1.0 INTRODUCTION
In this note, you are going to learn the:
· Importance of the auditor in a business organization;
· Responsibilities of the auditor in relation to those of management;
· Auditor’s independence relative to his relationship with
interested groups.
2.0 OBJECTIVES
At the end of this note, you should be able to:
· discuss the importance of the auditor in a business organization
· outline the responsibilities of the auditor
· explain the concept of auditor’s independence
· describe important groups with which the auditor maintains
professional relationships
· differentiate between the responsibilities of the auditor and
those
of management.
3.0 MAIN CONTENT
3.1 Importance of the Auditor in a Business
Organization
Business organizations, whether public or private, generate
financial
statements – balance sheet, profit and loss accounts, etc.
periodically.
Also, internal control comes into play to ensure adherence to
management policies, safeguard the company’s assets, and ensure
accurate and reliable records. All of these have to be appraised
and
verified. The law even requires that this should be done for
public
liability companies.
Both the owners of the business and users of financial statements
will be
interested in the following, amongst others:
(a) that the results of operations is authenticated;
(b) that the business is doing well;
(c) that the accounts are true and fair;
(d) that the company complied with statutory stipulations.
Therefore, the importance of the auditor can be seen from the
perspectives of the role/purpose and advantages of audit, as
summarised
below.
(a) Appraises and helps to improve the system of internal control;
(b) Enables the organization to comply with statutory provisions
on
the audit of accounts;
(c) Confirms the actual financial position of the organization
being
audited;
(d) Gives credibility to the financial statements;
(e) Ensures that accounts are produced in line with the best
practice.
3.2 Auditor’s Responsibility in relation to
those of
Management
Fundamental to a financial statement audit is the division of
responsibility between management and the external auditor. The
critical distinction is as follows:
· Management is responsible for preparing the financial statements
and the contents of the statements are the assertions of
management.
· The auditor is responsible for examining (verifying)
management’s financial statements and produces report that
contains an expression of opinion on their fairness. In the course
of examination, the auditor detects errors and frauds.
In discharging its responsibility, management is expected to:
(a) devise a system
of internal control that will safeguard assets and
help assure the
production of reliable financial statements;
(b) maintain an
adequate and effective system of accounts;
(c) adopt
appropriate accounting policies.
Note that the
criteria followed by:
(a) Management in
preparing financial statements ordinarily are
Generally Accepted
Accounting Principles (GAAP), and
(b) The auditor in
his examination, uses Generally Accepted
Auditing Standards
(GAAS).
In order to
highlight the division of responsibilities between
management and the
auditor, many companies include “a report on
management’s
responsibility” in their annual reports to the shareholders.
The auditor may assist in the preparation of financial statements.
For
example, he may counsel management as to the applicability of a
new
accounting principle, and, during the course of the audit, he may
propose adjustments to the client’s statements. However,
acceptance of
this advice and the inclusion of the suggested adjustments in the
financial statements do not alter the basic separation of
responsibility.
Ultimately, management is responsible for all decisions concerning
the
form and content of the statements.
.
3.3 Auditor’s Independence
This will be discussed under the following sub-heads.
3.3.1 Concept of Auditor’s Independence
In line with our earlier discussion in Module 1, Note 1,
professional
independence is a concept fundamental to the accounting
profession. It
is essentially an attribute of mind, characterized by integrity
and
objective approach to professional work. An auditor is expected to
examine the work of others and to express his opinion therein.
Therefore, it is necessary that he is independent of those who
appointed
him.
In auditing, independence means the possession of integrity,
ability to be
self-reliant and honest, freedom from bias and the avoidance of
relationships which, to a reasonable observer, would suggest a
conflict
of interest on the auditor’s part. Also, it means the avoidance of
any
relationship which might impair the auditor’s objectivity in
expressing
opinion. An auditor must have an independence of mind.
However, there are situations which have the effect of undermining
the
auditor’s independence, most of which border on the temptation on
his
part not to incur the wrath of those who have the capacity to
disengage
him.
As a way out, Section 359 (6) of CAMA, 1990 has provided for the
establishment of audit committees to ensure the auditor’s
independence.
The committees include non-executive members of the company
appointed to view the company’s position in a detached and
dispassionate manner, liaise between the auditors and the
management
board, and to reconcile disputes between the auditor and the
management board.
3.3.2 Auditor’s Relationships
The auditor is an intermediary in the communication of accounting
data.
In the discharge of his responsibilities, the auditor must be
independent
of both the preparers and the users of the financial statements
that
represent summaries of such data. In an audit engagement, the
auditor
maintains professional relationships with four important groups as
listed
below.
(a) Management
(b) The board of directors
(c) Internal auditors
(d) Shareholders.
3.3.2.1 Management
During the course of an audit, there is extensive interaction
between the
auditor and management. To obtain the evidence needed in an audit,
the
auditor often requires confidential data about the entity. It is
imperative,
therefore, to have a relationship based on mutual trust and
respect.
The auditor should have an interest in the well-being and future
of his
client. However, this concern should be tempered by a posture of
professional skepticism about management’s assertions. Moreover,
the
auditor must be prepared to evaluate critically the fairness of
management’s financial statement representations.
3.3.2.2 The Board of Directors
The board of directors of a company is responsible for seeing that
the
company is operated in the best interests of the shareholders. The
auditor’s relationship with the directors depends largely on the
composition of the board. When the board consists primarily of
company officers, the auditor’s relationship with the board may be
the
same as with management.
However, when the board has a number of outside members, a
different
relationship is possible. Outside members are not officers or
employees
of the company. In such a case, the board, or a designated audit
committee composed primarily of outside members of the board, can
serve as an intermediary between the auditor and management.
3.3.2.3 Internal Auditors
An external auditor ordinarily has a close working relationship
with the
client’s internal auditors. Management, for example, may ask the
auditor to review the internal auditors planned activities for the
year and
report on the quality of their work. The auditor also has a direct
interest
in the work of internal auditors that pertains to the client’s
system of
internal control.
The internal auditor’s work cannot be used as a substitute for the
external auditor’s work. However, it can be an important
complement.
In determining the effect of such work on his examination, the
auditor
should:
(i) consider the
competence and objectivity of the internal auditor,
and
(ii) evaluate the
quality of the internal auditors’ work.
The competence of the internal auditor can be ascertained by
inquiring
into his technical training, experience and proficiency. His
objectivity
can be evaluated by considering the organizational level to which
he
reports and reviewing the substance of his reports. In evaluating
the
quality of the internal auditors’ work, the auditor should
examine, on a
test basis, the audit programmes and working papers of the work
performed.
3.3.2.4 Shareholders
Shareholders rely on audited financial statements for assurance
that
management has properly discharged its stewardship responsibility.
The
auditor, therefore, has an important responsibility to
shareholders as the
primary users of his report.
During the course of an engagement, the auditor is not likely to
have
direct personal contact with the shareholders who are not officers
or key
employees of the client.
4.0 CONCLUSION
In this note, you have discovered that it is permissible under
GAAS for
the internal auditor to provide direct assistance to the auditor
in
performing a financial statement audit. When this occurs, the
auditor
should supervise the internal auditor to the extent considered
necessary.
In addition, all judgment required in the examination must be made
by
the external auditor.
5.0 SUMMARY
In this note, you have learnt the followings.
· The auditor is important in a business organization;
· Management is responsible for preparing the financial statements
and the contents of the statements are the assertions of
management;
· The auditor is responsible for examining management’s financial
statements and expressing an opinion on their fairness;
· The auditor requires professional independence in order to
perform;
· The auditor maintains professional relationships with four
important groups – management, the board of directors, internal
auditors and shareholders.
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