Audit Tutorial 1
Question 1 *Note: Advantages = Benefits = Purposes
A) Companies
• In the case of companies, shareholders must of necessity place great reliance
upon a review of the accounts by an independent qualified auditor since they do
not have access to the books and records of the company and they are not
always familiar with the business in which they have an interest, nor indeed with
the accounting policies adapted→ Agency theory → Stewardship
• The audit ensures that the directors have fulfilled their statutory obligations
under companies Act 2016
• Moreover, the audit act as a precaution against fraud on the part of employees
in view of the independence check by external auditor, employees take care to
make fewer errors in performing accounting functions and less likely to
misappropriate company assets. Hence, company records are more reliable,
reduces losses from embezzlements and fraudulent reporting.
• Additional benefits deriving include improvement of the company’s internal
control and information systems and possibly advice on improvement in
standards of the company’s reporting to its members (shareholders).
• Where audited accounts are available this may make the accounts more
acceptable to the taxation authorities i.e. by serving as basis preparation for tax
return to IRB.
• Facilitated major changes in ownership → especially when the past account
contains in unmodified opinions.
• Unmodified opinions in the auditor’s report will create creditability in the F/S for
the assessment of loan application.
B) Partnerships
• Audited accounts in the case of a partnership provide a reliable basis for the
division of profit and for the setting of accounts between partners, reducing the
possibility of disputes and facilitating their settlement should they arise.
• Audited accounts will assist in settling the partnership tax assessments.
• Audited accounts provide a basis for negotiation in the case of an incoming
partner or the sale of the business.
• On the death of a partner the total amount due to his estate should be more
readily determined and agreed, and the settlement of death duties facilitated.
• In the special situation of a firm which has ‘sleeping’ partners, an audit is of
particular importance and advantage as such persons take no part in the
management of the business.
C) Sole traders
• Similar advantages accrue to the business of a sole trader, i.e. improvement of
the internal company system since there is a possibility of a breakdown in
internal control and accounting system
• An incidental but important advantage of an audit is that the professional firm of
accountants acting as auditors will be available to provide other services such as
advice and assistance on accounting, costing, management, taxation and system
problems.
Question 2
A)
Accounting
Auditing
-Recording classifying and summarizing of
transactions in a systematic manner for the
purpose of providing financial information →
economic/business decision making
– A process of reviewing the transactions and
balances of accounting records → express an
audit opinion → true and fair view of the
financial statement → All material respect →
in accordance with an identified financial
statement
B)
• The type of audit that he needs to do in compliance with Companies Act 2016 is
Financial Statement Audit
• Overall financial statements are prepared according to the acceptable accounting
principles
• Scope of audit:
o 5 components of Financial Statements: Statement of Financial Position, Income
Statement, Statement of Changes in shareholder’s equity, cash flow statement,
notes to Financial Statements
o Accounting system, internal control system and all the relevant documentations.
• Frequency: Once a financial year
C)
• Financial statement audit is mandatory for all the registered companies (private
company and public company) under Companies Act 2016.
• The reason for making audit compulsory for the companies due to:
o The existence of agency relationship between the shareholders (owners) and
directors (agents) in order to ensure that the financial statements are drawn
accurately. They employ auditors to check its reliability of financial statements.
The job of external auditors is to report whether the financial statements
prepared and presented by BOD shows True & Fair view
o By having this independence check the shareholders gain confidence in terms of
money is being handled properly.
Question 3
A) Financial Statement Audit
• To review and determine whether Financial Statements are prepared according
to the acceptable accounting principles.
• Auditor will express an audit opinion → true and fair view of F/S prepared and
presented by BOD → all material respect → in accordance with an identified
