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Common myths about audits.

COMMON MYTHS ABOUT AUDITS

1. Auditors certify the financial statements. Actually, auditors do not certify, or guarantee, the financial statements; rather, they provide reasonable assurance--within the context of materiality--that the financial statements conform to generally accepted accounting principles. In other words, an audit adds credibility to management's representations in the financial statements.

2. An unqualified audit opinion indicates the financial statements are correct. An unqualified audit opinion does not mean the financial statements are correct to the exact penny--it just implies the statements aren't wrong by a material amount. In other words, any mistatements aren't large enough to affect a typical user's judgment.

3. Auditors check all of the company's transactions. Because of the number of transactions involved, a 100% audit would not make sense economically. Instead, auditors test selected transactions. The selections may be based on a statistical sample, an informal sample or a selection of large and unusual items. The auditor determines how much, what and when to test--and what the test results mean.

4. Audits are designed to detect minor fraud. Audits are planned to render an opinion on the overall financial statements. An audit provides reasonable--but not absolute--assurance that material misstatements--errors and fraud--will be uncovered. Thus, the auditor does not look for minor fraud, such as petty cash theft.

5. An unqualified opinion on the financial statements means a company's internal controls are sound. The auditor needs to obtain enough knowledge about the entity's internal control structure to plan the financial statement audit. The auditor may also obtain evidence about the effectiveness of certain aspects of the internal control structure. However, a financial statement audit is not directed toward finding weaknesses in internal control; an unqualified opinion on the financial statements provides no assurances about internal controls.

6. Auditors determine which accounting principles are used. This choice is made by the entity's management. It can ask an auditor for advice on which principles are preferable but, as long as management chooses from GAAP, the auditor won't qualify his or her opinion. However, if management changes the principles used, either from the previous year or during the course of the year being audited, that change--while it usually will not result in a qualified opinion--will be noted in the auditor's report.

7. Auditors prepare the financial statements. While that's often true for small businesses, the financial statements always remain the entity's representations because the entity's management selects the principles used and records the actual transactions. That's why auditors' clients must sign a letter indicating they accept responsibility for the statements and the accounting principles.

8. The standard auditor's report offers assurance about the safety of an investment. An auditor's standard report does not provide assurance that a business is a safe investment or will not fail. Auditors have a duty to assess whether existing conditions raise substantial doubt about an entity's ability to remain a going concern. When substantial doubt is raised, the auditor's report explains that doubt. But the absence of a reference in the auditor's report to substantial doubt about an entity's continued existence should not be viewed as providing assurance the entity will be successful.

PUBLICATIONS AVAILABLE

To help auditors explain their role, the American Institute of CPAs has published The New Auditor's Report (product no. 022014), a nontechnical brochure that describes the purpose of an audit and the content of the auditor's report. A more thorough explanation is presented in the AICPA booklet Understanding Audits and the Auditor's Report (product no. 058514), which is designed for financial statement users. Both are available from the AICPA order department at (800) 334-6961; (800) 248-0445 in New York State.
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Author:Akresh, Abraham D.
Publication:Journal of Accountancy
Date:May 1, 1990
Words:602
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