulatory and
 Performance audit
The main objective of audit of OFAG is to conduct operational audit.
The auditors of OFAG perform their duties in accordance with international auditing
standards and according to the financial and performance audit manual prepared by the
office. The existence of such professional standards helps to measure the quality of
performance of auditors.
Auditing standards
All audit staff of the OFAG are required to plan, control and record their work. Moreover
auditors have to evaluate the internal control system of the client to determine the extents
of reliance they could place on such internal controls. To arrive at reasonable
conclusion, auditors should gather sufficient, relevant and reliable audit evidence using
various techniques including review of financial statements.
Ethical standards
The OFAG requires all auditors to be professionally independent, to possess the
professional knowledge, skills and discipline 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.

AUDIT I CHAPTER 7 3
The OFAG 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 while the government accounts are prepared in
accordance with the government accounting standards, which focus on the principle of
accountability based on budgetary appropriations.
The audit service corporation
As discussed above, the OFAG was given the sole responsibility to audit or cause to be
audited all the accounts of the federal government offices and organizations. With the
Ethiopian government nationalization of a number of private enterprises, the OFAG
could not satisfy the need for audit within the country due to the limited number of man
power. Thus there was a need to establish a semi-independent audit services corporation.
As a result, audit Service Corporation was established in 1997 pursuant to proclamation
No 126/1977.
According to proclamation 126/1977, the objectives of the corporation were:
 To render audit services to production and service giving organizations, of which
the government is the owner or major shareholder.
 To render management consultancy service to the organizations specified above.
 To find means for further development of audit profession and try to make
Ethiopia self-sufficient with respect to audit profession.

Audit service is an entity with a power to sue and be sued, enter into contacts, determine
terms and conditions of recruitments, 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 corporation audits public enterprises on fee basis to examine
their financial statements fairly the true picture of their activities. Thus, the type of audit
rendered by the audit services corporation is a financial statement audit.
On the other hand the corporation provides auditing, accounting services, tax services and
management advisory services on see basis primarily to the private business.
Private auditing firms in Ethiopia
Private auditing practice was started with the opening of a branch office of price water
house private audit co. in Addis Ababa. Following the establishment and growth of

AUDIT I CHAPTER 7 4
Multi-national British companies like A. Bessie Co., Mitchell Cots Ltd., and shell and of
issuance of the commercial code of Ethiopia in 1960, the demand for commercial audit
increased as the commercial code of Ethiopia required the multinational statements for
renewal of trade license.
Private auditors and audit firms render opinion on those financial statements prepared by
Authorized Accountants and/or organizations. They also provide services including
bookkeeping, liquidation, tax advice, designing and installing accounting and internal
control system.
To open a private auditing firm and provide auditing services to the public in Ethiopia,
certificate of professional competence is required from the National Certification
Committee established by OFAG. The OFAG is empowered to issue, renew, suspend
and cancel certificate of professional competence of private auditors and accountants as
per Proclamation No.669/2002, Article 5/16. Accordingly, as of January 2005 the office
has authorized 48 auditors of three grades A – C.

AUDIT I CHAPTER 7 5