This document discusses the fundamentals and purpose of financial statement audits. It outlines the relationship between accounting and auditing, the need for audits due to conflicts of interest and complexity, and theories like agency theory that explain the purpose of audits. The document also describes the audit process, the duties and legal requirements of auditors, what gets included in the auditor's report, and limitations of audits.

2. Financial Statements Audit
Fundamentals of Financial Audits
•Relationship between Accounting and Auditing

3. Financial Statements Audit
Verifiability of Financial Statement Data
• Verifiable data: Two or more qualified individual reach the same conclusions
Need for Financial Statements Audit
• Conflict of interest
• Consequences of decisions (economic, social, other)
• Complexity (financial statements become increasingly complicated)
• Remoteness (most users are outside the company)
Explanatory Theories of Auditing
• Agency theory (investors entrust their resources to managers, expecting
return on capital)
• Information hypothesis (investors require information to assess risk and
return)
• Insurance hypothesis (shifting liability for litigation to auditors)

4. Financial Statements Audit Financial Statements Audit
Economic Benefits of Audit
• Access to capital markets
• Lower cost of capital
• Deterrent to inefficiency and fraud
• Control, risk assessment and operational improvements
Limitations of a Financial Statements Audit
• Time lapse (between occurrence of transactions, balance sheet preparation
and audit)
• Audit testing on samples and other selected data
• Over-reliance on expert systems (computer packages)
• Forming professional judgments in highly specialized areas (reports on too
technical subjects)
• Report format limitations (reports follow a standard format which may not
be sufficient to accommodate specific complexities)

5. Financial Statements Audit
Duties of Company Auditors
• Carry out an audit
• Report to members their opinion whether the financial statements give a
true and fair view and comply with applicable reporting framework and
regulations
• Be independent of the company
• Exercise a reasonable degree of skill and care
Statutory duties of auditors
• Auditors must report in specified format
• Duty to report on the company’s financial statements and send a copy to
all members

6. Financial Statements Audit
Contents of the Auditors Report
• Introduction (identification of annual accounts being audited)
• Description of scope and auditing standards followed
• Clearly state their view on the truth and fairness of the accounts
• Certify that financial statements have been prepared in accordance with
the relevant financial accounting framework and the Companies Act
Matters Reported on “by exception” (whether the auditor has:)
Obtained all the necessary information and explanations
• Adequate accounting records have been kept
• Returns from branch offices are adequate
• Financial statements are in agreement with the records and returns
The Audit Opinion
• The report must be “qualified” (including specific reservations) or
“unqualified” (after taking comments into account)

7. Financial Statements Audit
The Audit Process
• Obtain and accept engagement
• Plan the audit (understand the business and its risks, including those
related to internal control)
• Audit performance and evidence gathering
• Evaluate results and formulate conclusions
• Audit reporting
The Auditor’s Report
• Communication (different users, language and terminology, users’ level of
understanding)
• Form (title, addressee, introduction, statement of responsibilities of
management and the auditor)
• Scope (sample assessment of evidence, assessment of accounting
principles, addressing significant management estimates, evaluation of
overall presentation)
• Opinion (the financial statements have been prepared according to
standards & relevant legislation and give adequate disclosure to proper
understanding)
Date, auditor’s address and signature