Question

If management is responsible for its own financial statements, why are auditors important?

Answer 1

An auditor is an individual who is appointed to inspect the books of accounts of a company, the validity and accuracy of the transactions contained therein. He also forms an opinion on the overall view of the financial statements, whether the statements depict a true and fair view of the entity’s financial position.

---> The fundamental to a financial statement audit is the division of responsibility between management and the independent auditor. The critical distinction is :

• Management is responsible for preparing the financial statements and the contents of the statements are the assertions of management

• The independent auditor is responsible for examining management’s financial statements and expressing an opinion on their fairness

Management’s responsibility for the fairness of the representations in the financial statements carries with it the privilege of determining which disclosures it considers necessary. Although management has the responsibility for the preparation of the financial statements and the accompanying footnotes, the auditor may assist in the preparation of financial statements. For example, he may counsel management as to the applicability of a new accounting principle, and, during the course of the audit, he may propose adjustments to the client’s statements. However, acceptance of his advice and the inclusion of the suggested adjustments in the financial statements do not alter the basic separation of responsibility. Ultimately, management is responsible for all decisions concerning the form and content of the statements.

In the event that management insists on financial statement disclosure that the auditor finds unacceptable, the auditor can either issue an adverse or qualified opinion or withdraw from the engagement.

---> The auditor’s responsibility is limited to performing the audit investigation and reporting the results in accordance with generally accepted auditing standards. In most cases, any material errors and omissions will be discovered if the audit has been so performed. Yet the possibility always exists that the auditor’s selected evidence will fail to uncover a material error. In this event, the auditor’s best defense is that the audit was performed and the report prepared with due care in accordance with generally accepted auditing standards.

Some of the major roles that an auditor play in an Organization

• Assessing and comprehending the internal control structure of the organisation
• Making sure that resources are not tampered with
• Recognising if and where procedures are not functioning as they are supposed to and giving advice on the proper changes to be made accordingly
• Making sure that processes, policies, rules, regulations are diligently followed and abided by
• Monitoring the physical catalogue tally
• Completes audit work papers and memorandum by documenting audit tests and findings
• Protects organisation’s reputation by keeping information confidential
• Assessing the level of financial threat within the organisation
• Adds to team results by welcoming new and diverse work necessities; discovering new opportunities to add significance to the organisation; assisting others to achieve related job results as and where necessary
• Compiling, cross-checking and evaluating account reports statistics
• Investigation of the management and others to get an understanding of the business itself, how it operates, its financial reports and know its errors
• Carrying out systematic actions on predictable or unforeseen modifications in account balances