What Is the Need for an External Audit

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The need for an external audit in the case of companies arises primarily from the existence of split-up of ownership from control. When control is shared an audit report will be needed in order to ensure that all the partners or be it shareholders are on the same page as the managers (the ones who will be controlling the company) and know what has been happening in the company, what is happening at present and what can be expected to happen in the future in order to increase returns in the company. The case of an owner controlled company is different as usually the manager will be working in the company and will be aware of everything that will be taking place and will not need an audit report to find out what is going on. Since the owner is alone in decision making, he knows about all the decisions that need to be made and will not find out through an audit report that maybe the company has decided to expand and open a new branch using the accumulated or retained profits. The audit involves the client’s staff and management in giving time to providing information to the auditor. The auditors need part of the staff’s time as they will not know where the proprietary’s accounts are kept and in which way they are filed. To gather all the information that the auditor will use in making his audit report he has to get it through staff. Since most owner controlled companies are very small and the staff members are few, it will make it difficult for the Professional auditors to plan their audit to minimize the disruption which their work will cause. The audit might end up inconveniencing other stakeholders such as customers because service can become slow as one of the staff members will be assisting the auditor, giving him all the documentation that he needs and accompanying him around as he investigates the internal control measures that have been created in the company to see how effective they are. Application to lenders/financial institutions for finance may be strengthened by the submission of audited accounts. However some financial institutions, a bank, for instance, is likely to be far more concerned about the future of the business and available security, than by the past historical accounts, audited or otherwise. Audited accounts cannot predict the performance of the company in the future, which is the information that the Bank will be trying to find out.Therefore; audit reports are not an issue of paramount importance, especially in owner controlled companies. Not all owner controlled companies need to be audited. Auditing of companies does not depend on the type of ownership (that is, sole trader, partnership or co-operative), but it mostly depends on the size of the company at hand. There are laws that have been made in the U.K that exempt certain companies especially the small ones and the owner controlled ones from being audited. Instead of following all audit requirements, the owner controlled companies can submit shortened accounts. The main differences that can be produced under the banner of abbreviated accounts basically mean that an owner controlled company does not have to include a full balance sheet, profit and loss account or directors report which would normally be required by Companies House. The owner controlled company is still required to submit a shortened balance sheet together with notes that explain the year end balances shown in the balance sheet. Under the audit exemption rules the year end accounts for an n owner controlled company do not have to include an auditors report. When an auditor has prepared the accounts and submits a special audit report that report should state that in the auditor’s opinion the abbreviated accounts are being submitted in accordance with the appropriate section of the Companies Act. To qualify for being able to file shortened accounts a small company should satisfy at least two of three conditions. The three exemption conditions prior to April 2008 were that...
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