Chapter 2

Advantages of an Audit• For Limited Liability Companies

– Satisfies a regulatory requirement– Help to discharge the stewardship function– Shareholders get credibility

• For Partnerships– When new partners join or old partners retire,

to determine his/ her share (to be brought in or payable) more reliably

– Remove disputes in profit sharing– To determine GW reliably in case of change of

PS

Advantages of an Audit• For any entity

– Provides a high level of assurance for users– Facilitates external and internal financing– In case of merger or acquisition provides a

reasonable basis for valuation– As a by-product internal control weaknesses

are (with recommendations) reported– For a small entity other services can also be

obtained– Expert advice is provided

Purpose of Auditing

• Provision of an opinion to FS users or detection of fraud and error ?

• Detailed checking or other audit approach ?

• What are such ‘other’ approaches?

Agency Theory & Auditing

• The directors are the agents of the shareholders

• There may be conflicting interests among such parties

• Auditing can strengthen the agency relationship and weaken any conflicts

Positive & Negative Expression of Opinion

Based on level of assurance provided

E.gs. ?

Internal Vs External Audit

• Objective (Internal controls Vs Opinion)

• Legal basis (Not a requirement Vs Requirement)

• Scope ( Operational + Financial Vs Financial)

• Approach (System based Vs Risk based)

• Responsibility ( Mgt Vs External users)

Scope of Auditing

• Defined in SLAuS 1

• The ability ?

The Social Concept of Auditing

• Financial Audit Perspective: Adds value to the society by adding to the efficiency of the market + investment funds to rationally be allocated

• Holistic View: Examines the discharge of the duty has been properly done by the (social) entity – A Social Audit Report ?, Corporate social responsibility, environmental reporting and social auditing are emerging concepts under this view