Who is responsible for forming and expressing an opinion on financial statements?
AbstractThe purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. The objective of an audit of financial statements is to enable an auditor to express an opinion as to whether the financial statements are prepared, in all material respects, in accordance with International Financial Reporting Standards or another identified financial reporting framework. The auditor's opinion is expressed in by using the phrase 'give a true and fair view' or 'present fairly, in all material respects'. The auditor and the client's management have separate and distinct responsibilities. The auditor is responsible for forming and expressing an opinion on the financial statements. The client's management, on the other hand, bears responsibility for preparing and presenting the financial statements. Management's responsibilities are not relieved by the fact that the statements are audited. An auditor must comply with general principles of an audit. These require an auditor to: 1) comply with the 'Code of Ethics for Professional Accountants' issued by the IFAC (or a national Code of Ethics, where appropriate); 2) conduct an audit in accordance with International Standards on Auditing (ISAs) (where applicable); and 3) plan and perform the audit with an attitude of professional skepticism, recognizing that circumstances may exist that cause the financial statements to be materially misstated. Show
Citation“World Bank. 2011. Fundamentals of Financial Statements Audit. Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/13023 License: CC BY 3.0 IGO.” Collection(s)This item appears in the following Collection(s)
Updated November 17, 2022 In the past, companies and tax-exempt organizations often relied on accountants from their audit firms to assist in reconciling accounts, preparing the adjusting journal entries, and writing financial statements. Smaller organizations often lacked the level of accounting sophistication necessary to carry out these tasks. Relying on the audit firm often made sense from the perspective of efficiency and cost containment. New requirements by the American Institute of Certified Public Accountants (AICPA) and a host of related regulatory guidance issued by the Securities and Exchange Commission (SEC), the General Accounting Office (GAO, and the U.S. Department of Labor (DOL) have prompted an increased focus on auditor independence over the last decade. These days, the standards generally restrict the non-attest services like tax or consulting services that auditors may perform and the circumstances under which those services may be allowed. The increased regulations serve to muddy an already often-misunderstood set of expectations. What Auditors DoThe outside, independent auditor is engaged to render an opinion on whether a company’s financial statements are presented fairly, in all material respects, in accordance with financial reporting framework. The audit provides users such as donors, lenders and investors with an enhanced degree of confidence in the financial statements. An audit conducted in accordance with GAAS and relevant ethical requirements enables the auditor to form that opinion. To form the opinion, the auditor takes a risk-based approach to gather appropriate and sufficient evidence and observes, tests, compares, and confirms until gaining reasonable assurance. The auditor then forms an opinion about whether the financial statements are free of material misstatement, whether due to fraud or error. Some of the more important auditing procedures include:
At the completion of the audit, the auditor may also offer objective advice for improving financial reporting and internal controls to maximize a company’s performance and efficiency.
What Auditors Do Not DoFor a clear picture of the role of external auditors, it helps to understand what you should not expect auditors to do. The emphasis is on “independent.” Many people are surprised to learn that auditors do not take responsibility for the financial statements on which they form an opinion. The responsibility for financial statement presentation lies squarely in the hands of the entity being audited. Auditors are not a part of management, which means the auditor will not:
This list is not all-inclusive. In short, the auditor may not assume the role and duties of management. In practical terms, there are a number of tasks you should not expect your auditor to perform:
Management’s Responsibilities in an AuditThe words, “The financial statements are the responsibility of management,” appear prominently in an auditor’s communications, including the audit report. Management’s responsibility is the underlying foundation on which audits are conducted. Simply put, without management having responsibility for the financial statements, the demarcation line that determines the auditor’s independence and objectivity regarding the client and the audit engagement would not be as clear. It is important for a company’s management to understand exactly what an audit includes as well as the role of the auditor. The auditor’s responsibility is to express an independent, objective opinion on the financial statements of a company. This opinion is given in accordance with auditing standards that require the auditors to plan certain procedures and report on the results of the audit, while considering the representations, assertions, and responsibility of management for the financial statements. As one of their required procedures, auditors ask management to communicate management’s responsibility for the financial statements to the auditor in a representation letter. The auditor concludes the engagement by using those same words regarding management’s responsibility in the first paragraph of the auditor’s report. Auditors cannot require management to do anything or to make any representation. However, to conclude the audit with the hope of a “clean” unmodified opinion issued by the auditor, management must assume responsibility for the financial statements. Auditing standards are very clear that management has the following responsibilities fundamental to the conduct of an audit:
It is not uncommon for the auditor to make suggestions about the form and content of the financial statements, or even assist management by drafting them, in whole or in part, based on information provided by management. In those situations, management’s responsibility for the financial statements does not diminish or change. Furthermore, auditors can advise on implementation of new Accounting Standard Updates (ASUs) as long as management has the proper skills, knowledge, and experience (SKE) to take responsibility for non-attest services. For example, ASU 2019-01, Leases (Topic 842) is effective for fiscal years beginning after December 15, 2021. The standard changes the accounting treatment for operating leases and involves a complex calculation to recognize a lease asset and lease liability at the present value of the lease payments in the Statement of Financial Position. In addition to findings, the management letter may contain recommendations for management ranging from segregation of duties to addressing possible cybersecurity risk. Addressing these recommendations in a timely manner will safeguard operations and ensure the organization is applying industry best practices. Risk management is an area often highlighted in the presentation of audit findings to the board of directors. Below are two areas that auditors often recommend for further review. To be proactive ahead of the next audit, organizations should review these areas to avoid possible findings. CybersecurityDuring the audit, the auditor may observe risk to the organization related to IT policies and procedures and recommend a separate cyber audit. The scope of a cyber or cybersecurity audit focuses on internal IT infrastructure, external infrastructure, framework benchmarking, penetration testing, and more. Learn more about cybersecurity audits. Fraud RiskFraudulent activity is on the rise and every organization is at risk. Implementing new technology, reliance on third-party vendors, and necessary changes to internal control structures all provide opportunities for fraud. It is more important than ever for organizations to remain proactive in preventing fraudulent activity through effective management of fraud-related risks and implementation of anti-fraud controls. Learn more about preventing fraud risk. ContactFor more on audit best practices, including the implementation of new ASUs, visit GRF’s resource center or contact us for assistance. Contact Us Amy Boland, CPA Which is responsible for expressing an opinion on the financial statements?The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Who is responsible for financial statement preparation?Directors prepare financial statements; audit committees monitor the integrity of financial information. 5. Auditors audit the financial statements and perform other procedures on other parts of the annual report. 6.
Who is responsible to express opinion on the true and fair view of the financial statements?An unmodified opinion is expressed when the auditor is able to conclude that the financial statements give a true and fair view 1 and comply in all material respects with the applicable financial reporting framework.
Who is responsible for the fair presentation of the financial statements?Management is responsible for the preparation and fair presentation of these financial statements in accordance with the [state basis of accounting].
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