Accounts

• Economic decisions in every society must be based upon the information available at the time the decision is made
• Decision of a bank to make a loan to a business is based upon previous financial relationships with that business, the financial condition of the company as reflected by its financial statements and the current economic climate
• Information used in the decision process must be reliable for decisions to be consistent with the intention of the decision makers
• Unreliable information can cause inefficient use of resources to the detriment of the society and the decision makers
• As the business environment becomes more complex, there is an increased likelihood that unreliable information will be provided to decision makers
• To overcome the problem of unreliable information, the decision-maker must develop a method of assuring that the information is sufficiently reliable for these decisions
• A common way to obtain reliable information is to have some type of verification (audit) performed by independent persons
• Auditing is concerned with reviewing, examining, verifying and investigating any aspect of a business in a systematic and independent manner
• Internal auditing and external auditing are two critical types of business auditing
• Internal auditing is concerned with the review of any aspect of an entity by its own employees with a view to bring about improvements in all areas
• The internal audit department helps an organisation to achieve its objectives
• Internal audit:

  • Performed by internal auditors who are employees of the company being audited
  • Report to the board of directors or audit committee
  • Objective is to improve operational procedures and safeguard resources of the entity
  • Responsible to recommend improvement in all areas but have to report any problem
  • Verification is performed on a detailed basis
  • Performed on an ongoing basis
• External audit:

  • Performed by external auditors who are not employees of the company being audited
  • Report to shareholders of the company
  • Objective is to provide an opinion as to whether the financial statements show a true and fair view
  • Not responsible to recommend improvement but have to report any problem
  • Verification is performed on a sample basis
  • Is performed at end of year only
• Role and duties of internal auditors:

  • Verify the existence of assets and recommend proper safeguards for their protection
  • Evaluate the adequacy of internal control procedures and suggest any improvements
  • Assess compliance with policies, procedures, and sound business practices
  • Assess compliance with government laws and contractual obligations
  • Assess the effectiveness of risk management procedures and perform risk assessments on key business activities
  • Provide support and guidance to management on how to handle threats and opportunities
  • Investigate theft, fraud, embezzlement, and waste
• • Review operations and projects to ensure consistency with organizational objectives and proper implementation
  • Prepare reports to highlight issues and weaknesses to the board or audit committee
• Role and duties of external auditors:

  • Verification of books of accounts and physical existence of assets
  • Attend and observe the physical inventory take
  • Analytical review of the financial statements
  • Correspond with customers and suppliers to ensure reliability of trade payables and trade receivables
  • Review the internal control system
  • Ascertain adherence to procedures at all levels
  • Ensure directors comply with all relevant laws and accounting standards
  • Ensure directors exercise prudence and reasonable judgment in arriving at estimates
• • Inform directors of any misstatements, errors in financial statements, or discovered fraud
• Qualities of an auditor

  • Qualified accountant
  • Thorough knowledge of general principles of law
  • Sound knowledge of taxation
  • Qualities of a good businessman such as tact, caution, firmness, adaptability, strong analytical and communication skills, patience, reliability, teamwork, common sense
  • In-depth knowledge of accounting in all its branches
  • Comprehensive understanding of computers and information systems
  • Adequate knowledge of the client's business
  • Independence
  • Strong ethical standards and high levels of integrity
  • Ability to think objectively and demonstrate sound judgment
• When an audit is completed, the auditor issues a report that states the auditor's responsibility, the nature of the work performed, and the conclusions reached
• Audit report


  Consists of three paragraphs: an introductory paragraph, a scope paragraph, and an opinion paragraph
• Types of professional opinions in an audit report

  • Unqualified report
  • Qualified report
• Unqualified report: no significant limitations affected audit performance and no material deficiencies exist in the financial statements, hence the financial statements show a true and fair view
• Qualified report: the scope of the auditor's work is significantly restricted, or there is a material departure from generally accepted accounting principles which results in the financial statements not showing a true and fair view
• Characteristics of an audit report

  • Prepared by an independent person
  • Prepared by a suitably qualified person
  • End result of the auditing process
  • Contains a report to shareholders detailing the scope of the audit, the nature of work performed, and the conclusions reached
  • Contains the auditor's stated opinion as to whether the financial statements give a true and fair view
  • Opinion formed must be objective and free from prejudice
• Importance of unqualified report to shareholders

  • Shareholders obtain an independent view on the performance and financial position of the business
  • They can confirm if the value of assets and liabilities is appropriate, reasonable, and realistic
• Shareholders will be able to trust and use the financial statements with confidence in their decision-making processes


  Since it has been approved by an independent person
• Shareholders would rely on those statements to keep their shares or even invest more


  Share prices may increase resulting in capital gain for shareholders
• Shareholders suppliers will be more prepared to deal with the company


  Leading to expansion and higher profits for the company
• Directors will be able to demonstrate their stewardship during AGM


  Hence shareholders can decide to keep them as directors
• Implications of a qualified audit report
• A qualified audit report means that the auditors are not satisfied with the figures contained in the financial statements
• Qualified audit report may have the following implications
• Implications of a qualified audit report

  • Shareholders may dismiss directors, become aware of errors, refrain from investing, penalised by the general body, dispose of their shares at the annual meeting, result in significant fraud in the company
• Shareholders would not trust the financial statements
• Drop in share price
• Advantages of Auditing


  • Helps in detection of errors and fraud
  • Facilitates banking procedures for negotiation and approval of loans
  • Contributes to the improvement of financial reporting and internal control system
  • Acts as a deterrent against fraud
  • Enhances the reputation of the business
  • Protects the financial interest of external stakeholders
  • Ensures financial statements are prepared in accordance with company's act and accounting standards
  • Ensures financial statements are reliable for decision making
  • Helps ensure stewardship function of directors is carried out properly
  • Provides assurance that assets of the entity are fairly valued
• Limitations of Auditing


  • Payment of audit fees increases the expenses of an entity
  • Daily activities are disrupted since the auditor requires the attention of several staff members
  • The accuracy and completeness of all information cannot be guaranteed since the auditor does not check every transaction
  • Frauds concealed by collusion and careful forgery may not be detected
  • The auditor does not guarantee the success of the business
  • Management may use corrupt practices and threats to influence the auditors and get a favourable report
  • Incorrect and subjective information from management undermines the usefulness of the audit report
  • Inherent limitations of financial statements such as historical cost, estimated figures, inflation and non-monetary factors are also obstacles to the auditor's work
  • Complex and rapidly changing business environment such as financial situation of a customer and economic conditions may have a material impact on the figures in the financial statements
  • The auditor's report should be interpreted in line with the scope of work of the auditor and the conditions under which the audit was performed