Section 4 of 5
An auditor is an independent accountant appointed by the shareholders to verify the accounts prepared by the directors and to report to the shareholders.
The auditor ensures:
True — the figures exist and the transactions have happened Fair — the accounts have been prepared using generally accepted accounting rules and principles
In limited companies and plcs there is a separation of ownership and control — shareholders own the company but directors run it day to day. Shareholders rely on annual financial statements to assess how the business is performing.
If the auditor is not independent, they may be persuaded to accept financial statements that:
This means shareholders cannot rely on the information, which may lead to incorrect investment decisions and potentially to the loss of their investment.
| Role | Responsibility |
|---|---|
| Directors | Appointed by shareholders to run the business; required by law to prepare financial statements showing a true and fair view of the state of affairs and the profit or loss for the year |
| Auditors | Appointed by shareholders to independently check those statements; report to shareholders that the accounts show a true and fair view and comply with the Companies Acts and accounting standards |
Key distinction: Directors prepare the financial statements; auditors check them and report to the shareholders.
Finished this chapter? Mark it complete to earn XP.