Lessons

Auditing of Financial Statements

Objectives

The financial statements are the responsibility of the management of the company. The Board of Directors of the company will appoint an independent public accounting firm to conduct the audit of the firm.

The primary objective of the audit is to express an opinion on the financial statements. The auditor issues an opinion on fairness of financial statements. He also issues his opinion on the effectiveness of controls if it’s a public company.

As a part of the audit, the auditor examines the accounting books, financial statements, assets, liabilities, internal controls, etc., to determine that there are no material errors in the financial statements.

The objective is to ensure that the financial statements are presented fairly, are complete in all material aspects, and are in conformance with accounting standards such as GAAP.

The auditor will present his views in the form of a report called auditor’s report.

The auditor’s report has a standardized format. A sample opinion paragraph of the Standard Auditor’s Report is provided below:

“In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and its subsidiaries as of December 31, 20X3 and 20X2, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.”

The auditors obtain sufficient audit evidence and reasonable assurance to conclude that the financial statements as a whole are free from material misstatements.

Types of Audit Reports

There are four categories of audit reports:

Type of Report	Interpretation
Unqualified Opinion	Financial statements taken as a whole present fairly the financial position, results of operations, and cash flows in conformity with generally accepted accounting principles (GAAP).Unqualified opinion may be issued with an explanatory paragraph to highlight certain matter.
Qualified Opinion	“Except for” the effects of a particular matter, the financial statements present fairly the financial position, results of operations, and cash flows in conformity with GAAP.
Adverse Opinion	Financial statements do not present fairly the financial position, results of operations, and cash flows in conformity with GAAP.
Disclaimer of Opinion	Auditor does not express an opinion on the financial position, results of operations, or cash flows.

Effective Internal Control

The internal controls are processes established by the management of a company designed to provide reasonable assurance that the organization achieves its objectives regarding effectiveness and efficiency of their operations; reliability of financial reporting; and compliance with applicable laws and regulations.

Internal controls are a responsibility of the management. Under US GAAP, it is mandatory for the auditor to provide his opinion on the internal controls followed by the firm.

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