Auditor

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The Institute of Chartered Accountants in Australia

Addressing Unit 3BACF Accounting & Finance The role and function of external auditors

charteredaccountants.com.au

The Institute of Chartered Accountants in Australia

Government and the community The role and influence of governments and other bodies The role and function of external auditors Financial statements are used for a variety of purposes and decisions. For example, financial statements are used by owners to evaluate management’s stewardship, by investors for making decisions about whether to buy or sell securities, by credit rating services for making decisions about credit worthiness of entities, and by bankers for making decisions about whether to lend money. Effective use of financial statements requires that the reader understand the roles of those responsible for preparing and auditing financial statements. Financial statements are the representations of management. When using management’s statements, the reader must recognize that the preparation of these statements requires management to make significant accounting estimates and judgments, as well as to determine from among several alternative accounting principles and methods those that are most appropriate within the framework of generally accepted accounting standards. In contrast, the auditor’s responsibility is to express an opinion on whether management has fairly presented the information in the financial statements. In an audit, the financial statements are evaluated by the auditor, who is objective and knowledgeable about auditing, accounting, and financial reporting matters. During the audit, the auditor collects evidence to obtain reasonable assurance that the amounts and disclosures in the financial statements are free of material misstatement. However, the characteristics of evaluating evidence on a test basis, the fact that accounting estimates are inherently imprecise, and the difficulties associated with detecting misstatements hidden by collusion and careful forgery, prevent the auditor from finding every error or irregularity that may affect a user’s decision. The auditor also evaluates whether audit evidence raises doubt about the ability of the client to continue as a going concern in the foreseeable future. However, readers should recognize that future business performance is uncertain, and an auditor cannot guarantee business success. Through the audit process, the auditor adds credibility to management’s financial statements, which allows owners, investors, bankers, and other creditors to use them with greater confidence. The auditor expresses his assurance on the financial statements in an auditor’s report. The report, which contains standard words and phrases that have a specific meaning, conveys the auditor’s opinion related to whether the financial statements fairly present the entity’s financial position and results of operations. If the auditor has reservations about amounts or disclosures in the statements, he modifies the report to describe the reservations. The auditor’s report and management’s financial statements are only useful to those who make the effort to understand them.

Introduction to Audits and Financial Reporting
In today’s economy, information and accountability have assumed a larger role in our society. As a result, the independent audit of an entity’s financial statements is a vital service to investors, creditors, and other participants in economic exchanges. The auditor communicates audit results in a standard report. The auditor’s is based on rigorous work performed by highly trained professionals. Need for Financial Statements Regardless of the type of entity — whether in the public or private sector, or whether for profit or not — all entities use economic resources to pursue their goals. Financial statements enable an entity’s management to provide useful information about its financial position at a particular point in time and the...
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