Question

As you studied and read in chapter readings so far as well as reading the WSJ article posted last week, it is the responsibility of Management to apply accounting standards (GAAP/IFRS) when communicating with investors and creditors through financial statements (management assertions).

Another group, auditors, serves as an Independent Intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements.

Auditors examine (audit) financial statements to express a professional, independent opinion (a GAAS Audit). The opinion reflects the auditors' assessment of the statements' fairness, which is determined by the extent to which they are prepared in compliance with GAAP.

Some feel that it is important for an auditor to give an independent opinion on a company's financial statements because the auditors' fees for performing the audit are paid by the company. In addition to the audit fee, quite often the auditor performs other services for the company such as preparing the company's income tax returns.

How might an auditor's ethics be challenged while performing an audit?

Answer 1

Main objective of audit of financial statements is to express an independent audit opinion by the auditor. But it is against professional ethics if the auditor prepares the accounts and express an opinion theron as the word 'independent opinion' will no longer be maintained as the person preparing the accounts and auditing the same is same.

Hence the objective of audit of financial statements is violated if the person is preparaing the company's income tax returns as well as auditing the financial statement.