Understanding the Auditor's Report
If all the facts concerning financial transactions were properly and accurately recorded and if the owners and managers of business enterprises were entirely honest and sufficiently skilled in matters of accounting and recording, there would be little need for independent auditing. However, human nature being as it is, there probably will always be a need for the auditor. Many businesses, depending on size and nature, employ internal auditors. Their responsibilities and functions, while similar to those of an independent auditor, are vitally different in a major respect having to do with impartiality and independence. For the purpose of this discussion the terms accountant, auditor and certified public accountant (CPA) are used interchangeably and only refer to the "outside" independent auditor. The Role of the Auditor
Dependable financial information is essential to the very existence of our society. The credit professional making a decision to grant trade credit, the investor making a decision to buy or sell securities, the banker deciding whether to approve a loan, the government in obtaining revenue based on income tax returns, all are relying upon information provided by others. In many of these situations, the goals of the providers of information run directly counter to those of the users of the information. Implicit in this line of reasoning is recognition of the social need for independent auditors - individuals with a professional competence and integrity who can tell us whether the information on which we rely constitutes a fair picture of what is really going on. Good accounting and financial reporting aid society in allocating its resources in the most efficient manner. The goal is to allocate our limited capital resources to the production of those goods and services for which demand is greatest. Economic resources are attracted to the industries and organizational entities that are shown by accounting measurements to be capable of using the resources to the best advantage. Inadequate accounting and inaccurate reporting, on the other hand, conceal waste and inefficiency and thereby prevent our economic resources from being allocated in a rational manner. A decision by a credit professional to grant credit is usually based on careful study of the company's financial statements along with other information. The credit manager's purpose in granting credit is to facilitate the sale of product and collect payment when it is due. But what if the financial statements submitted by the company along with its credit application are not dependable? Assume, for example, that the financial statements overstate current assets and annual earnings, and omit major liabilities. Assume also that the credit manager, acting on the basis of such misleading information, grants trade credit. The end result is likely to be that the credit manager does not receive payment and may have to write the transaction off as a loss. The contribution of the independent auditor is to give credibility to financial statements. Credibility, in this usage, means that the financial statements can be believed; that is, they can be relied upon by outsiders, such as trade creditors, bankers, stockholders, government and other interested third parties. Audited financial statements are now the accepted means by which business corporations report their operating results and financial position. The word audit when applied to financial statements means that the balance sheet, statements of income and retained earnings, and statement of cash flows are accompanied by an audit report prepared by independent public accounts, expressing their professional opinion as to the fairness of the company's financial statements. The goal is to determine whether these statements have been prepared in conformity with generally accepted accounting principles (GAAP). Financial statement audits are normally performed by firms of certified...
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