Audit Expectation Gap: External Users Of Financial Statements

The purposes of a company audit

The main responsibility of an auditor is to express an opinion on whether the financial statements are materially correct or show ‘a true and fair view’. The work carried out by the auditors provides the evidence to support this opinion.

There are a number of other responsibilities an auditor must conclude on:

  1. Whether proper books of account have been kept.
  2. Whether the directors report is consistent with the rest of the financial statements.
  3. For a company limited by shares, whether an EGM is required to discuss the future of the company as the net assets have fallen to below half the called up share capital.

External users of financial statements

Auditors express their opinion on the financial statements and report this opinion to the shareholders. Although the auditors opinion is often used by other external users such as bankers, creditors or potential investors, the auditors are responsible for reporting to the shareholders only.

It is the responsibility of the directors to prepare the financial statements. Apart from the financial results themselves, the following should be included in the financial statements to assist external users.

  1. A review of the business should be included in the directors report.
  2. The principal risks and uncertainties which the business faces should be outlined in the directors report
  3. If appropriate a disclosure should be made in the financial statements regarding the directors reasons why the financial statements have been prepared on a going concern basis i.e. the directors feel the company will continue trading for a year after the approval of the financial statements.

It is the auditors responsibility to ensure the statements made in the directors report are consistent with the rest of the financial statements. Also, if there is enough concern regarding the future of the company  that the directors have had to disclose their reasons for preparing accounts on a going concern basis, the auditor should include and ‘emphasis of matter’ paragraph in the audit report noting the financial position of the company.

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