a) Responsibilities of external auditors to directors and shareholders
? The external auditors are required to prepare a report to shareholders on the
truth and fairness (or fair presentation) of financial statements prepared by
management for the benefit of shareholders.
? The auditors, if appointed by shareholders, act as agents for the shareholders in
the same way as directors act as agents for the company.
? Auditors have no specific duties to directors although it is clearly necessary that
an adequate working relationship is formed in order that the audit can be
performed properly. Directors generally have a duty to provide auditors with
the information and explanations they require to perform the audit.
? Auditing standards require that auditors report weaknesses in systems that they
discover during the course of their audit to management (ISA 400 ‘Risk
Assessments and Internal Control’).
(b) Limitations of the external audit – fraud
? Auditing standards require that auditors plan and perform their audits with a
reasonable expectation of detecting fraud and error if they are material to the
financial statements (ISA 240 ‘Fraud and Error’).
? It is commonly believed that the purpose of the external audit is to detect, and
report, fraud and error. The detection and reporting of such matters is
secondary to forming an opinion on the financial statements.
? Material fraud is often very difficult to detect, however, and an auditor has not
necessarily failed in his duty if he fails to detect such a fraud.
? Most frauds are small, and immaterial to the financial statements. If auditors
detect frauds, they have a duty to report such matters to the management of
the company regardless of whether they are material or immaterial. Only
matters that are material need to be reported in the financial statements.
(c) External auditor independence
? External auditors are unable to fulfill their duties to shareholders if they are not
independent of the entity on which they are reporting.
? If external auditors have an interest in the financial statements on which they
are reporting, they may not be objective. For example, if, in the case of a listed
company, they have prepared the financial statements on which they are
reporting, their view may not be considered objective.
? If they have financial or employment connections with the company on which
they are reporting they will not be objective.
? If they provide a significant level of additional services to the entity, it is argued
that they cannot report objectively as auditors to shareholders.
(d) Advantages and disadvantages of external auditors providing consulting
services
? The principal advantage of providing consulting services lies in the fact that
auditors are best placed to provide such services, because they have an intimate
knowledge of the operations of the company.
? Equally, if they provide consulting services, the knowledge so obtained will be
useful in conducting the audit, and experience in general of consulting better
enables auditors to conduct their duties as auditors, because knowledge of
other industries can be brought to bear on the client.
? The principal disadvantage is that auditors often make a lot of money from
such work, and it is argued that auditors are not objective in these
circumstances because they would be unwilling to challenge directors or issue a
qualified audit report for fear of losing the fees for consulting work.
? The other disadvantage is that if they have implemented systems that produce
the financial statements, they are unlikely to give a qualified audit report on the
information that those systems produce.
johnson mwenjera answered the question on August 4, 2018 at 11:58
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