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External auditing and societies

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Introduction

'Independent auditing of financial information is essential in any advanced society.' The American Accounting Association define auditing as 'a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria, and communicating the results to interested parties'. The systematic process of auditing refers to a sequence of strategic procedures based on standards and objectives set out in conceptual framework. For the audit to be useful it has to be as objective as possible based on the evaluated evidence. To ensure the auditor gives an unbiased opinion when evaluating evidence there is a requirement that they are working independent of the audit. The assertions the definition refers to are the management's representation of the information presented in both the financial statements and the accounting system information. Any unaudited financial statement is only an assertion made from the company itself. All the assertions have to be evaluated against all the international accounting standards so they follow a uniform and mutually understandable standard to both preparer and user groups. The auditor is required to communicate their opinion as to whether the accounts show a 'true and fair' view of the company's company position and carefully explaining their reasons to the decision. ...read more.

Middle

Therefore no information can be withheld and management cannot restrict auditors from doing their job. There a number of ways that a company will have its accounts audited that can be classified into four categories: independent financial statement audit, internal audit, compliance audit and value-for-money audit. The essential one is the independent audit where 'independent contractors who, after adequate examination and investigation, offer a professional opinion as to whether the concern's financial statements which they have examined present fairly the results of operations and the financial condition of the enterprise' (Maurtz, p5). The primary purpose is to assure the investing and lending public that the financial statements are objectively and fairly presented in accordance with the established criteria set by the International Accounting Standards Board. As stated by (Cosserat and Rodda, p11) 'Independence is the essence that underlies the success and credibility of the accounting profession and its service to the public'. Independence offers objectivity to allow auditors perform their attestation duties effectively. To some extent an audit will report on the management's influence on accounting data as well as the department itself. Unlike independent audits, internal auditors are employed by the company and will owe a primary allegiance to the company as whatever happens to that company will in some way or another reflect the future of that person's job. ...read more.

Conclusion

Auditors have the incentive to cheat however being discovered could cost them their reputation, their most valuable asset. Therefore auditors are likely to perform their audits honestly even though they are unobserved. Auditing is not a perfect method but it is essential and is the best current method currently available. This is proved by every country following International Accounting Standards by law requires an audit. Companies would not have chosen to use auditing before it came into requirement by law. This is because an audit costs a small fee compared to what could be gained from various parties (shareholders, managers, bankers, auditors, analysts) having the right information to form a solid basis for making financial decisions. The users need unbiased financial information to reduce the information risk they make when making decisions. If there were no audit at all, nobody on the stock exchange would know if any of the information is true. The auditor's opinion helps to establish credibility of the financial information. The financial market is based on trust and without credible information means no trading other than selling resulting in zero value. 'Audit is a social phenomenon. It has no purpose or value except in its practical usefulness. It is wholly utilitarian' (Flint). ...read more.

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