Why is audit quality so important?
Well, both investors and creditors depend on reliable financial statement information to make their
investment and lending decisions about a company. As a result, the confidence of investors and
creditors is shaken each and every time that audit quality is compromised. In fact, before we think
about audit quality any further, we must first explain the vital role that financial statement auditors
play in supplying key decision makers with useful, understandable, and timely information. When
you have a better understanding of why auditing is so critical to help ensure the liquidity of the
world’s capital markets, we will then explore in detail the process auditors take to help ensure that
audit quality is achieved. Because many of you are likely planning to enter the public accounting
profession and work as an auditor, we hope that you will work hard to acquire this knowledge so
that you may do your part in playing a key role in maintaining the public’s confidence in both the
auditing profession and the capital markets.
The purpose of an audit
The purpose of an audit is to enhance the degree of confidence that intended users can place in the
financial statements. This is achieved by the expression of an opinion by the auditor on whether the
financial statements are prepared, in all material respects, in accordance with an applicable financial
reporting framework. In the case of most general purpose frameworks, that opinion is on whether
the financial statements are presented fairly, in all material respects, in accordance with the
framework. An audit conducted in accordance with generally accepted auditing standards and
relevant ethical requirements enables the auditor to form that opinion. (AU-C 200.11)
Financial Reporting
financial reporting is to provide statements of financial position (balance sheets), results of
operations (income statements, statements of shareholders’ equity, and statements of
comprehensive income), changes in cash flows (statements of cash flows), and accompanying
disclosures to outside decision makers who do not have access to management’s internal sources of
information. A company’s accountants, under the direction of its management team, perform this
function.
Thus, the financial statements contain management’s assertions about the transactions and events
that occurred during the period being audited (primarily the income statement, statement of
shareholders’ equity, statement of comprehensive income, and statement of cash flows), assertions
about the account balances at the end of the period (primarily the balance sheet), and assertions
about the financial statement presentation and disclosure (primarily the footnote disclosures).
The auditing procedures are completed to provide the evidence necessary to persuade the auditor
that there is no material misstatement related to each of the relevant assertions
Once the auditor is satisfied that the evidence has supported each of the relevant assertions, the
auditor issues a report to provide assurance to financial statement users that the financial
, statements are free of material misstatement in accordance with generally accepted accounting
principles
list of all of management’s financial statement assertions
1. Existence or Occurrence (Existence, Occurrence)
The numbers listed on the financial statements have no meaning to financial statement
users unless the numbers faithfully represent the actual transactions, assets, and liabilities of
the company
Existence asserts that each of the balance sheet and income statement balances actually
exist. Occurrence asserts that each of the income statement events and transactions actually
did occur. As a general rule, the occurrence assertion relates to events, transactions,
presentations, and footnote disclosures (as indicated in columns 2 and 4 of Exhibit 1.5), and
the existence assertion relates to account balances (as indicated in column 3).
Auditors must test whether the balance sheet amounts reported as assets, liabilities, and
equities actually exist. To test the existence assertion, auditors typically verify cash with
banks and count the physical inventory, verify accounts receivables and insurance policies
with customers, and perform other procedures to obtain evidence whether management’s
assertion is in fact supported
management asserts that each of the revenue and expense transactions summarized on the
income statement or disclosed in the financial statement footnotes really did occur during
the period being audited. To test the occurrence assertion, auditors complete procedures to
ensure that the reported sales transactions really did occur and were not created to
fraudulently inflate the company’s profits.
2. Rights and Obligations (Rights and Obligations)
In the financial statements, management asserts that they have ownership rights for all
amounts reported as assets on the company’s balance sheet and that the amounts reported
as liabilities represent the company’s own obligations.
In simpler terms, the objective for an auditor is to obtain evidence that the assets are really
owned and that the liabilities are really owed by the company being audited.
The auditor also has an obligation to ensure that the details of the company’s obligations are
properly disclosed in the footnotes to the financial statements.
3. Completeness (Completeness, Cutoff)
In the financial statements, management asserts that all transactions, events, assets,
liabilities, and equities that should have been recorded have been recorded.