Introduction. Discuss the role of the auditor Discuss the auditor’s basis of opinion Identify the records that require to be audited Explain the connection between shareholders, directors and auditors Understand what is meant by the term ‘true and fair view’ Discuss the role of directors. Stewardship Extra readings Past paper questions. Model questions. Summary

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Auditing & Stewardship
Sanjaya Jayasundara
B.Sc.(Finance) Sp.
University of Sri Jayewardenepura,
Investment Advisor,
International School Teacher

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Content
Introduction.
Discuss the role of the auditor
Discuss the auditor’s basis of opinion
Identify the records that require to be audited
Explain the connection between shareholders, directors and auditors
Understand what is meant by the term ‘true and fair view’
Discuss the role of directors.
Extra readings
Past paper questions.
Model questions.
Summary
Syllabus according to Cambridge
1.1.5 Auditing and stewardship of limited companies
Candidates should be able to:
• explain the role of the auditor
• explain and discuss the role of directors and their responsibilities to shareholders (stewardship)
• discuss the importance of a true and fair view in respect of financial statements.

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Introduction
Auditing is normally associated with the accounts of limited companies. It is compulsory that
larger limited companies have their financial statements audited by external auditors.
However, tax authorities or a business’s bank may request sight of audited financial
statements of non-incorporated businesses.
An external auditor investigates whether or not the business has kept adequate records, that
financial statements are consistent with the records from which they are prepared and that
financial statements prepared by management give a true and fair view of the business’s state
of affairs. The auditor verifies that transactions have actually taken place and that they have
been recorded in the books of account accurately.
The audit provides the users of financial statements with an assurance that the statements
provided to them can be relied upon.
Auditors
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External auditors
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Internal auditors
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Differences between external and internal auditors
External auditors Internal auditors

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The auditor’s opinion
If, in the auditor’s opinion, adequate records have not been kept of the company’s financial
statements or the auditable part of its directors’ report is not in agreement with the company’s
records and returns, the auditor will a qualified opinion to the report.
A qualified report will raise points that the auditor considers have not been dealt with correctly
by the directors in their preparation of the financial statements.
Where such points are not of a serious nature, the report might state ‘.. with the exception of…
the financial statements do show a true and fair view…’ If, however, the auditor is of the opinion
that there has been a serious breach the statement will state that ‘the financial statements do
not show a true and fair view.’
The auditor’s report has three main sections:
01. Responsibilities of directors and auditors
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02. Basis of opinion
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03. Opinion
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Types of auditor’s reports
01. Qualified auditor’s report
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02. Un -Qualified auditor’s report
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Audit requirements
The main statements that have to be audited are:
 The income statement
 The statement of financial position
 Statement of cash flows
 Statements of changes in equity
 Notes to the accounts
 Accounting policies
Regulatory framework
The regulatory framework is made up of shareholders, directors and auditors:
 Shareholders are responsible for the appointment of directors and auditors.
 Directors recommend the appointment of auditors to the shareholders.
Because of the interdependence of the three parties there is a need for rules and regulations
that accountants follow in the preparation and presentation of financial statements. The
sources of the regulations are the Company Acts and the application of accounting standards.
Accounting standards are not laws. However, in the UK, the Companies Act 1985 requires
that directors must state in the notes to the financial statements that international accounting
standards have been applied in the preparation of the statements.
True and fair view
A true and fair view requires that the auditor must give an opinion as to whether the financial
statements presented to the shareholders are truthful and unbiased.
The auditor must verify that financial statements agree with company records. They must
confirm that:
 Results shown in income statement are truly and fairly stated.
 Fundamental accounting concepts have been applied.
 The accounting convention followed in the preparation of financial statements is
stated.
 The preparation of financial statements is consistent with previous periods.
The auditor must verify that: assets exist and are owned by the company and are stated at
amounts are in accordance with accepted accounting policies and all liabilities are included
and stated at amounts that are accordance with accepted accounting policies.

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The role of directors
Shareholders provide the capital of limited companies by the purchase of shares. In the case
of public limited companies there are often many thousands of shareholders. Clearly, all these
shareholders cannot run the business on a day-to-day basis, so it is the responsibility of
shareholders to appoint directors to run and manage the business on their behalf. The
directors of a limited company are responsible for the preparation of annual financial
statements that are then used by shareholders to assess the performance of the company
and the directors whom they have appointed. The directors must ensure that the provisions of
the Companies Act 1985 are implemented.
Directors are paid emoluments as their reward for running the business.
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‘Divorce of ownership and control’ is the term often used to describe the relationship between
shareholders and directors because although shareholders are the owners of a company, it is
the directors who control the day-to-day affairs of the business.
Stewardship
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Directors’ responsibilities
Directors have a responsibility to:
 Keep proper accounting records that allow financial statements to be prepared in
accordance with relevant companies legislation.
 Safeguard business assets.
 Select the accounting policies to be applied to the business books of account.
 State whether international standards have been applied.
 Report on the state of the company’s affairs.
 Ensure that the financial statements are signed by two members of the board of
directors.

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Past Paper Questions
May/June 2019 – Variant 32
3.
(a) Explain one benefit of auditing. [2]
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May/June 2018 – Variant 31/33
3.
(a) Explain the role of an external auditor. [2]
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May/June 2017 – Variant 31/33
2.
(c) Explain the role of an external auditor. [4]
(d) Explain why the audit report of a limited company is addressed to the company’s
shareholders and not its directors. [2]
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May/June 2017 – Variant 32
Jack, Julia's brother, is the sole trader of a small business. He has asked his sister if his
accounts should be audited.
REQUIRED
(e) Discuss the advantages and disadvantages to Jack of having his accounts audited. [5]
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October/ November 2016 – Variant 33
(b) Explain the purpose of an end of year audit. [2]
(c) State whether the published audit report will be qualified or not. [1]
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February/ March 2017 – Variant 32
2 Euan was the external auditor of Z Limited.
REQUIRED
(a) Explain the difference between the role of an external auditor and the role of an internal
auditor of a limited company. [4]
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October/November 2016 - Variant 32

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October/November 2017 - Variant 32
3 LS Limited has completed its first year of trading. The company has four directors, of
whom two
are not shareholders. The auditors are currently carrying out the end of year audit.
REQUIRED
(a)
(i)
Explain the term ‘stewardship’. [2]
(ii) Explain how directors carry out their role of stewardship within a limited company. [2]
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Important Notes:
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Test your understanding:
1 Explain the difference between a shareholder and a director, and the roles and
responsibilities of each in respect of managing a limited company. [6]
2 Explain the difference between an internal and external auditor and the roles and
responsibilities of each. [6]
3 Auditors have to be shareholders of the company.’ Is this statement true or false? [1]
4 Directors are responsible for the keeping of financial records and the preparation of the
annual financial statements. How can shareholders be guaranteed that the records are
prepared in an objective way? [3]
5 Explain the relationship that exists between shareholders and directors. [2]
6 Explain whether or not a shareholder can become a director of a limited company. [2]
7 What is meant by the term ‘emoluments’? [3]
8 Identify two items that the auditor must verify. [2]
9 Explain the components of auditor’s report. [6]
10 In what circumstances might an auditor qualify his opinion.? [2]
All the best children…!
We wish you an enjoyable learning session...!
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Sanjaya Jayasundara