Text №7. PERFORMING AN AUDIT

Auditing is a process in which an independent accountant-auditor examines a firm's accounting records and financial statements and offers their accuracy and reliability.

There are different types of audits, for example, financial statements audits, income tax audits, "value for money" audits, environmental audits, administrative audits, financial management audit: etc.

The accountancy profession has built up a significant amount of expertise in performing financial statements audits.

Accounts audits were established as an instrument to protect third parties, the users of accounts. Special bodies of users, such as supervisory boards, employee representatives, government agencies may sometimes need an in-depth audit report which is usually confidential.

It should be stressed that auditors do not offer an opinion. The auditor's opinion is gradually being built up from a mass of detailed work to the final judgment through the planning and testing stages. The auditor normally starts with a study of the business environment the audited company is working in, and performs a preliminary analytical review.

Then he should direct his attention to the financial statements.

If auditor's attention is directed towards correctness of various assumptions made by the management for their preparation, auditor should focus on any misstatement whether it is intentional or unintentional.

Defining the audit strategy the auditor has to decide whether to rely on internal controls or to resort to substantive testing applying analytical review procedures, such as test in totals, comparison with budgets or even statistical analysis of figures.

In the planning stage as well as during the performance of audit

procedures and. finally, in forming conclusions, "materiality" and "audit

risk" are critical elements in the auditor's judgment. "Materiality"

refers to the magnitude or nature of a misstatement (including an

mission) of financial information.

"Audit risk" (including three different components - inherent risk, control risk, detection risk) is the risk that an auditor may give an inappropriate opinion on financial information that is materially misstated.

The natural finalization of the audit process is the auditor's report, reflecting the auditor's opinion on the financial statements. Unfortunately, audits do not always end up in an approval of the financial statements.

In order to protect the public interests and the profession's integrity an individual must be sufficiently educated and adequately trained before being certified to act as an auditor.

 

Text №8. THE ACCOUNTING EQUATION AND

THE BALANCE SHEET

 

Accounting is often said to be the language of business, it is used in the business world to describe the transactions in all kinds of organizations. Accounting terms and ideas used by people associated with business, whether they are managers, owners, investors, bankers, lawyers, or accountants. As it is the language of business there are words and terms that mean one thing in accounting, but whose meaning is completely different in ordinary usage survey the transactions of businesses, will gain a greater insight into the way that business is transacted and the methods by which business decisions are taken.

The actual record-making phase of accounting is usually called book-keeping. However, accounting extends far beyond the actual making of records. Accounting is concerned with the use to which these records are put, their analysis and interpretation.

An accountant should be concerned with more than the record-making phase, in particular, he should be interested in the relationship between the financial results and the events which have created them. He should be studying the various alternatives open to the business, and be using his accounting experience in order to aid the management to select the best plan of action for the business. The owners and managers of a business will need some accounting knowledge in order that they may understand what the accountant is telling them. Investors and others will need accounting knowledge in order they may read and understand the financial statements issued by the business, and adjust their relationships with the business accordingly.

Probably there are two main questions that the managers or owners of a business want to know: first, whether or not the business is operating at a profit; second, they will want to know whether or not the business will be able to meet its commitments as they fall due, and so not have to close down owing to lack of funds. Both of these questions should be answered by the use of the accounting data of the firm.

The accounting equation

The whole of financial accounting is based on the accounting equation. This can be stated to be that for a firm to operate it needs resources, and that these resources have had to be supplied to the firm by someone. The resources possessed by the firm are known as Assets, and obviously some of these resources will have been supplied by the owner of the business. The total amount supplied by him is known as Capital. If in fact he was the only one who had supplied the assets, then the following equation would hold true:

Assets = Capital

 

Accounting Services

There are many levels of accounting services provided by a wide range of accounting firms. A good accountant can set up your books and offer solid advice when it comes to such issues as tax planning and cash flow problems. He or she can help you select a good retirement plan and help you when setting up employee benefit packages. Accounting procedures can seem like a foreign language at times, but a good accountant can help translate everything into terms you can understand.