Stewardship and Auditing of Limited Companies (Cambridge (CIE) A Level Accounting): Revision Note

Stewardship & directors

What is the stewardship role of the directors of a limited company?

• In a limited company, ownership (shareholders) and control (directors) are separated

  • This means the directors are accountable to the shareholders

• Directors are entrusted by the shareholders to act as stewards

  • They manage the company's assets and resources

• Directors are required to act in the best interests of the shareholders

  • They must be professional, show integrity and avoid conflicts of interest

What are the responsibilities of the directors of a limited company?

• Directors must sign the financial statements and ensure they give a true and fair view

  • They take personal legal responsibility for their accuracy

• Directors present financial results at the Annual General Meeting (AGM) to the shareholders

• They provide a directors' report alongside the financial statements

  • This details information such as the names and roles of the directors, proposed dividends, political donations and future business plans

Auditors

What is an auditor?

• An audit is an examination of a company's financial statements

• An auditor is a financial professional who carries out the audit

What is the difference between an internal and external audit?

What are the responsibilities of an auditor?

Internal

• An internal auditor scrutinises the company's accounts and systems

• They identify any potential risks and suggest improvements

• They evaluate the effectiveness of the control systems

• They check whether the company adheres to legal requirements and internal policies

External

• An external auditor examines the books and accounts of the company

• They ensure that the financial statements comply with legal requirements and accounting standards

• They verify the value and existence of assets and liabilities

• They prepare an audit report

  • This states whether the financial statements give a true and fair view

  • This states whether the financial statements are free of errors

• The auditor must report whether the company's ability to continue trading is reliant on financing options

What is the difference between a qualified and an unqualified audit report?

• An unqualified (clean) audit report is issued when the auditor is satisfied that the financial statements give a true and fair view

• The following circumstances lead to an unqualified report:

  • The financial statements comply with international accounting standards

  • The financial statements are free from material errors and omissions

  • The financial statements comply with all legal requirements

• A qualified audit report is issued when the auditor has reservations about the financial statements

• The following circumstances can lead to a qualified report:

  • Limitation of scope

    • For example, if an auditor cannot verify certain figures because they were deleted

  • Disagreement with accounting treatment

    • For example, the company has not followed an IAS correctly

  • Going concern doubt

    • For example, there is significant uncertainty about the company's ability to continue trading

  • Material misstatement

    • For example, figures in the financial statements are materially incorrect

• A qualified report can lead to consequences

  • It can damage investor and lender confidence in the business

  • It may cause share price to fall for listed companies

  • It can trigger regulatory scrutiny

  • It can make it harder to obtain finance or credit

What is the importance of a true and fair view?

• A true and fair view means that the financial statements:

  • are free from material misstatements and errors

  • faithfully represent the actual financial performance and position of the business

  • have been prepared in accordance with applicable accounting standards and legal requirements

• A true and fair view is important because:

  • it gives shareholders confidence that their investment is being managed properly

  • it allows lenders and creditors to make informed decisions

  • it helps potential investors assess the business accurately

  • it increases credibility and transparency of the company in the market