External auditing (20 marks)

What is a financial statement audit?

An independent examination of evidence to assess whether financial statements follow the applicable reporting framework, followed by an audit opinion.

What is the auditor’s main objective?

Obtain reasonable assurance that financial statements are free from material misstatement due to fraud or error, and express an opinion.

What do “reasonable assurance” and “material misstatement” mean?

Reasonable assurance is high assurance, not a guarantee. A material misstatement is an error or omission that could influence users’ decisions

Who prepares the accounts, and who checks them?

Management prepares the financial statements under governance oversight. The independent auditor examines them and gives an opinion.

What does an auditor actually do? (6)

Understand the business, assess risks and controls, test transactions and evidence, evaluate errors, discuss adjustments with management and issue a report.

Why are independence and professional scepticism important?

Independence supports unbiased judgement. Scepticism means having a questioning mind and critically assessing evidence rather than simply accepting management’s claims.