Question

The auditors are in the best position to evaluate a company because they have prepared the financial statements. Do you agree or or disagree? Support your 450 word response with reputable sources.

Answer 1

No, I do not agree with this statement.

First of all auditors do not prepare the financial statements for a company. For any organization its financial statements like income statement, balance sheet and statement of cash flows are prepared by the employees working in the organization’s accounting and finance department. The role of an auditor is merely to examine the financial records of a company so as to determine if the financial records and financial statements present a fair and accurate picture of a company’s financial position during a year. When talking about the role of an auditor I am referring here to an external auditor. External auditors are also known as independent auditors and there role is to examine the financial records and financial statements and issue a report containing an opinion on the company’s financial statements and its internal controls. Thus an auditor has the main function of an attestation function.

To further reinforce my statement that auditors are not in the best position to evaluate a company let me briefly explain the audit process as well. Audit includes four main steps – planning, gathering of evidence, evaluation of the evidence that was gathered in the last step and issuing a report with opinions after examining all relevant financial records and transactions. In the planning stage auditors develop an audit program and identify the audit procedure that will be used for the purpose of gathering and obtaining evidence. The next step is that of evidence gathering and it includes observation of financial records, calculations based on these records and financial statements, a comprehensive analysis of these records and finally a comparison. Evidence that is gathered is thoroughly evaluated and after all these are done the auditor prepares a report which is based on the findings of all the other steps.

The above understanding of the role and primary responsibility of an auditor clearly shows us that an auditor role is to evaluate the strengths and weaknesses of internal controls, system designs, and company policies and procedures, besides determining the accuracy and fairness of financial statements and records. Thus the role of an auditor is mainly restricted to the quantitative aspect. The primary reason why an auditor is not in the best position to evaluate a company is because an auditor is not much aware of the important qualitative aspects like the strategy of a company, management’s plan of action for future, its marketing strategy, its competitive advantage, the presence of competitive forces in the industry etc.

For instance an auditor of Tesla will only be restricted in the financial aspects of the company and will not have much knowledge about how fortunes and competitive positioning of Tesla will be affected by its decisions to launch a space program or to diversify its business.

Sources:

(1): https://pcaobus.org/Standards/Auditing/Pages/AS2201.aspx

(2): https://home.kpmg/content/dam/kpmg/mu/pdf/mu-acf-position-paper-2.pdf