Question

Prepare Answer Plans, to enable you to contribute to a group discussion in the tutorial, for the following questions:

1. Explain briefly why external financial statement audits are necessary, from the viewpoint of shareholders, employees, prospective investors, Governments, suppliers, the Stock Exchange and the Public.

2. Explain the key differences between auditing and accounting.

3. Why can’t audits provide absolute assurance as to the accuracy of the financial statements?

4. Why do governments make the independent audit of the financial statements of limited liability companies a legal requirement?

5. a) What are the main elements of the Audit Expectation – Performance Gap?

b) Give examples of each of the main elements of the gap.

c) What could be done to eliminate or reduce the gap?

Answer 1

1.. The externally audited financial statements provides a true and fair view of the financial position and operating results of an enterprise.

Externally audited financial statements are needed for:

Shareholders - To provide a transparency to the shareholders about company's performance and to know whether it protects the interest.

Employees- To evaluate the growth protential of the company for increase in wages and incentives and for settling the trade disputes for higher wages.

Government- To know whether proper taxes are paid and to know whether it is appropriate to give assistance or issue license.

Investors- To analyse whether to invest in the company by analyzing the growth potential.

Public - How and what it contributes to society.

Suppliers- T o know the credit worthiness of the organization .

Stock exchange - To reduce the fear of loss of investors from inaccurate information , thereby increasing the investment in industries

2. Differences between accounting and auditing

Accounting	Auditing
a) Accounting is preparing financial statements and accounting records	a) Auditing is critical examination of financial statements by the auditor to form an opinion on financial statements.
b)Accounting starts when book keeping ends.	Auditing starts when accounting ends.
c)Accounting is mostly done by the employees of the organization.	c)Auditing is done by independent body having no direct relationship with organization.
d)Accounting is a continuous process and is performed throughout the year.	d)Auditing is mostly done at the year end.
e)very detailed	e) Mostly based on sample.

3. Auditing does not provide absolute assurance that the financial statements are free from material mistatements.This is due to the inherent limitations of the audit, which results in most of the audit evidence on which the auditor draws conclusions and bases the auditor's opinion to be persuasive rather than conclusive.The inherent limitations are:

A) Nature of financial reporting

B) Nature of audit procedures

C) Timeliness of financial reporting

D) Balance between benefits and cost and other matters like fraud.

4 . The audit of limited liability partnership depends upon the turnover and when capital contribution exceeds certain limit.When crossing the threshold limits,LLP has to get the accounts audited to provide a true and fair view on the financial statements of the LLPs and to provide an appropriate audit report for the stakeholders.

5.a) The elements of Audit expectation performance gap are :

A) Reasonableness gap between what society expects to achieve from auditors and what they can reasonably be expected to accomplish.

B) Performance gap arising due to deficient standards.

C) Performance gap arising out of deficient act by the auditors.

b) Example of reasonableness gap is : The users expect the auditor to detect all the fraud and material mistatement, however the auditor could not due to inherent limitations.

Example of performance gap: The auditor has not complied the relevant standars or has not reported certain issues.

c) It is not possible to completely eliminate the gap .However it is possible to reduce it .This can be done through expanded audit report, proper audit education , improving the communication between auditors and users, proper understanding of auditing standards and laws and so on.