Page 12 - Microsoft Word - 00 IWB ACCA F7.docx

Chapter 1

External audit

3.1 External audit

ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with International Standards on Auditing states:

The objectives of an auditor are to:

 Obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error.

 Express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting
framework.

 Report on the financial statements, and communicate as required by ISAs, in
accordance with the auditor's findings.

3.2 Need for external audit

 Shareholders provide the finance for a company and may or may not be
involved in the day to day running of the company.

 Directors manage the company on behalf of the shareholders in order to
achieve the objectives of that company (normally the maximisation of
shareholder wealth).

 The directors must prepare financial statements to provide information on
performance and financial position to the shareholders.

 The directors have various incentives to manipulate the financial statements
and show a different level of performance.

 An external audit provides an independent verification of the financial
statements to ensure they give a true and fair view.

8