Auditing and Assurance

Main objectives of an audit of financial statements

An audit is an independent examination of the financial statements of an entity, carried out to express an opinion on their truth and fairness. Its main objectives are:

1. Expression of an independent opinion — To enable the auditor to report whether the financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with the applicable financial reporting framework (NFRS/NAS in Nepal).

2. Verification of the reliability of financial statements — To ascertain that the statements are free from material misstatement, whether due to fraud or error, so that users can rely on them.

3. Detection of fraud and errors — To identify material misstatements arising from fraud or error, and to report them appropriately. (Primary responsibility for prevention and detection rests with management, but the auditor must plan the work to have a reasonable expectation of detecting material misstatements.)

4. Compliance with laws and regulations — To check whether the entity has complied with the applicable laws, statutes, rules and directives (e.g., Companies Act 2063, Income Tax Act 2058, NRB directives) and to report non-compliance.

5. Safeguarding of assets and proper use of resources — To verify the existence, ownership and valuation of assets, and to ensure that resources are used economically, efficiently and for the intended purposes.

6. Verification of the accounting system and internal controls — To review the adequacy and effectiveness of the internal control system and the books of account, and to suggest improvements.

7. Reporting to stakeholders — To communicate the audit findings and opinion to shareholders, the board, regulators and other stakeholders, thereby adding credibility to the financial information.

8. Compliance with statutory/legal requirements — To fulfil the legal obligation of audit imposed on companies, banks, cooperatives and public enterprises, and to certify the accounts as required by law.

How audit supports establishing good corporate governance

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

1. Ensuring accountability of management — By independently examining the stewardship of management over the entity's resources, audit holds the board and management accountable to shareholders and the public.

2. Promoting transparency and disclosure — The audit report and audited financial statements provide reliable, comparable information to stakeholders, reducing information asymmetry and strengthening trust.

3. Strengthening internal control — The auditor's evaluation of internal control and the management letter highlighting weaknesses help the board to correct deficiencies and prevent fraud, misappropriation and irregularities.

4. Supporting the audit committee and board — Independent auditors report to the audit committee, giving the board an objective basis to oversee financial reporting, risk management and internal control.

5. Detecting and deterring fraud and irregularities — The fear of detection through audit acts as a deterrent, protecting the interests of shareholders, depositors, creditors and the government.

6. Enhancing credibility of financial information — An unqualified (clean) audit opinion increases the confidence of investors, lenders and regulators, which is essential for raising capital and maintaining market confidence.

7. Compliance with laws and regulatory framework — Audit verifies compliance with statutory provisions and regulatory directives, which is a core element of good governance (e.g., NRB's corporate governance directives for banks).

8. Strengthening risk management — By assessing risks and reporting on significant matters, audit helps the board to identify and manage risks in a timely manner.

9. Supporting effective decision-making — Reliable audited information enables the board, shareholders and other stakeholders to take informed decisions.

10. Protecting stakeholder interests and public trust — Audit safeguards the interests of minority shareholders, depositors and the public, and thereby maintains trust in the corporate sector and the economy.

Conclusion: Audit is not merely a legal formality; it is a key instrument of accountability and transparency. By providing an independent opinion, evaluating controls, detecting fraud and reporting to the board and stakeholders, audit directly supports the pillars of good corporate governance — accountability, transparency, fairness and responsibility.