In a limited liability company, there is a separation between ownership and control. In other words, the people who own the company are not necessarily the ones who are running it. Shareholders are the owners of a limited company and they may or may not participate in its day-to-day operations. Rather, they appoint directors who take care of this for them. Therefore, directors have to make the right decisions on behalf of shareholders.
A part of making the right decisions is ensuring that the limited company is following the law. An important legal requirement for a limited company is that it must have its financial statements- the income statement and the statement of financial position (or the balance sheet)- audited annually. Shareholders are the ones who appoint external auditors.
There are 2 broad types of audits: internal and external audits. Internal audits are conducted by the company’s employees to ensure that the company’s policies are being followed. External audits are conducted by auditors who are not affiliated to the company in any way.
Legally, external auditors are required to perform the following functions:
- They must be independent of the company to check the company’s accounting records. They must not be influenced by the directors in any way.
- They must be unbiased in their opinion and base their judgements on the evidence they are provided with by the directors.
- They should ensure that the company’s accounting records comply with the international accounting standards and the laws put forth in the Companies Act.
- They should determine if the company’s financial statements provide a true and fair view of the company to shareholders so that they are not misled.
- They should ensure that the records are free of significant errors.
In addition to this, the auditors who are appointed must be qualified enough to examine the company’s financial records. Moreover, the directors should make sure to provide them with sufficient information and access to the records.