Generally Accepted Auditing Standards Accounting Essay

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The Generally Accepted Auditing Standards are standards that were developed by the American Institute of Certified Public Accountants as a foundation in conducting an audit in its reasonable accuracy. There is a need for auditors to follow the standards provided to be able to render a report of the financial statements audited stating that it is free from any misstatement. GAAS are divided into three categories such as the general standards, the standards of fieldwork and standards of reporting. Auditors can render reports of the financial statements audited in four ways. The report render can either be qualified opinion, unqualified opinion, adverse opinion and disclaimer of opinion. Auditors who considered the report to be free from any material defect can render a report of unqualified opinion and a disclaimer is issued if the auditor will not be able to render a report on the basis of want of sufficient information. Independence and impartiality are character traits that auditors must nurture and the materiality of an audit finding has an inverse relationship with audit risk.

Introduction

A business entity has the need to prepare financial statements that will truly reflect its economic performance within a business cycle. The financial statement will serve as proof on how the entity fared, on whether or not it was able to gain a profit or suffered a loss while conducting its daily business operation. The prepared financial statements will show the financial position, the comprehensive income, the cash flows and the changes in equity of the company. Failure to reflect an accurate report will have dire consequences not only to the business organization but also to the other stakeholders. Thus, business entities have to accurately report its economic standing and it is the role of the auditors to render an audit that will accurately show the financial standing of the company with the aid of Generally Accepted Auditing Standards. The government had imposed rules and regulations as well as guidelines on how these financial statements are made. This is to prevent companies from misstating their financial reports especially if it has the intention to mislead the public and its stakeholders on its true economic standing. To further safeguard the stakeholders who are relying on the business entity's reported financial statements, the government is requiring that these financial reports be audited by external auditors who will check the reasonableness of its accuracy. These auditors must remain independent and objective in conducting the audit to prevent the stakeholders from thinking otherwise. There are also rules and guidelines that auditors follow in conducting the audit. The Generally Accepted Auditing Standards (GAAS) contains the necessary guidelines that will aid auditors in conducting an audit that will truly reflect the true financial standing of a business entity.

Background

The Generally Accepted Auditing Standards (GAAS) was developed by the American Institute of Certified Public Accountants when it has the authority to oversee and provide guidelines in the conduct of Certified Public Accountants in the Accounting and Audit Profession. "The Auditing Standards Board of the AICPA developed ten generally accepted auditing standards for the audit of financial statements that serves as a foundation for all other standards, including those that have been adopted by the PCAOB. Because the standards are conceptual in nature, an understanding of them provides a foundation to better understand other standards. The said standards are developed into three categories such as the general standards which apply to the auditor and the audit firm, fieldwork standards which apply to the conduct of the audit and the last is the reporting standards which are applicable to communicating the auditor's opinion. (Rittenberg, Schwieger, & Karla 2008) Despite the fact that the AICPA has been impliedly stripped off of its authority in providing guidelines and rules for auditors and accountants to abide by yet, the standard it had developed continues to be in effect since the guidelines provided serves as a foundation for the creation of further measures that safeguards auditors in conducting an audit that produces reasonable accuracy.

Auditors and GAAS

Auditors have an important role in the business world. They are primarily in charge with checking the accuracy of the financial statements reported by business entities. These business entities are required to record, interpret and report every business transaction that has a corresponding effect on the comapany's economic standing. The whole business process of every business entity or organization are done or made in conformity with the Generally Accepted Accounting Principles. (GAAP) However, there are instances that business entities do not accurately follow the rules and guidelines provided in the GAAP. Some entities are doing it without the intention to defraud others but there are also others who delineate from the standards provided with the intention to mislead others into believing that the company is performing well or has enough assets to pay all of its liabilities despite the opposite fact. To prevent the instances mentioned above from happening, auditors are required to obtain and evaluate data from the business entities to check for any irregularities. The auditor is required to render a report whether or not there are is an irregularity or a misstatement in the financial statements reported by the company.

There are a number of ways that an auditor will render his audit report based on the audit findings found. These are four types of audit report, namely, Clean or Unqualified Report, Qualified Report, Adverse or Negative Report and Disclaimer of Opinion.

"A clean report is when an auditor gives an opinion on the various matters without any qualification or reservations…However, it should be pointed out that the auditor is not a guarantor or an insurer. If he gives a clean report, it does not mean that it is completely accurate…A qualified report is when auditor gives an opinion subject to certain reservations. The said report can be used only when the auditor believes that the overall financial statements are not fairly stated…An auditor can make an adverse or negative report when there is a reasonable ground for him to form an opinion that the accounts and financial statements taken as a whole, do not present a true and fair view of the financial position and the working results of the company. If the auditor wishes to give an adverse report, he should disclose all material reasons. A disclaimer of opinion is when an auditor, for want of sufficient information, is unable to form an opinion as to the fairness of the financial statements." (Kumar & Sharma 2006, p. 329-335)

Through the GAAS, all auditors are required to render a report stating that the financial statements of a business entity are free from any material misstatements. These material misstatements are either caused by fraud or error committed by the company to hide its true and financial standing. The materiality of the said error varies from one business entity to another which depends on the nature of the business and the audit risk involve. "When planning an audit, the auditor considers what would construct the financial information materially misstated. The auditor's preliminary judgment of materiality, related to specific account balances and classes of transactions, helps the auditor make a decision such questions as what items to examine and whether to use sampling and analytical procedures" (Gupta 2004, p.1146) Auditors must take note of these criteria when planning of an audit procedure to use before conducting an audit.

It is the role of the auditors to check on the reliability of the financial statements reported by a business entity. However, the auditors are not required to render a report stating that the financial statements reported by the company are absolutely and accurately reported in all its material intents and purposes. The GAAS provides that the auditor's role is to obtain a reasonable assurance on the fairness of the financial statements reported by an entity. The GAAS provides 10 standards which not only serves as a guide but also serve as a safeguard of the auditor from any liability in instances that it was not able to uncover fraud or misstatement of the company's financial statement while conducting the audit

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