Auditing and Assurance

Main Objectives of an Audit of Financial Statements

The audit of financial statements is the independent examination of an entity's financial statements to enable the auditor to express an opinion on whether they are prepared, in all material respects, in accordance with the applicable financial reporting framework. Its main objectives are:

1. Primary (Principal) Objective — Expression of Opinion To express an opinion on the truth and fairness (or fair presentation) of the financial statements, i.e. whether the Statement of Financial Position, Statement of Profit or Loss and Other Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows and notes thereto give a true and fair view in conformity with the applicable framework (NFRS/NAS or other applicable standards).

2. Secondary Objectives

• Detection and prevention of fraud and errors: To detect material misstatements arising from fraud or error, and by the very existence of audit, to act as a deterrent against them.
• Detection of non-compliance: To ascertain compliance with laws, rules, regulations and directives applicable to the entity (e.g. Companies Act, tax laws, regulatory directives).
• Verification of assets and liabilities: To verify the existence, ownership, valuation and completeness of assets and liabilities.
• Evaluation of internal control: To assess the adequacy and effectiveness of the internal control system and to report material weaknesses (management letter).
• Reporting to stakeholders: To communicate the audit opinion and significant findings to shareholders, the board, regulators and other stakeholders.
• Safeguarding of resources: To help ensure that the entity's resources are used economically, efficiently and for the intended purposes.
• Reliability of financial information: To enhance the credibility and reliability of financial statements so that users can take informed economic decisions.

How Audit Supports Establishing Good Corporate Governance

Corporate governance is the system by which entities are directed and controlled, covering accountability, transparency, fairness and responsibility towards stakeholders. Audit supports good corporate governance in the following ways:

1. Independent Assurance to Stakeholders The auditor provides an independent, objective opinion on the truth and fairness of financial statements. This reduces the information risk of shareholders, lenders, regulators and the public, and builds trust in the management's stewardship of resources.

2. Strengthening Accountability of the Board and Management By examining the assertions made by management and reporting on them, audit holds the board and management accountable for their financial reporting responsibilities. It discourages manipulation of accounts, window dressing and creative accounting.

3. Enhancing Transparency and Disclosure Audit reviews the adequacy of disclosures in the financial statements and notes. This promotes full, fair and timely disclosure of financial and non-financial information, which is a core pillar of good governance.

4. Detection of Fraud, Errors and Irregularities Through substantive testing, analytical procedures and risk assessment, the auditor detects material fraud, misappropriation of assets and non-compliance with laws. This protects the interests of shareholders and other stakeholders and acts as a deterrent.

5. Evaluation of Internal Control and Risk Management The auditor assesses the design and operating effectiveness of internal controls and the entity's risk management framework. Recommendations in the management letter help the board to plug control weaknesses and improve the governance structure.

6. Support to the Audit Committee and Board The audit report and communication of key audit matters, significant deficiencies and fraud risks provide the audit committee and board with reliable information for oversight, oversight of management and strategic decision-making.

7. Compliance with Legal and Regulatory Framework Statutory audit ensures that the entity complies with the Companies Act, regulatory directives (e.g. those of NRB, SEBON, CAA Nepal) and tax laws. This legal compliance is a prerequisite for good governance.

8. Promoting Ethical Culture and Fraud Deterrence The auditor's independence, professional scepticism and ethical standards set an example and encourage an ethical tone at the top, which is essential for good corporate governance.

9. Improving Financial Discipline and Performance Regular audit encourages timely and accurate bookkeeping, budgetary discipline and efficient use of resources, thereby improving the overall performance and sustainability of the entity.

10. Basis for Stakeholder Confidence and Investment A clean audit opinion increases investor confidence, lowers the cost of capital and facilitates credit, investment and public trust — all of which are outcomes of sound corporate governance.

Conclusion Thus, audit is not merely a legal formality but a vital governance mechanism. By providing independent assurance, promoting transparency, strengthening accountability and improving internal controls, audit significantly contributes to establishing and sustaining good corporate governance in an entity.