You are required to explain the factors that external auditors should consider in determining whether the financial statements of a limited company show a true and fair view.
The auditor will have to consider whether the financial statements have been prepared in accordance with the provisions of the companies Act, the International Financial Reporting framework and any other relevant legislation and are free from material misstatements. In particular the auditor‘s opinion will be influenced by:
- Whether he has been able to obtain all the information and explanations that were necessary for the purposes of the audit. If the auditor has not been able to obtain to obtain information on issues that are considered material to the financial statements, this amounts to a limitation in the scope of the work and the auditor should qualify his report or issue a disclaimer of opinion;
- Whether the company has kept proper books of accounts. Management is required to maintain proper books of accounts, this include a ledger to record all the transactions, shareholders register and a record of minutes of the directors. If the company has not maintained such books of accounts then this would be a ground to qualify the reports;
- Whether the financial statements i.e. company‘s balance sheet and profit and loss
account are not in agreement with the books of accounts and returns;
- Circumstances of disagreement for example where the auditor does not agree with the choice of accounting policy adopted by management or the mode of disclosure of facts in the financial statements;
- Whether there are unresolved inherent uncertainties such as conditions threatening the going concern ability of the company;
- Whether the financial statements have been prepared in accordance with the financial reporting framework.
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