Imagine this:
Mark opens a toy shop. He receives a considerable income for
the first three years. The business is good and he thinks the business will
grow faster if there is an investment put into it to cover the extension as
well as the employment of more staffs.
He needs more money, so he decides to ask one of his
friends, Josephine, to invest in the business.
Josephine says she won’t finance the business unless Mark
agrees to convert the business into a company, which means if the company is in
solvency, what Josephine will lose is the money invested in the company itself.
So, Mark agrees and Josephine bought 97% of shares in the company while Mark
owns the remaining shares.
However, because Josephine is not interested in running the
business, the operation of the business is managed by Mark alone. Mark receives
salary as a director as well as the dividends as a shareholder.
Thus, the business starts. Mark keeps records of the
business transactions as well as prepares the financial statements annually and
gives a copy to Josephine. However, Josephine feels the profit is very low,
much lower than she had expected, so she tries to obtain explanation from Mark,
the manager. He said the financial statements are accurate.
Josephine is concerned that the profit is understated and
because she knows that Mark does not worry about the profit figure as much as
she does—simply because he will get paid, the salary, regardless of what the profit
level is.
Since Josephine doesn’t know the inflows and the outflows of
the company and isn’t very knowledgeable about the business and financial
statements, she attempts to look for independent assurance to confirm that the
financial statements are accurate.
Who can offer Josephine such assurance?
 |
| An External Auditor |
Of course, the external auditor who is an independent
individual of the company and the one who possesses the professional
qualification which enables him/her to give Josephine both the ‘knowledgeable
review’ of the financial statements as well as express his/her opinion as to
whether the financial statements are true and fair.
The external auditor will carry out audit procedures and
testing to obtain audit evidence on which the opinion is based and produce an
audit report.
The audit report gives reasonable assurance to the
shareholders (people who own the company) and the stakeholders (people who are
interested in the company including employees, potential investors or
customers, suppliers, directors, and so on).
Labels: Audit, External Auditor, FIA
