Why is there a need for an audit?


As mentioned above in the section on agency theory,
the problem which has always existed when manager’s report to owners is-can the
owners believe the report?
 

The report may:

·        
Contain
errors;
·        
Not
disclose fraud;
·        
Be
deliberately misleading;
·        
Fail to
irrelevant information;
·        
Fail to
conform to regulations.
The solution to this problem of credibility in
reports and lies in appointing independent professionals called auditors to
investigate the report and report and on their findings.
Only companies over a certain size need an audit.
These have:
·        
A
turnover in excess of £5.6m;
·        
A net
asset value of £2.8m; and/or
·        
Employ
more than 50 people.
Companies who do not fulfill two out of three
criteria do not need what is known as a statutory audit.
Companies can be very large with multinational
activities and comprising many subsidiaries.
The preparation of the accounts of such entities is
a very complex operation involving the bringing together and summarizing of
accounts of subsidiaries with differing conventions, legal systems and
accounting and control systems. The examination of such accounts by independent
experts trained in the assessment of financial information is of benefit to
those who control and operate such organizations as well as to owners and
outsiders.
Financial statements must conform to statutory or
other requirements. The most notable is that all company accounts have to
conform to the requirements of the company’s act 2006 but many other bodies
(e.g. charities, building societies, financial services businesses etc.) also
have detailed accounting requirements. In addition all accounts should confirm
to the requirements of financial reporting standards (FRSS).
It is essential that an audit should be carried out
on financial statements to ensure that they conform to these requirements.

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