Auditing and stewardship
The role of shareholders
The shareholders do not usually manage the company on a day-to-day basis
unless they are also directors. Most public limited companies have many
shareholders and it would be impractical to get them together regularly to
make speedy and effective decisions, particularly as it is unlikely that they
would be in complete agreement. However, shareholders do have two
important duties to perform:
1. They appoint the members of the board of directors. Each year the
company must hold an annual general meeting (AGM).
At this meeting the ordinary shareholders, who are the owners of the
company, will vote on a number of items put forward by the directors. One of
these will be to elect the members of the board of directors.
2. They vote at the AGM on key issues that ensure the effective
governance of the company by the directors.
By voting on these issues they are giving clear and detailed instructions to
the board of directors as to how the company should be managed and what
is expected of them as directors.
The directors act as stewards of the shareholders’ investment in the
company and, as such, are in a position of trust.
Apart from voting on the appointment of directors at the AGM, the
shareholders are also asked to vote on other issues such as:
• The appointment of the company’s auditors
• To approve the dividends proposed by the directors
• To approve charitable donations by the company.
Stewardship: the role of the directors and their
responsibilities to shareholders
The directors act as stewards of the shareholders’ investments in the
company that is they are in a position of trust. As there is most likely to be
more than one director, they are usually referred to as the board of directors.
Directors are appointed to manage the company day-to-day on behalf of the
owners, its ordinary shareholders, and are directly accountable to those
shareholders for their actions.
Each year at the AGM the directors must provide a report to the shareholders
on the performance of the company, its future plans and strategies, and
recommend any dividends.
The key role of the board of directors is;
to ensure the prosperity of the company by directing the company’s
affairs.
They must also meet the interests of the shareholders and other
stakeholders by ensuring that they (and the company) always act in a
responsible and ethical manner.
The responsibility of directors are;
ensuring that certain documents are prepared and published annually in
accordance with the law and accounting regulations.
These documents are:
• statement of profit or loss
• statement of financial position
• statement of cash flows
• directors’ report
• audit report.
Directors’ report
The directors’ report contains the following information:
• The names of the directors, together with their responsibilities,
interests and shareholdings in the company.
Proposed dividends payable by the company,
Political donations made by the company,
Company policy on the employment of disabled people.
A report on the annual quantity of greenhouse gas emissions
from activities for which the company is responsible.
A statement confirming that all relevant audit information has
been provided to the company’s auditor and an auditor’s
independence statement.
Roles and responsibilities of auditors
In connection with a limited company there are two types of auditor:
• Internal auditors:
1. These are employees of the company, appointed by the directors.
2. In many organisations, internal auditors will be linked to the security
function although their main role is to help ‘add value’ to the company
and help the organisation achieve its strategic objectives.
3. They form part of the day-to-day management team of the business.
Key roles of Internal Auditors:
a evaluate and assess the control systems in place within the company
b evaluate information security and risk within the company
c consider and test the anti-fraud measures in place in the company
d overall, help to ensure that the company meets its strategic and ethical
objectives.
• External auditors:
These examine the systems and records of the company – usually at the
year end.
1. External auditors are not employees of the company;
2. they are independent accountants.
3. They are appointed by the shareholders to ensure that the financial
statements prepared by the directors are a true and fair view of the
state of financial affairs of the company.
4. The auditors examine the financial records and systems.
5. They prepare an audit report, which is presented to the shareholders
at the AGM.
The shareholders appoint auditors to report at each AGM whether:
a proper books of account have been kept
b the annual financial statements are in agreement with the books of
account
c in the auditor’s opinion, the statement of financial position gives a true and
fair view of the position of the company at the end of the financial year, and
the statement of profit or loss gives a true and fair view of the profit or loss
for the period covered by the accounts
d the accounts have been prepared in accordance with the Companies Act
and all current, relevant accounting standards.
If auditors are of the opinion that the continuance of a company is
dependent on a bank loan or overdraft, they have a duty to mention that fact
in their report, as it is relevant to the going concern concept.
Who are external auditors?
Auditors must be qualified accountants and independent of the company’s
directors and their associates.
They report to the shareholders and not to the directors; as a result, auditors
enjoy protection from wrongful dismissal from office by the directors.
Audit Report
The report sets out the responsibilities of the directors and auditors in
connection with the financial statements.
These include:
• that the audit has been conducted in accordance with the accounting
standards issued by their professional body in their country
• that the directors are fully aware of their responsibility to prepare accurate
financial statements
• that they, as auditors, have taken all the necessary steps to obtain enough
information to express their opinion
• that they have also taken into account the relevant IASs and Companies
Act provisions as part of their audit.
Qualified(bad) and unqualified(good) audit reports
The final stage is for the report to give an opinion on the financial
statements. These may take several forms:
Unqualified reports: The auditors will issue an unqualified audit report if:
in their opinion, the company’s financial statements are fairly and
appropriately presented and represent a true and fair view of the state
of affairs at the year-end date, without any identifiable exceptions
the financial statements have been prepared in compliance with
generally accepted accounting principles(IAS & accounting concepts) ,
legislation and the accounting regulations
the auditor believes that all changes, accounting policies, and their
application and effects
This audit report will be written as:
In our opinion, the financial statements give a true and fair view of
Miggins Limited’s affairs at 30 November
2020 and of the profit and cash flows for the 52 weeks ended on that date…
…that they have been properly prepared in accordance with the
requirements of the Companies Act 2006 and
IAS…
…that the information given in the directors’ report is consistent with
the data contained in the financial statements.
Qualified reports: If, during the course of their audit the auditors found
anything which they feel was in doubt or inaccurate they can issue a
qualified audit report.
In this case, at the end, a statement will be inserted that draws the attention
of the shareholders to this fact.
For example:
During the course of our audit we discovered that the method of valuing
inventory changed from last year, but no mention of this has been made in
the directors’ report. We believe that this has had a material effect on the
profit stated.
The offending issues will have been raised with the directors who will have
been given the opportunity to make the necessary changes suggested by the
auditors.
This type of qualified audit report is unusual and can indicate that either the
directors have refused or are unable to make the necessary changes.
In extreme cases, the auditors will put something along the lines of:
we are unable to express an opinion as to whether these accounts
represent a true and fair view …
This means vital information could not be verified due to a lack of evidence
or proper accounting concept were not used
A qualified auditor’s opinion represents very bad news for a limited
company, particularly the ‘unable to express an opinion’, as stakeholders are
unable to place much, if any, trust on those reports.
Auditors and fraud:
The accounting authorities hold the view that if the auditors have adopted a
thorough approach to examining and testing data that makes it reasonably
likely that significant error or fraud would be revealed, then they will not be
held responsible for problems that remain
