All major companies and many smaller ones have their accounting records reviewed by independent, outside public accountants. This process is called auditing, and independent accountants are called auditors.
Ordinarily, after making his examination the auditor makes three statements, as follows:
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1. The auditors have followed generally accepted auditing standards.
2. The financial statements are fairly presented.
3. The financial statements conform to generally accepted accounting principles consistent with the principles followed in the preceding year.
Does any one of these statements say that the financial statements are accurate? No.
In the second statement, what phrase is used instead of the phrase are accurate? The phrase used is "fairly presented."
Statement no. 3 states that "the financial statements conform to generally accepted accounting principles" and that in particular, the doctrine of consistency has been followed.
If any of the statements above cannot be made, the auditors explain the discrepancy in what is called an exception.
Auditing standards refer to the criteria by which the quality of performance of auditing engagements is measured.
They indicate levels of performance which must be attained for the completion of a satisfactory audit; they relate both to the auditor's personal qualifications and to the exercise of his judgment in performing the examination and in rendering his report.
The application of auditing standards is influenced by the materiality or relative significance of the items or matters concerned as well as the degree of risk involved.
Thus items which are relatively more important or in which the possibilities of material error are greater require more attention than other items of less significance or in which the possibility of material error is remote.
An auditor would relatively give more attention to inventories of a merchandising or manufacturing concern as they are more significant than inventories of other types of business concerns that do not deal in merchandise or goods for sale.
The auditor must obtain direct confirmation for goods deposited in public warehouses, consignees or other outside custodians.
If a bed linens company made consignments of sheet sets, quilts, comforters and duvets to other small retailers or held for others, the auditor must see to it that these goods are properly excluded from the inventory or consider correspondence with entities customarily consigning goods to the company even if the records show no balance.
The auditor's primary responsibility in the examinations of inventories relates to ascertain as far as practicable the physical existence of the goods represented as inventories and establish that the client has title to the goods and if subject to lien, such fact must be disclosed in the financial statements.
The auditor must satisfy himself that the client has taken a reasonably accurate count of quantities and has carefully reviewed the condition of the goods and make certain that the inventories are priced in accordance with generally accepted accounting principles consistently applied from year to year.
Similarly, a business entity with poor internal controls and therefore subject to a greater degree of risk of error will require a larger scope of examination than one with better internal controls.
As used in reporting standards, the term "accounting principles" refers not only to accounting principles and practices but also to the methods of applying them. Accounting principles are rules or guides for action developed for purposes of establishing reliable financial and operating information control for business enterprises.
The auditor must keep abreast of the developments and changes in accounting principles which are generally accepted with alternative accounting principles applicable to complex, critical or unusual situations.
The doctrine of consistency implies that no significant change has been made in the accounting principles employed between the current period and the preceding period.
The purpose of the consistency standard is to assure users of financial statements that the comparability of such statements as between periods has not materially affected by changes in accounting principles, practices, or methods of application.
If however, there is a material effect on the financial statements; compliance with the consistency standard requires that the nature of the change and their effects be disclosed.
Certain auditing steps are omitted because of a request or instruction from the client. When qualifying an opinion due to a restricted examination, the exception should refer to the specific items on the financial statements on which an opinion cannot be expressed because of the auditing procedure omitted, rather than to the limitation in the scope of examination.
The auditor's report should disclaim an opinion on the financial statements taken as a whole if the items affected by the limited examination are sufficiently material as not to justify a qualified opinion.
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Oct 18, 2011 00:01:39
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