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