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An auditor or an auditor firm is a certified Chartered Practicing Accountant who is authorized to inspect and investigate financial statements of a company. It is the legal responsibility of an auditing firm to check the books of accounts and financial statements i.e. Trading, Profit and Loss Account along with Balance Sheet and relevant Schedules are in accordance with the principles of accounting and legally complied with provisions of Companies Act 1985. The register of audit firms and information about Audit Firms in accordance with Companies Act 1989, Regulations 1991, shall be kept at the Principal office of UK. The register contains the list of auditors whether a firm or a body corporate and address of each person. Similarly for partnership audit firms, the name and address of each partner is mentioned in the register.
Companies remit audit fee for practicing audit firms for each audit conducted during the financial year of business. Every business that is registered under Companies Act 1985or a non-profit organization or any other independently floated business as partnership or a sole proprietorship requires the authentication of an auditor to certify that the business is performing in accordance with the compliance of enactments and practicing ethical business standards. The certification of an auditor is more valuable in terms of financial records for the company as well in fulfilling the government requirements of filing of Annual Reports and other prescribed legal forms.
Final auditing is conducted before the end of financial year and only after a thorough verification of accounting records, auditors are expected to sign Auditor’s Report which is the final evidence. Before final audit, internal audits are conducted which is within the premises of business or administration in order to scrutiny, check and verify for clerical errors and if there are any, a due correction to that extent is made in records. Internal audit is one of the effective measure to prevent any neglected areas of auditing or any miscalculations in accounting before conducting external audit. An auditor is expected to be both professional in conducting auditing and also must maintain a good relationship with the clients. Companies also must disclosure all such relevant information that is pertaining to auditing without concealing any facts in the process of auditing. Even in case of accounting mistakes, a complete explanation must be brought to the notice of auditor, which would enable an auditor to make necessary corrections and bring the business to order. Legal penalties and implications of violations are severe in
Companies Act, 1985 and with this fact, a complete and thorough disclosure of business accounting records is required to be submitted to the auditor. Auditing is an important aspect of a business, school, university, social service organization, hospital, restaurant which would bring a scenario and picture of a business or an organization and basing on the result of auditor’s report, strategies for development are made in organizations.
“Auditors tell each other that an audit report indicates that they have obtained reasonable, though not absolute, assurance that the financial statements are free of a financial mis-statement and, further, that the level of reasonable assurance must depend on the perceived risk of the hypothetical mis-statement in question. It would seem useful to inform the readers of this interpretation”. (Anderson, 1977, p.439)
Auditing requires professionally trained people who are thoroughly well versed with accounting laws and practices. Auditing staff must ensure true and fair facts are mentioned in audited statements as per the material facts that are made available for the purpose of auditing. For instance, in audit is conducted for a manufacturing company, a thorough audit of inventory, production and factory equipment apart from workmen salaries and other allowances. There are also risk areas in auditing which have to be prevented by auditing firms and in order to carry out smooth auditing, a good relation must be maintained between accounting staff and auditing staff.
The following are some of the best practices that enable audit firms to perform with efficiency.
1. The most important aspect of an efficient audit is the collection data. If CPA’s staff has to search for books of accounts, the time of audit would extend lengthening to more number of days and it also increases the auditing fees. In order to use time efficiently, CPA’s staff must be assisted by company staff in providing the required data on a priority basis which would be of great help. Appropriate and good communication must exist between board of directors and CPA practitioners keeping the aspects of auditing work. Auditors fee and other auditing related expenses must be debited to the account of company as agreed upon between the board and auditors. It is also important to understand that auditing is a legal compliance of rules provided under Company Law and, it must be performed with due consideration with relevant account information and if the facts and account data is not provided and auditing is not performed, at times, companies would be lead to dissolution of business.
2. Efficient staff contribute excessively to the success of audit firms. Staff who are young and energetic, who possess a sound knowledge of accounting software packages, and who can provide any information that is required in the process of auditing are the strength of audit firms. Further CPA professionals always keep staff who can negotiate, carry good aptitude and communication skills. Audit firms have to touch various companies which consist different working environments and different staff members. Audit staff must build a good rapport with staff of companies and creditworthiness in order to bring reputation to the respective audit firms. The job of auditing is both prestigious and professional with ethic standards. Every document that is related and useful in auditing must be dated, stamped at the time of receipt by auditing staff and even downloading of software or client trial balance, preparation of schedules must carry efficiency and to a certain extent confidentiality must be maintained with the fact that, auditing reveals the financial status of a company and it is not appropriate to disclose information to other clients.
Auditors are also considered as intermediary officials between companies and shareholders. Investors trust and rely on the auditor’s report that is certified by Auditors of a company.
3. Planning is most essential while conducting auditing. A time schedule must be prepared and it must be adhered to in order to bring the entire task of auditing to a successful base. Progress on day-to-day basis, completing each task viz., journals, ledgers, trial balance, inventory, bank transactions and statements, profit and loss accounts and balance sheet are the most important documents that require a thorough check before these are certified and published in Annual Reports. If a clarification is required at any place, auditing staff must approach company staff and ask for explanation or a suitable relevant document, in an appropriate manner.
4. Assessment of risk is not low in auditing. Even in spite of the fact that auditors have performed the duty of auditing in a professional manner, the liability does not end with the certification of auditor’s report. In fact, auditors are liable, even for the mistakes of other audit staff members, if regulatory procedures are not adhered to at the time of auditing.
Keeping the future risks also in view, it is important for auditing firms to thoroughly verify all the facts and figures before any final report is signed.
With the rise of corporate and industrial sector with access to globalization, UK government has changed some of the accounting and auditing requirements in the Companies Act 1985. These are included in Sl2004 No.2947 –The Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations.
All companies excepting charity organizations, have an option to prepare individual accounts using International Accounting Standards instead of UK GAAP. The companies which are practicing UK GAAP accounting standards have a new accounting option to use fair value accounting for property investment, financial instruments or any living plants and animals. Another new option is, a new provision has been made to make revision in financial statements as applicable in for director’s report and annual accounts.
The Companies Act 1985 (Accounts of Small and Medium-sized Enterprises and Audit Exemption) (Amendment) Regulations 2004 states that the following are considered as “small-sized group”.
“Not more than £2.8 million net (or £3.36 million gross)”
“Not more than £1.4 million net (or £1.68 million gross)”
“For not more than £11.2 million net (or £13.44 million gross)
“For not more than £5.6 million net (or £6.72 million gross)
Audit exemption as per Section 249A of the 1985 Act is amended as
Subsections 3(b) and (3A)(b) for “£1million”; Subsections (3)(c) for “£1.4 million”
Before undertaking audit work from companies, it is important for audit firms to consider whether it is a medium-sized company, small-sized company or a company that is not exempted company from financial auditing. A thorough understanding of auditing regulations and practices is desirable to overcome any shortcomings while conducting audit in companies. The term of auditor expires at the end of every financial year and it is mandatory to elect auditors either at the Board Meeting or in shareholders meeting whichever is applicable depending on the size of the company. Appointment of auditors is a statutory requirement and it must be fulfilled whether by contract period or by voting in company’s meeting. The statutory duties of an auditor are detailed in Section 235-237 of Companies Act 1985 and duties have to be carried with care, skill and caution.
There is every opportunity for litigations, conflicts, scams, misinterpretation and misrepresentation of facts and figures which is why an auditor and audit staff must exercise extra professional care in examining the accounts during the time of either internal audit or external audit.
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