What is an audit?
An audit is the highest level of financial statement service a CPA can provide. The purpose of having an audit is to provide financial statement users with an opinion by the auditoron whether the financial statements are prepared in accordance with the proper financial reporting framework. An audit enhances the degree of confidence that intended users, such as lenders or investors, can place in the financial statements.
The auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatement, and whether the misstatements are from error or fraud.
To obtain reasonable assurance, items are observed, tested, confirmed, compared or traced based on the auditor’s judgment of their materiality and risk. After gathering appropriate evidence through this process, the auditor issues an opinion about whether the financial statements are free from material misstatement.
As an additional benefit, the auditor may become aware of some deficiencies in internal control or weaknesses in the organization’s systems and offer suggestions for improvement. Some of the more important auditing procedures include:
- Inquiring of management and others to gain an understanding of the organization itself, including operations, financial reporting and known fraud or error
- Evaluating and understanding the internal control system
- Performing analytical procedures as expected or unexpected variances in account balances or classes of transactions appear
- Testing documentation supporting account balances or classes of transactions
- Observing the physical inventory count
- Confirming accounts receivable and other accounts with a third party
Ideally, auditors will provide an unqualified, or “clean,” opinion on the company’s financial statements. An unqualified opinion will contain language such as “the financial statements present fairly in all material respects” and “in conformity with accounting principles generally accepted (GAAP) in the United States.
If an auditor is unable to render an unqualified opinion, a qualified opinion may be issued. Some reasons opinions may be qualified include scope limitations and departures from GAAP.
A qualified opinion due to a scope limitation alerts the reader that, except for the matter to which the qualification relates, the financial statements present fairly, in all material respects, the company’s financial position. If the scope limitation is severe enough, the auditors may disclaim an opinion on the overall financial statements.
When an auditor issues a qualified opinion, the auditor believes the financial statements are fairly stated in all material respects except for a material departure from GAAP. But the auditor has concluded not to express an adverse opinion.
However, if the auditor concludes that the departures from GAAP are so significant that the financial statements as a whole are not fairly stated, an adverse opinion must be issued. An adverse opinion will include language describing what the auditor believes is materially misstated in the financial statements, and the effects of the misstatements. If the effects are not reasonably determinable, the auditors will state that.