AUDITING

AUDITING

• Systematic and scientific examination of books of accounts
• Examination of financial statements of company
• System of accounting reviewed, from critical aspect
• Internal control
• Auditing done with help of business documents
• Vouchers, and explanations
• Auditing done by independent person

AUDITOR

• Qualified accountant
• Knowledge of general principles of law, taxations and computer info systems
• Recommended by directors
• Appointed by shareholders
• Verification of transactions
• Verify if correctly recorded, and accurately
• Verify assets existence, in accordance with Acc policies
• Confirm that concepts correctly applied
• Consistent with previous periods
• Prepare report to give opinion

BENEFITS OF AUDITING

• Detect fraud
• Detect errors
• Improve internal control system
• Ensures reliability
• Promotes goodwill of company
• Ensures that fin statements prepared in Acc with Acc std

LIMITS OF AUDITING

• Impossible to examine all records
• Opinion may be biased, given that samples are used
• Provides only assurance but no guarantee of accuracy
• Auditing depends on information from third parties, so, info wrong, audit will be false
• No assurance about future profitability

AUDIT REPORT = OPINION OF AUDITOR

• Qualified report
• Unqualified report

QUALIFIED REPORT

• Financial statements DO NOT show a true and fair view
• In this report, auditor will point to all areas not dealt with correctly.

TRUE AND FAIR VIEW

• Fin statements free from material misstatements
• True = fin statement prepared according to framework; not mislead users
• Fair = fin statement present information faithfully, without bias , reflect the economic substance of an transaction, not just legal form

THE PROCESS

• MANAGEMENT FUNCTION
• STEWARDSHIP FUNCTION

MANAGEMENT FUNCTION

• Enables directors to analyse the performance of company
• Internal use
• Areas of improvement highlighted

STEWARDSHIP FUNCTION

• Financial statements for External use
• Show shareholders that funds are safe
• Funds used wisely by directors
• Published accounts
• Responsibility of shareholders to appoint directors, to run and manage company

DIVORCE OF OWNERSHIP AND CONTROL

• Shareholders own, but directors control day to day activities
• Directors must then report financial statements to the shareholders
• Directors paid emoluments for running business

DUTIES OF DIRECTORS

• Keep proper records to prepare FS in accordance with act.
• State which IAS USED AND APPLIED
• Report on state of affairs
• Prepare published financial statements

STEWARDSHIP

• Accountability of directors to manage resources entrusted to them by shareholders
• Relationship btw directors and shareholders
• Manage and report
• When a person is responsible for taking care of something on behalf of another

INTERNAL VS EXTERNAL AUDITOR

• Difference is in how they do their work

ROLES AND DUTIES OF SHAREHOLDERS

• They delegate responsibilities to directors
• Main duty = elect director
• Voting power = can remove and re elect
• In some situations, shareholders asked at AGM to consent to directors actions
• No right though to interfere in day to day running or management of company
• No access to company records
• Only access to annual report
• Required by law to appoint auditors, directors will recommend to the shareholders, then shareholders will appoint
• Note; directors can also be shareholders in a company

INTERNAL AUDIT

• Responsible to report to senior management
• Assess risk
• Effectiveness of control
• More focus on operations, processes,systems

EXTERNAL AUDIT

• Report to shareholders
• Report on truth and fairness
• Hired by shareholders