Audit and Internal Control

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Case Study Project

What is the purpose of auditing? Describe the relationship between internal controls and the audit process.

Answer

The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. An audit also enhances the degree of confidence of intended users in the financial statements. Financial audits add credibility to the implied assertion by the management that the financial statements fairly represent the entity’s position and performance to its stakeholders like shareholders, tax authorities, banks, regulators, suppliers, customers, and employees. Auditors strive to maintain a high level of independence to keep the confidence of users relying on their reports. When auditing accounting data, auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period. Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. A likely cause of the information risk is the possibility of inaccurate financial statements. Auditing has a significant effect on information risk. The reduction of information risk can have a significant effect on the borrower’s ability to obtain capital at a reasonable cost. The most common way for users to obtain reliable information is to have an independent audit. External users, such as stockholders and lenders who rely on the financial statements to make business decisions, look to the auditor’s report as an indication of the statement’s reliability. They value the auditor’s assurance because of the auditor’s independence from the client and knowledge of financial statement reporting matters. For example, a bank officer, while deciding to make or not a loan to a business, tries to be satisfied that there is...
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