Review the definition of financial statements how to

§
Review the definition of “financial statements”,
§
How to define “External Auditing” vs. “Internal Auditing? What are the key
determinants?
§
Determine the factors to consider in accepting the audit engagement of a
prospective client;
§
Identify the majors steps in audit planning & analyze how to assess risks;
§
Discuss the techniques used to obtain an in-depth understanding of
internal control, then consider how to establish an overall audit strategy.
SECTION 1
Financial Statements Revisited
AC504 - F2017
Session 1: Introduction to Auditing
11
Financial Statements Revisited –
Purpose of Financial Statements
AC504 - F2017 Session 1: Introduction to Auditing
12
Financial statements are a structured representation of the financial
position (Balance Sheet) and financial performance (Income Statement) of
an entity.
The objective of financial statements is to provide information about the
financial position, financial performance and cash flows of an entity that is
useful to a wide range of users in making economic decisions.
Financial statements also show the results of management’s stewardship
of the resources entrusted to it.

RSB (F2017) 5
Financial Statements Revisited – Component of
Financial Statements
AC504 - F2017 Session 1: Introduction to Auditing
13
Components of Financial Statements:
A complete set of financial statements (IFRS Standards) comprises:
a balance sheet;
an income statement;
a statement of changes in equity showing either:
all changes in equity, or
changes in equity other than those arising from transactions with equity
holders acting in their capacity as equity holders;
a cash flow statement; and
notes, comprising a summary of significant accounting policies and
other explanatory notes.
Financial Statements Revisited –
User of Financial Statements
AC504 - F2017
Session 1: Introduction to Auditing
14
User of the financial statements Interest of the user
Equity investors (existing and potential) They are interested whether buy, hold or sell the shares in hand
and also enable them in payment of dividends.
Loan creditors i.e., existing and potential
holders of debentures and loan stock, and
providers of short-term loans
The amount will be paid when due and for continuation of the
business.
Employees (existing, potential and past) Interested in stability and profitability for employment
opportunities, remuneration and retirement benefits.
Business contacts including customers,
trade creditors, competitors and potential
take-over bidders
Whether the payment of loan will be made in due dates and
enable sustainability of business for future business with the
enterprise.
Government , including tax authorities,
government departments and local authorities
Interested in allocation of resources and also to regulate the
activities of an enterprise and determining tax policies and as a
basis for national income.
Public , including tax payers, ratepayers and
environmental groups
Trends and recent development in the prosperity of the entity and
range of it’s activities.
Basic Accounting Principles
AC504 - F2017