Transcript Financial Statements Audit

Financial Statements Audit
Fundamentals of Financial Audits
•Relationship between Accounting and Auditing
Financial Statements Audit
Verifiability of Financial Statement Data
• Verifiable data: Two or more qualified individual reach the same conclusions
Need for Financial Statements Audit
• Conflict of interest
• Consequences of decisions (economic, social, other)
• Complexity (financial statements become increasingly complicated)
• Remoteness (most users are outside the company)
Explanatory Theories of Auditing
• Agency theory (investors entrust their resources to managers, expecting
return on capital)
• Information hypothesis (investors require information to assess risk and
return)
• Insurance hypothesis (shifting liability for litigation to auditors)
Financial Statements Audit Financial Statements Audit
Economic Benefits of Audit
• Access to capital markets
• Lower cost of capital
• Deterrent to inefficiency and fraud
• Control, risk assessment and operational improvements
Limitations of a Financial Statements Audit
• Time lapse (between occurrence of transactions, balance sheet
preparation and audit)
• Audit testing on samples and other selected data
• Over-reliance on expert systems (computer packages)
• Forming professional judgments in highly specialized areas (reports on too
technical subjects)
• Report format limitations (reports follow a standard format which may not
be sufficient to accommodate specific complexities)
Financial Statements Audit
Duties of Company Auditors
• Carry out an audit
• Report to members their opinion whether the financial statements give a
true and fair view and comply with applicable reporting framework and
regulations
• Be independent of the company
• Exercise a reasonable degree of skill and care
Statutory duties of auditors
• Auditors must report in specified format
• Duty to report on the company’s financial statements and send a copy to
all members
Financial Statements Audit
Contents of the Auditors Report
• Introduction (identification of annual accounts being audited)
• Description of scope and auditing standards followed
• Clearly state their view on the truth and fairness of the accounts
• Certify that financial statements have been prepared in accordance with
the relevant financial accounting framework and the Companies Act
Matters Reported on “by exception” (whether the auditor has:)
Obtained all the necessary information and explanations
• Adequate accounting records have been kept
• Returns from branch offices are adequate
• Financial statements are in agreement with the records and returns
The Audit Opinion
• The report must be “qualified” (including specific reservations) or
“unqualified” (after taking comments into account)
Financial Statements Audit
The Audit Process
• Obtain and accept engagement
• Plan the audit (understand the business and its risks, including those
related to internal control)
• Audit performance and evidence gathering
• Evaluate results and formulate conclusions
• Audit reporting
The Auditor’s Report
• Communication (different users, language and terminology, users’ level of
understanding)
• Form (title, addressee, introduction, statement of responsibilities of
management and the auditor)
• Scope (sample assessment of evidence, assessment of accounting
principles, addressing significant management estimates, evaluation of
overall presentation)
• Opinion (the financial statements have been prepared according to
standards & relevant legislation and give adequate disclosure to proper
understanding)
Date, auditor’s address and signature