The directors are responsible for preparing draft financial statements that are submitted to the auditors for their audit. It is the directors who select the accounting policies and must make accounting estimates that are reasonable in the circumstances.
The auditors will inspect the various decisions and judgements that the directors have made. Only if the auditors agree will they report that the accounts do give a true and fair view. Thus the directors are held accountable for their decisions and judgements, since the reputation of the company and the directors may suffer if the auditors reported that the accounts did not give a true and fair view.
A general question may arise i our mind, how does an external audit contribute to checking whether the directors of a company have exercised good stewardship of the company’s assets?
Yes! The published financial statements will disclose the financial performance (i.e., profit or loss, and cash inflow or outflow) that the directors have achieved over the year, and the auditors will confirm whether or not these statements give a true and fair view. If the company has suffered a large loss during a period when its competitors have reported profits, then it appears that the directors have exercised poor stewardship of the assets under their control. The role of the auditors is to ensure that the directors are motivated to present accurate financial statements. If the directors try to hide the losses that have been incurred by unacceptable creative accounting, then the auditors will step in to persuade the directors to adopt proper accounting policies if they want the audit report to state that the accounts