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AUDITING Introduction

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4 views

AUDITING Introduction

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takesure svondo
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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AUDITING

INTRODUCTION TO AUDITING

“Audit” is a Latin word meaning “he hears”.

The role of auditor can be traced back many hundreds of years, and
there are records, for example, from ancient Egypt and Rome, showing
that people were employed to review work done by tax collectors and
estate managers. Further, in medieval Britain, an independent auditor
was employed by the feudal Barons to ensure that the returns from
tenant farmers accurately reflected the revenues received from the
estates. In this case the accounts of an estate were checked by having
them called out by those who had compiled them to those in authority
(auditors). The emphasis then was much focused on the detection of
fraud and other irregularities. However, although the emphasis has
changed and the role of the auditor becomes much more sophisticated,
the concept of auditing remains the same.

STEWARDSHIP ACCOUNTING

Modern auditing has developed since the concept of a company as a


separate legal entity from its owners came into existence during the
late 19th century. This development led to the separation of ownership
(shareholders) from control (directors). As a result there was need to
safeguard the interests of the owners who in the majority of cases were
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no longer involved in the day-to-day decisions made by management.
Generally, most of the time it is assumed that managers act to increase
the value of the shareholders’ wealth or investment in the business.
However, in reality managers are human beings and have to attend to
their own personal interests as well as those of the shareholders’. This
apparent dilemma or conflict of interest is normally referred to as “The
Agency Problem”. Accordingly the question to be asked here is that
would it be realistic to expect managers always to act in the best
interest of the shareholders? Should the shareholders be expected to
believe the information or reports given out by managers? In such a
situation where ownership and the day-to-day management of the
business are divorced, there is a need for a Third Party who
authenticates or endorses the information from managers before it is
passed on to the owners of the business i.e. the shareholders. This
important role of authenticating or endorsing or lending credibility to
the financial statements is achieved through auditing.

DEFINITION OF AUDITING

One author on the subject has defined Auditing as “a process carried


out by a suitably qualified competent and independent person or
persons (auditors), whereby the accounting records underlying a
financial statement of an enterprise are subjected to scrutiny in such

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detail as will enable the auditors to report on the degree of
correspondence between the information given and established
criteria. Further, auditors should be able to form an opinion as to
whether the financial statements give a true and fair view of what it
purports to show. The auditors’ opinion is then embodied in an “audit
report” addressed to the interested parties who commissioned the
audit or to whom the auditors are responsible under the statute.

According to International Standard on Auditing (ISA) 200 objective and


General Principles Governing an Audit of Financial Statements, the
objective or purpose of an audit is ‘to enable the auditor to express an
opinion whether the financial statements are prepared in all material
respects, in accordance with an identified financial reporting
framework’. This framework might be International Accounting
Standards, or the national standards of a particular country, e.g. for
South Africa or ….. for the UK. The phrases used to express the auditor’s
opinion are that the financial statements ‘give a true and fair view’ or
‘present fairly in all material respects’.

These phrases, which are equivalent terms, are used in many countries,
including the UK, USA and Zimbabwe.

Financial Statements-these include the Statement of Financial Position,


the Statement of Comprehensive Income, the Statement of Changes in

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Equity, the Statement of Cash Flows, notes and any other explanatory
materials that are identified as being part of the financial statements.
What is included/excluded in the financial statements is determined by
the national legislation and accounting standards.

MEANING OF AUDIT OPINION

It should be noted that auditors DO NOT CERTIFY the financial


statements or GUARANTEE that the financial statements are correct;
they report whether in their opinion they give ’A TRUE AND
FAIRVIEW’ or ‘PRESENT FAIRLY’ the financial position

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