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The purpose of an external audit and its role are not well understood. You have been asked to write some material for inclusion in your firm’s...

The purpose of an external audit and its role are not well understood. You have been asked to
write some material for inclusion in your firm’s training materials dealing with these issues in the
audit of large companies.
Draft explanation dealing with the purpose of an external audit and its role in the audit of large
companies, for inclusion in your firm’s training materials.

Answers

Wilfred
•• Training material: purpose of external audit and its role
•• The external audit has a long history that derives largely from the separation of the
ownership and management of assets. Those who own assets wish to ensure that
those to whom they have entrusted control are using those assets wisely. This is known
as the ‘stewardship’ function.
•• The requirement for an independent audit helps to ensure that financial statements are
free of bias and manipulation for the benefit of users of financial information.
•• Companies are owned by shareholders but they are managed by directors (in very
small companies, owners and managers are the same, but many such companies are
not subject to statutory audit requirements).
•• The requirement for a statutory audit is a public interest issue: the public is invited to
invest in enterprises, it is in the interests of the capital markets (and society as a whole)
that those investing do so in the knowledge that they will be provided with ‘true and fair’
information about the enterprise. This should result in the efficient allocation of capital
as investors are able to make rational decisions on the basis of transparent financial
information.
•• The requirement for an audit can help prevent investors from being defrauded, although
there is no guarantee of this because the external audit has inherent limitations.
Reducing the possibility of false information being provided by managers to owners is
achieved by the requirement for external auditors to be independent of the managers
upon whose financial statements they are reporting.
•• The purpose of the external audit under International Standards on Auditing is for the
auditor to obtain sufficient appropriate audit evidence on which to base the audit opinion.
This opinion is to the effect that the financial statements give a ‘true and fair view’ (or
‘present fairly in all material respects’) of the position, performance (and cash flows) of
the entity. This opinion is prepared for the benefit of shareholders.
Wilfykil answered the question on April 12, 2019 at 08:00

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