Question

1: Mr. Mahmoud is the owner of EFG company his finance manager Miss. Bushra presented financial statements with big difference of percentage declined in terms of assets, net income and high increased of liabilities compared to the last year. Mr. Mahmoud ask Miss. Bushra to give explanation, that did not satisfy him. Mr. Mahmoud decided to hire external auditor to clear his doubts.

Based on the above scenario:

1. Wite at least 3 interpretations of financial statement which the auditor may provide. Justify your answer practically – .

2. How auditor will plan his work to clear Mr. Mahmoud’s doubts? Suggest some recommendations on how to rectify the issues in the above cited case

Answer 1

>Companies produce financial statements that provide information about their financial position and performance. This information is used by a wide range of stakeholders (e.g., investors) in making economic decisions. Typically, those that own a company, the shareholders, are not those that manage it. Therefore, the owners of these companies (as well as other stakeholders, such as banks, suppliers and customers) take comfort from independent assurance that the financial statements fairly present, in all material respects, the company’s financial position and performance.

>To enhance the degree of confidence in the financial statements, a qualified external party (an auditor) is engaged to examine the financial statements, including related disclosures produced by management, to give their professional opinion on whether they fairly reflect, in all material respects, the company’s financial performance over a given period(s) (an income statement) and financial position as of a particular date(s) (a balance sheet) in accordance with relevant GAAP. In many cases this is required by law.

>The management of a company is responsible for preparing the financial statements. The auditor is responsible for expressing an opinion indicating that reasonable assurance has been obtained that the financial statements as a whole are free from material misstatement, whether due to fraud or error, and that they are fairly presented in accordance with the relevant accounting standards (e.g., International Financial Reporting Standards).

Audit Procedures:

In undertaking an audit, the auditors consider the mandatory and detailed GAAP that set out how a company should account for and disclose even the most complex transactions. However, many of the issues that arise in an audit—particularly those involving valuations or assumptions about the future—involve estimates to which the auditor must bring their professional judgement and experience to bear. Indeed, many accounting measures can only ever be estimates that are inevitably based on imperfect knowledge or dependent upon future events. For example, if a company was involved in legal action, it would need to estimate the amount at which the case would be resolved; or if it was planning to sell an office building it owns, it would have to estimate the sale price. In such cases, the auditor may determine the reasonable range of possible values, and consider whether the company’s estimates lie within that range. The uncertainties that affect this judgement need to be disclosed and—if they could have a material effect—the auditors may include an emphasis of matter paragraph in their report. These are areas where the auditors must use their experience and skill to reach an opinion on the financial statements. The words ‘opinion’ and ‘true and fair’ are deliberately chosen to make clear that judgement is involved. They underline the fact that the auditor’s report is not a guarantee but rather reflects the auditor’s professional judgement based on work performed in accordance with established standards.

Five phase of audit:

1.Planning

2. Risk Assessment

3. Audit Strategy and Plan

4. Gathering Evidence

5. Completion