## **Learning Outcomes**

After reading this article, you should be able to:

- Explain the objectives and principles of financial statement audits within assurance engagements.
- Identify and distinguish the roles and needs of key audit stakeholders.
- State the impact of audit findings and opinions on various user groups.
- Apply your knowledge to exam scenarios involving audit purposes, stakeholder interests, and reporting outcomes.

## **ACCA Audit and Assurance (AA) Syllabus**

For ACCA Audit and Assurance (AA), you are required to understand how financial statement audits serve different stakeholders and the key issues that affect their interests. For revision, focus on:

- The objectives and value of external audits for financial statements.
- The main stakeholder groups in financial reporting and their information needs.
- How audit findings and opinions affect users of audited accounts.
- The structure and requirements of the independent auditor’s report.
- The impact of audit outcomes on different stakeholders’ decisions.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Name three main stakeholder groups who rely on audited financial statements, and state one key interest for each.
2. What is the primary objective of an external auditor in a financial statement audit?
3. Who is responsible for preparing the financial statements, and who gives the audit opinion?
4. How can a qualified audit opinion affect the decisions of stakeholders such as investors or lenders?
5. List two elements commonly included in the independent auditor’s report.

## **Introduction**

Financial statement audits are a form of assurance engagement designed to improve user confidence in published accounting information. Audited statements are relied upon by a broad range of stakeholders whose decisions depend on credible, independent assurance that the information is free from material misstatement.

> **Key Term: financial statement audit**
> An independent examination of an entity’s financial statements, performed in accordance with auditing standards, with the objective of expressing an opinion on whether the statements present a true and fair view.

## Purpose and Objectives of Financial Statement Audits

The main purpose of an external audit is to provide an objective opinion as to whether the financial statements are prepared in accordance with the applicable financial reporting framework and are free from material misstatement, whether due to fraud or error.

> **Key Term: true and fair view**
> A conclusion that the financial statements are factually correct, unbiased, and reflect the economic substance of the entity’s transactions in all material respects.

The auditor provides reasonable assurance—not a guarantee—using structured procedures in accordance with International Standards on Auditing (ISAs). This process is independent from management and enhances the reliability of financial information.

## Key Stakeholders in Audited Financial Statements

A wide variety of groups depend on audited financial statements for decision making. Key stakeholders and their typical interests include:

- **Shareholders/Investors**: Assess company performance and stewardship. Decide whether to retain, increase, or sell their investment.
- **Lenders**: Assess creditworthiness and the ability of the entity to meet its obligations.
- **Suppliers**: Evaluate whether the entity can pay for goods and services provided.
- **Customers**: Judge the stability and ongoing viability of a business partner.
- **Employees**: Interested in job security and company stability.
- **Management**: Use audit findings to improve controls and processes.
- **Governments and Regulators**: Verify tax compliance and legal adherence.
- **Other stakeholders**: Such as analysts, creditors, and the general public.

> **Key Term: stakeholder**
> Any person, group, or organisation with an interest in, or affected by, the financial position and performance of an entity.

## Stakeholder Needs and the Impact of Audits

Each stakeholder group uses audited financial statements differently:

- **Shareholders** rely on the independent opinion as evidence that management has fulfilled its responsibilities and not misrepresented the business.
- **Lenders** may base lending decisions or the terms of finance on the assurance provided.
- **Suppliers and Customers** may assess whether to enter into or continue trading relationships.
- **Employees** look for assurance on ongoing job security.
- **Regulators and Governments** depend on audits to strengthen trust in markets and ensure accurate tax reporting.

> **Key Term: audit opinion**
> A formal statement issued by the auditor indicating (unmodified or modified) whether the financial statements are presented fairly and comply with the financial reporting framework.

## Structure and Content of the Auditor’s Report

The independent auditor’s report communicates the outcome of the audit and is addressed primarily to shareholders or members. Key elements include:

- **Opinion paragraph**: States whether the financial statements present a true and fair view.
- **Basis for opinion**: Outlines the audit standards followed and summarizes the auditor’s responsibilities.
- **Key audit matters (for listed entities)**: Highlights matters of high significance in the audit.
- **Management and auditor responsibilities**: Clarifies respective roles.
- **Other reporting requirements**: As required by local laws.
- **Signature, date, and address**: Identifies the firm and the date of the report.

> **Key Term: independent auditor’s report**
> The formal written document in which the external auditor communicates the audit opinion and explains the basis for that opinion to users of the financial statements.

## Decision-Making and Audit Outcomes

Stakeholders must understand the level of assurance provided and the implications of any modifications to the opinion:

- **Unmodified (clean) opinion**: Indicates financial statements are materially correct. Users can generally rely on the financial information for decision making.
- **Qualified opinion**: Indicates the financial statements are presented fairly, except for specific material issues. Stakeholders may reconsider decisions or seek further clarification.
- **Adverse opinion or disclaimer**: Indicates serious concerns. Users are warned not to rely on the statements as a fair representation.

### **Worked Example 1.1**

**Scenario:**  
Global Paper Ltd’s external auditor issues a qualified opinion because of a limitation of scope over inventory valuation. The company’s largest lender is reviewing whether to renew a substantial loan.

> **Answer:**  
> The qualified opinion signals to the lender that part of the financial statements—inventory—may be misstated. The lender may request additional information, impose more stringent loan terms, or even withdraw the facility until the issue is resolved.

### **Worked Example 1.2**

**Scenario:**  
A trade supplier wants to extend credit to a new customer, but notes the auditor’s report contains an unmodified opinion.

> **Answer:**  
> The unmodified opinion gives the supplier more confidence that the accounts are reliable, supporting the decision to extend credit, subject to other checks.

## Stakeholder Rights and Responsibilities

Stakeholders must understand their position in relation to audited information:

- The **responsible party** (usually management) prepares the financial statements.
- The **auditor** expresses the opinion independently.
- **Shareholders** commonly hold the right to appoint auditors and receive annual audited statements.
- **Governance structures** (e.g., audit committees) provide oversight and communicate with auditors on critical matters.

> **Key Term: responsible party**
> The individual(s) or organisation with primary responsibility for preparing the financial statements subject to audit.
>
> **Key Term: governance**
> The arrangements and processes by which the entity is directed and controlled, including board oversight and audit committee functions.

## Limitations of the Audit and User Implications

While auditors give reasonable assurance, several factors limit their work and, therefore, the confidence stakeholders can place in the statements:

- Use of sampling rather than examination of all transactions.
- Reliance on professional judgement, accounting estimates, and management representations.
- Possibility that some material misstatements (including from fraud) may go undetected.

> **Key Term: reasonable assurance**
> A high, but not absolute, level of confidence given by the auditor’s opinion, based on sufficient audit evidence and professional judgement.
>
> **Key Term: expectation gap**
> The difference between what users believe auditors are responsible for and what audit standards actually require.

## Effects of Audit Findings on Stakeholders

The impact of audit findings extends beyond compliance:

- Clean audit reports can support access to finance, good supplier relations, and employee confidence.
- Modified reports can affect share prices, increase borrowing costs, or lead to regulatory scrutiny.
- Public interest is served by maintaining confidence in reported financial results.

### **Exam Warning**

Users should not assume audits guarantee the financial statements are perfectly accurate or that all fraud will be detected. Misunderstanding the scope of assurance is a common error.

## **Summary**

Financial statement audits provide stakeholders with an independent, high-level opinion on the reliability of a company’s reported performance and position. Multiple stakeholder groups depend on auditor opinions for informed decision making, but must remain aware of the limitations of the process and the respective roles of the responsible party, auditor, and users. Clear understanding of auditor reporting helps all parties interpret results appropriately in economic and governance contexts.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the objectives and purpose of external audits of financial statements.
- Identify key stakeholder groups relying on audited accounts and state their specific interests.
- Recognize the structure and main elements of the independent auditor’s report.
- Understand the possible effects of audit findings and opinions on stakeholder decisions.
- Identify the respective roles of responsible party, auditor, and stakeholders.
- State the key limitations of the audit and the meaning of reasonable assurance.

## **Key Terms and Concepts**

- financial statement audit
- true and fair view
- stakeholder
- audit opinion
- independent auditor’s report
- responsible party
- governance
- reasonable assurance
- expectation gap

Assurance and audit concepts - Financial statement audits and stakeholders