Chapter2 : Auditing

Introduction:

In chapter 1 we have talked about Financial Accounting and the financial statements. We
focused on the balance sheet which is an important statement as it gives a picture on the
company’s financial situation.

In addition to financial accounting there are other types of accounting. Those types are
determined based on the nature of information analyzed, summarized, reported and on the
functions performed.

Auditing

Management Finacial
Accounting Accounting

Types of
Accounting Tax
Cost
Accounting Accounting

Types of Accounting

Starter: Match up the terms with their definitions

1. Bookkeeping a. Calculating an individual’s or company’s liability for a tax

2. Accounting b. Writing down the details of transactions (debits and
credits)
3. Managerial accounting c. Keeping financial records, recording income and
expenditure, valuing assets and liabilities.
4. Cost accounting d. Preparing budgets and other financial reports necessary for
management.
5. Tax accounting e. Inspection and evaluation of accounts by a second set of
accountants
6. Auditing f. Using all available accounting procedures and tricks to
disguise the true financial position of a company
7. Creative accounting g. Working out the unit cost of products, including materials,
labour and all other expenses.
Please, try to work seriously without having a look at the key answers. Use your
dictionaries to explain the difficult words.

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Before you read:
Discuss the following questions:
1. In general, how important do you think the audit report is to a company’s investors?
Do you think they understand or even bother to read it?
2. How do you think the shareholders of a company which received a negative opinion
about its financial statement would react? Would this opinion have any effect on the
company’s future?
Reading :
Read the article and say whether the following statements are true or false
1. In general, investors pay attention to the auditors’ report on a company.
2. In difficult times, investors might react more strongly to a negative opinion, to the
extent the push the company into complete failure.
3. Auditors are not held responsible if they fail to indicate that a company’s financial
affairs look unhealthy, then the company goes bankrupt.
4. Poor economic conditions make auditors even more cautious when they write their
report.
Scary jargon in a jittery market
Auditors’ jargon rarely enters normal conversation but one phrase- ‘added emphasis’- has the
power to terrify boardrooms. It is a phrase that auditors sometimes use to indicate possible
dangers hiding below the surface of a company’s balance sheet.
Every January, investors begin the wait for the full-year financial statement. Most years, the
auditors’ report – a page of largely standardized phrases, including an opinion whether the
business is a valid going concern- attracts little interest. In a bad year, however, that ‘going-
concern’ statement is critical to investors.
Technically, ‘going concern approval’ means that the auditors consider the business to be
viable for at least a year from when the accountants are signed off. At worst, auditors can give
an ‘adverse opinion’, indicating a general and serious disagreement with the directors’
statement of the company’s financial position. In volatile markets, however, even a ‘qualified
opinion’, indicating a limited and specific concern, can act as a death warning.
Auditors have good reason to worry about professional liability. After the failure of many
dotcom companies in 2001, a wave of lawsuits against audit firms followed. Since then,
regulators have made it clear they will take a firm line with audit firms. There are no excuses
these days for saying “when we signed off, we didn’t think about that”.
In a difficult economic environment, investors can start to panic at any delay in the publishing
of the annual report. So in a difficult year, auditors are even more rigorous than usual. No
matter how well-run the client company is, a year of difficult economic conditions is the year
you sit down and make sure you really understand that bank mandate or those liabilities.
Vocabulary:
A. Word search
Find in the article words or phrases which fir with these definitions
 Chapter2 : Auditing

1. The technical vocabulary that a certain industry or profession uses.

2. Volatile, nervous
3. A company which does business using the internet or provides an internet service.
4. A charge, complaint or claim against a company or person in a court of law.

B. Definitions
Match these phrases with their definitions
1. Going concern a) Given in an audit if the auditor disagrees with the treatment of a
specific piece of information in the financial statement, or if the
auditor feels that the audit has been too limited in its scope.
2. Emphasis of matter b) a business that functions without the intention of liquidation for
the next 12 months.
3. Qualified opinion c) when the auditor decides that the financial statement of a company
are materially misstated and do not conform with the generally
accepted accounting principles. (such as IFRS)
4. Adverse opinion d) a paragraph which draws attention to a specific point disclosed in a
a company’s financial statement which the auditor considers to be of
great importance to the user’s understanding of the statement.
C. Number the following words or expressions with their underlined equivalents in the text.

Accuracy external a synonym Annual Genral Meeting

Implemented ratified shareholders board of directors

Deficiencies determine checking standard of operating procedures

Deviations subsidiaries directives transnational corporations

The traditional definition of auditing is a review and an evaluation of financial records by a

second set of accountants. An internal audit is a control by a company’s own accountants,
checking for completeness, (1) exactness and reliability. Among other things, internal auditors
are looking for (2) departures from (3) a firm’s established methods for recording business
transactions. In most countries, the law requires all firms to have their accounts audited by an
outside company. An (4) independent audit is thus a review of financial statements and
accounting records by an accountant not belonging to the firm. The auditors have to (5) judge
whether the accounts give what in Britain is known as a “ true and fair view” and in the US as
a “ fair presentation” of the company’s financial position. Auditors are appointed by a

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company’s (6) most senior executives and advisors, whose choice has to be (7) approved by
the (8) owners of the company’s equity at the (9) company’s yearly assembly. Auditors write
an official audit report. They may also address a “management letter” to the directors,
outlining (10) inadequacies and recommending improved operating procedures. This leads to
the more recent use of the word “audit” as (11) an equivalent term for “control”: (12)
multinational companies, for example, might undertake inventory, marketing and technical
audits. Auditing in this sense means (13) verifying that general management (14) instructions
are being (15) executed in branches, (16) companies which they control, etc.

D. Add appropriate words to these phrases:

1. Auditors ………………..companies accounts.
2. Accounts have to ………………… a fair presentation.
3. Auditors write a …………………
4. It’s the directors who ………………. The auditors.
5. Auditors sometimes …………………better accounting procedures.
6. Using external auditors is a …………………requirement.
E. Put the letters into the correct order to make words.
1. L.P.Y.E.R.R.I.I. M.A.N preliminary initial
2. S.D.S.I.S.U.C ………………. Talk about
3. G.D.U.E.P.A.R ………………… improvement
4. T.V.E.I.Y.R.A ………………… range
5. B.E.S.I.A.Z.L.E ……………………… Big
6. G.U.F.E.R.I …………………… amount of money
7. S.C.O.D.I.N.R.E ………………… think about
8. E.E.B.A.R.S.N.O.L.A ………………. sensible

Grammar: The passive voice

Verbs can be in either the active voice or the passive voice. Verbs in the active voice indicate
action that the subject of a sentence is doing. Verbs in the passive voice indicate action that
the subject is having done to it. In other words, in active form the focus is on the doer of the
action (who does the action) whereas in passive form the focus is on the action and not on the
doer.

Notice the following examples:

 Chapter2 : Auditing

a. The Chief Executer Officer suggested the new strategy of the company. (the doer of
the action is important, so we use the active form)
b. This factory is very old, it was built in 1902.

How to change a sentence from active into passive voice ?

This is very easy, but you have to know the parts of your sentence. It means, the SUBJECT,
the VERB and the OBJECT.

Active James Signed a contract

Subject Verb Object

Passive A contract Was Signed by James

Agent (to be + past participle) Subject

Passive verb tenses

Active voice Passive voice

Present simple He sends a letter A letter is sent
Past simple He sent a letter A letter was sent
Future simple He will send a letter A letter will be sent
Present continuous He is sending a letter A letter is being sent
Past continuous He was sending a letter A letter was being sent
Present perfect He has sent a letter A letter has been sent
Past perferct He had sent a letter A letter had been sent
Infinitive He has to send a letter A letter has to be sent
Modals He must send a letter A letter must be sent

Test yourself: The passive

1. Change these active sentences to the passive to avoid mentioning the agent
a. Your company sometimes releases illegal levels of nitrates into the river
b. Your department is making too many mistakes at the moment
c. Unfortunately, you made a poor decision in hiring unqualified staff
d. Our sub-contractors were employing children to make T-shirts in Asia.
e. Several anonymous journalists have accused us of industrial espionage
f. My boss and several other managers had warned the company about the risks

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 g. The authorities might ask you some delicate questions

Key answers of the activities:

Starter: 1 B /2 C /3 D/ 4 G/ 5 A/ 6 E/ 7 F

Reading: 1. False. “They attract little attention…….”

2. True. “In volatile market even a qualified opinion can act as a death warning”
3. False. “ Auditors have good reasons to worry about professional liability”
4. True. “ …auditors are more rigorous……”

Vocabulary

A. 1. Jargon 2. Jittery 3. Dotcom 4. Lawsuit

B. 1 b /2 d / 3 a / 4 c
C. Accuracy 1 external 4 Annual General Meeting9 a synonym 11
Implemented 15 ratified 7 shareholders 8 board of directors 6
Deficiencies 10 determine 5 standard operating procedures 3 checking13
Deviations 2 subsidiaries 16 directives 14 transnational corporations 12
D. 1. Verify/ check 2. Give 3. Report 4. Appoint 5. Follow 6. Legal
E. 2. Discuss 3. Upgrade 4. Variety 5. Sizeable 6. Figure 7. Consider 8. Reasonable

Grammar:

a. Illegal levels of nitrates are sometimes released into the river

b. Too many mistakes are being made at the moment

c. Unfortunately, a poor decision was made in hiring unqualified staff

d. Children were being employed to make T-shirts in Asia.

e. We have been accused of industrial espionage

f. The company had been warned about the risks

g. You might be asked some delicate questions