Perspectives on Audit - Why accounts need to be audited and can a legal action be brought against auditors if they make mistakes

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Appendix 1


Perspectives on Audit: Why accounts need to be audited and can a legal action be brought against auditors if they make mistakes?

  1. Introduction

This report will examine two aspects of auditing, the first aspect to be explored will be; the reason to why accounts need to be audited, the second aspect to be explored will be; can a legal action be brought against auditors if they make mistakes.

To help understand the questions at hand, the following areas will be explored:

  • Misconceptions about the role of auditors
  • The difference between accounting and audit
  • The nature, scope and purpose of auditing including;
  • Audit Opinion
  • Reporting Requirements
  • Stages in Audit Process

  • Liability to Shareholders
  • Liability to third parties
  • Auditor professional ethics

  1. Why accounts need to be audited 

  1. Misconception about the role of auditors

There seems to be an expectation gap in the minds of the public as to the main purpose of auditors. The public believe the auditor’s role is to detect fraud and make sure that the company has acted within the law. However auditors have no statutory duty to seek out fraud but they do have to consider where there is fraud.

Lord Denning’s judgement in the case Fomento (Sterling Area) Ltd -v- Selsdon Fountain Pen Co Ltd [1958] 1 All ER 11 said that  Auditors should come with an enquiring mind and an exception there maybe errors.

To understand the role of the audit, we will first have to consider its definition and its relation to accounting.


  1. The difference between accounting and audit

Accounting is the process of identifying, measuring and communicating economic information to allow informed judgments and decisions by users of the information. (Drury, C. (2008)

Gray & Manson (2005) define an audit as

 ‘an investigation or a search for evidence to enable an opinion to be formed on the truth and fairness of financial and other information by a person or persons independent of the preparer and persons likely to gain directly from the use of the information. A [audit] report is issued on that information with the intention of increasing its credibility and therefore its usefulness.’

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From the two definitions we can see that accountants produce financial information and auditors ascertain the validity of that information.

  1. The Nature, Scope and Purpose of Auditing

Audits serve a vital economic purpose and play an important role in serving the public interest to strengthen accountability and reinforce trust and confidence in financial reporting. It was not until the Companies Act 1900, however, that a general legal obligation for annual audits was imposed on registered companies. (Institute of Chartered Accountants in England & Wales. (2005))

A UK company has a board of directors (the agents) and a ...

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