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Need For An Independent Financial Statement Audit

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18 views2 pages

Need For An Independent Financial Statement Audit

Uploaded by

mayantapire
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Need for an Independent Financial Statement Audit

- The need for an independent audit of financial statements stems from the following interrelated sources:

1. Conflict of interest between management and users of financial statements


- In a sense, financial statements may be viewed as the report by management as to how the entity
performed under their direction and supervision. Managers are frequently placed in positions where they
can benefit by providing outside parties with overly optimistic or even false financial information.
Outside parties, however, want unbiased, realistic financial statements. Recognizing this inherent conflict
of interest, users of financial statements have become sceptical of unaudited financial statements.

2. Expertise
- The complexity of accounting and auditing requires expertise in verifying the quality of the financial
information. Since most of the users of financial information are not equipped with the necessary skills
and competence to determine whether the financial statements are reliable, a qualified person is hired by
users to verify the reliability of the financial statements on their behalf.

3. Remoteness
- Users of financial information are usually prevented from directly assessing the reliability of the
information. Most of the users do not have access to the entity’s records to personally verify the quality of
the financial information. Consequently, an independent auditor is needed to assist them in verifying the
reliability of the financial information.

4. Financial consequences
- Misleading financial information could have substantial economic consequences for a decision maker. It
is therefore important that financial statements be audited first before they are used for making important
decisions.

Theoretical Framework of Auditing


- The audit function operates within a theoretical framework. Below are selected postulates, assumptions
or ideas that support many auditing concepts and standards.

1. Audit function operates on the assumption that all financial data are verifiable
- All balances reported in the financial statements must have supporting documents or evidence to prove
their validity. If no evidence exists in relation to the financial statements on which an auditor is to express
an opinion, then there can be no audit to perform.

2. The auditor should always maintain independence with respect to the financial statements under
audit
- Independence is essential for ensuring the credibility of the auditor’s report. The report of the auditor
will be of little or no value to the readers of the financial statements if the readers are aware that the
author is not independent with respect to the client.

Independence is:
(a) Independence of mind - the state of mind that permits the provision of an opinion without being
affected by
influences that compromise professional judgment, allowing an individual to act with integrity, and
exercise objectivity and professional skepticism; and
(b) Independence in appearance - the avoidance of facts and circumstances that are so significant a
reasonable
and informed third party, having knowledge of all relevant information, including any safeguards applied,
would reasonably conclude a firm's or a member of the assurance team’s integrity, objectivity or
professional skepticism had been compromised.
(Ref: Code of Ethics for Professional Accountants in the Philippines)

3. There should be no long-term conflict between the auditor and the client management
- Short-term conflicts may exist regarding the application of auditing procedures and accounting
principles, but in the end, both the auditor and the management must be interested in the fair presentation
of the financial statements.

4. Effective internal control system reduces the possibility of errors and fraud affecting the
financial statements
- The condition of the entity’s internal control system directly affects the reliability of the financial
statements. The stronger the internal control is, the more assurance it provides about the reliability of the
accounting data and financial statements.

5. Consistent application of generally accepted accounting principles (GAAP) or Philippine


Financial Reporting Standards (PFRS) results in fair presentation of financial statements
- We often use different criteria to verify the validity of an assertion. In the case of an independent audit
of financial statements, the criteria are usually the PFRS.

6. What was held true in the past will continue to hold true in the future in the absence of known
conditions to the contrary
- Experience and knowledge accumulated from auditing a client in prior years can be used to determine
the appropriate audit procedures that need to be performed.

7. An audit benefits the public


- Financial statements are ordinarily prepared and presented in order to meet the common information
needs of a wide range of users. These users who rely on the financial statements as their major source of
information are the primary beneficiary of the financial statement audit.

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