Question

Having just completed the annual financial audit, the audit partner and supervisor are holding a final debriefing meeting with the client. As part of this meeting the managing director of Computek Electronics Ltd indicates: I’m glad we got a clean bill of health on that audit report. I had some concerns about controls at the warehouse but I see there is nothing to worry about.’
The audit partner replied: ‘our procedures did not involve a full review of controls, so I don’t know whether your specific concerns would be addressed or not.’
The managing director retorted, ‘Well, what are we paying you for then?

Advise the partner on an appropriate reply to the managing director.

Answer 1

As is evident, audit being considered here is Statutory Audit as prescribed for Companies under Statute governing Company Law, Audit Partner can reply keeping following in consideration:

It has been well established from precedents and now current law on the matter that an outside independent auditor engaged is only to render an opinion on whether the Company's financial statements are presented fairly in all material respects, in accordance with the governing financial reporting framework.

Accordingly an audit has to and may involve:

• Inquiring of management and others in order to gain an understanding of the organization, its operations, financial reporting, any known fraud or error
• Evaluation and understanding of the internal control system
• Performing analytical procedures on expected or unexpected variances in account balances or classes of transactions
• Testing documentation supporting account balances or classes of transactions
• Observing the physical inventory count
• Confirming accounts receivable and other accounts with a third party

However,an auditor is a watchdog and not a bloodhound and an Audit is not a 100% assurance that all the material misstatements have been found and dealt with in the audit. Further, here the matter is w.r.t internal controls of the Company Warehouse. which is sole responsibility of the Management and an Auditor's responsibility is only to report on same if they have come across any discrepancy w.r.t. internal controls on performing audit procedures deemed fit by them keeping knowledge of business and operations in perspective.

So Auditor's responsibility is mainly to consider if an Organization is not in violation of any Statutory Compliance applicable to it. And is not a 100% check upon all the activities of an organization.