UNIT-8 [ Lesson-2: Some Essential Reports ]
After completing this lesson you should be able to:
- explain what is an audit and who are auditors
- differentiate between management audit, and accounting firms
- write an audit report by following the sample audit report presented in the lesson
- write a report as the chief executive of a company by assessing the sample report presented
- describe the role of Audit Committee
- assess your own abilities in writing a report as director of your own company.
Some Essential Reports
What are management audit and operational audit?
Each and every company has some established rules and regulations of its own, known as statutory rules. Each company again may succeed as a marketing or engineering organisation, while being poorly managed; it may succeed because of a favourable environment such as a sellers’ market, as often happens in wartime, despite inadequate management.
If the quality of managing will ultimately make the difference in success or failure, then certainly this quality should be given an assessment, separate from the ability to do well in marketing, engineering, producing or financing. This kind of assessment is known as management audit. It covers evaluation in the field of
Planning
Organising
Staffing
Directing and
Controlling
But there is another audit in all enterprises known as Operational Audit – auditing the quality of operations. This kind of audit is about management decision; dealing with the quality of decisions in the areas of long range and company wide Planning, Marketing, Operations (Production, Material), Personnel, Accounting and Finance.
So we can say each company use some systems and techniques for implementing internal control to improve the accountability for actions, the accuracy and reliability of records, the safeguarding of assets and the overall efficiency of operations – The key role in achieving these goals is played today by a company’s audit committee.
What in an audit?
An audit is an appraisal of the entire enterprise in the light of its present and probable future environment. The audit system appraises the
company’s position to determine where it, where it is heading stands under present programmes, what its objective should be, and whether revised plans are needed to meet those objectives.
If the enterprise does not change course to suit the changing social, technical and political environment, it looses markets, personnel, and other requirements for continued existence. The enterprise self audit is designed to force management to meet this situation.
Who are auditors and what type of reports they write
An auditor is a professional who conducts an independent examination of the accounting data presented by the business enterprise.
If the auditor is satisfied that the financial statements (the balance sheet, the income statement, the statement of changes in financial position, and the statement of changes in owners’ or stockholders’ equity) represent the financial position and results of operations, an opinion is expressed on audited statements as indicated below from the report of a group of auditors.
In preparing this report, the auditor follows these reporting standards:
1. The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.
2. The report shall state whether such principles have been consistently observed in the current period in relation to the preceding period.
3. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.
4. The report shall contain either an expression of opinion regarding the financial statements taken as a whole or an assessment to the effect that and opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the degree of responsibility being taken.
In short, these standards require that an auditor state in the opinion that generally accepted accounting principles have been followed and that they have been applied on a basis consistent with that of the preceding year.
In most cases, the auditor issues a standard unqualified or “clean” opinion; that is, the auditor believes that the financial statements do present fairly the financial picture on a basis consistent with that used in the preceding year.
Audit Committees
These are typically composed of three or more “outside” board members. Not being everyday employee of the company, they are usually considered to be more independent than the “inside” directors, who, as employees, also serve as part of the corporation’s management.
The objective of the audit committee is to oversee the accounting controls, financial statements, and financial affairs of the corporation. The Committee represents the full board and provides personal contact and communication among the board, the external auditors, the internal auditors, the financial executives, and the operating executives.

These relationships are depicted in Exhibit 1.1. The display in Exhibit 1.1 is only one of many possible arrangements. Above all, note how the audit committee is supposed to be the main pipeline to the board of directors, especially for individuals responsible for the accounting functions.
Exhibit 1.1 shows that the internal audit manager is directly responsible (solidline) to the accounting executives, who, in turn are directly responsible to both the audit committee and the executive vice president. The dashed line indicate that the audit department should communicate with and gather information directly from the external auditors and the internal auditors.
The internal auditing department sometimes is directly responsible to the executive vice president, or to the president or to the audit committee itself.
ACTIVITY
What is the objective of an audit committee?
When does an Audit Committee have a meeting?
The committee typically meets at least twice annually. The first meeting is to review the annual external audit plan; the second, to review the audited financial statements before their publications. Additional meetings may be held
(a) to consider and approve the retention of the external auditors;
(b) to review the company’s accounting system, particularly the internal controls; and
(c) to review any special matters raised by internal audits.
Meetings should be attended by the Chief Financial Officer and a representative of the external auditing firm. At least once a year, the committee should discuss with the external auditors, their evaluation of corporate management (without the presence of the latter).
Similarly, the committee should discuss with management their evaluation of the external auditors. The committee selects the independent public accountants annually in advance of the Annual Meeting of Stockholders and submits the selection for ratification at the meeting.
Exhibit 1.1.
Typical Corporate Organisation Chart
Exhibit 1.2.
A sample Report of Independent Public Accountants
Exhibit 1.3.
A sample Audit Report no. 2
How do you write a report as being a Director of a Company?
Suppose you are the Director of a Computer Centre and is responsible to the College president for operation of the Computer Centre as a teaching resource of the college. You are also responsible for answering administrative request for computer operation. Suppose you have more functions stated as below:
- as a director you in fact advise the president in report form about policies and procedures for effective computer use.
- sometimes advise chairpersons, faculty, and staff about computer applications in teaching or administrative duties.
- submit budgets request to the Dean of administration.
- supervise the data processing of college computerised records.
So for all the above functions to be carried out effectively you need to communicate most often in written report form to various people. Below is a sample report of a Director to all the faculty, and staff about the change of address and introduction of a new computer technology.
Exhibit 1.4

Question for Review
These questions are designed to help you assess how far you have understood and can apply the learning you have accomplished by answering (in written form) the following questions:
1. What do you understand by a management audit and an operational audit?
2. Who are auditors?
3. Why does an organisation need an audit report?
4. Write an audit report as one of the public accounts chosen for a company?
5. Suppose you are the Personnel Director of a company and have to write assessment report on candidates applying for jobs. Write a recommendation report for a candidate you consider suitable for the post advertised from your company?
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