Fred, the sole owner of a small hardware business, has been told that the business should have its financial statements audited by an independent CPA if the business is converted into a limited company. Fred, having some bookkeeping experience, has personally prepared the companys financial statements and does not understand why such statements should be audited by a CPA to report on whether it is in a true and fair view under the Companies Ordinance. Fred discussed the matter with Frankie, a CPA, and his questions are summarised as below:

1 Is it necessary to conduct audit if I can prepare the financial statements by myself?

2 What is a true and fair view then? I know that the figures are either right or wrong there are no in-betweens

a Describe the objective of a statutory financial statement audit. (7 marks)

b Explain to Fred what a true and fair view is. (8 marks)

c Frankie explained to Fred that as there will be conflict of interests between preparer and users of financial statements, audit is necessary.

Discuss why there could be conflict of interests between preparers and users of financial statements. How can auditing serve as a monitoring mechanism?