Page 3: Auditing
In order that shareholders and other interested parties can make informed judgements as to the financial health of a company, it is a legal requirement that all companies have their financial facts and figures checked. This is known as an audit and must be performed by an independent registered firm of auditors. The auditors use guidance from the Accounting Standards Board to state whether in their opinion the financial information presented by the company is a ‘true and fair’ representation of that company’s financial health. The primary reporting responsibility of the auditors is, however, to the shareholders, not to the company’s directors.
It is interesting to note the difference between ‘true and fair’ and 100% accurate. It is not the role of the auditors to check every individual transaction performed by a company and therefore the auditors cannot state that the figures are 100% correct, merely that, in their opinion, they are ‘true and fair’.
Legislation and regulation of companies
The accounts of a company are designed to show both the performance and its current financial position. All company accounts in this country need to be produced in accordance with: 1. The Companies Act, 1985 and 2. Accounting Standards:
- Statement of Standard Accounting Practice (SSAPs)
- Financial Reporting Standards (FRSs).
In essence these standards set out:
- what information should be included in a company’s accounts
- how this information should be presented.
The Companies Act decrees that companies must produce accounts for publication. The Accounting Standards Committee devised SSAPs. In 1991 the Committee was replaced by the Accounting Standards Board, which develops FRSs. The Board is gradually replacing SSAPs with FRSs, which are issued when the Board identifies a need. These two sets of standards encourage greater clarity so that the reader can fully understand the information represented.