Reviews the financial reports of an organization to ensure that there are no errors
The financial reports of an organization are reviewed to ensure that there are no errors. This is what they are hired for to look over the financial statement, test them, and make sure they are accurate and the systems are working correctly.
Due to widespread fraud and the accounting practices being blamed for things like the global financial crisis. This has led to a more scrutinized role of these professionals in tightening their training standards.
Properly doing their jobs leads to better credibility of the financial statements as they are checked multiple times by internal members and members that are independent and external to the organization.
Those preparing the financial statement know that they have to be more careful and avoid committing fraud. In addition, the knowledge that the work will be audited is enough to deter some organizations from committing fraud.
Different professionals operate worldwide, each type having different roles, standards, and independence levels.
The types are:
1. Internal: They are internal to the organizations they are reviewing. That business employs them, and their primary role is to check the statements before the external party does to fix errors.
External: They double-check an organization'sevidence of material misstatements. These are the ones that need to be independent of creators to ensure no bias.
2. Government: They look at the government files, ensure that the money received is appropriately spent, and audit individuals for tax purposes. They make sure there is no fraud or embezzlement taking place.
3. Forensic: They help agencies detect any criminal and illegal activity. They look at criminal organizations and audits to detect crimes like laundering and help police and federal agencies find evidence and build a case.
Who is an auditor?
The accounting standards globally have become strict due to organizations in the past not being transparent with their stakeholders. Therefore, they hold an essential societal role by being the middleman and holding the organizations accountable.
An Auditor is a professional that reviews an organization's financial reports and analyses them to find any errors or other misstatements.
They also help the organization ensure that its financial statements are free and credible.
They have some tasks and responsibilities that they must perform to do their job correctly.
Many tasks must be performed to ensure the audit is successful and the material misstatement is found and corrected. The jobs that must be done are much more than double-checking the accounting work that the organization did.
Some of them are
- Testing the organization's internal controls
- Preparing for an audit
- Ensuring they don't have any conflicts of interest
- Report on findings
- Advising the organization of standards
- Analyzing the potential for fraud
- Examining risk frameworks
These tasks ensure that the organization's financial statements give an accurate and fair view of its performance. This makes not only the organization's efficiency better but also the market as a whole.
There are many responsibilities that they must perform to do their job correctly. These are the responsibilities that go with their role within the organization and the financial market.
These responsibilities must be taken seriously. This could lead to problems for the organization and its stakeholders if they are not done. It could also lead to legal ramifications if they do not take their duty of care seriously.
They have some responsibilities they must provide and follow to perform their job efficiently. Some of them are
- Professional skepticism: They must have a questioning mind and constantly check things they should.
- Professional judgment: They need to use the decision they have gained through the expertise, knowledge, and training they have obtained over their career.
- Due care: They must be diligent and ensure they abide by standards and practices that are expected for the role.
- Independence: They must be independent of the organization to perform their task with no biases.
What is the need?
There has always been a need for them in theas businesses must have someone to verify the work they have reported.
There are always checks and balances in accounting to ensure that no single party can do an illegal activity without it being caught.
This ensures that the market is efficient as the information it introduces is accurate. In addition, it prevents users from being misled about the organization's performance and therefore increases better decision-making.
It has been seen many times the adverse effects lousy accounting can have on the world. This is the reason why there is a need for professionals that can authenticate the organization's financial statements.
Cases like the Lehman Brothers and the global have made the public wary of the accounting practice. This led to more strict standards being placed on the industry to ensure the public would trust them.
They are being more strictly scrutinized due to some people blaming them for some of these significant cases.
The public and many experts blame them and believe they could have stopped these things from happening if they had done their job correctly.
Now with them having more standards that they have to follow closely, this leads them to be more careful with their work and use their professional judgment to ensure that they do their jobs properly.
They are also another level of security and help the stakeholders of an organization become aware of the mistakes that the organization has made in its financial reports. Moreover, it allows them to catch the errors comparatively earlier.
Having the auditors look over the financial statements increases the likelihood of finding errors. This makes the words more accurate and allows the users to make better decisions.
Finding these errors allows them to be corrected before it is too late. But on the other hand, if the user is already making decisions on the wrong information, it could lead to the whole profession losing credibility.
They need to make sure that there are no signs of misstatements. Those were not only the ones that were done by mistake but also the ones that were done on purpose by fraudulent individuals.
They ensure that the markets are efficient as the reports now have an extra layer of credibility. This means the information in the market is likely to be more accurate and already checked for errors, which are then corrected.
The need for them has increased as the world is getting globalized and technology is advancing. In addition, the information people are getting and using to make decisions, which the users must verify.
There are two main types of members- internal and external. Each class has a different role in the business operations and has other responsibilities and functions towards the organization they are auditing.
One key difference between the two types is that those internal to the organization do not need to have independence. This is seen as an almost impossible task because they are hired internally, so they can't be independent.
Both types are essential to ensure that the organization's financial statements are accurate and serve as checks and balances. For example, if one party were to miss an error, there is a high likelihood of the other party finding and rectifying the mistake.
They are the ones that the organization employs. They perform the auditing services to double-check the work that has been done and try and find any material misstatements.
The internal auditing team has more leniency regarding independence from the external team, which is an essential factor and one of the most significant components.
The internal unit is dependent on their loyalty to those who pay them.
They are a part of the organization and, in some cases, have a better understanding of what to look for compared to external parties that perform the same tasks, which shows their importance to the organization and the economic environment.
They are the stage between the financial statements being finished and the external members performing their review of the information that the organization provided.
After they are done with their audit, the external team comes in, and they perform their service. This may lead to some errors being found by them and let them be known in the organization's financial reports.
After the internal audit team does its work, the external team comes in. They are more important and give the stakeholders more legitimacy as they are not reviewing the work they did.
They test the reports to find if there are any indicators of fraud and other material misstatements. They are the ones that can be held legally liable if they are found to be working with the organization to hide any signs of fraud.
Unlike the internal team, the external team must be completely unbiased to ensure that the assurance engagement is impartial. To do that, they must be completely independent and need to make sure there are no threats to their independence.
Risks to independence
They must remain independent, which means they must look at the reports from an independent mind. Any case where the member isn't independent has led to mistakes that have negatively affected not only the stakeholders of the organization but everyone.
There are five risks to independence that lead to the external auditors not doing unbiased work. These threats have shown that not doing their job correctly risks their reputation and can lead to consequences for stakeholders.
The risks are:
1. Familiarity: This is when they are familiar with the business and the employees.
They may have friendships with some employees and thus won't be unbiased when doing the assurance engagement for their clients.
2. Self-review: Auditors may provide other services to organizations that hire them, like accounting.
This is when they may review some work they already did. This leads to reviewing their work; thus, they can't be unbiased.
3. Self-interest: This may be because they have something to gain if they continue being on the good side of the business.
So they won't be unbiased as they want to keep gaining favors and may overlook signs of fraud.
4. Advocacy: This is when the auditor is also helping promote the client's interest to the point where they are no longer independent.
This will lead to them wanting the reports to look the best they can, and they will overlook any misstatements.
5. Intimidation: this is where the managers of the organization use intimidation tactics to ensure that the auditors do what they want. This may lead them to overlook fraud because they are scared to report it.
The use of auditors leads to many advantages for the organization being audited and all the organization's stakeholders. In addition, using these external parties to review the financial reports is vital to the market's efficiency.
Some of the advantages are:
1. They make sure accounting is correct
The work done on the organization's financial statements must have some layers that protect them from fraud and other material misstatements.
When they look at the organization's financial statements, they are doing so to ensure that the reports are accurate and show a true and fair view of the organization.
They look at the work and ensure no signs of errors or fraud being committed by the organization. Therefore, it makes accounting more accurate, and double-checking the result is more likely to correct mistakes.
2. They provide credibility
The profession losing credibility is a negative as this may lead to fewer investors. So there must be credit to ensure they have the trust of the outside parties that use the financial statements.
The people who read and use the financial reports must feel that the words are 100% accurate. If external parties did no auditing, there would be no way to know if this is the case, and the statements' users would not find them credible.
The fact that external parties review the reports the organization creates gives credibility to the word as they have been checked for errors or fraud. This ensures the credibility of the information in the market as well.
3. They help prevent fraud
By double-checking the work and following the statements back to the invoices, auditors can find any fraud committed. It also ensures that those who made the reports know they will be reviewed, decreasing the chances of error.
This can be smaller-scale fraud, like employees stealing from the organization and making it seem like there were sales.
They also find larger-scale fraud: managers wanting to manipulate the financial statements to make the organization look better.
They are essential to the, and without them, there would be a lot more information given to the stakeholders that are inaccurate and lead to problems like those that happened in the past.