Title: Professional Issues
1Professional Issues
- Finance and Accounting in Business.
2Learning Outcomes
- Know and differentiate between the different
sources of capital for business ventures. - Understand the importance of budgeting for a
business.
3Learning Outcomes
- Understand the process involved in calculating
costs and setting prices. - Been able to calculate assets depreciation.
- Know the annual statements that need to be
submitted by a company and understand the
characteristics of each of them.
4Class Contents
- Need for capital and sources of funds.
- Budgeting Sales and Expenditure.
- Sales, Costing, Depreciation and Pricing
5Class Contents
- Annual Statements
- The Balance Sheet
- The Profit and Loss Account
- Auditors Limitations and Responsibilities
6Need for Capital
- To start a new venture, there is always a need
for money. - Invoices are normally issued at the end of the
month. - Clients usually pay their invoice from 1 to 2
months after receiving them.
7Need for Capital Software Companies
- There are more expenses
- Salaries, however small, for the group and for
any other staff they may employ. - Rent, rates, heating and lighting of the premises
used. - Equipment and consumables.
- Costs of advertising and marketing the products.
- Miscellaneous expenses, ranging form company
stationery to travelling expenses for any trips
that may be necessary.
8Need for Capital Software Companies
- While packages are being developed, there will be
no revenue coming into the company. - However successful the development of the
packages, it will take some months before sales
reach a level sufficient to cover the companys
on-going costs, so even after development is
complete, more cash will be needed
9Need for Capital Business Plan
- Raising Money Business Plan
- The purpose is to explain the plans to potential
funders and to convince them that - The plans are well thought out
- The venture is likely to be successful.
10Need for Capital Business Plan
- A Business Plan Usually contains
- A description of what the company will be doing,
- information to show that the company is
technically feasible and that founders of the
company have the necessary expertise. - An assessment of the size of the market and the
competition - A prediction of the financial performance of the
company
11Sources of Funds
- Government policy in the UK has, over recent
years, strongly encouraged the growth of small
companies and, as a result, there are many
possible sources of funding. - All sources of funding can be grouped in 3
categories
12Sources of Funds
- Grants
- Loans
- Sales of Equity
13Sources of Funds - Grants
- A Grant is a sum of money given to a company by
another organization. - The company is obliged to demonstrate that it has
been used for the purpose for which it was
intended. - It is not intended that the grant should ever be
paid back to the organization which gave it .
14Sources of Funds - Grants
- Availability of Grants
- Government (Local or National)
- European Commission Sources
- Charities
- Very often, grants are limited to a certain
proportion of the money spent on a particular
development and are conditional upon the
remainder being raised from other sources
15Sources of Funds - Grants
- Availability of grants for new companies depend
on - Where the company is located.
- How many people it expects to employ.
- On government policy at the time.
16Sources of Funds - Loans
- A Loan is a sum of money lent to the company.
- Interest have to be paid at a rate that may be
fixed or variable. - The loan is usually for a limited period.
17Sources of Funds - Loans
- The company is liable to pay back the loan and,
if the company goes into liquidation, the lender
is entitled to recover the loan from the sale of
the assets of the company. - In most cases, security is required for the loan
- The loan is associated with assets owned by the
company in much the same way that a mortgage is
associated with a house.
18Sources of Funds - Loans
- Loans can be divide into 3 categories
- Overdraft
- Long-term loans
- Soft Loan
19Sources of Funds - Loans
- Overdrafts They are offered by banks and allow a
company (or an individual) to spend more money
than is in its account, up to a specified
maximum. - Interest is only payable to the amount that is
actually owed. - Interest is usually very low.
20Sources of Funds - Loans
- Advantages
- Most flexible and cheapest way to borrow.
- Drawback
- A bank can withdraw overdraft facilities without
warning.
21Sources of Funds - Loans
- Long Term Loans Are usually made for a fixed
period of time and have a fixed interest. - The borrower receives the capital at the start of
the period of the loan - He is committed to paying interest on that amount
through the period of the loan.
22Sources of Funds - Loans
- Provided the borrower pays the interest on time,
the lender cannot call in the loan. - The borrower must repay the capital at the end of
the period
23Sources of Funds - Loans
- Soft Loans Are available to start up companies
as a result of government initiatives. - It is a loan on terms which are less demanding
than those that prevail for commercial loans. - The interest rates may be lower than commercial
interest rates and security is not demanded.
24Sources of Funds Equity Capital
- Equity capital is money paid to the company in
exchange for a share in the ownership of the
company. - The relationship between loan capital and equity
capital in a company is important and it is known
as gearing.
25Sources of Funds Equity Capital
- Shareholders are at a much greater risk of
getting a poor return on their capital or even
losing it completely than are lenders. - In compensation for this, they stand to make
greater profit than lenders if all goes well.
26Gearing Example
- A company has a share capital of 100 and a loan
capital of 10.000 at 10. - If the company makes an operating profit of
1.000, the interest charges will consume all the
profits and the shareholders will receive
nothing.
27Gearing Example
- If the companys operating profit doubles, to
2.000, the lender will still receive 1.000 but,
neglecting taxation and assuming that all the
profit is distributed to the shareholders, the
shareholders will receive 1.000, a rate of
return of 1000 - As the profit increase, the value of the company,
and hence the value of the shares, increases. - If the company is sold, the shareholders will get
much more than their original 100 investment,
but the lender will still only be entitled to
their original 10.000, plus interest.
28Gearing Example
- If the company is unsuccessful and goes into
liquidation, the lenders will be at the front of
the queue of people to whom money is owed,
whereas the shareholders will get nothing until
everyone else has bee paid in full
29Budgeting
- A Budget is a prediction of the future financial
position of an organization covering the current
or the next financial year. - A complete budget will include predictions for
the annual financial statements.
30Budgeting
- The Annual Financial Statements Contain
- Balance Sheet.
- Profit and Loss Account.
- Auditors Report.
- The ordinary manager in a company is much more
concerned with budgeting for income and
expenditure than with other aspects of budgeting.
31Budget Example - Expenditures
32Budgeting
- Budgeting is an iterative process.
- Adjustments to the budget need to be made
repeatedly until budgeted sales exceed budgeted
expenditure with a reasonable profit margin.
33Budgeting
- The first version of the budget is likely to show
expenditure exceeding income. - Operating managers will want to expand their
operations while the sales and marketing
department will not wish to give hostages to
fortune by being over-optimistic about the volume
of sales it can generate.
34Budgeting Sales and Order Intake.
- Monitoring the level of sales is an important
managerial activity and needs to be supported by
adequate information. - The amount of sales in a month is the total value
of the invoices issued during the month - The order intake is the total value of the orders
received.
35Budgeting - Costing
- The price at which an organization decides to
sell a product or a service depends on - The cost of producing the product.
- The market conditions. (price and availability of
competing products, elasticity of the demand)
36Budgeting - Costing
- The cost of producing an item or providing a
service is not a well-defined quantity. - Different definitions of cost need to be used for
different purposes.
37Budgeting - Costing
- Costs can be grouped into four categories
- Raw materials and bought-in items.
- Costs of equipment.
- Direct labour costs
- Overheads.
38Budgeting Raw Materials
- Materials which are bought by a company and
processed as part of the companys manufacturing
process are known as raw materials. - Examples
- Steel bought by motor manufacturers.
- Sulphur bought by chemical companies to
manufacture sulphuric acid.
39Budgeting Bought in items
- Companies also buy items that are incorporated,
unchanged, into their products. Such items are
known as bought-in items - Examples
- Computer manufacturers buy ICs from specialist
suppliers. - Motor manufacturers buy door locks to incorporate
in the cars.
40Budgeting Costs of Raw Materials and Bought in
Items
- There is no difficulty in determining how many of
which bough-in item, or how much of each type of
raw material, goes into the final product. - A company which uses chips or sulphur will
usually carry a stock
41Budgeting Costs of Raw Materials and Bought in
Items
- it is quite likely that not all the stock was
purchased at the same time or at the same price. - It may not be known from which batch the chips or
the sulphur used in producing a give unit of
output came, - how do we decide which price to use in assessing
its costs?
42Budgeting Costs of Raw Materials and Bought in
Items
- The usual practice is to adopt a FIFO policy for
costing regardless of the order in which the
items or materials are used. - The cost of the oldest batch is used until a
quantity equal to the size of that batch had been
used, and then the cost of next batch is used in
the calculations
43Budgeting Costs of Raw Materials and Bought in
Items
- In the case of raw materials or bought-in
components whose price may fall dramatically as a
result of over-supply, a FIFO policy for costing
may render a companys prices uncompetitive and
the current cost then has to be used instead.
44Budgeting Cost of Equipment
- The cost of a unit of output from an asset
depends critically on its utilization. - Example What is the cost of owing a car?
-
45Budgeting Cost of Equipment
- A car is bought for 10,000.
- It was kept for 3 years and then sold for cash.
- Each year the car was used for 10,000 miles.
46Budgeting Cost of Equipment
- The effects of inflation is going to be neglected
(The price of a new equal car remains the same
all the time). - The selling price of the car is expected to be
4,200 - (the exact figure will depend on the make and
model of the car, the physical shape of the car
and the geographical location).
47Budgeting Cost of Equipment
- Different Costs Involved
- Depreciation Is the difference between what was
paid for the car and the price it was sold for - Interest that needs to be paid on borrowed money
- Opportunity costs Are cost generated as a result
of being unable to take up another opportunity of
using the capital - Example putting the money in the bank to
generate interest at a fixed rate. Instead of
buying the car. (at 3 generate 927)
48Budgeting Cost of Equipment
- These costs are called fixed costs that is, they
do not vary with the amount that we use the
equipment. - Other examples of fixed costs include road tax
(140/year) and insurance (700/year).
49Budgeting Cost of Equipment
- variable costs are costs which vary in
proportion to the amount that the equipment is
used. - The most obvious of these cost in the car example
would be fuel.
50Budgeting Cost of Equipment
- Example Assuming price of fuel 0.7/lt and
average consumption is 10 miles/lt - The cost per mile will be
51Budgeting Cost of Equipment
- Other variable costs vary in a less smooth
manner - Example A set of tyres will last for some
40,000 miles if they are properly looked after a
replacement set might cost 200. - This gives a cost of 0.5p per mile for wear and
tear of the tyres. - Since only 30,000 miles have been covered at the
moment of sale, nothing should have been spent in
the replacement tyres.
52Budgeting Cost of Equipment
- Servicing costs are similar in nature assuming
that servicing is needed every 10,000 miles (at
150/service) and the service is not done just
before selling the car, two services will need to
be added to the cost of the car.
53Budgeting Cost of EquipmentCost of Owing a Car
for 3 years
54Budgeting Cost of Equipment
- If the costs are distributed over the 30,000
miles that have been driven in the car, the cost
per mile will be 38.82p. - This cost per mile is very dependant on how many
miles we drive in the three year period, that is,
on the utilization of the car. - If the mileage is doubled (60,000), allowing for
additional fuel and servicing plus 200 for a new
set of tyres and 500 for repairs, the total cost
will rise to 14,897 and the cost per mile will
fall to 24.82p
55Budgeting Cost of Equipment
- This car example is what economists would call an
ex post calculation. - It is based on a knowledge of what actually
happened to the asset (car) - It can only be carried out after the asset has
been sold (or disposed at scrap value).
56Budgeting Cost of Equipment
- For costing a piece of machinery in industry, an
ex ante estimate of what will happen is needed. - This is an estimate that can be made at the start
of the life of the machine.
57Budgeting Cost of Equipment
- This also means making assumptions about what
happens to the average machine of that type in
the same environment. - The same type of calculation will be carried out
(excluding the lost of capital) but depreciation
needs to be looked at more carefully.
58Budgeting Cost of Equipment
- Depreciation can be looked at in two ways
- As the reflection of the diminishing value of the
item both its market value and its value to the
company as its life passes. - As a way of distributing the cost of owning the
item over the work which it produces.
59Budgeting Cost of Equipment
- There are several ways of calculating
depreciation. - The two most commonly used are
- Straight Line Depreciation
- Reducing Balance Depreciation
60Budgeting Depreciation
- Calculation Parameters
- Initial cost of a unit of the produced item C
- Life of the item (likely) in years n
- Resale or scrap value of the item (reached at the
end of the item life) S
61Depreciation Straight Line
- Then the annual depreciation is calculated as
62Depreciation Straight Line
- The VALUE of the item at the end of year m is
- Straight line depreciation is simple and adequate
for many purposes. In particular it is a
reasonable way of distributing the cost of owning
the item over its useful lifetime.
63Depreciation Reducing Balance
- If we want the depreciated value of the asset to
reflect its diminished market value, straight
line depreciation is unrealistic. - The resale value of an asset normally falls much
more in absolute terms during the earlier years
of its life than during the later years.
64Depreciation Reducing Balance
- The reducing balance method of calculating
depreciation reflects this. - A factor r (0ltrlt1) is chosen as the fraction by
which the value falls in each year
65Depreciation Reducing Balance
- Using Reducing Balance, the annual depreciation
will be - An the price of the asset at the end of year m
will be
66Depreciation Reducing Balance
- The value of the factor r should allow for the
scrap price to be reached at the end of the life
of the asset - With the reducing balance method, the value of
the asset can never fall to zero. The effect of
no resale value can be obtained assigning S1
67Budgeting Depreciation
68Budgeting Depreciation
69Budgeting - Depreciation
- For the purpose of internal costing, a company is
free to use whatever methods it wishes for
calculating depreciation. - In its published accounts the same method must be
used for all assets of the same type - It is common to use the same methods for internal
costing as are used in published accounts.
70Budgeting Cost of Labour
- The costs of labour are basically all the costs
associated with an employee of the company. - If an employee works for one hour in order to
produce an item, what cost should we attribute to
the employees time?
71Budgeting Cost of Labour
- First, the total cost of the employee needs to be
calculated - Example Suppose the annual salary of the
employee is 15,000. - In addition to the salary, the company is obliged
to pay what is known as the Employers National
Insurance Contribution. - This depends on the salary in a rather
complicated way for a salary of 15,000, it
comes to about 1,500.
72Budgeting Cost of Labour
- If the company runs a pension scheme, then it is
normal for the employer as well as the employee
to make a contribution to this - We will assume that the employer contribution is
6 (900). - In some cases, there may be other allowances
payable, such as car allowances or clothing
allowances (which we will ignore for this
example).
73Budgeting Cost of Labour
- The total cost of employing the employee for the
year is
74Budgeting Cost of Labour
- Second, the number of hours worked in a year
needs to be calculated - Assuming a five day week, there are 260 possible
working days in a year. I - If there are 20 working days of holiday plus 8
days of public holidays, the number of possible
working days is reduced to 232. - We must make some allowance for days off for
sickness. The best that can be done is to take
the average of the company as a whole, since we
cannot predict what will happen to an individual
employee this might be 8 days. - This brings the total of days worked down to 224
75Budgeting Cost of Labour
- If we assume a seven hour day, the number of
hours worked is 1568. The cost per hour is
therefore
76Budgeting - Overheads
- Some costs like raw materials, use of specific
machinery and some labour costs, can be directly
associated with specific products or services. - Therefore they are taken into account directly in
determining prices.
77Budgeting - Overheads
- Other costs cannot be directly associated with
specific products or services - sales and marketing costs
- managers costs.
- costs related to the preparation of bids.
- They must still be covered by the total revenue.
These are called Overheads.
78Budgeting - Overheads
- Some of the overheads can be associated with
specific parts of the organization and should be
covered by the revenue earned by those parts
these are called departmental overhead. - Other overheads can only be associated with the
whole organization these are known as corporate
overheads.
79Budgeting - Overheads
- The concept of an overhead may vary from one
organization to another - A software house based at a single site may find
it impracticable or not worthwhile to associate
the cost of rent, rates, heating and lighting
with individual projects or departments it will
therefore treat those as corporate overheads. - A computer manufacturer producing peripherals on
one site, processors on another, and system
software on a third, will treat the cost of these
premises as departmental overheads. - A company that runs a number of aluminium
smelters at different sites will associate costs
of each site with the aluminium produced there.
80Budgeting - Overheads
- There is no right way of allocating overheads
to individual parts of the organization or to
individual products. - How it is done depends partly on the policy of
the organization and partly on the nature of the
overhead.
81Budgeting - Overheads
- There are two basic approaches to handle
overheads as costs - overheads can be added to costs of the inputs
(labour, machine time, etc.) - or they can be added to the costs of the outputs
(products and services). - In a software house, overheads are usually
recovered by adding them to the direct labour
costs.
82Budgeting - Overheads
- A manufacturing company is more likely to recover
overheads by adding a mark-up to the direct cost
of each product. - It is usual to make the amount added for
overheads a fixed percentage of the costs to
which it is being added, whether this is an input
or an output.
83Budgeting - Overheads
- With the overall constraint that all overheads
must ultimately be recovered from revenue, the
following principles should apply to the way that
overheads are distributed - Consistency similar costs should be treated in
similar ways. - The treatment of overheads should encourage
managers to behave in ways which optimize the
performance of the company as a whole rather than
just the performance of their own department. - The treatment of overheads should not distort the
price structure of the companys products so as
to make them uncompetitive.
84Budgeting - Overheads
- It should be remarked that it is easier to
- enunciate these principles in general than
- it is to implement them in practice.
85Budgeting - Pricing
- The prices that a company charges for its
products and services are ultimately constrained
by the long-term requirement that the revenue
from its trading operations must exceed the costs
of those operations. - For a company which provides a range of products
and services, the unit price of each item can be
adjusted to maximize the companys profit and
need not necessarily be related to the cost of
providing the item
86Budgeting - Pricing
- Using Math
- A company produces n products.
- The cost of producing a unit quantity of product
i is ci. - The quantity of product i which can be sold at a
unit price of pi is
87Budgeting - Pricing
- The trading profit can be expressed as
88Budgeting - Pricing
- It is desirable that the choice of pi is done in
a way that it maximizes this equation. - This choice of the pi will be constrained by
limitations on the qi resulting from the fact
that the company only has limited resources and
cannot produce indefinitely large quantities of
any of the products
89Budgeting - Pricing
- For most companies, the way in which qi depends
on pi is much too uncertain for this approach to
be useful. - Pricing in such circumstances is usually based on
the cost of producing the product or providing
the service, plus a percentage for profit
90Budgeting - Pricing
- In some industries, it is normal to discount
prices for quantity or for favoured customers so
that published prices must be sufficiently high
to allow a sale to be profitable even after
discounting.
91Budgeting Pricing in Software Companies
- Software companies are faced with pricing in
three contexts - Pricing a bid to provide services, such as
consultancy, design or programming, with payment
based on the effort supplied (time and
materials). - Pricing a bid for a contract to supply software
at a fixed price. - Pricing a software product which they have
developed or for which they are agents.
92Budgeting Pricing in Software Companies
- Biding for Time and Materials
- The price will depend on the cost of labour plus
overheads. - The price may need to be modified to take into
account a number of factors
93Budgeting Pricing in Software Companies
- Factors
- How badly the company needs the business
- The Desirability of the client
- The general level of the market
- All the factors will affect the pricing offered
to gain the bid for the contract.
94Budgeting Pricing in Software Companies
- Fixed Price Contract
- All the costs need to be calculated beforehand
- Estimation of resources needed
- Cost of Labour Travel and Subsistence Expenses
- Costs for Bought in products (maintenance,
operating costs, floor space, insurance, etc.)
95Budgeting Pricing in Software Companies
- Costs of financing the work (due to usual delay
in payments) - Costs of servicing the final product (to cover
guarantee period) - Increase in price according to level of risk
perceived in the contract (can be up to 50
additional.
96Budgeting Pricing in Software Companies
- Pricing Software Products
- The resource used in developing the products
should be known and from these the costs of the
development calculated . - The costs of maintaining and supporting the
product must also be estimated - They usually consists on a fairly substantial
fixed cost plus a small variable element
depending on the number of copies sold.
97Budgeting Pricing in Software Companies
- The cost of selling the product must also be
taken into account (Strategies for level of sales
are different) - PRICING IS CRITICALLY DEPENDANT ON THE STIMATE OF
LIKELY SALES
98The Annual Statement
- There are three important annual statements that
a company must supply according to the Companies
Act 1985 - Balance Sheet
- Profit and Loss Account
- Auditors Report
99Balance Sheet
- A Balance sheet is a snapshot of the financial
state or an organization at a single instant
(normally the end of the organizations financial
year). - It shows the value of what the organization owns
(assets) and what it owes (liabilities).
100Balance Sheet
- A Balance sheet must balance
- the total assets and the total liabilities should
be equal. - To achieve this, a balancing item needs to be
included on one side of or the other - This item is usually labelled excess of asset
over liability
101Balance Sheet
- In commercial balance sheets, the assts and
liabilities are grouped into various categories
and a single figure is given for each category. - There will be several notes to the balance
sheet describing the basis of the account and
giving more detail about certain items such
items will cross reference the notes
102Balance SheetExample
103Balance Sheet
- Assets are divided into
- Fixed Assets
- Current Assets
- Liabilities are also divided into
- Current Liabilities (due in less than 1 year)
- Long Term Liabilities
104Balance Sheet - Fixed Assets
- They contribute towards the company productive
capacity - They depreciate according to the company
depreciation policy - They can also be subdivided into
- Investments
- Tangible Assets
- Intangible Assets
105Balance Sheet - Current Assets
- They are items which are bought and sold in the
course of the companys day to day trading
activities. - They must be valued at the lower of cost and net
realizable value (the money that would be
obtained by selling them, less any expense of the
sale)
106Balance Sheet - Current Assets
- Manufacturing companies will usually have items
in their list of current assets covering stock of
finished products or raw materials. - Contracting companies will usually have an item
for amounts recoverable on contracts or work
in progress, that is work being carried out
under contract to clients that has not yet been
billed.
107Balance Sheet - Current Assets
- The valuation of any of these items is subject to
a degree of uncertainty. - The finished goods have not yet been sold it
might prove impossible to sell them. - The work in progress value on a software contract
may be based on the assumption that the software
is 90 complete, but software projects have been
know to remain 90 complete for a very long time
108Balance Sheet - Liabilities
- The liabilities section of a commercial balance
sheet effectively distinguishes between current
liabilities, and long term liabilities. - It is usual practice to arrange current
liabilities next to current assets in the balance
sheet so that they can be deducted to give a
figure for net current assets
109Balance Sheet - Liabilities
- The phrase provisions for liabilities and
charges refers to items which the company knows
it will have to pay but whose precise amount may
be uncertain - Example tax on previous years earnings which
has still to be assessed. - work which may have to be carried out by the
company under warranty.
110Balance Sheet Net Assets
- It is customary to show how the net assets have
come about - Using the Example
- Called-up share capital is the face value of the
shares that have been issued. - The figure from the profit and loss account is
the total value of the profits and losses made by
the company since it was established - The share premium reserve is the extra money
raised when shares have been sold at above their
face value
111The Profit and Loss Account
- A profit and loss account shows what has happened
to an organizations financial position over a
period of time (usually 1 year). - It records the money received and the money spent
during the period. - It is also known as income and expenditure
account in the case of non-profit making
organizations.
112The Profit and Loss Account
113The Profit and Loss Account
- There is a distinction between cost of sales
and other operating expenses. - This distinction is an uncertain one and some
companies do not show the items separately. - Example For a package software company, there is
a real difference between the expenditure on - Selling, printing documentation, installing
software, etc. all of which are the costs of
sale - The development of new versions of existing
packages or on new products, which would come
under the heading of other operating expenses.
114The Profit and Loss Account
- The bottom line of the profit and loss account
shows the retained profit for the year, that is
the profit not paid out in tax or dividends to
shareholders. - This profit is added to the cumulative retained
profit in the previous years balance sheet to
give the value of the retained profit shown in
the new balance sheet.
115Auditors Report
- The Companies Act 1989 requires that company
accounts should be accompanied by an auditors
report. - The purpose of the report is to provide members
of the company and the public at large with an
assurance that, in the opinion of the auditors,
the accounts give a true and fair view of the
state of the affairs of the company
116Auditors Report
- It is important to understand the limits of
auditors responsibilities. - Accounting standards permit the figures in the
annual statements to be presented in a variety of
different ways. - The auditors responsibility is limited to
certifying that the accounts have been prepared
in accordance with these standards - Auditors have no authority to question whether
the particular choices are the most appropriate
for the company, provided that they are used
consistently
117Auditors Report
- there is the issue of whether the company is a
going concern. - is the company is likely to survive its next
financial year? - Example
- The balance sheet and the profit and loss account
present a picture of a healthy company. - The auditors can certify is true and fair,
- and yet the company has little chance of
surviving the next twelve months (depending on
the type of trade).
118Auditors Report
- If auditors have reason to suspect that the
company is a going concern, they are expected to
carry out procedures to test the position. - Typically they examine cash flow predictions and
seek assurances that suitable credit facilities
will be available over the next 12 months. - If they have no such suspicion, they are not
required to take such action
119Auditors Report
- The primary responsibility for preventing and
detecting fraud lies with the directors of the
company, not with the auditors. - Auditors, however, do have a responsibility to do
their work in such a way as to have a reasonable
expectation of finding anything seriously
misleading in the financial statements. - If they find evidence of fraud, they have the
duty to report it to the directors.