Thursday, July 15, 2010

Responsibilities of Management and The Independent Auditor over the Audited Financial Statements

The fundamental to a financial statement audit is the division of responsibility between management and the independent auditor. The critical distinction is :

  • Management is responsible for preparing the financial statements and the contents of the statements are the assertions of management
  • The independent auditor is responsible for examining management’s financial statements and expressing an opinion on their fairness

Management’s responsibility for the fairness of the representations in the financial statements carries with it the privilege of determining which disclosures it considers necessary. Although management has the responsibility for the preparation of the financial statements and the accompanying footnotes, the auditor may assist in the preparation of financial statements. For example, he may counsel management as to the applicability of a new accounting principle, and, during the course of the audit, he may propose adjustments to the client’s statements. However, acceptance of his advice and the inclusion of the suggested adjustments in the financial statements do not alter the basic separation of responsibility. Ultimately, management is responsible for all decisions concerning the form and content of the statements.

In the event that management insists on financial statement disclosure that the auditor finds unacceptable, the auditor can either issue an adverse or qualified opinion or withdraw from the engagement.

The auditor’s responsibility is limited to performing the audit investigation and reporting the results in accordance with generally accepted auditing standards. In most cases, any material errors and omissions will be discovered if the audit has been so performed. Yet the possibility always exists that the auditor’s selected evidence will fail to uncover a material error. In this event, the auditor’s best defense is that the audit was performed and the report prepared with due care in accordance with generally accepted auditing standards.

If the auditor were responsible for making certain that all the representations in the statements were correct, it would make him a guarantor or insurer of the reliability of the financial statements. If auditors had that responsibility, evidence requirements and the resulting cost of the audit function would be increased to such an extent that audits would not be economically feasible.

It is usually more difficult for auditors to uncover irregularities (intentional misstatement of financial statements or misappropriation of assets) than errors (unintentional mistakes). This is because of the intended deception associated with irregularities. The auditor’s responsibility for uncovering irregularities deserves special mention.

References :

1)  Auditors Responsibility for Fraud Detection (JofA)

2)  Auditors’ Responsibilities Formalized Under SAS 109 (CPA Journal)

3)  New Fraud Guidance (JofA)

4)  ISA 240 (redrafted) : Auditors and Fraud

5)  IFAC.org Projects

1 comment:

  1. Great thoughts you got there, believe I may possibly try just some of it throughout my daily life.

    Management Audit

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