The companies Act Cap 486 requires that the auditor of a limited liability company to report to the members, whether the financial statements laid before the AGM, show a true and fair view of the state of affairs of the company and comply with the requirements of the companies Act. The audit report is therefore the means by which the auditor reports his opinion as to whether the financial statements show a true and fair view of the state of affairs. The report is addressed to the shareholders.
The requirements of the Companies Act with regard to the Auditor’s Report:
S.162 (1) of the Companies Act (CA): Stipulates the statements that should be expressly stated in the Auditors Report. These statements are;
- Whether they have obtained all the information and explanations, which to the best of their knowledge and belief were necessary for the purposes of their audit.
- Whether in their opinion, proper books of account have been kept by the company, so far as it appears from their examination of those books, and proper returns adequate for the purposes of their audit have been received from branches not visited by them.
- Whether, the company’s balance sheet and profit and loss account dealt by the report are in agreement with the books of accounts and returns.
- Whether, in their opinion and to the best of their information and according to the explanations given to them, the financial statements give the information required by the Act in the manner so required and give a true and fair view:
- In the case of the balance sheet, of the state of the company’s affairs as at the end of its financial year; and
- In the case of the profit and loss account, of the state of the profit or loss for its financial year.
- In the case of a holding company submitting group financial statements whether in their opinion, the group financial statements have been properly prepared in accordance with the provisions of the Act so as to give a true and fair view of the state of affairs and profit or loss of the company and its subsidiaries.
Basic elements of the auditor’s report
The Companies Act does not stipulate the form the auditors report should take. The auditing standard seeks to ensure that the auditor’s report is clear and unambiguous. To this end, it seeks to standardize the form of the auditor’s report. It seeks to do this by giving to basic elements of the auditor’s report.
- Appropriate title
An appropriate title such as the independent auditors report distinguishes the Auditor’s Report from any other reports that may be annexed to the annual report and Financial Statements.
- The Auditor’s report should be appropriately addressed
Usually the auditors report is addressed to the members on whose behalf the audit
is carried out. For practical reasons, it also limits the users of the auditor’s report.
- Introductory paragraph
This identifies the Financial Statements audited. Under the Companies Act, Financial Statements or Accounts consist primarily of the Balance Sheet, Profit and Loss account and notes to the account. International Accounting Standards on Cash Flow Statements requires auditors to recognized the Cash Flows as part of the Financial Statements.
The auditor’s report relates to the above statements only. However, the published Financial Statements that are sent to the readers include other reports that may contain financial information such as the Chairman’s Statement. The DirectorsReport, the detailed Profit and Loss account and other statistical information.
Although the auditor reviews these other statement or reports, he does not report on them. It must therefore be clear in his report that he is not reporting on these other statements otherwise the financial information contained therein could have anunmerited air of authenticity.
It is felt that most readers of auditors reports and Financial Statements assume that the auditor prepared the Financial Statements. It’s necessary for the auditor to clarify that the preparation of Financial Statements is the responsibility of the directors.
- Paragraph on the scope of the audit
The reader requires assurance that the auditors procedures were authoritative and through. The auditor therefore needs to state that they have audited in accordance with International Standards of Auditing.
It is felt within the profession that readers expert auditors to detect and report on material errors and frauds. It is not practicable within the constraints of auditingto detect all material misstatements be they as a result of frauds or errors. And even though an audit shouldn’t be relied upon for the detection of errors and irregularities, the auditor must arrange his audit in such a manner as to have reasonable assurance that the Financial Statements are free of material misstatements.It is important to inform the reader that auditing is a limited exercise that cannot guarantee 100% completeness and accuracy. That the auditor examines items a test basis not all of them and that in valuing assets and liabilities there is subjectivity involved.
- Opinion paragraph
The report should clearly state the auditor’s opinion as to whether the financial statements give a true and fair view in accordance with the relevant financial reporting framework and whether they comply with the companies Act requirements.
- Dating the audit report:
Clearly specifies the date the auditor committed himself to his opinion so that any subsequent developments are considered in the light of that date.
- Auditor’s address
- Signature in the name of the audit firm and location of the auditor i.e. office.