Question

In: Finance

Unfortunately, auditing is not necessary for effective financial reporting. Do you agree with this statement? In...

Unfortunately, auditing is not necessary for effective financial reporting. Do you agree with this statement? In 300 words, defend your position with reputable sources.

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Expert Solution


I do not agree with the said position.

In USA, a public listed entity must be audited by a firm registered with Public Company Accounting Oversight Board.

Auditing is examination of the financial records which forms part of financial statement. Auditing is done by an independent person who is not involved in regular accounting and finance activity of the firm. Auditing by an independent auditor brings reliability and trust on prepared financial statement.

Audited financial statement is only relevant statement for stakeholders. The unaudited statement is not credited by banker or rating agencies because they want independent bodies to have a say on those reports hence, auditing is essential for any financial report. Saying unaudited report would not be in best interest of shareholders who are not on board hence, it is always suggested to have a financial statement audited.

Auditing is of two types 1) Internal audit and 2) External or statutory audit. Internal audit department is established by entity itself to ensure that the business is following best practices in department of accounts, finance and operations. External audit is statutory requirement which is conducted by an entity which are ought to conduct audit as per law.

Why auditing is conducted?

1)      To ensure that the financial records which are reported in financial statement are accurate

2)      To ensure that the firm following accounting guidelines

3)      To ensure that there is no material difference in actual and reported statements

4)      To ensure that management is working in best interest of their shareholders

5)      To ensure that there is no fraud or there is no manipulation in financial records

Audit helps to improve existing accounting and operational processes. The management seeks audit opinion of the current scope of improvement and loopholes in existing system. Audit finally helps to make processes efficient and reliable which helps in prevention of fraud or any scope of material mismanagement.

Therefore, audited financial statement is important and unavoidable.


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