THEORY - Auditing and Stewardship
of limited companies
External auditors: auditors who are
independent of the business. In the case of
limited companies, external auditors are
appointed by the shareholders,
Internal auditors: members of staff who
scrutinise the internal controls of the
Explain the role of an external auditor.
- Auditor provides reassurance to
shareholders that the accounts are true
records of the business activities
-Auditor expresses his /her opinion whether
the financial statements give a true and fair
view carry out checks to ensure that the
directors have acted in the best interest of
the shareholders.
-To prevent fraud.
State three characteristics of an auditor’s
- A report to shareholders
- Prepared an independent person
- Prepared by a suitably qualified
- Contains the auditor’s stated
opinion as to whether the financial
statements give a true and fair
Discuss the advantages and disadvantages
to Jack of having his accounts audited.
• increase the credibility/reliability of
• Helpful if Jack wants to apply for a bank
loan/investment from 3rd parties
• help identify weaknesses in the internal
• high cost of audit fee
• no segregation of ownership and
management in Jack’s business
• no need for audit as sole trader
Explain the purpose of an end of year
An end of year audit is the process of
checking the financial records of a business
(1) by an independent person (1), in order
to ensure that the records show a true and
fair view. (1)
Explain what is meant by qualified audit
A qualified audit report is provided when
there is a misstatement in a balance (1) or
when the auditor is unable to gather
evidence to report truthfully on a balance
(1). The accounts have not been fairly
presented (1)
Assess the implications of a qualified audit
A qualified audit report which indicates that
the auditor is not satisfied (1) that the
financial statements audited present a true
and fair view. (1) This is a safeguard of the
shareholders’ interests (1) as it signals that
the statements are incorrect in the opinion
of the external independent examiner. (1)
This may also put potential shareholders off
investing in the business (1)
List five duties which the auditor would
carry out during an audit. [5]
Checking financial data (1) Examining
accounts (1) and systems (1). Reviewing
accuracy of records (1) and reports (1).
Reviewing security of assets (1). Check
trade and other receivables/payables (1).
Attend stock counts (1) Recommending
changes after review (1). Ensuring
procedures are adhered to (1). Produce
audit report (1). Comment on true and fair
view (1). Independent check (1). Ensure
company directors comply with
international accounting standards and
company law (1). Verify that the records do
not have any material errors (1)
Explain the role of directors.
Keep proper accounting records
Prepare financial statements in accordance
with relevant Companies Acts
Safeguard the business’s assets
Report on the state of the company’s affairs
State whether IAS have been applied
Analyze the importance to the
shareholders of the auditors providing a
true and fair view of the company’s
True and fair view means that the
statements are free from misstatements (1)
and faithfully represent the financial
performance and position of Soames
Limited (1). The shareholders of Soames
Limited will have confidence (1) since the
report will confirm the accuracy of the
statements (1) and the professional opinion
should be trusted due to the expertise (1)
and independence (1) of the auditor. Share
prices might increase (1). The shareholders
may be encouraged to invest more / not sell
their shares (1) Lenders may be more
willing to lend to the business which will
improve potential profits for the
shareholders (1)
Explain the term stewardship.
Stewardship is the responsibility which
managers have for the management of
resources (1) within a business on behalf of
the owners. (1)
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