management. Management has control over the accounting systems. They are not only responsible for the financial reports to investors, but they also have the authority to determine the way in which the information is presented. 1.3 The Auditor, Corporations and Financial Information Investors and creditors may have different objectives than management (e.g., management prefers higher salaries and benefits (expenses), whereas investors wish higher profits and dividends). Investors and creditors must depend on fair reporting of the financial statements. To give them confidence in the financial statements, an auditor 2 provides an independent and expert opinion on the fairness of the reports, called an audit opinion. The Importance of Auditing It can be said that the function of auditing is to lend credibility to the financial statements. The financial statements are the responsibility of management and the auditor’s responsibility is to lend them credibility. By the audit process, the auditor enhances the usefulness and the value of the financial statements, but he also increases the credibility of other non-audited information released by management. 3 WorkfileContents.doc
WorkfileContents.doc 5 The Expectations of Auditors The importance of the company as a potential generator of wealth is increasingly understood, and so is the impact that a company’s activities have on society and the environment. This has led to the expectation by investors that more information than just financial statements should be provided about a company. Public expectations go further and include questions such as: Is the company a going concern 4 ? Is it free of fraud? Is it managed properly? Is there integrity in its database? Do directors have proper and adequate information to make decisions? Are there adequate controls? What effect do the company’s products and by-products have on the environment? Can an “unfortunate mistake” bring this company to its knees? These are matters of corporate governance 5 as well as reporting and are all concerns of the auditor. The auditors are very important to the directors of these corporations. As Sir Adrian Cadbury commented: 6 The external auditors are not part of the company team, but the chairmen (members of a corporate board of directors) have a direct interest in assuring themselves of the effectiveness of the audit approach within their companies. No chairman appreciates surprises, least of all in financial matters. The relationship between auditors and managers should be one where the auditors work with the appropriate people in the company, bur do so on a strictly objective and professional basis, never losing sight of the fact that they are there on the shareholders’ behalf. Chairmen need auditors who will WorkfileContents.doc
WorkfileContents.doc 6 stand up to management when necessary and who will unhesitatingly raise any doubts about the people or procedures with the audit committee. Weak auditors expose chairmen to hazards.
You've reached the end of your free preview.
Want to read all 58 pages?
- Fall '13
- Financial audit