Financial reporting by companies is strengthened with auditors' report. Section 174(2) of the Companies Act 1965 requires auditor to report to the members of the company on the accounts presented at the annual general meeting. An auditor's report is a statement which communicates auditor's views on the financial statements prepared by the company. When the auditors are satisfied with all the evidences they have verified, they state that the financial statements give a 'true and fair view'.
Based on the above statement:
Explain the meaning of audit and its nature. (3 marks)
Distinguish between accounting and auditing. (5 marks)
Discuss the objective of auditing and why auditing is needed. (8 marks)
Distinguish the role of internal auditor from external auditor. (8 marks)
Explain the importance of audit to the users of financial statement. (5 marks)
Discuss the types of audit and provide ONE (1) example for each type. (12 marks)
Explain the meaning of 'true and fair view'. (3 marks)
Get your grade
or your money back
using our Essay Writing Service!
Explain the categories of audit report. (12 marks)
Select TWO (2) companies' annual report for year 2011. Discuss what category of audit report that has been issued by auditor on the company's financial statement. (8 marks)
Discuss your personal views on unaudited financial statements and the circumstances or conditions that it can be used. (8 marks)
A) Auditing is a process that check the accuracy of financial by examining and evaluating the financial statement. The word "audit" comes from Latin word audire which has the meaning of "to hear". As Professor L.R.Dicksee said, "Auditing is an examination if accounting records undertaken with a view to establishes whether they correctly and completely reflect the transactions to which they relate." (Dicksee, L. R.) The book "An introduction to Indian Government account and audit" that is issued by The Comptroller and Auditor General of India stated the meaning of audit as an instrument of financial control. (India, T.I.)
The nature of audit is it is concerned with the establishment of the reliability of financial statement. Besides, audit is a critical review of the accounting system and the internal control. Auditors can only get their job done with the relevant documents such as invoices and other information and explanations.
According to Assurance Standard 1 (ASS 1) which is issued by the council of the Institute of Chartered Accountant of India in the book entitled "Basic Principles Governing an Audit", audit is to independently examine the financial statements of an entity, no matter the profit is oriented or not and regardless of its legal form or size, as the examination is conducted to express an opinion on the financial statements (India, T.I.).
B) The first difference of accounting and auditing is the meaning. Accounting is the recording of all the day to day transactions in the accounting books to facilitate the preparation of financial statements. In other words, it is the process of identifying, recording and communicating information for decision making. However, auditing is the examination of the transactions recorded in the accounting books to prove the true and fair value of the account.
The second difference between accounting and auditing is the nature. Accounting is concerned with the current data. It is to finalize the accounts. However, auditing is concerned with pass data. It is to establish reliable financial statements.
The third difference between accounting and auditing is the objective. The objective of the accounting is to ascertain the trading results. It keeps the transactions recorded. However, the objective of auditing is to check on the correctness of financial statements. It is concerned with checking and verification of the accounts.
Besides, commencement is also one of the differences between accounting and auditing. Accounting commences when book keeping ends. Accountants will need to do recording each time a transaction takes place. Normally, accounting period is one year, which means accountants takes one year to complete the records. Auditing commences when accounting work ends. Normally, the time period of auditing is less than one year.
The last difference of accounting and auditing is the scope. Accounting involves many financial statements such as statement of comprehensive income, statement of financial position and statement of cash flow. It also involves the maintenance of the accounting books. It does not go beyond the accounting books. However, auditing depends on the agreement or the provision of the law or company act. It goes beyond the accounting books.
Always on Time
Marked to Standard
C) The objective of auditing is to help the users to express the opinions and detect the errors and frauds. The auditors should make sure that the accounting statements are true and accurate and the errors and frauds should not exist. There are two main objectives of auditing which are primary objective and the secondary objective which are also known as incidental objective.
As per Section 227 of the Companies Act 1956, the primary objective of the auditor is to report whether the company's balance sheet provide a true and fair view. The primary objective of auditing is to express the auditors' opinion of the truth and fairness of the financial statements of a company so that other users can trust it. The implication of the concept of "true and fair view" must be understood. According to Lord Justice Lindley, Auditors do not need to advice directors or shareholders. Besides, whether the loans are made sensibly and carefully or not, whether the company's business is conducted sensibly and carefully; profitability or unprofitability, there is nothing to do with the auditor. The auditor's job is only to examine and state the company's true financial position as when he or she is auditing (India, T.I.).
The secondary objective is to prevent and detect the errors and frauds. As per the Statement on Auditing Practices that is issued by the Institute of Chartered Accountants of India, an auditor should always remind himself or herself of the possibility of the existence of errors and frauds in the unaudited accounts since they may cause the financial position to be misstated (India, T.I.).
Fraud in accounting means the defalcation of either cash or goods and the fraudulent manipulation of accounts. Errors are the mistakes in the financial information such as principle errors. The auditing process is undertaken to make sure that errors and frauds do not exist in the financial statement of the company.
The reason why the auditing is needed is there are always some problems that will exist in the financial statement. For example, the financial report may contain error and fraud. Therefore, the auditing process is needed for the independent person who is known as the auditor to investigate the report and report on what he or she found.
Besides, auditing is needed to help to improve the internal controls of a company and help the company to set its objectives. Internal control system is established to ensure the company's transactions are controlled according to the rules and policies. Therefore, knowing this system enables the company's job to be completed efficiently and effectively. Audit process helps to increase the investor's confidence because the auditing process provides them a trusted second opinion of the company's financial statement so that they will trust the company and invest their money in the company.
(D) The first difference between the role of internal auditor and external auditor is their position in the organization. Internal auditors are considered part of the organization. The board, professional standards and management will determine their objectives. The management and the board are their primary clients. However, external auditors are not considered as part of the organization, although they are engaged in it. Their objectives are set by the act of the organization and their primary client which is the board of directors.
The second difference between the role of internal and external auditor is their objectives. Internal auditors help the organization to accomplish its objectives, improve operations, manage risk, provide internal controls and governance processes. They are concerned will both financial and nonfinancial aspect of the organization. They continuously review and evaluate controls and processes so that they are able to focus on future events. However, external auditors' primary mission is to provide an independent opinion on the financial statements of the organization yearly. They audit the financial statement and provide a certification of internal controls over financial reporting.
Besides, approach of internal control also differs between the role of internal and external auditors. Internal auditors are concerned with all the aspects regarding the organization's internal control system. However, external auditors concerned the internal control system based on materiality perspective, which enables them to eliminate those errors that are not significant since they do not influence the financial results.
This Essay is
a Student's Work
This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.Examples of our work
Finally, application of the audits also differs between internal and external auditors. Internal auditors deal with all the organization's transactions. External auditors only deal with those operations that will affect the financial results and the performance of the organization.
E) In short, the main function of audit is to verify a financial statement of a legal entity, to show an audit option with a view. Audit is very important to the users of financial statement because the users like tax authorities, bankers, shareholders and so on are concern in knowing that the financial statements are presented fairly. Audited financial statements help to protect the users of financial statement by proving the audited company financial statement has no fraud and corruption and these could help to enhance the confidence of the users of financial statements.
Besides, audit prepare an outside look at the operation of accounting and the overall financial health of a company, this is important to the users because the users may rely on these audited financial statements to make a decision whether it is worth to invest in this business or not. For example, bank and supplier used audited financial statements to decide whether it is worth to borrow the money to the company or not.
In addition, audit help to add reliability to the report and reduce the missing and false information which would cause users to change their decision, these would do a favour to the users.
Lastly, the internal controls organization and users. It helps to improve the operation or business process of a company. The external auditor help to identify the business process improvement. For example, audit discovers any weakness in internal controls. When any weaknesses are discovered, the auditor will report it to the users (management) for discipline or corrective actions. Auditors may give some recommendation to users and help users to facilitate resolution.
F) What is audit? According to 'Gale Encyclopedia of Small Organization', audit is a systematic process of objectively obtaining and evaluating the accounts or financial records of a governmental, organization or other entity. There are several types of audit, such as financial statement audit, operational audit, forensic audit and compliance audit.
Firstly, a financial statement audit is the determination of the financial statement provided by the board of director of an organization. Usually, financial statement audit will concerns about the basic set of financial statement, such as Income Statement, Balance Sheet and Statement of Cash Flow. The example of this audit is an external audit examines the fairness, accuracy and reliability of financial reports prepared by an organization and whether it complies with relevant legislation and accounting standard.
Secondly, an operational audit studies the internal system and operation procedures used by an organization in order to produce goods and services sold to customers. This audit focuses on the efficiency and effectiveness of the production operations. Some of the main purposes and responsibilities of an operational audit are to assess performance, identify areas for improvement and develop recommendations. The example of this audit is a private sector employs auditors to assess the effectiveness and efficiency of the use of raw material resources.
Thirdly, a forensic audit investigates the financial records prepared by an organization in order to detect corruption, fraud and misappropriation of assets. The reasons of people commit fraud are lack of control, lack of fraud detection mechanisms, absence of appropriate punishment and poor remuneration of employees. Forensic audits are trained to detect, investigate and deter the fraud. . The example of this audit is public accounting firms employ forensic audit in order to analyze the financial transactions involving unauthorized transfer of cash and identify the asset misappropriation.
Lastly, a compliance audit is an overall determination of an organization's adoption to regulatory guidelines. Besides, compliance audit identifies the whether the rules, policies or governmental regulations are followed by the entity being audited. The example is a compliance auditor may audits an organization to determine whether the department follows organization's rules and regulations. Thus, rules and regulations are the criteria for measuring the department's compliance.
G) A true and fair view is the meaning of expression. True and fair view in the audit means that the financial statement is materially accurate based on relevant evidence. Therefore, users are able to make a good decision based on the correct statement.
The Companies Act (CA 1985 S.226) defines that every company's profit and loss account and the balance sheet must have a true and fair view of the state of affairs and the profit or loss respectively. The auditors should ensure a few conditions in order to show a true and fair view in auditing. For examples, the final account must be tally with the book of account and the provision for depreciation must be correct. Besides, the transactions that are cut off must be recorded properly so that all the sales invoices are relevant with the goods delivered and the goods that received from suppliers are matched with all the purchase invoices. Furthermore, the transactions are recorded based on the accrual principle which are prepaid expenses, accrued expenses, income accrued and the income in advance must be recorded properly.
Moreover, the account is considered as true and fair view when it discloses all the material facts. The account must disclose all material facts based on the revenue, expenses, assets and liabilities. Besides, the final accounts of the limited company must be in the format under the Schedule VI of the Companies Act, 1956. For examples, special companies such as banks must prepare the accounts under special laws.
H) An audit report is an evaluation of an organization's overall financial status. This document shows the organization's assets and liabilities. Audit report is required by law if an organization is publicly traded or regulated by the Securities and Exchange Commission (SEC). There are four primary categories of audit report. They are unqualified opinion, qualified opinion, adverse opinion and disclaimer of opinion.
Unqualified opinion report is also called as a clean opinion. This is because this report will only issue when an auditor identifies that every financial records provided by the organization is fair and free of misrepresentations. Besides, financial records with unqualified opinion have been maintained in accordance with the standard which is Generally Accepted Accounting Principles (GAAP). By this, accountant is much easier to perform the audit. Normally, unqualified report will consists of a title with word "independent" showing that it was completed by an unbiased third party. Then, the main body of the title emphasizes the responsibilities of auditor, purpose of audit and the audit's findings.
Secondly, qualified opinion report is issued if the auditor has unsatisfactory on the financial records that provided by the organization. Furthermore, qualifies opinion shows that the financial statement has not been maintained in accordance with GAAP but there are no misrepresentations or adverse opinions are recognized. The writing of both qualified and unqualified opinion is extremely similar, however the only difference between them is the qualified opinion report will includes a paragraph that emphasizes the reason why the issued audit report is not unqualified.
Thirdly, adverse opinion report is the worst type of audit report that can be issued to an organization. One of the reason is the organization's financial records do not comfort to GAAP. The other reason is the financial records have been misrepresented and unfair. Typically, it is an indication of fraud. When adverse opinion report is issued, the organization must correct its financial statement, explain the problems and give opinion as to how the records differ from GAAP. This is because the lenders and investors will normally not accept the financial statement with adverse opinion report.
Lastly is disclaimer opinion report. When the auditors are unable to complete an accurate audit report and perform their work well, a disclaimer opinion report is issued. This situation may be influenced by some factors, such as absence of appropriate financial records, information constraint and time constraint. Moreover, disclaimer opinion report indicates also the organization's financial status could not be analyzed. After disclaimer opinion report is issued, the organization should give all the essential reason for the disclaimer.
I) Our selected companies are Maxis Berhad and Digi.Com Berhad. Both of the companies are telecommunication services companies. We have identified the categories of audit report that has been issued by auditor on both companies' financial statement based on their annual report for year 2011.
For Maxis Berhad, an unqualified opinion report has been issued by the auditors. This is because based on the auditors' opinion, they think that the accounting records and the registers required by the Act to be kept by Maxis and its subsidiaries of which the auditors have been properly kept in agreement with the provisions of the Act. Furthermore, the other reason is that the auditors are satisfied that the financial statements of Maxis are in form and considered proper and appropriate for the preparation of financial reports and the auditors are also satisfy with the information and explanation received. Thus, the audit report on the financial statements of the subsidiaries did not contain any qualification and any adverse comment made under Section 174(3) of the Act.
Similarly, an unqualified opinion report has been issued by the auditors to Digi.Com Berhad. The main reason is the auditors determine that the financial statements of Digi have been properly drawn up in agreement with Financial Reporting Standards and the Companies Act, 1965 in Malaysia so as to provide a true and fair view of the financial position of the group and of the company at the end of the accounting period. The auditors are satisfied that Digi has an appropriate and proper content for the preparation of the consolidated financial statements. They have also received satisfactory information and explanation that they require. Thus, the auditors' reports on the financial statements were not subject to any qualification and do not include any adverse comment required under Section 174(3) of the Act.
J) First of all, unaudited financial statements represent unreliable financial statement because it is an accounting report that has not gone through the checking of accuracy and it may contain fraud which bring the meaning of the intention to change or misrepresentation of accounting record for a profit motivate. Besides, unaudited financial statement may mislead the users of financial statements with their financial performance appraisal will be put up by the optimistic to cozen the users of financial statements. Lastly, unaudited financial statements will affect the user's judgement quality.
An unaudited financial statement can be used when requesting for a bank loan or requested from financial institution. This is because for the current year the audited financial statement is not accessible. So the financial institution and bank only can rely on these unaudited financial statements additionally earlier audited financial statements.
Besides, an unaudited financial statement can be used in a private limited company. This is because audited financial statement is not necessary for investors and shareholders but the company will use the information in the unaudited financial statements to make business decisions.
For listed company, it is required to file unaudited financial statements on the quarterly basis with specific regulatory authorities.
Besides, important financial information is also announced to investor and general public with unaudited financial statements.