Financial statements in auditing-the way of auditing

From 1900 the financial statements became the basic
mechanism by which the activities of company managers were monitored, and, to
some extend, this is still true today.

Once the directors were required by law to prepare
annual financial statements

shareholders then had access to financial
information about the company they owned. However, this access is limited and
the shareholders may come to believe that they are not getting all the
information, or the right information to enable them to make investment decisions/

Thus the role of the auditor as agent for the
shareholders becomes crucial and the costs of the audit are as nothing compared
with the comfort and reassurance the audit affords the shareholders.
Owners who appoint managers to look after their
property will be concerned to know what has happened to it. Reporting and
accounting for their actions is usually done by means of financial statements
which the managers must prepare, and it is through these that the owners of the
business monitor the activities of their agents. The independent audit is a
crucial part this process to ensure that the financial statements faithfully
represent the activities of the managers during the financial period.
Financial statements can take many forms. The best
known are the profit and loss accounts and balance sheets of businesses. In the
specific case of limited companies, financial statements are produced annually
and take the for, of an ‘annual report and accounts’ which includes a profit
and loss account and balance sheet and also other statements including the
directors’ report and a cash flow statement.

Parties
to financial statements

Historically, annual reports and accounts of
companies are produced by the directors (as managers) to the shareholders (as owners),
and other people were not expected to be interested in them. However, today, a
much wider range of people are interested in the annual report and accounts of
companies and other organizations.
The following people or groups of people are likely
to want to see and use financial statements. These are often described as
stakeholders;
·        
Actual or
potential:
o  
Owners or
shareholders
o  
Lenders
or debenture holders
o  
Employees
o  
Customers
o  
Suppliers
·        
People
who advise the above-accountants, stockbrokers, credit rating agencies,
financial journalists, trade unions, financial analysts.
·        
Competitors
and people interested in merges, amalgations and takeovers.
·        
The
government, including the tax authorities, and government bodies connected with
consumer protection and the control and regulation of business.
·        
The
public, including those who are interested in consumer protection,
environmental protection, and political and other pressure groups.
·        
Regulatory
organizations for example those set up under the financial services and markets
act 2000, principally the financial services authority (FSA).
All these people must be sure that the financial
statements can be relied upon.

 

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