Text Book Notes

Text Book Notes - 1 LEARNING OBJECTIVE #1 Explain the...

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1 LEARNING OBJECTIVE #1 Explain the importance of auditing Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic (1) actions AND (2) events TO: Ascertain the degree of correspondence between the assertions and established criteria Communicate the results to interested parties RESULT: Reduction in information risk associated with the FS for the third party (investor) First party = auditor, second party = seller If auditor is independent of the second party and acts in the interest of the user, we have three- party accountability 1. Audits reduce the risk that decisions will be based on inaccurate information Auditors provide assurance as to the accuracy of accounting information This creates “three-party accountability.” THREE PARTY ACCOUNTABILITY Under three-party accountability: - The (external) auditor serves as an independent intermediary who lends credibility to the financial information (Also called: providing assurance as to the reliability of the information) The auditor is expected to act in the interest of the user of the information To meet the public interest, it is important that the auditor is trustworthy - Accounting attempts to record and summarize a company’s transactions into financial statements for the benefit of users Accounting is a function of the organization’s mgmt Preparation of financial information by management creates a conflict of interest between users of financial information and management “The objective of the audit of financial statements is to express an opinion whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework” 2. Critical to proper functioning of capital markets Without effective audits, modern capital markets cannot fulfill their role as efficient economic systems leading to high living standards Example An Effective Auditor complained that J. Joseph King and his chief financial officer had not disclosed that they allowed a bookkeeping error worth 1% of NI into the audited results demanded that King be removed from office Result: Board stood behind the CEO with a unanimous vote Deloitte quit as Molex’s auditor and wrote a blistering and detailed account of the affair for public disclosure at the SEC within 10-days the directors ousted King, promised to hire a new director with financial expertise for their audit committee
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The above example illustrates the work of effective auditors In audit societies : 1) economic activities are extensively monitored to ensure market efficiency 2) auditors monitor the effectiveness and efficiency of government Example Importance of Auditing Suppose you want to buy a Thai food restaurant for $3 million 1. Is the business worth $3 million? -
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Text Book Notes - 1 LEARNING OBJECTIVE #1 Explain the...

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