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 companys 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 Auditors 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, auditors address and signature