The role of the auditor including legal and professional requirements, its importance, benefits and limitations
The Role of an Auditor
An auditor is a professional who has an authority to independently examine, verify and confirm the accuracy as well as fairness of financial records of a business entity. The role of auditors can be classified as internal and external auditing activity. Internal auditors are those accounting experts who examine the accuracy and reliability of financial statements of their own employer. In contrast, external auditors are independent auditing/accounting entities who pass their professional judgment and form an opinion concerning the fairness of financial statements .
Under the Companies Act, the role of an auditor is to form an honest opinion and pass concerned judgment whether the financial statements of a company reflect “True and Fair View” and are free from errors and material misstatements. For this, the role of an auditor is to thoroughly examine internal controls, inspect assets and verify the existence of all business transactions. An auditor’s role in corporate governance is to protect interests of all stakeholders. By independently examining the validity of financial records, auditors promote those policies and measures aimed at introducing accountability in the work environment.
Apart from this, auditors play their significant role in performing risk assessment techniques to detect any error and fraudulent activity that can have material consequences to the financial statements. In addition to this, auditors play their significant role in promoting transparency and fairness of financial records as well as internal controls having financial consequences.
Legal Requirements under Company Law
In the United Kingdom, it is illegal for accounting firms and professionals to audit the financial statements of any company until a qualification is awarded by a concerned body. Until an auditor becomes a registered member of a recognized body and collect practicing certificate, any judgment passed by such an auditor remains unacceptable. The membership of Institute of Chartered Accountants in England and Wales (ICAEW) must also be applied for in case an auditor wishes to enter the field and apply professional judgments.
Professional Requirements
Any person wanting to assume responsibility as an auditor must qualify as a professional accountant. Such a person must also be well versed in financial accounting, internal controls, audit of financial statements and reporting activities. Apart from this, an auditor must assume professional responsibility to not only be independent but should also be seen as independent to the general public to maintain stakeholders’ trust .
Furthermore, an auditor is required to exercise professional skepticism as material misstatement may occur due to fraudulent activities. It is a professional responsibility of auditors to distinguish between material misstatements resulting from frauds and those occurring due to misappropriation of assets . It is a professional requirement that an auditor should always remain independent of management’s influence. Apart from this, auditors should refrain from exchanging gifts with management to retain audit independence.
In addition to all these professional requirements, auditors must ensure that all internal controls having financial consequences are free from any loophole. All those business processes that result in non-productive activities and wastage of resources must be highlighted by an auditor.
Importance, Significance and Relevance of the Phrase ‘True and Fair View’
In auditing, “True and Fair View” represents that not only the financial statements faithfully reflect the true, accurate and reliable financial performance of an entity but are also free from errors and material misstatements. In its true essence, an audit represents independent examination of financial performance of an organization. It assures whether the financial records and statements are “True and Fair” in view. Such a view clarifies that, as per auditor’s opinion and judgment, the financial statements are accurate, reliable and prepared with reasonable, if not absolute, assumptions in mind .
The “True and Fair” view is important because it reflects that all members of the board (directors) have fulfilled their responsibilities in preparation of error free financial statements. This kind of audit view is also significant for auditors to report their professional judgment and form an unbiased opinion concerning financial position of a business entity.
The “True and Fair View” becomes relevant when the audit process is complete and the business can report or publish its financial statements. Once these statements are verified by independent auditors and backed by authentic detailed description of financial performance, the “True and Fair View” is obtained.
Based on audit evidence collected during examination process, an auditor issues an “Auditor’s Report” to reveal professional judgment about the fairness and accuracy of financial statements for obtaining “True and Fair View”. This view stipulates an important assumption that the organization, whose financial records are audited, is capable enough to carry out its business activities as a “Going Concern” for the next twelve (12) months. The “true and Fair View” is also significant to allow auditors to form “Qualified Opinion” on the accuracy and reliability of financial records if they fail to gain audit evidence and have doubt in its ability to continue operational activities as a “Going Concern”. In other words, the “True and Fair View” stresses upon the fact that auditors should pass their honest judgment in their report even if they find any material uncertainty about the business’s capability to keep operating as a Going Concern.
Clear Explanation and Evaluation of the Importance of an Audit
An audit is important to an organization for examining the effectiveness and reliability of every internal control or process which is critical to achieve corporate objectives, prevent misappropriation and fraudulent activities as well as keep financial records sound and accurate. Moreover, implementing a system of strict internal controls to detect and rectify accounting irregularities and fraudulent activities is important for every business entity. An audit is an important activity for ensuring that each internal control encourages segregation of duties, is reliable and prevents any irregularity as well as unusual activity.
An audit is important for evaluating the overall riskiness of material errors and misstatements in the financial records of a company. This is done by examining the extent to which managers can rely on certain internal controls. An audit is important to be carried out because it finalizes accurate and reliable financial records on the basis of which managers can determine profitability of certain business segments and product lines. Moreover, business going through internal and external audits can easily determine their net worth as well as fair and market value of all assets.
Implementing an independent audit activity is important to ensure that interest and disclosure rights of all stakeholders are protected and carefully accounted for. This is because an effective audit program and honest opinion/judgment provides assurance to all stakeholders that the financial statements are free from material misstatements and errors. Obtaining an independent opinion about accuracy and reliability of financial records is another importance of an audit.
The Benefits and Limitations of an Audit
The first benefit an audit provides is the identification and suggestions for improvement in a weak accounting system. The second benefit auditing provides a manager is to ensure that directors have no influence over accounting system. Audit is beneficial in reducing the scope of fraudulent activities and discourages continuity of poor accounting practices. Enhancing the reliability and credibility of financial figures as well as promoting transparency and accuracy of financial records for good credit rating are the other benefits of having an audit .
Despite several benefits offered by an audit, there are some inherent limitations to this activity. Such limitations restrict an auditor’s ability to obtain absolute assurance as they do not ensure if the financial statements are free from material errors and any kind of misstatement. Due to these limitations or restrictions of an audit, auditors can only provide reasonable but not the absolute assurance.
The first limitation of an audit concerns the availability of sufficient time frame to perform accurate examination. Since the deadline within which auditors are bound to present their opinion on the reliability of financial statements is short, auditors fail to account for important matters concerning reliability and accuracy of financial records.
The second inherent limitation in an audit concerns financial and non-financial aspects. For instance, while examining the accuracy and reliability of financial statements to detect any material misstatement, auditors only consider financial nature of all business events and transactions. In other words, the non-financial factors affecting the financial statements are completely disregarded or ignored. In this situation auditors can only provide reasonable assurance while failing to pass any absolute judgment.
The use of sampling for audit testing stands as third limitation of an audit. For limiting the number of transactions and their volume for testing, auditors use sampling technique for performing independent examination effectively and efficiently. These results, derived from sampling, may fail to reflect any error or material misstatement as such a large sample may fail to act as a representative of all business transactions. Concerning this particular matter, there is an inherent risk that the material misstatements and errors may not be detected. Therefore, absence of detailed performance of testing procedures is another limitation of an audit program.
References
Basu, 2010. Fundamentals of Auditing. Pearson Education India.
Collis, J., Holt, A. & Hussey, R., 2012. Business Accounting: An Introduction to Financial and Management Accounting. Palgrave Macmillan.
Holsapple, C. & Whinston, A.B., 2013. Decision Support Systems: Theory and Application. Springer Science & Business Media.
Johnstone, K., Gramling, A. & Rittenberg, L.E., 2013. Auditing: A Risk-Based Approach to Conducting a Quality Audit. Cengage Learning.
Yankova, K., 2015. The Influence of Information Order Effects and Trait Professional Skepticism on Auditors’ Belief Revisions: A Theoretical and Empirical Analysis. Springer.
