Get premium membership and access questions with answers, video lessons as well as revision papers.
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
- Towards the end of an audit, it is common for the external auditor to seek a letter of
representation (written representations) from the management of the...(Solved)
Towards the end of an audit, it is common for the external auditor to seek a letter of
representation (written representations) from the management of the client company.
Required:
(a) Explain why auditors seek letters of representation.
(b) List the matters commonly included in the letter of representation.
(c) Explain why it is important to discuss the content of the letter of representation at
an early stage during the audit.
(d) Explain why management is sometimes unwilling to sign a letter of representation
and describe the actions an external auditor can take if management refuses to sign
a letter of representation.
Date posted: August 4, 2018. Answers (1)
- a) Internal control systems are designed, amongst other things, to prevent error and
misappropriation.
Required:
Describe the errors and misappropriations that may occur if the following are not
properly...(Solved)
a) Internal control systems are designed, amongst other things, to prevent error and
misappropriation.
Required:
Describe the errors and misappropriations that may occur if the following are not
properly controlled:
(i) Receipts paid into bank accounts;
(ii) Payments made out of bank accounts;
(iii) Interest and charges debited and credited to bank account
(b) A book-selling company has a head office and 25 shops, each of which holds cash
(banknotes, coins, and credit card vouchers) at the balance sheet date. There are
no receivables. Accounting records are held at shops. Shops make returns to head
office and head office holds its own accounting records. Your firm has been the
external auditor to the company for many years and has offices near to the
location of some but not all of the shops.
Required:
List the audit objectives for the audit of cash and state how you would gain the audit
evidence in relation to those objectives at the year-end.
c) The external auditors of companies often write to companies’ bankers asking for
details of bank balances and other matters at the year-end.
Required:
Explain why auditors write to companies’ bankers and list the matters you would
expect banks to confirm.
Date posted: August 4, 2018. Answers (1)
- Citing six reasons, justify why an accounting officer of a procuring entity, may, at any time, prior to notification of tender award, terminate or...(Solved)
Citing six reasons, justify why an accounting officer of a procuring entity, may, at any time , prior to notification of tender award, terminate or cancel procurement or asset disposal proceedings without entering into a contract.
Date posted: July 23, 2018. Answers (1)
- What is cost accounting?(Solved)
What is cost accounting?
Date posted: July 11, 2018. Answers (1)
- List the purposes of the trial balance(Solved)
List the purposes of the trial balance
Date posted: June 25, 2018. Answers (1)
- What are the setbacks associated with group incentive schemes?(Solved)
What are the setbacks associated with group incentive schemes?
Date posted: June 24, 2018. Answers (1)
- From the following information prepare a cost statement clearly showing the various components of the cost of production (20 Marks)
Sh.
stock on 1st January 2007 48,000
Raw materials 9,800
work in...(Solved)
From the following information prepare a cost statement clearly showing the various components of the cost of production (20 Marks)
Sh.
stock on 1st January 2007 48,000
Raw materials 9,800
work in progress 120,000
finished goods 148,000
wages paid to the factory workers 52,000
factory insurance 400,000
plant balance on 1st January 2007 180,000
factory rent 200,000
cleaning costs 350,000
purchase of raw materials
stocks at 31st December 2007
Raw materials 21,000
work in progress 6,000
carriage on raw materials 42,000
return of raw materials to suppliers 6,200
salary of marketing manager 200,000
fixed admission expenses 140,000
salesman commission 60,000
Date posted: June 20, 2018. Answers (1)
- Define managerial accounting(Solved)
Define managerial accounting
Date posted: June 16, 2018. Answers (1)
- What are the transactions to be excluded in computing national income?(Solved)
What are the transactions to be excluded in computing national income?
Date posted: June 11, 2018. Answers (1)
- What are the differences between ledger entries of cash transaction and ledger entries for credit transactions?(Solved)
What are the differences between ledger entries of cash transaction and ledger entries for credit transactions?
Date posted: May 25, 2018. Answers (1)
- Auditors carry out various audit assignments. In relation to the above statement, explain four non-assurance assignments that auditors undertake(Solved)
Auditors carry out various audit assignments. In relation to the above statement, explain four non-assurance assignments that auditors undertake.
Date posted: May 22, 2018. Answers (1)
- Discuss the problems of Cross Sectional Analysis in accounting.(Solved)
Discuss the problems of Cross Sectional Analysis in accounting.
Date posted: May 22, 2018. Answers (1)
- Outline the limitations of financial ratios.(Solved)
Outline the limitations of financial ratios.
Date posted: May 22, 2018. Answers (1)
- Discuss the uses of financial ratios.(Solved)
Discuss the uses of financial ratios.
Date posted: May 22, 2018. Answers (1)
- Outline the agency costs incurred by shareholders in trying to control management behavior and actions.(Solved)
Outline the agency costs incurred by shareholders in trying to control management behavior and actions.
Date posted: May 22, 2018. Answers (1)
- Outline the actions that a shareholder may take which may conflict the interest of the government as the principal.(Solved)
Outline the actions that a shareholder may take which may conflict the interest of the government as the principal.
Date posted: May 22, 2018. Answers (1)
- Examples of actions by shareholders through management that could lead to a conflict between them and creditors
(Solved)
Examples of actions by shareholders through management that could lead to a conflict between them and creditors
Date posted: May 22, 2018. Answers (1)
- Give examples of decisions by managers which would result in a conflict with shareholders.(Solved)
Give examples of decisions by managers which would result in a conflict with shareholders.
Date posted: May 22, 2018. Answers (1)
- State five the disadvantage of management accounting(Solved)
State five the disadvantage of management accounting.
Date posted: April 24, 2018. Answers (1)
- Clearly, give the differences between management accounting and financial accounting(Solved)
Clearly, give the differences between management accounting and financial accounting.
Date posted: April 24, 2018. Answers (1)