A lot of students are unsure as to why the Companies Act is included in their Auditing studies. I’ve often heard them propose that it must be because it doesn’t really fit into any other subject, so it was just dumped into Auditing!
This isn’t true, of course, but why is it so important then, and why is it part of Auditing?
One of these reasons… As an auditor, your objective is to express an opinion on the fair presentation of the AFS. This means that anything that may affect the fair presentation of the AFS must be considered. Is there any possibility that requirements of Company Law might affect the AFS?
The Companies Act governs the company from the birth of the company to it’s death, and while it exists. Amongst other things, there are requirements surrounding how the directors behave, the decisions they make and some of the transactions they enter into. This may impact you as an auditor when you assess management integrity. Also, it may indicate invalid decisions they may have made.
If transactions are governed by the Companies Act, then they are invalid if the Companies Act requirements haven’t been followed… invalid means that they shouldn’t have taken place… which will affect the occurrence of those transactions… this means that the AFS will be misstated in terms of those transactions.
There are also sections in the Companies Act that deals with the external auditor, their rights and obligations. If these govern your work as an auditor… you’d better know what they are!
This is not a comprehensive list of the important components of the Companies Act, but it does give you a better idea of why you need to know it, and how to focus on it as a student at all levels.
Keep this in mind when you study Company Law.