What an Auditor does and doesn’t do

What an Auditor does and doesn’t do

In the previous, companies often relied on accountants from their audit firms to assist in reconciling accounts, preparing the adjusting journal entries and writing financial statements. Small companies, in particular, 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. But an increased focus on auditor independence has come about during the last decade in new requirements by the American Institute of CPAs and a host of related regulatory guidance issued by the Securities and Exchange Commission, the General Accounting Office and the U.S. Department of Labor. The standards generally restrict the nonattest services – such as 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 auditor do
The 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. To form the opinion, the auditor gathers appropriate and sufficient evidence and observes, tests, compares and confirms until gaining reasonable assurance. The auditor then forms an opinion of whether the financial statements are free of material misstatement, whether due to fraud or error.

Some of the more important auditing procedures include:
Inquiring of management and others to gain an understanding of the organization itself, its operations, financial reporting and known fraud or error
Evaluating and understanding the internal control system
Performing analytical procedures on expected or unexpected variances in account balances or classes of transactions
Testing documentation supporting account balances or classes of transactions
Observing the physical inventory count
Confirming accounts receivable and other accounts with a third party
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 doesn’t auditors do

For 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.” First and foremost, 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 company being audited. In practical terms, there are a number of tasks you should not expect your auditor to perform.\

In practical terms, there are a number of tasks you should not expect your auditor to perform.
Analyse or reconcile accounts
“Close the books”
Locate invoices, etc., for testing
Prepare confirmations for mailing
Select accounting policies or procedures
Prepare financial statements or footnote disclosures
Prepare an entity for audit
Determine restrictions of assets
Implement corrective action plans
Determine estimates included in financial statements
Establish value of assets and liabilities
Maintain client permanent records, including loan documents, leases, contracts and other legal documents
Prepare or maintain minutes of board of directors meetings
Establish account coding or classifications
Determine retirement plan contributions

The 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 is – and what an audit does and does not do. The auditor’s responsibility is to express an independent, objective opinion on the financial statements of a company.

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