Question

How you would describe  audits and their importance?

Overall, how much trust do you place in financial reporting? Do you trust public financial reporting more, less, or the same as private financial reporting? Explain.

Answer 1

An audit is an independent inspection of the financial information of any organization, whether profit-oriented or not profit-oriented, irrespective of its legal form, status or size when such examination is conducted with a view to express an opinion. Having regular audits of your financial statements is essential for the trustworthiness of your company. Audits will help you track and solve any internal issues, and will help you convey greater reliability to investors, shareholders, banks and tax officials. Furthermore, thorough audits will give you greater peace of mind and will leave you with more energy to plan for the future.It is very important because of the following:

(1) Improve Your Credit Rating

(2)Presents an overall picture of how your company is working

(3)Reliability in your company's financial statements

(4)Helps the management in detection of frauds and errors

(5)Government authorities accept audited statements as true and fair for the purpose of taxation.

Financial reporting involves the disclosure of financial information about the company to its various stakeholders.

Financial reporting typically encompasses the following:

• Financial statements, which include the income statement, balance sheet, and statement of cash flows
• Accompanying footnote disclosures, which include more detail on certain topics, as prescribed by the relevant accounting framework
• Any financial information that the company chooses to post about itself on its website
• Annual reports issued to shareholders
• Any prospectus issued to potential investors concerning the issuance of securities by the organization

However complete trust on these reports cannot be given as the corporates use these statements to carry out various manipulations for there selfish motives .Some such problems are:

• Standard financial metrics intended to enable comparisons between companies may not be the most accurate way to judge the value of any particular company—this is especially the case for innovative firms in fast-moving economies—giving rise to unofficial measures that come with their own problems.
• The shortcomings of revenue-recognition practices have also caused companies to increasingly use unofficial measures to report financial performance, especially for businesses operating in the virtual space.
• Window dressing is used by business to make their balance sheets and income statements look more healthy or in some cases worse. It the current different climate businesses are in, window dressing has been used more than ever to cushion the drop in sales and revenue.
• Managers also goose the numbers by manipulating production. If a company has substantial excess capacity, for instance, mangers can choose to ramp up output, allowing fixed manufacturing costs to be spread over more units of output. The result is a reduction in unit cost and, therefore, lower costs of sales and higher profits

Generally with available information from a company we have to trust the public companies slightly more than that of private companies.Some reasons being:

1. A public company can quickly raise large amounts of capital for expansion by selling stock (equity) or bonds (debt).

2. The public company has more transparent finances.

3. It is easier to transfer public company shares.

4.The public company has transparent corporate governance standards.

5. A private company can hide difficulties it may be having, but a public company must report its problems, exposing any weaknesses to competitors, who can access detailed information about the company’s operations by getting copies of the required financial reports.

However this does not guarantee a public company free from manipulations and malpractices.But due its wider marketability and accountability its financial statements are far more questionable.