External Audit

Question 1

What are the objectives of an external audit?

Answer 1

To express an opinion as to whether the financial statements are fairly presented, IE that they;

• show a true (accurate) and fair (unbiased) view
• have been presented in accordance with specific legislation (which will vary internationally)

Question 2

What are the duties of directors?

Answer 2

• safeguard the entity’s assets and to prevent fraud and errors in the entity;
• ensure that the entity keeps proper accounting records;
• deliver to the relevant national regulatory authority a copy of the entity’s audited financial statements within a defined time limit;
• set up an internal control system in the entity to ensure that all of the above requirements are met

Question 3

As well as expressing their opinion as to the accuracy and fairness of the financials, auditors have a number of additional duties. What are these?

Answer 3

R returns from branches have been received
A accounts are in agreement with underlying accounting
records
P proper accounting records have been kept
Iinformation and explanations has been received
D Directors report is consistent with the financial statements, e.g. director’s emoluments, related party transactions. The Directors’ Report is a document produced by the board of directors under the requirements of UK company law, which details the state of the entity and its compliance with a set of financial, accounting and corporate social responsibility standards

Question 4

What rights do auditors have?

Answer 4

• access to accounting records
• access to information and explanations as necessary
• to receive notice of, attend and speak at general meetings of shareholders
• rights relating to their removal, resignation and retirement

Question 5

Describe the type of audit report “unmodiified opinion”

Answer 5

An auditor is able to conclude that the financial statements are free from material misstatements and they express an unmodified opinion. They typically use one of the following phrases;

“The financial statements present fairly in all material respects…”

“The financial statements give a true and fair view of…”

Question 6

What are the 2 circumstances under which an auditor will give a modified opinion?

Answer 6

When the financial statements are not free from material misstatement

Or

When they have been unable to gather sufficient appropriate evidence

Question 7

What are the 3 types of modified opinion?

Answer 7

Qualified opinion;

There are material misstatements or insufficient evidence where there may be a material misstatement, but NEITHER of these is pervasive. “Except for”

Adverse opinion;

There are material AND pervasive misstatements. “Do not present fairly”

Disclaimer of opinion;

Material and pervasive inability to obtain sufficient evidence and so the auditor is unable to form an opinion. “We do not express an opinion”

Question 8

How would an auditor use an “emphasis of matter”

Answer 8

This is a paragraph in the audit report to draw the users attention to a mater already disclosed in the financial statements because the auditor believes it is fundamental to their understanding. 3 appropriate uses;

1 - where there is uncertainty about exceptional future events

2 - early adoption of new accounting standards

3 - when a major catastrophe has had a major effect on the financial statements