Auditing provides the techniques and procedures by which a competent, qualified person objectively accumulates and evaluates evidence in a systematic process, about accounting information related to a specific economic entity, for the purpose of determining and reporting on the degree of correspondence between the quantifiable information and established criteria.
Auditing involves planning the nature, timing, and extent of financial information testing and conducting analytical procedures necessary to obtain quantifiable information so that a qualified, independent accountant may issue an opinion as to whether the financial statements fairly represent the financial position of an entity. Auditing also provides the techniques necessary to examine the internal control system of a company and perform operational or compliance audits by internal or external auditors.
In case of an independent audit, the purpose is to investigate and determine if the financial statements submitted for audit have been prepared in accordance with financial reporting practices that are appropriate for the auditee. In most cases, generally accepted accounting principles constitute the the proper audit criteria for judging an auditee’s financial reporting practices. The fundamental aim of an independent audit is to arrive at an objective opinion concerning the fairness and dependability of the auditee’s financial statements. In expressing an opinion on financial statements, auditors assume professional and legal responsibilities for their propriety. To be professionally and legally defensible, the auditor’s opinion must be based on an examination conducted in accordance with “generally accepted auditing standards.” Failure to comply with these standards in conducting an audit exposes the auditor to risks of such unfavorable consequences as a loss of public respect or the assessment of sizable legal damages and possibly criminal indictment.
Generally Accepted Auditing Standards are those guidelines which auditors must adhere to while conducting an audit of a company’s or government entity’s financial statements. It must also be stated in the audit report that the audit was conducted following Generally Accepted Auditing Standards. Generally Accepted Auditing Standards are divided into three main areas: 1)General Standards, 2) Standards of Fieldwork, and 3)Standards of Reporting. Each area contains three or four specific standards. General Standards : There are three general standards. They deal with technical training and proficiency, independence, and due professional care. To have technical training and proficiency means you have the
proper educational background. This is demonstrated by passing a comprehensive examination. Independence is the most important attribute of an auditor. An auditor must remain independent of the client at all times and avoid all situations that may jeopardize his independence. Due professional care means working carefully and being willing to take responsibility for the accuracy of the work. Standards of Field Work : There are three standards of field work. They address proper planning and supervision, examination and evaluation of internal controls, and collecting sufficient and competent evidence. An auditor must adequately plan his audit in advance and be familiar with the business and industry of his client. He should test the internal control system of the client, especially those controls on which he plans to rely during the audit. He should obtain the most reliable evidence available and select the best procedures to obtain that evidence. Standards of Reporting : There are four standards of reporting. They are concerned with whether the financial statements are presented in accordance with Generally Accepted Accounting Principals (GAAP), consistency, informative disclosures, and an expression of opinion on the financial statements that have been audited. The audit report must explicitly state whether the financial statements have been prepared in conformity with GAAP and whether or not these principles have been applied consistently from one year to the next. Unless stated otherwise, it should be assumed that the informative disclosures stated in the financial statements are adequate. Any deficiencies in this area should be specifically stated in the audit report. Footnotes must contain all the relevant information needed to be able to properly interpret the financial statements. Finally, the auditor must express an opinion on the financial statements. The auditor should issue either an unqualified, qualified, adverse, or disclaimer of opinion. The basic format for each of these opinions is pretty much pre-established. In a qualified or adverse opinion, an additional paragraph should be added for each problem found within the financial statements. A disclaimer of opinion should be issued any time an auditors independence is violated or if he is unable to complete the entire audit for some reason.
In the past, the Auditing Standards board’s (ASB) auditing standards have applied to audits of all entities. As a result of the passage of the Sarbanes-Oxley Act of 2002 (Act), however, auditing and related professional practice standards to be used in the performance of and reporting on audits of the financial statements of public companies are now established by the Public Company Accounting Oversight Board (PCAOB). Audits of non-public companies remain governed by generally accepted auditing standards as issued by the ASB.
The term “public companies,” as used above, actually encompasses more entities than just public companies. To state the authority of the PCAOB more precisely, the Act authorizes the PCAOB to establish auditing and related attestation, quality control, ethics, and independence standards to be used by registered public accounting firms in the preparation and issuance of audit reports for entities subject to the Act or the rules of the Securities and Exchange Commission (SEC).
Accordingly, public accounting firms registered with the PCAOB are required to adhere to all PCAOB standards in the audits of “issuers,” as defined by the Act, and other entities when prescribed by the rules of the SEC (collectively referred to as “issuers”). Those entities not subject to the Act or the rules of the SEC (referred to as “non-issuers”) must conduct the preparation and issuance of audit reports in accordance with standards promulgated by the ASB.
As directed by the Sarbanes-Oxley Act of 2002, the SEC is adopting rules that require conformance with specific sections of the Act. These rules require officers to certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the issuer’s internal controls; that they have made certain disclosures to the issuer’s auditors and the audit committee of the board of directors about the issuer’s internal controls; and that they have included information in the issuer’s quarterly and annual reports about their evaluation and whether there have been significant changes in the issuer’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.
REFERENCES:
Wallace, Wanda.(1995). Auditing. Ohio: South Western College.
Carmichael, Douglas. (1995). Auditing concepts and methods : A guide to current theory and practice. New York : McGraw-Hill.
