January 26, 2022

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Concept of Stewardship on Audit. What you should know

Concept of Stewardship on Auditing. What you should know
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Understanding stewardship is important to an audit of a business. This is true because the relationship between directors and the owners/shareholders of an entity is paramount. The shareholders appoints the auditor. But it is the board of directors that recommend the external auditor.

Definition — What is Stewardship?

Stewardship is about the responsibility of the directors to manage the resources entrusted to them by shareholders. It can be defined as the fiduciary relationship that exists between the shareholders and the directors. This relationship requires the board to manage the resources entrusted to them with care and to report the usage of the resources.

Relationship between Stewardship and Accountability

Stewardship is related to accountability. How? Accountability arises as a result of stewardship function of management. Management has resources on their hand. This must be managed efficiently and effectively (stewardship) Therefore, it is also their duty to report how the resources were managed (accountability).

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Key Explanations

Fiduciary relationship. The relationship between the board of directors and shareholders are more of fiduciary. That is, it is based on trust. This means that shareholders believe the top management team will exercise caution in handling the resources in their care.

Responsibility. Stewardship means responsibilities have been given to the board. Therefore, it is their duty to manage the resources handed to them with care. Also, with due diligence. They also ensure avoidance of wastage of organization’s resources.

What resources. The resources provided by shareholders are equity investments. This fund is used to buy other resources needed to run the business. The fund is used to acquire Properties, plants and equipment. Also, it is used to employ skilled humans. Humans are required to achieve the entity’s goals. The resources is used to build reputation for the company.

Small Business, Stewardship and Audit

In small businesses, it is difficult to distinguish between owners and management. In most cases, it is the owners that run the businesses. However, the law now allows this one person to own a company. This means the person is seen as both the shareholder and manager/director. Which makes him two persons. Therefore, the manager of a small business needs to be responsible for how he manages his business resources and reports the same. If he or she avoids his stewardship role, the business may crumble.

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How Stewardship affects Audit

It is important for auditors to understand the stewardship role. It is the responsibility of the auditor to ensure that the directors report correctly and clearly how it managed the resources of shareholders. To this end, it is possible for the board to pressure the auditor to state an unqualified report. Though, they are failing on their stewardship duties. In such a case, the external auditor will have to choose between keeping his job or reporting the true and fair state of the entity to the shareholders.

Conclusion

The stewardship role is a fiduciary relationship between the board of directors and shareholders. It ensures that the management team responsibly manages the resources entrusted to them. And are accountable by providing adequate financial reports. In achieving this, the auditor ensures that the board of directors report the correct state of affairs of the entity to the owners. More so, the audit firm may decide between keeping their job or report the true and fair view of the company to the shareholders.

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