The auditors’ reports on the statutory framework for auditing

Section 495 states:

(1)   A company’s
auditor must make a report to the company’s members on all annual accounts of
the company of which copies are during his tenure of office-
(a) In the case of a private company, to be sent out to
members…
(b) In the case of a public company to be laid before
the company in general

meeting…

(2)   The
auditors’ report must include-
(a) An introduction identifying the annual accounts
that are the subject of the audit and the financial reporting framework that
has been applied in their preparation,
(b) A description of the scope of the audit identifying
the auditing standards in accordance with which the audit was conducted.
(3)   The report
must state whether in the auditors’ opinion the annual accounts-
(a) Give a true and fair view-
                                            
i.           
In the
case of an individual balance sheet, of the state of affairs of the company as
at the end of the financial year,
                                          
ii.           
In the
case of an individual profit and loss account, of the profit or loss of the
company for the financial year,
                                         
iii.           
In the
case of group accounts, of the undertakings included in the consolidation as a
whole, so far as concerns members of the company.
(b)  Have been
properly prepare in accordance with the relevant financial reporting framework,
and
(c) Have been properly prepared in accordance with the
requirements of the act.
(4)   The auditors
report-
(a) Must be unqualified or qualified, and
(b)  Must include
reference to any matters to which the auditor wishes to draw attention by way
of emphasis without qualifying the report.
In addition to this s 496 says:
The
auditor must state in his report on the company’s annual accounts whether in
his opinion the information given in the directors’ report for the financial
year for which the accounts are prepared is consistent with those accounts.
What does all this mean?
A public company must hold an annual general
meeting (AGM) of its members (i.e. shareholders) in each calendar year. Private
companies can decide whether or not to hold an AGM, unless their articles of
association (essentially the rules of company procedure) require them to do so.
If an AGM is held the annual report and accounts,
including the balance sheet and profit and loss account (and, in the case of
holding companies, group accounts), which comprise the financial statements,
are presented to the meeting for approval by the members.
In the case of private companies which elect not to
hold an AGM the report and accounts must be sent to the members within nine
months of the year end or, if earlier, by the date it actually files its
accounts with the registrar of companies.
Included in the annual report and accounts, three
must be a report by the auditors on the financial statements examined by them.
Auditors are appointed only for one financial year
at a time. They are usually appointed at an AGM and hold office from the end of
that meeting (say July 19th 20-7) till the end of the following AGM
(say July 17th 20-8). That is their tenure of office. They report on
the accounts presented at the AGM of 20-8, which is within their tenure of
office.
Where a private company does not hold an AGM,
generally, the auditor is deemed to be automatically reappointed, unless there
is a provision in the company’s articles of association that they must be
physically re-elected by a vote at a meeting or unless disgruntled
shareholders, holding at least 5 per cent of the shares, object to automatic
re-appointment.
The auditors’ report has very specific content via:
·        
The act
contains very detailed requirements on the form and contents of accounts. The
auditor has to say whether in his opinion the accounts have been prepared in accordance
with the act.
·        
The act
requires, in s 396, that the accounts must give a true and fair view of the
state of affairs of the company (i.e. by the balance sheet) and of its profit
or loss (i.e. by the profit and loss account).
The auditors must say in their report whether, in
their opinion, the financial statements give a ‘true and fair’ view.
The idea of ‘true and fair’ is a difficult one and
we will consider it in a later chapter. At this stage assume that it means that
the accountant free from any significant errors or misstatements.
Finally, s 496 requires the auditors to consider
whether there is any inconsistency between the information given in the
directors’ report and the annual accounts.
We will deal with this in more detail latter in the
book but for the moment you should understand that auditors are not being asked
to give an opinion on the directors’ report as a whole; they are only asked to
review the directors’ report and to consider whether the statutory disclosures
which the directors have to make are properly stated and whether, taken as a
whole, the report is consistent with the accounts. If the auditors form an
opinion that there is an inconsistency they have to say so in their audit
report.
For example, suppose the directors’ report states
that ‘production at the Ballston factory has ceased and that the plant there
will be sold for scrap’, but the accounts include the Billson plant at full
cost. There is an inconsistency in that the directors’ report shows the Billson
plant to have no further use and the accounts assume further use. If the matter
was material i.e. of significant size) then the auditors would have to detail
this inconsistency in their report.
Publication of the auditors’ report
The companies act has a number of rules for
publicizing the auditors’ report. However, the companies act treats small
companies and large quoted companies rather differently. These are a summary of
the regulations designed to set out the basis principles. A lot of the detailed
provisions have been left out in the interest of clarity, and brevity.
Students should be aware from their studies in
financial accounting of the form and content of company accounts and the
various dates for filling these with the registrar of companies; so much of
that detail is omitted from the following paragraphs.
These are the main provisions:
a)   
Firstly,
s 423:
(1)  Every
company must send a copy of its annual accounts and reports for each financial
year to-
(a)  Every member
of the company,
(b) Every holder of the company’s debentures, and
(c) Every person who is entitled to receive notice of
general meetings.
b)   
Secondly
s 430, which is new and only applies to quoted companies:
(1) A quoted company must ensure that its annual accounts
and reports-
(a) Are made available on a website, and
(b) Remain so available until the annual accounts and
report for the company’s next financial year are made available in accordance
with this section.
(2)  The annual
accounts and reports must be made available on a website that-
(a) Is maintained by or on behalf of the company, and
(b) Identifies the company in question.
Section
431 and 432 are also relevant.
Section 431 states:
(1)  A member of
or a holder of debentures of an unquoted company is entitled to be provided, on
demand and without charge, with a copy of-
(a) The company’s last annual accounts,
(b) The last director’s report on those accounts.
Section 432 says the same thing in respect of
quoted companies. The auditor’s reports must include any additional reports the
auditors make, including those in respect of the directors’ remuneration report
and the directors’ report. And section 434:
(1)   If a company
publishes any of its statutory accounts, they must be accompanied by the
auditors’ report on those accounts (unless the company is exempt from audit and
the directors have taken advantage of that exemption).
Finally section 437:
(1)  The directors of a public company must lay before
the company in general meeting copies of its annual accounts and repots.
Remember that this section applies only to public
companies.
The reason for this is that private companies no
longer have to hold annual general meetings unless they wish to do so. However,
as we saw above, s 424 requires private companies to send a copy of its annual
report and accounts to its shareholders within nine months of the year end, (s
442) or the date it files its accounts with the registrar of companies, if
earlier.
Section 441 requires each company to deliver to the
registrar each year a set of reports and accounts in the prescribed format
within a set period after the financial year end. There are various
requirements dependent upon the size of the company and whether it is quoted or
unquoted. These are too detailed to be set out here but interested students
should refer to so 442 to 447 of the act.
Thus, whenever the full or summary financial
statements are sent to members and other entitled persons, published, put onto
a website, laid before the company in general meeting, or delivered to the
registrar of companies then the auditors’ report has to be included.
Every company has a file at company’s house and the
accounts sent to the registrar are included in the file. The file is open to
inspection by members of the pubic. Thus, any interested person has access to
the file without the company being aware of the enquiry.

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