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Role of the external auditor - Coggle Diagram
Role of the external auditor
The external auditor is responsible for carrying out each year on behalf of the shareholders an independent audit of the company to make sure that the financial statements of the company can be relied upon
After carrying out the audit, the external auditor is required to prepare a report (the audit report) for the shareholders which is included in the annual report and accounts
The audit report has two main purposes
To give an expert and independent opinion on whether the financial statements give a true and fair view of the financial position of the company as at the end of the financial year covered by the report and of its financial performance during the year
To give an expert and independent opinion on whether the financial statements comply with the relevant laws
The external auditor of a listed company is also required to review the company's compliance with the 2018 Code and to obtain evidence to support the company's statement, included in the annual report and accounts, of its compliance with the 2018 Code
The external auditors report provides an opinion on compliance with the law and accounting standards and whether the accounts that have been prepared by the board present a true and in some cases fair picture of the financial reality of the company
They are not responsible for detecting fraud or errors in the organisations financial statements. This is the responsbiity of the board of the directors
The reports issued by the external auditors are either unmodified or modified. Most are unmodified in that the auditors are stating the company's financial statements do present a true and fair view of the financial position of the company
An unmodified report includes standard wording in the following subsections
Report on the financial statements
Managements responsibility for the financial statements
Auditors responsiblitity
Opinion
Modified audit reports
Audit report in which the auditors express some reservations about the financial statements of the company because of insufficient information to each an opinion or disagreement with the figures in the statements
Serious issue as it implies there are potentially grave concerns about the financial statements and the financial condition of the company
It also implies that the external auditor and the board of the company could not agree on the application of accounting policies and hence the content of the financial statements
There are three types of modified audit opinion
A qualified audit opinion which is given when in the opinion of the external auditor, the financial statements would give a true and fair view except for a particular mater which the external auditor explains
An adverse opinion which is given when th external auditor considers that there are material misstatements in the accounts and that these are 'pervasive'. In effect the external auditor is starting that they believe the information in the financial statements is seriously incorrect
A disclaimer of opinion which is given in cases where the external auditor has been unable to obtain the finroamtion that they need to give an audit opinion. The lack of information means that the auditor is unable to state that the financial statements give a true and fair view and that there may possibly be serious misstatements that the external auditor has been unable to check