Independent auditing of financial statements is one of the best known services that certified
public accountants provide; however, it is also the least understood.
Over 47 million investors own shares in more than 14,600 publicly held U.S. companies. Such
companies are required to issue financial statements. CPAs are engaged to add credibility to
management's financial representations by giving assurance that the financial statements
conform to generally accepted accounting principles. The concept of the independent audit has
been a key element in the growing number of shareholders willing to invest in the future of this
nation's businesses.
CPAs have acquired the expertise to give a professional opinion on the overall fairness of a
company's financial statements from having met the following requirements: obtained at least a
college degree or its equivalent; passed a rigorous two-and-a-half day national examination;
and obtained specific experience to qualify for the CPA certificate and a state license. CPAs
are further guided by the accounting profession's basic tenets of independence, objectivity, and
integrity.
Before investors or other interested parties can determine how much they are able to rely on
the auditor's report, they must first gain a general understanding of what an audit is and what it
is not.
What an audit is not
The financial information upon which the audit is based is prepared not by the auditor, but by
management.
An auditor does not express a judgment on the competence of management, advise on the
desirability of investing in or lending to a company, nor assure that employees are honest and
competent.
The CPA uses sophisticated testing techniques and professional judgment, within the
parameters of established standards, to reach an informed opinion on the overall fairness of the
financial statements in accordance with generally accepted accounting principles.
Although the purpose of an audit is not to uncover all fraud, the auditor is required to design the
audit to provide reasonable assurance that material errors or irregularities that exist in the
financial statements are detected.
Characteristics of an audit
It is virtually impossible for a CPA to examine all transactions recorded in financial statements.
The auditor bases his or her opinion on selective testing using sampling techniques. Audits
provide an economical and reasonable level of assurance that the financial statements are free
of material misstatements, rather than a guarantee of absolute accuracy.
Before forming an opinion, the auditor must consider the company's internal control structure,
which is divided into the control environment, accounting system, and control procedures. The
auditor uses this knowledge to identify the risk of misstatement in the financial statements and
then designs procedures to reduce that risk.
The auditor also is required to use analytical procedures, which are evaluations of financial
information, in the planning and final review stages of all audits.
In addition, the auditor is obligated to consider whether the overall audit results raise substantial
doubt about the company's ability to stay in business. If there is doubt that the company can
continue as a "going concern", an explanatory paragraph must be included in the audit report.
The auditor's standard report
When an audit is completed, the auditor issues a report that states the CPA's responsibility, the
nature of the work performed, and the conclusions reached.
The auditor's standard report consists of three paragraphs: an introductory paragraph, a scope
paragraph, and an opinion paragraph. The introductory paragraph differentiates management's
responsibilities for the financial statements from the auditor's responsibility to express an
opinion on them.
The scope paragraph explicitly states that the audit was planned and performed to obtain
reasonable assurance about whether the financial statements are free of material errors or
irregularities. It also provides a brief description of what is involved in an audit and states that
the auditor formed an opinion on the financial statements taken as a whole.
The third or opinion paragraph presents the auditor's conclusions.
Recent professional developments
Quality control is a vital part of a CPA's practice in that it helps ensure that appropriate
standards are followed. In 1988, AICPA members voted to require regular independent
reviews of their accounting and auditing practices.
In April 1988, the AICPA Auditing Standards Board responded to the public's concerns and
misperceptions about what an audit is and what auditors do by issuing nine new statements on
auditing standards. These standards, most of which are effective for audits of financial
statements periods beginning on or after January 1, 1989, are designed to improve auditor
performance and auditor communications.
One of the new standards revised the auditor's standard report so that it gives clearer
descriptions of the auditor's responsibility, the work the auditor does, and the assurance the
auditor provides. This is the most substantial change in the auditor's standard report in forty
years.
Other new standards cover the detection of fraud and illegal acts, more effective audits, and
improved internal communications.
In summary
The auditor's report is intended to communicate the auditor's responsibility and conclusions
reached. The report is set forth in standardized wording that has a specific meaning. At times,
because of particular circumstances, the auditor may modify the report. In such cases, the
reasons for any modification are noted. When CPAs affix their names to these reports, their
opinions are not to be treated lightly. Their professional integrity and reputation are at stake.
The purpose of an audit
The primary objective of an audit is to provide reasonable assurance that the financial
statements prepared by management are fairly presented in conformity with generally accepted
accounting principles and do not contain material misstatements. These include
errors-unintentional misstatements or omissions in financial statements-and
irregularities-intentional misstatements or omissions. (Misstatements are considered material if
they are significant enough to make a difference in the decisions of a reasonable financial
statement user.)
This assurance, in the form of the CPA's opinion, is obtained by testing the data underlying
financial position, results of operations, and cash flows. To do this, the CPA is guided by
statements on auditing standards issued by the Auditing Standards Board of the American
Institute of CPAs (AICPA). Also, subjective professional judgment is involved.
The auditor then forms one of the following types of professional opinions:
Unqualified (no significant limitations affected audit performance and no material deficiencies
exist in the financial statements)
Qualified (the scope of the auditor's work is significantly restricted, or there is a material
departure from generally accepted accounting principles)
Disclaimer (restrictions in the audit's scope are so pervasive that the auditor cannot form an
opinion on the fairness of the presentation)
Adverse (departures from generally accepted accounting principles are so significant that the
financial statements do not fairly present the company's financial position)
The basic point to remember is that an opinion is just that-an opinion indicating that a
professional judgment, not a guarantee, has been given on management's financial statements.
Any user must carefully review such financial statements and all related footnotes, in addition to
the auditor's report.
 |
 |
 |
 |
 |
 |
 |
 |
| |
 |
| |
 |
| |
 |
| |
 |