ACCA AA Syllabus A. Audit Framework And Regulation - Limitations of external audits - Notes ^{6 / 8}

Benefits of Statutory Audits

• Investors are more able to rely on the information provided

• Management can verify that their systems are sound.

• Management are less likely to commit fraud

• The business more able to raise finance

• The auditor will highlight any deficiencies in their letter to management.

Problems

• Many businesses with a recent clean audit report have subsequently gone out of business.

• Not all transactions are checked.

• The opinion is based on evidence, often provided by management.

• Many controls can be overridden by management

Where do we get the information from?

To understand a client (new or old)

• Prior year audit file

  Identification of issues that arose in the prior year audit and how these were resolved. 

  Also whether any points brought forward were noted for consideration for this year’s audit

• Prior year financial statements

  Provides information in relation to the size of the entity as well as the key accounting policies and disclosure notes

• Accounting systems notes

  Provides information on how each of the key accounting systems operates.

• Discussions with management

  Provides information in relation to any important issues which have arisen or changes to the company during the year

• Current year budgets and management

  Provides relevant financial information for the year to date

• Permanent audit file

  Provides information in relation to matters of continuing importance for the company and the audit team, such as statutory books information or important agreement

• Client website

  Recent press releases from the company may provide background on changes to the business during the year as this could lead to additional audit risks

• Prior year report to management

  Provides information on the internal control deficiencies noted in the prior year; if these have not been rectified by management then they could arise in the current year audit as well

• Financial statements of competitors

  This will provide information about competitors, in relation to their financial results and their accounting policies