Importance of Auditing Financial Statements

2485 words (10 pages) Essay

8th Feb 2020 Accounting Reference this

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1.0  Introduction

 

This project will discuss the importance of the Audit of Financial Statements. An audit refers a review of the financial statements, financial system, records, transactions and operations of an entity or a project, performed by accountants, in order to ensure the accuracy of the records and provide credibility to the financial statements and other management reports.

The audit also identifies deficiencies in the internal control system and the financial system and makes recommendations for improvement.

Audits may differ substantially depending on your objectives, the activities for which the audits are used and the reports expected to be received from the auditors.

This work will aim to demonstrate the resources that the organization obtains with the aid of the audit to avoid losses unrecoverable and obtain financial resources with quality and precision of the information provided.

 

2.0 AUDIT OF FINANCIAL STATEMENTS

The purpose of an audit of the financial statements is to permit the auditor to express an opinion on whether the financial statements present a true and fair view, in accordance with generally accepted accounting policies, of the state of the company’s business at the balance sheet date.

 

The need for audit

      The need for auditing was driven by the growing separation between ownership and business management.

      The Industrial Revolution and the growth of public enterprises in the 19th century brought the need for audits

      In the early 2000s, the stock market and the dot-com bubble resulted in many corporate financial scandals. For example, Enron. This has resulted in an increase in the need for Audit and Warranty functions inside and outside the company.

      The financial crash of 2008 has also resulted in corporate financial scandals, for example. Brothers Lehman, Bear Stearns, Anglo Irish Bank, and further development and reform of the Audit and Guarantee services.

      Over the years, the need for audit services has increased as the number of users of financial statements has increased.

Figure 1: (Da Silva, Virginia 2019)

 

Users of financial statements include:

      Financial institutions

      Suppliers

      Customers

      Employees

      Government

      General public

Figure 2: (Da Silva, Virginia 2019)

Every administrative environment needs to be in control and therefore auditing is a very important tool. The absence of adequate controls for companies with complex structures exposes them to numerous risks, frequent mistakes and waste. Nowadays, there is a need for companies to invest in technological development, improve their controls, reduce expenses, and thus make their products more competitive, they require a large volume of resources, and consequently get to see their balance sheets with more credibility and with more confidence in the market.

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The need for auditing has been increasing in organizations and the emergence of doubts from its managers of the accurate audit assistance to obtain accurate information of the company’s financial and equity situation, fails to raise funds together with third parties such as bank loans or opening their capital investors for their investment.

 

3.0 ASSURANCE THAT AN AUDIT CAN GIVE SEVERAL USERS OF FINANCIAL STATEMENTS

 

It will be observed the importance of business tasks such as management, and the need to do the audit work of financial reporting companies. There are two types of audits, internal and external. The difference between them is that the entire audit is done throughout the year and external, done until the end of the financial year. Both have an obligation to express opinions, which must have a basis in competence and independence.

In addition to financial audits, there are also operational audits and obedience audits:

      Financial Audit: The most commonly conducted type of audit; a financial audit is an official retrospective inspection of an organisation’s financial accounts, typically by an independent body. It will offer an opinion on whether the accounts have been properly prepared and whether they show a true and fair view of the company or organisation’s financial position.
 

      Compliance Audit: A compliance audit is to ensure that the business or organisation is acting in compliance with regulatory or internal standards, and is commonly carried out in regulated industries.
 

      Operational Audit: This is a detailed analysis of procedure, planning, processes, goals and results of the operations of a business, with recommendations for improvement.

Figure 3: (Da Silva, Virginia 2019)

“Fraud Fraud has a corrosive effect on the trust necessary for companies to do business. Management is responsible for running the company and preventing and detecting fraud. Preventing and detecting fraud is difficult because fraud is intentionally hidden and may involve collusion by multiple participants. Even though audits are properly performed in accordance with relevant GAAS, they may not detect material fraud. However, auditors are responsible for obtaining reasonable assurance that the financial statements are not materially misstated as a result of fraud. 8 | PwC Importantly however, if the auditors form suspicions of fraud in the course of their work a number of things will change, including their risk assessment (see below), the nature and extent of communications with those charged with governance, the nature and extent of audit procedures, and the evaluation of the effectiveness of the relevant internal controls and processes. The knowledge that an independent external audit will be conducted generally has a deterrent effect against fraud.” Pwc.com. (2019).

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The independent audit is an activity that, using specific technical procedures, has the purpose of attesting the adequacy of an act or fact in order to give it reliability characteristics. According to legislation of the national economies, the law that conducts the accounting and the termination of the law that fits the audit functions and so must follow it. One way of ensuring the credibility of financial statements is the need for the auditor’s opinion. By analysing what has been quoted, everything involves credibility and precision, so auditing needs to be done by qualified auditors who will be able to make accounting statements. Moreover, those results, which are prepared and authenticated by independent auditors, will be included in the financial statements of the companies along with the auditor’s opinion.

 3.1 THE RISK

In the context of risk in the audit, there is the possibility that the auditor may generate a technically inappropriate opinion about significantly incorrect accounting.

‘’The purpose of an audit of the financial statements is to enable the auditor to express an opinion on whether the financial statements present a true and fair view, in accordance with generally accepted accounting policies, of the state of the company’s business at the balance sheet date.’’ Nolan, External Auditing and Assurance, 2011

To mitigate material misstatement, the auditor should consider the risk of material misstatement and plan the audit to reduce those risks to an acceptable level. In order to reach this stage, the auditor must:

      Identify business risk affecting the entity

      Consider the control environment within the entity, including the internal control function

      Make an assessment of the risks of material misstatement arising

      Identify the level of audit risk arising as a result of the risk assessment process

      Determine materiality in view of audit risk

      Plan the nature, timing and extent of audit procedures to be performed in order to reduce the risk of material misstatement to an acceptably low level

“Risk assessment—Auditors use their knowledge of the business, the industry and the environment in which the company operates to identify and assess the risks that could lead to a material misstatement in the financial statements. Those risks often involve a high degree of judgement and require a significant level of knowledge and experience by the auditor, particularly on large and complex engagements. This requires a good understanding of the business and its risks, which is typically built up over a number of years as part of the audit firm’s and auditor’s knowledge. It also means that the auditors need to be well informed about the industry and wider environment in which the company operates, and about what its competitors, customers, suppliers and—where relevant—regulators are doing.” Pwc.com. (2019).

It should be noted that distortion means the difference between the values, organisation or revelation of a reported financial statement and what is essential for the item audited to imitate to the appropriate financial reporting framework. Distortions can ascend from error, usually not intended or fraud when intended. When the auditor expresses his or her opinion on whether the financial statements have been presented fairly, in all material respects, the misstatements include the value, classification, or disclosure adjustments that, in the auditor’s judgment, are necessary for the financial statements to be adequately presented in all material respects.

5.0  Conclusion

It can be concluded that the Audit has the objective of analysing if everything that was planned in the norms is in agreement with the practiced one. This systematic process to examine the activities carried out by a company is not something that everyone appreciates, but by putting on a scale their benefits are stronger.

The fact of extreme importance is the responsibilities of directors under corporate law is the requirement to produce accounts that provide a true and fair view of the state of affairs of the company.

Auditing may seem somewhat intrusive at first glance for anyone who is starting out on the subject, but its benefits are diverse. So much so that virtually any company in more advanced, maturity stages of management adopt this practice.

As described in this assignment, it is important to organize auditing in companies; it is necessary to be effective throughout the year and is the basis for all subsequent audits and controls. Based on what has been proposed, authorized internal and external auditors should carry out, auditing activities objectively and with great independence in the work, in order to.

 

6.0 Bibliography

 

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