QS Study

Objective of Audit in Financial Statements

Auditing is a systematic examination of books and records of a business or other organization, in order to the assertion or verifies and to report upon the facts regarding its financial operations and the results thereof. It is the process of reviewing and investigating any aspect of a business, whether financial or nonfinancial. It is an official examination and verification of accounts and records, especially of financial accounts.

Topic Contents:

  1. Accountability
  2. Reliability
  3. Scope

The objective of an external audit is for the auditor to express an opinion on the truth and fairness of financial statements.

Accountability

The main necessity for conducting the audit of financial statements stems from the fact that the persons responsible for the preparation of financial statements are often different from the owners of the large corporation.

Whereas in small owner-managed companies, the owners have firsthand knowledge of the affairs of their business, management, and ownership is normally separate in the case of large companies that often have thousands of shareholders. In large corporations, shareholders appoint directors to run the enterprise on their behave. This separation of ownership and control creates the need for an external audit.

Financial statements are the main source of accountability of management performance by the shareholders. However, as the management is responsible for the preparation of financial statements, shareholders have to rely on external verification by auditors in order to gain reasonable assurance that the accounts are free from material misstatements and can, therefore, be relied upon to be presenting a true and fair view of the affairs of the company.

Reliability

Apart from the needs of owners, other users of financial statements may need to place reliance on the financial statements. External audit is a means of providing a reasonable basis for the users to place reliance on financial statements.

Scope

A financial audit is intended to provide a ‘reasonable’ assurance over the accuracy of financial statements. It, therefore, does not provide absolute assurance that the financial statements are free from all misstatements. The purpose of audit la confined to monde reasonable assurance in order to avoid the excessive time and cost in the performance of the audit that may outweigh any benefit that may be derived from the enhanced assurance. Absolute assurance is also impossible to guarantee in most cases due to the inherent limitations of the audit.