## **Learning Outcomes**

After studying this article, you will be able to explain why audits are conducted, identify the main objectives of an external audit, and discuss both the advantages and disadvantages of having financial statements audited. You will also be able to describe the key terms relevant to this topic and apply your knowledge to typical examination scenarios.

## **ACCA Foundations in Audit (FAU) Syllabus**

For ACCA Foundations in Audit (FAU), you are required to understand the rationale behind performing an audit and the practical implications for an organisation. Point your revision towards:

- Defining the purpose of an audit of financial statements
- Identifying who typically requires an audit and when it is compulsory or voluntary
- Explaining the advantages and disadvantages of conducting audits
- Recognising the expectations and limitations of an external audit

## **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. What is the core objective of the external audit of financial statements?
2. Name two specific benefits that a voluntary audit can bring to a small business.
3. True or false? Having an audit means that all errors and frauds will be detected and corrected.
4. List one disadvantage of subjecting a business to an external audit.

## **Introduction**

Audit is a central concept in financial reporting and business accountability. As businesses grow, ownership and day-to-day management are often separated, which can create concerns over the accuracy and reliability of information presented to stakeholders such as shareholders, lenders, or members. An audit provides independent assurance on financial statements, but there are costs and practicalities to consider. This article explores the purpose, advantages, and disadvantages of an audit for the ACCA FAU syllabus.

> **Key Term: audit**
> The independent examination of the financial statements of an entity by a suitably qualified person, in order to express an opinion on whether those statements give a true and fair view.

## The Purpose of an Audit

The key purpose of an audit is to increase the reliability of financial statements produced by an entity. In many cases (e.g., limited companies), the owners do not manage the entity, so external users require assurance that the financial information reflects the true situation. An audit aims to:

- Give stakeholders confidence in the financial statements
- Reduce the risk of error, deliberate misstatement, or fraud going undetected
- Encourage accountability between those who manage an entity and those who own or otherwise rely on it

> **Key Term: true and fair view**
> A term describing financial statements that are, in all material respects, free from misstatement and appropriately represent the entity’s financial position, performance, and cash flows.
>
> **Key Term: independent**
> Free from any conflict of interest, personal or financial ties, or bias that could affect the impartiality of the auditor's judgments.

## Advantages of an Audit

Audits offer several significant benefits to an entity and to stakeholders. These include:

- **Credibility:** The audited financial statements are considered more reliable, increasing trust among existing and potential investors, lenders, and other users.
- **Facilitation of Disputes:** An external audit may help resolve disagreements between business partners, owners, or members by providing an independent assessment of the accounts.
- **External Funding:** Lenders and investors are more likely to provide finance to entities with independently audited accounts, as they perceive the risk to be lower.
- **Business Transactions:** Audited financial statements make changes in business structure, such as mergers, sales, or admission of new partners, easier and less contentious.
- **Constructive Feedback:** The audit process may highlight weaknesses in internal controls or business processes and provide management with recommendations for improvement.

### **Worked Example 1.1**

_A not-for-profit club has no legal obligation to have its annual accounts audited. Still, the members vote each year to engage an external auditor. Explain two reasons why members may prefer a voluntary audit._

> **Answer:**
>
> - Members gain greater confidence that funds have been used correctly and the accounts are not misstated.
> - An external audit can mediate disputes over funds or expenditures and offer suggestions to improve internal record-keeping.

## Disadvantages of an Audit

Despite the benefits, audits also have drawbacks, and these must be weighed before a business or organisation decides to undergo an audit, especially if not legally required.

- **Cost:** Hiring a qualified auditor incurs fees, which can be significant for small entities.
- **Time and Disruption:** Management and staff must provide documents, answer questions, and prepare for audit visits, which can interrupt normal operations.
- **Expectation Gap:** Some users mistakenly believe an audit is an absolute guarantee against all errors or fraud. In reality, an audit offers only reasonable, not absolute, assurance.
- **Limited Value in Some Circumstances:** Where owners are closely involved in the day-to-day running of the business (e.g., small family companies), the benefits of an external audit may be reduced.

### **Exam Warning**

> A common misconception is that an audit guarantees detection of all frauds or errors. In fact, the auditor provides reasonable assurance only—small or sophisticated frauds may go undetected despite proper audit procedures.

## When Is an Audit Compulsory or Voluntary?

In some jurisdictions, such as the UK, company law requires all but the smallest companies to have their annual financial statements audited. Elsewhere, an audit may be voluntary or only required for certain types of entities (e.g., charities, public bodies).

Even where not compulsory, an audit may be desirable:

- To satisfy investor or lender requirements
- To resolve partner, member, or stakeholder concerns
- In anticipation of a sale, merger, or business restructuring

> **Key Term: reasonable assurance**
> A high, but not absolute, level of confidence that the financial statements are free from material misstatement, based on evidence and professional judgment.

## Limitations of an Audit

Audits are important, but not without limits:

- An audit is not designed to detect every error or fraud.
- The auditor typically works on a testing and sample basis.
- Judgment is required when evaluating evidence—no audit can provide complete certainty.
- The value of an audit is highest where internal controls are established and management is open and cooperative.

### **Revision Tip**

> For exam questions on audit advantages or disadvantages, focus on the circumstances (e.g., legal requirement, business change, size, or disputes) and who benefits from the audit or bears the costs.

## **Summary**

An audit involves an independent review of financial statements to provide an opinion on their truth and fairness. This increases confidence among stakeholders but comes with costs, potential disruption, and practical limitations. Audits are compulsory for many entities, but for others, the decision to undertake one involves balancing anticipated benefits against disadvantages.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- State the main purpose of an audit: to provide independent assurance on financial statements
- Describe the key advantages of having audited accounts, including increased credibility and support for business decisions
- Explain common disadvantages, such as cost and time impact
- Recognise audits offer reasonable—not absolute—assurance, and cannot guarantee the detection of all mistakes or frauds
- Identify factors leading to compulsory or voluntary audits in practice

## **Key Terms and Concepts**

- audit
- true and fair view
- independent
- reasonable assurance

Purpose and scope of an audit - Purpose, advantages and disadvantages