Auditing Edspira

• Audit


  A type of assurance service that lends credibility to financial statements
• Purpose of an audit

  • To provide reasonable assurance that financial statements are free from material misstatements and conform to generally accepted accounting principles
• Audit process


  1. Auditor performs tests and procedures to verify the accuracy and legitimacy of the financial information provided by the company

  2. Auditor issues an opinion on whether the financial statements present a fair and accurate picture of the company's financial position and performance
• Material misstatement


  A significant error or inaccuracy in the financial statements that could influence the decisions of investors or creditors
• Walmart's financial statements


  • $500 billion in revenue (immaterial error of $8)
  • $300 billion in revenue (overstated by $200 billion - material misstatement)
• Auditors do not provide a 100% guarantee, but aim to provide reasonable assurance
• Auditing


  Fundamental to the success of financial markets
• Companies that are publicly traded in the United States are required to file audited financial statements with the Securities and Exchange Commission
• Even small privately owned companies may voluntarily choose to have their financial statements audited
• Auditing


  Makes the numbers in financial statements more credible
• Without auditing


  Investors and creditors cannot trust the financial information
• Investors and creditors can trust audited financial information


  They can make better decisions about how to allocate their capital
• Reasons to get financial statements audited

  • Buying a business
  • Buying shares of a publicly traded company
  • Lending money to a company
• Enron's financial statements were not properly audited, leading to fraud and overstatement of revenue and profitability
• Enron's auditor, Arthur Andersen, was indicted due to their poor audit practices
• Lack of trust in financial information


  Investors and creditors are less likely to invest or lend money
• Auditing is critical for the proper functioning of capital markets
• Going concern opinion


  An opinion issued by a company's external auditor when they have reason to believe the company could cease operations soon and go bankrupt
• Going concern assumption


  • Accounting assumption that a company will continue into the future, which is why assets are depreciated over their useful life
• Issuing a going concern opinion

  1. Auditor identifies substantial doubt about company's ability to continue as a going concern

  2. Auditor adds an explanatory paragraph to the audit opinion to disclose this
• A going concern paragraph does not mean the audit opinion is not clean/unqualified
• If a company is going to go bankrupt soon

  It may not make sense to depreciate assets over many years
• The going concern paragraph is an obligation for the auditor to disclose this information to investors and creditors