Page 1: Introduction
In order to make judgements about business activities, individuals require information. Accounting acts as an information system by processing business data so that interested parties can be provided with the means to understand how an organisation is performing.
This case study is intended to provide an understanding of the accounting process and how accounting information meets the needs and requirements of many different groups of people.
Shareholders delegate the day-to-day running of the business to the directors. Every year, the directors are required by law to report to the shareholders; they do this through publishing financial statements. The accounts of limited companies must be audited by a firm who are registered auditors. One of the largest auditors in the UK is KPMG. KPMG has 32 offices throughout Great Britain and over 800 offices world-wide. It is a global advisory firm whose purpose is to turn knowledge into value for the benefit of its clients, its people and its communities.
The role of the auditor
Auditors are firms of accountants who hold a watching brief on behalf of the owners of the company (the shareholders). Auditors are appointed by shareholders, since they require an independent opinion on accounts. The directors of the company prepare and sign the accounts. It is the auditors’ job to certify that these accounts present a true and fair view of the company’s profits and financial position, or to point out any failings where they do not. The principal function of the audit is to add credibility to the accounts published by the directors of a company.
Duties and responsibilities
The principal duty of the auditor is to report on the accounts prepared by the directors. The auditor will do this by issuing a short statement to say whether the accounts give a ‘true and fair view’ of the company’s profit or loss for the year and of its financial position at the end of the year. The auditor also gives his opinion on whether the accounts have been prepared in accordance with the provisions of the Companies Acts.
The words ‘true and fair’ reflect the fact that accountancy is not an exact science and that there may be a number of different ways in which to present broadly similar information. The phrase conveys the idea that the accounts have been honestly prepared to reflect the true trading position and are not misleading to readers. In addition to his basic reporting role, the auditor is required by law to consider whether the company has kept its books in a satisfactory way (‘proper accounting records’), and certain other matters.