Question

What does auditing do to an entity's financial statement?

Answer 1

An audit is independent examination of financial information of any entity whether profit oriented or not, and irrespective of its size and legal form, when such an examination is conducted with a view to expressing an opinion thereon. The person conducting this process should perform his work with knowledge of the use of the accounting statements discussed above and should take particular care to ensure that nothing contained in the statements will ordinarily mislead anybody. This he can do honestly by satisfying himself that;

I. The accounts have been drawn up with reference to entries in the books of accounts;

II. The entries in the books of accounts are adequately supported by underlying papers and documents and other evidence

III. None of the entries in the books of account has been omitted in the process of compilation and nothing which is not in the books of account has found place in the statements

IV. The information conveyed by the statements is clear and unambiguous

V. The financial statements amounts are properly classified, described and disclosed in conformity with the accounting standards and

VI. The statements of accounts taken as an integrated whole, present a true and fair picture of the operational results and of the assets and liabilities

Auditing may define as a systematic and independent examination of data, statements, records, operations, and performances of an enterprise for a stated purpose. In any auditing situations the auditor perceives and recognises the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his judgement which is communicated through his report.

The nature of the propositions which an auditor is called upon to review varies. Thus, an auditor may review the financial statements of an enterprise to ascertain whether they reflect a true and fair view of its state of affairs and of its working results. In another situation, he may analyse the operations of an enterprise to appraise their cost effectiveness and in still another he may seek evidence to review the managerial performance of an enterprise. In yet another type of audit the auditor may examine whether the transactions of an enterprise have been executed within the framework of certain standards of financial propriety. However, the variations in the propositions do not change the basic philosophy of auditing, though the process of collection and evaluation of evidence and that of formulating a judgement thereon may have to be suitably modified.

Purpose of a financial statement audit Companies produce financial statements that provide information about their financial position and performance. This information is used by a wide range of stakeholders (e.g., investors) in making economic decisions. Typically, those that own a company, the shareholders, are not those that manage it. Therefore, the owners of these companies (as well as other stakeholders, such as banks, suppliers and customers) take comfort from independent assurance that the financial statements fairly present, in all material respects, the company’s financial position and performance. To enhance the degree of confidence in the financial statements, a qualified external party (an auditor) is engaged to examine the financial statements, including related disclosures produced by management, to give their professional opinion on whether they fairly reflect, in all material respects, the company’s financial performance over a given period(s) (an income statement) and financial position as of a particular date(s) (a balance sheet) in accordance with relevant GAAP. In many cases this is required by law.

The management of a company is responsible for preparing the financial statements. The auditor is responsible for expressing an opinion indicating that reasonable assurance has been obtained that the financial statements as a whole are free from material misstatement, whether due to fraud or error, and that they are fairly presented in accordance with the relevant accounting standards (e.g., International Financial Reporting Standards). There are clear frameworks from independent auditing standard setters which provide rules and guidelines for how an audit should be carried out and the level of assurance obtained. It is the auditor’s responsibility to plan and conduct the audit in such a way that it meets the applicable auditing standards and sufficient appropriate evidence is obtained to support the audit opinion. However, what constitutes sufficient appropriate evidence is ultimately a matter of professional judgement. The auditor considers a number of factors in determining whether financial statements are free of material misstatement, and in evaluating any misstatements identified. These factors require professional judgement, where auditors use their skill and experience to form a view based upon the evidence gathered on the financial statements taken as a whole. The audit opinion is clearly stated as a separate paragraph in the audit report. The auditor issues a ‘clean’ opinion when it concludes that the financial statements are free from material misstatement