Chapter 1 part 1 - Auditing 442-01 Chapter 1 1.29 The...

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Auditing 442-01 Chapter 1 1.29 The objective of external auditing is to provide an opinion on the reliability of the financial statements of a publicly traded company. An integrated audit also provides an opinion on the effectiveness of internal controls. Auditing is essential to the public to keep a free-market economy operating. The users of financial statements need an unbiased, trusted opinion in order to invest their money into the economy. 1.30 The special function of an auditor is to be a “public watchdog.” It is their responsibility to protect the public’s investments and the free-market. Many people depend on the auditors’ work, but the most important user is the public. 1.31 The need for an independent assurance of information arises from: Potential bias – Management is in an unbiased position because they want their companies to do better. There could be a temptation to bend GAAP in order to increase their pay. Remoteness – The users of financial statements are management are separated by geographical distance and the availability of information for each party. Most users are not directly involved with operations, so they rely on the financial statements. Complexity – The nature of some business transactions and information are complex, so it can be difficult to determine how to present it. Consequences – The decisions that users must make is supported by the financial statements. These decisions have many consequences, so users need reliable information. 1.32 An audit enhances the quality of the financial statements because it is an unbiased, trusted opinion that management is portraying the accurately. Because management is directly involved in the company and needs it to succeed, there is potential for bending numbers to work in their favor. An auditor’s opinion is needed for the public to trust the free-market. An audit doesn’t guarantee that the
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