Companies often relied on accountants from their audit firms to assist in reconciling accounts, preparing the adjusting journal entries and writing financial statements. For instances, Small companies often lacked the level of accounting sophistication necessary to carry out these tasks. So, relying on the audit firm often made sense from the perspective of efficiency and cost containment.
Today
An increased focus on auditor independence has come about . Therefore, the outside independent auditor is engaged to render an opinion on whether a company’s financial statements are presented fairly, in all material respects, in accordance with financial reporting framework. The audit provides users such as lenders and investors with an enhanced degree of confidence in the financial statements. An audit conducted in accordance with GAAS and relevant ethical requirements enables the auditor to form that opinion.
What The external auditor do
The outside auditor, to form the opinion, gathers appropriate and sufficient evidence and observes, tests, compares and confirms until gaining reasonable assurance. The auditor then forms an opinion of whether the financial statements are free of material misstatement, whether due to fraud or error. First and foremost, auditors do not take responsibility for the financial statements on which they form an opinion. The responsibility for financial statement presentation lies squarely in the hands of the company being audited.
But the external auditors are not a part of management, which means the auditor will not:
-Authorize, execute or consummate transactions on behalf of a client
- Prepare or make changes to source documents
-Assume custody of client assets, including maintenance of bank accounts
- Establish or maintain internal controls, including the performance of ongoing monitoring activities for a client
- Supervise client employees performing normal recurring activities
-Report to the board of directors on behalf of management
- Serve as a client’s stock or escrow agent or general counsel
-Sign payroll tax returns on behalf of a client
-Approve vendor invoices for payment
- Design a client’s financial management system or make modifications to source code underlying that system
-Hire or terminate employees
This list is not all-inclusive. But, in short, the auditor may not assume the role and duties of management.
In practical terms, there are a number of tasks you should not expect your auditor to perform.
- Analyze or reconcile accounts
- “Close the books”
- Locate invoices, etc., for testing
- Prepare confirmations for mailing
- Select accounting policies or procedures
-Prepare financial statements or footnote disclosures
- Determine estimates included in financial statements
- Determine restrictions of assets
- Establish value of assets and liabilities
- Maintain client permanent records, including loan documents, leases, contracts and other legal documents
- Prepare or maintain minutes of board of directors meetings
- Establish account coding or classifications
- Determine retirement plan contributions
- Implement corrective action plans
-Prepare an entity for audit
On sum, “The financial statements are the responsibility of management ”
It appears prominently in an auditor’s communications, including the audit report. Management’s responsibility is the underlying foundation on which audits are conducted. Simply put, relying on outside auditors without management having responsibility for the financial statements, the demarcation line that determines the auditor’s independence and objectivity regarding the client and the audit engagement would not be as clear.
Adopted from: www.grfcpa.com/resources/publications/auditor-responsibilities
April 03, 2022 April 03, 2022/ Steven Bragg
The preparation of financial statements involves the process of aggregating accounting information into a standardized set of financials. The completed financial statements are then distributed to management, lenders, creditors, and investors, who use them to evaluate the performance, liquidity, and cash flows of a business. The preparation of financial statements includes the following steps (the exact order may vary by company).
Step 1: Verify Receipt of Supplier Invoices
Compare the receiving log to accounts payable to ensure that all supplier invoices have been received. Accrue the expense for any invoices that have not been received.
Step 2: Verify Issuance of Customer Invoices
Compare the shipping log to accounts receivable to ensure that all customer invoices have been issued. Issue any invoices that have not yet been prepared.
Step 3: Accrue Unpaid Wages
Accrue an expense for any wages earned but not yet paid as of the end of the reporting period.
Calculate depreciation and amortization expense for all fixed assets in the accounting records.
Step 5: Value Inventory
Conduct an ending physical inventory count, or use an alternative method to estimate the ending inventory balance. Use this information to derive the cost of goods sold, and record the amount in the accounting records.
Step 6: Reconcile Bank Accounts
Conduct a bank reconciliation, and create journal entries to record all adjustments required to match the accounting records to the bank statement.
Step 7: Post Account Balances
Post all subsidiary ledger balances to the general ledger.
Step 8: Review Accounts
Review the balance sheet accounts, and use journal entries to adjust account balances to match the supporting detail.
Step 9: Review Financials
Print a preliminary version of the financial statements and review them for errors. There will likely be several errors, so create journal entries to correct them, and print the financial statements again. Repeat until all errors have been corrected.
Step 10: Accrue Income Taxes
Accrue an income tax expense, based on the corrected income statement.
Step 11: Close Accounts
Close all subsidiary ledgers for the period, and open them for the following reporting period.
Step I2: Issue Financial Statements
Print a final version of the financial statements. Based on this information, write footnotes to accompany the statements. Finally, prepare a cover letter that explains key points in the financial statements. Then assemble this information into packets and distribute them to the standard list of recipients.
April 03, 2022/ Steven Bragg/
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The directors are responsible for preparing the financial statements in accordance with applicable law and regulations. The directors have elected to prepare financial statements for the Group in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs) and have also elected to prepare financial statements for the Company in accordance with UK accounting standards. Company law requires the directors to prepare such financial statements in accordance with the Companies (Jersey) Law 1991.
International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the Preparation and Presentation of Financial Statements’.
In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. Directors are also required to:
- properly select and apply accounting policies;
- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
- provide additional disclosures, when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and
- make an assessment of the Company’s ability to continue as a going concern.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a directors’ report and directors’ remuneration report.
The directors are responsible for the maintenance and integrity of the Company website. Jersey legislation and UK regulation governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions.
The directors confirm that so far as they are aware, there is no relevant audit information of which the Company’s auditors are unaware. Each director has taken all the steps that he or she ought to have taken, as a director, in order to make himself or herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.
The following information, together with the letters from the chairmen of the Nomination, Audit and Compensation Committees, the statements regarding directors’ responsibilities and statement of going concern set out above and the directors’ remuneration and interests in the share capital of the Company set out here, are included in the Directors’ report, which also includes the sections ‘Letter to share owners,’ ‘Who runs WPP’ and ‘What we think’.