4. Resultados de la Investigación
4.1. Análisis de los resultados
Here we look at the role of the external auditor. If you work for an organisation which is audited (internally or externally), try to talk to the auditors about the audit. Because it is the audit of an organisation you know well, you should gain some insight into the role of the auditor.
The external auditors are employed to check the good
stewardship of the directors of the company and the
truth and fairness of the financial statements. To enable them to do this they have certain rights and duties.
When the audit is completed and the auditors are satisfied with the information and explanations provided, an audit
report is issued. The audit report is the instrument by
which the auditors express an opinion on the truth and fairness of the financial statements. In Section 4 we look at the standard audit report and its modification when the auditors are not completely satisfied with the results of the audit.
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2: External audit PART A REGULATION AND ETHICS OF FINANCIAL REPORTING1 External audit
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Introduction
If you work in an organisation you may have come across the auditors and even been asked questions by them. In this section we look at what an audit is and why it is necessary.
1.1 Why is an audit needed?
In the modern commercial environment, businesses which are operated as companies with limited liability need to produce accounts to indicate how successfully they are performing. However the owners of a business require something more than accounts because the managers responsible for preparing them may, either unintentionally or by deliberate manipulation, produce accounts which are misleading. An independent examination of the accounts, an audit, is needed so that the owners of the business can assess how well management have discharged their stewardship.
1.2 Objective of an audit
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The objectives of an audit are given in International Standard on Auditing, ISA 200 Overall objectives of the independent auditor and the conduct of an audit in accordance with international standards on auditing and can be summarised as follows.
The objective of an AUDIT of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.
The phrases used to express the auditor's opinion are 'give a true and fair view' or 'present fairly, in all material respects', which are equivalent terms.
The phrase ‘presented fairly’ is interpreted as meaning: • Factual
• Free from bias
• Reflecting the commercial substance of the business’s transactions.
The auditor’s opinion enhances the credibility of the financial statements by providing reasonable assurance from an independent source that the financial statements taken as a whole are free from material misstatement.
A matter is MATERIAL‘if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements'.
(Framework) The concept of materiality is very important to auditors as they do not report on anything which is not material. However, they do have to decide whether something is material or not. They may use guidelines such as treating anything which exceeds 5% of profit or 1% of revenue as material.
Reasonable assurance is a high level of assurance, however, it is not absolute assurance because there are inherent limitations of an audit which result in the auditor forming an opinion on evidence that is persuasive rather than conclusive.
1.3 Responsibilities of management
Responsibility for the preparation and presentation of the financial statements rests firmly with the management of the entity. An audit of the financial statements does not relieve management of this responsibility. Many members of the public fail to realise this.
KEY TERM
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Other responsibilities of management include ensuring that proper accounting records are maintained and preventing and detecting fraud and errors. Management are also responsible for establishing a system of internal controls within the company.
1.4 The expectations gap
There are some common misconceptions in relation to the role of the auditors, even among 'financially aware' people, including the following examples.
(a) Many people think that the auditor’s report is to the directors of a company, rather than the shareholders
(b) Some think that a qualified audit report is more favourable than an unmodified audit report, whereas the opposite is true
(c) There is a perception that it is the auditor’s duty to detect fraud, when in fact the detection of fraud is the responsibility of the directors
These findings highlight the 'expectations gap' between what auditors do and what people in general think that they do. Add the fact that many 'financially aware' people do not look at the report and accounts of a company they are considering investing in, and you have some sobering facts for the auditors to
contemplate!
Public concern at large company failures has highlighted problems with the expectations gap. This has formed part of a general debate on corporate governance (ie how companies are governed) in many countries. Corporate governance developments have aimed to make the role of the auditor clearer and to regulate the relationship between the auditors and the management of the entity being audited.
1.5 Advantages and disadvantages of having an audit
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There are several advantages to a company of having an audit, including the following:
(a) An audit may act as a fraud deterrent as employees know their work will be audited by someone else
(b) An audit adds credibility to the accounts so may assist the entity in obtaining external finance or with mergers and acquisitions
(c) The auditor may be able to give advice to management on improvements to internal systems or controls
However, there are disadvantages, including:
(a) The cost of an audit. Countries often legally require companies of a certain size to be audited, so the cost is unavoidable.
(b) Disruption caused to employees’ normal work as they have to provide information to the auditor.
1.6 An overview of the audit process
Very briefly, the key stages of an audit are as follows.
(1) The auditor is usually appointed by the shareholders at an annual general meeting of the entity. (2) The auditor issues to the entity an ‘engagement letter’ which is a contract that sets out the terms
of the audit.
(3) The auditor plans the audit, which includes obtaining a detailed understanding of the entity and its accounting systems, assessing the risk of material misstatement and selecting audit procedures to respond to the risk and gather evidence. The planning will also identify which individuals from the audit team will carry out the audit procedures.
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2: External audit PART A REGULATION AND ETHICS OF FINANCIAL REPORTING(4) The audit team will then carry out the planned audit procedures and gather evidence about whether the accounts are true and fair.
(5) Once all the evidence has been collected, it will be reviewed by the auditor (usually the audit partner) who will then form an opinion on whether the accounts are true and fair.
(6) Once the opinion has been formed, an audit report can be issued. The audit report is addressed to the shareholders of the entity.
Section summary
An audit is essentially an independent review of the financial statements.
Audits at best give reasonable assurance that the accounts are free from material misstatement. The expectations gap is the difference between the work auditors actually carry out and the work
non-auditors think they carry out.
2 Duties and rights of auditors
Introduction
In this section we look at the duties and rights of the auditor. The duties and rights vary according to national law, we focus here on the UK.
2.1 Duties
The auditors should be required to report on every statement of financial position and statement of profit or loss and other comprehensive income laid before the company in general meeting.
The auditors are required to consider the following.
Compliance with legislation Whether the accounts have been prepared in accordance with the relevant legislation.
Truth and fairness of accounts Whether the statement of financial position shows a true and fair view of the company's affairs at the end of the period and the statement of profit or loss and other comprehensive income (and a statement of cash flows) show a true and fair view of the results for the period.
Adequate records and returns Whether adequate accounting records have been kept and proper returns adequate for the audit received from branches not visited by the auditor.
Agreement of accounts to records Whether the accounts are in agreement with the accounting records.
Consistency of other information Whether the other information presented with the accounts is consistent with the accounts.
2.2 Rights
The auditors must have certain rights to enable them to carry out their duties effectively.
The principal rights auditors should have, excepting those dealing with resignation or removal, are set out in the table below.
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Access to records A right of access at all times to the books, accounts and vouchers of the company.
Information and explanations A right to require from the company's officers such information and explanations as the auditors think necessary for the performance of their duties as auditors.
Attendance at/notices of general meetings
A right to attend any general meetings of the company and to receive all notices of, and communications relating to such meetings which any member of the company is entitled to receive.
Right to speak at general meetings A right to be heard at general meetings which they attend on any part of the business that concerns them as auditors.
Rights in relation to written resolutions
A right to receive a copy of any written resolution proposed.
Right to require laying of accounts A right to give notice in writing requiring that a general meeting be held for the purpose of laying the accounts and reports before the company.
Rights to information
It is an offence for a company's officer knowingly or recklessly to make a statement in any form to an auditor which:
(a) Purports to convey any information or explanation required by the auditor (b) Is materially misleading, false or deceptive
If auditors have not received all the information and explanations they deem necessary, they should state this fact in their report.
Section summary
Auditor's duties generally include the duties to report explicitly on the reasonableness of the accounts audited and their compliance with legislation. They should also report on whether adequate accounting records have been kept.
Auditor’s rights should include the rights of access to records and to receive information and explanations, also rights relating to attendance and speaking at general meetings.
3 The audit report
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Introduction
This section looks at the audit report. This is the way that the auditors will report to the shareholders of a company with their opinion on the findings from the audit. In this section we will focus on the structure of the report.
3.1 Preparing the report
International Standard on Auditing, ISA 700 Forming an opinion and reporting on financial statements, deals with the auditor’s responsibility to form an opinion on the financial statements and provides guidance on the form and content of the auditor's report. The auditor’s report is the report issued as a result of an audit performed by an independent auditor of the financial statements of an entity.
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2: External audit PART A REGULATION AND ETHICS OF FINANCIAL REPORTING3.2 Basic elements of the auditor's report
The auditor's report includes the following basic elements, usually in the following layout. (a) Title
(b) Addressee
(c) Introductory paragraph identifying the financial statements audited
(d) A statement of the responsibility of the entity's management and the responsibility of the auditor (e) Scope paragraph (basis of opinion) including a description of the work performed by the auditor (f) Opinion paragraph containing an expression of opinion on the financial statements
(g) Date of the report (h) Auditor's address (i) Auditor's signature
3.2.1 Unmodified audit opinion
An unmodified audit opinion should be expressed when the auditor concludes that the financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with the applicable reporting framework. An unmodified opinion also indicates implicitly that any changes in accounting principles or in the method of their application, and the effects, therefore, have been properly determined and disclosed in the financial statements.
An illustration of an audit report with an unmodified audit opinion is shown below.
INDEPENDENT AUDITOR'S REPORT (APPROPRIATE ADDRESSEE) Report on the Financial Statements
We have audited the accompanying financial statements of ABC Company, which comprise the statement of financial position as at December 31, 20X1, and the statement of profit or loss and other
comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.