i) The minority shareholders and Evalyn and Edith should benefit from having the company's financial statements audited firstly because it gives assurance to the shareholders that the accounts show a true and fair view, because Evlayn and Edith are dealing with jewellery the chances of pilferage is high and therefore inventory valuations could be misstated. An audit insures that there aren't any misstatements or fraud by completing checks and gathering sufficient audit evidence. An auditor also insures that the accounts comply with the appropriate accounting policies and regulatory bodies. For example, an auditor will insure that Jewellers Ltd method of allocating depreciation is correct and the figures are accurate. In the United Kingdom ACCA and CIMA are the regulatory bodies, the auditor will be a member of these and will comply with the regulatory framework. Another benefit of auditing the financial statements is that public confidence in the company increases. If the accounts are audited it shows that they are true and fair and therefore when an investor looks at the accounts he knows that the accounts are reliable and that the investment is more trustworthy. The auditor also gives the manager guidance on how to improve internal control systems and management, he also gives advice on the financial reporting this helps the managers to reduce the level of risk within the company and refrain from it happening in the future.
ii) Preparing financial statements is simply collecting financial information about the income and expenditure that the firm has occurred and putting it into an understandable and readable manner for the stakeholders. Auditing on the other hand is checking that the financial statements are correct by going through each part of the statement and checking whether or not it complies with the regulatory framework, is measured accurately and shows a true and fair view. Therefore, it takes much longer to collate and acquire the information for an audit especially when there isn't already an internal auditor and the accounts are more reliable and so it costs more than just preparing financial statements.
A Material item is one which if omitted affects the financial statements considerably that is why it is very important and professional judgement is required. The level of materiality is different for every firm and depends on how much money the business deals in. When auditing financial statements the auditor has to look at quantitative and qualitative factors such as determining the materiality level of an item by comparing it to the group it is in, he may also look at previous year's figures and look at irregular transactions which could affect the businesses materiality level. In some cases it is also a legal requirement to show items such as director's fees even if the item isn't material hence it being a qualitative factor.
When performing an audit, an auditor will be required to collect sufficient evidence to back up his views on the audit. In jewellers' ltd, the auditor may check and count the inventory of jewellery to verify that it exists and that the valuations are correct by checking the receipts of the goods, the different types and barcodes registered against them. By doing this the auditor will have completed the procedure of inspection and recalculation. The purpose of carrying out this test is to make sure that all the inventory is actually there and by checking the receipts it shows that the items have actually been bought and not hired or leased and therefore the financial statements aren't misstated. It also helps the auditor to judge whether the inventory is valued correctly for example, some of the jewellery may get damaged through delivery and therefore the damaged items will have to be adjusted to the net asset value rather than the cost. Another test that could be carried out is on the basis of calculations. For example, the auditor may want to confirm that the method of depreciation used in jewellers ltd is correct and may ask an employee on how it is calculated, the employee's answer has to be tested by re-performing the task, so if the employees says that machinery is depreciated using the reducing balance method then the auditor must check to confirm the amount is correct and the method used is correct. By doing this the procedure of 'inquiry' is met and the objective of doing this is to test whether or not the information disclosed is correct and accurate. Observation is also a procedure followed by the auditor, in jeweller ltd's case a test could be done on observing the way the inventory is counted and stored, because most of the merchandise comes from abroad it is very important to count all the stock is there and that it is stored properly. By doing this the auditor observes how different tasks are done by which employees and what routines are being followed, this gives evidence of the operation of controls which help to prove other assertions.
An auditor's job is to 'audit' the financial statements and be independent from the entity they are auditing. Evalyn is suggesting that the inventory counting is the role of the auditor, however it isn't the role of the auditor in fact it is against the code of ethics, if the auditor offers additional services to the entity he isn't regarded as 'independent' because he is a part of the business and the results could be biased. Another point mentioned is the extra pay for supervising the count, again this is against the international standards on auditing this is because the independence is affected and the auditor may get too close to the staff and therefore the impact on his judgement on the financial statements may be biased. Another point in the passage, 'whatever a label says is in a box, will be in that box - there's no need to reopen any of them' this is also against the ACCA code of ethics and conduct because it isn't objective, the findings can't be relied on and if the auditor followed Evalyn's word he would be breaking the rules and the financial statements won't be based on rationale and research and therefore may be biased and unreliable.