Concepts & Need for Assurance

Question 1

Why do we conduct an audit?
What is the relationship between shareholders and directors?

Answer 1

1. Shareholders (Owners) and Directors (Managers) are different persons.
2. Directors have a stewardship role, managing the company’s assets on behalf of shareholders.
3. Directors act as agents, and shareholders act as principals.
4. Therefore, directors are accountable to shareholders.
5. Company law requires directors to prepare annual financial statements (FS) for shareholders, which will be audited by external auditors.

Question 2

What does the law require management to do regarding financial statements?

Answer 2

1. Prepare annual financial statements (FS) for shareholders.
2. These FS must be audited by external auditors.

Question 3

What are the characteristics of an external audit?

Answer 3

1. Independence: Auditors must be independent.
2. True and Fair View: Reports state whether FS present fairly or give a true and fair view.
3. Materiality: Auditors focus on significant items in FS rather than every number.

Question 4

When is a statutory audit required?

Answer 4

1. Required by law for public companies and private companies having paid-up capital exceeding Rs. 1 million.
2. Audit may also be conducted voluntarily if not required by law.

Question 5

What are the responsibilities of management and TCWG?

Answer 5

1. Fraud prevention and detection.
2. Preparing financial statements.
3. Designing and implementing internal controls.
4. Providing the auditor access to relevant information or necessary individuals to inquire.
5. Providing written representations at the end of the audit.

Question 6

What is an audit?

Answer 6

Audit is an official examination of the accounts of an entity by an auditor.

Question 7

What is the objective of an audit?

Answer 7

The objective of an audit is to express an opinion on whether FS are prepared as per the Applicable Financial Reporting Framework (AFRF).

Question 8

What is the Applicable Financial Reporting Framework (AFRF)?

Answer 8

The AFRF is adopted by management or TCWG for FS preparation and must:
1. Be acceptable in view of:
a) The nature of the entity.
b) The objective of the FS.
2. Be required by law or regulation.

Question 9

What is assurance?

Answer 9

Assurance refers to ‘confidence.’

Question 10

What are the levels of assurance?

Answer 10

1. Reasonable Assurance:
2. Limited Assurance: