Small companies are exempt from an audit but all companies that are above a certain threshold must have their accounts audited. Auditors are appointed by the shareholders to act independently in checking a business’ accounting system and system of internal controls. Shareholders delegate the day to day management of companies to directors and because of this separation of ownership from control shareholders need independent people to check if the directors are discharging their stewardship responsibilities properly.
Auditors should discharge their duties objectively and independently. Objectivity is the state of mind that considers the work at hand and nothing else. Auditors must base their judgements and opinions based on objectively verifiable information and they must exercise their duties free from the influence of their commercial interests.
For the result of audit to be used reliably by users of accounting information the auditors must be independent and must be seen to be so. They should not be viewed as having relationships with the management of the companies they are auditing and they must not accept material gifts and hospitality which can be viewed as indicating that they may be biased. Auditors should be able to demonstrate that they are neutral.
Auditors’ Responsibilities
The auditors must ensure that the accounts they are auditing comply with accounting standards such as the generally accepted accounting principles (GAAP) framework, financial reporting standards, and the relevant SORP (statement of recommended principles). The audit should also comply with the requirements of company laws outlined in the Companies Act.
The auditors should also ensure that the accounts show a true and fair view of the business financial affairs. This means the profit and loss account, the balance sheet, the cash flow statements, and the notes show and report a true and accurate picture of the business. The accounts should be free from material or significant errors for them to show a true and fair view of the business’ financial performance, financial position, and financial adaptability.
Responsibilities Outside the Scope of an Audit
- The role of preparing financial statements is not within the scope of the audit because it is the directors’ duty to prepare accounts. Auditors only check if the accounts have been prepared correctly.
- The auditors rely on the accounting systems and internal controls set up by the business in conducting their audit; however, the setting up of these systems is outside the scope of the audit. It is the directors who set up the relevant accounting systems and internal controls for the business.
- The role of an audit is not to detect error and fraud. Auditors are not blood hounds; they just express an opinion on whether the accounts show a true and fair view of the business’ affairs. However in the normal course of an audit error and fraud may be detected but this is still not the primary goal of an audit.
- The reporting on compliance with management policies and evaluating of whether the systems and procedures set up by management work or are efficient is also not within the remit of the audit. A business should be able to monitor business and employees compliance with procedures through use of its corporate governance processes.
Munya Mtetwa - Munya is an ACCA and IFA qualified accountant with over ten years financial management and accounting experience acquired in a plethora of ...
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