Do Users’ Expectations Call for a New Report?
In the wake of the financial failures of companies such as Enron and WorldCom, auditors were blamed and held accountable for the financial losses suffered by the stakeholders of the companies. The users of the financial statements of these failed companies expected the auditor to inform users of any going concern problems associated with the companies and discover fraudulent practices during the audit (Dennis, 2010). The auditor’s job involves opining on the fair presentation of a company’s financial statements in accordance with the generally accepted accounting principles (GAAP) and to present information on all important matters that affect ...view middle of the document...
The report specifically communicates three specific elements regarding the company’s financial statements, the conduct of the audit, and the entity in general:
* The auditor’s report communicates whether a company’s financial statements fairly present the financial condition, results of operations, and cash flows of the entity in conformance with GAAP. The auditor is responsible for reporting any departures from GAAP and any material omissions from the financial statements.
* The auditor’s report highlights any unusual aspects of the audit examination. The auditor presents any information that concerns the performance of the audit such as scope and timing of the audit, any client-imposed restrictions, and division of auditors’ responsibility.
* The auditor’s report references other important matters that affect the audit or the client. These matters may include information relating to going-concern problems, relevant subsequent events and any changes in accounting principles that the auditors believe are material to the intended users of the financial statements. (Louwers et.al., 2011)
In addition, the Auditing Standards Board (ASB)-issued Statements of Auditing Standards (SAS) No. 58, Reports on Audited Financial Statements, “requires the auditor to indicate the responsibility being assumed by the auditor, the nature of audit procedures performed in conducting the audit, and the degree of assurance being provided” (as cited in Gray, Turner, Coram & Mock, 2011, p. 664). This requirement helps distinguish between the auditor’s and management’s responsibility relating to the financial statements. Most importantly, the statement emphasizes that the auditor plans and conducts the audit to obtain reasonable assurance rather than absolute assurance that the financial statements are free of misstatements in all material respects (Gray et. al., 2011). Auditors of nonpublic companies in the United States adhere to the ASB-issued standards. However, the auditors of public companies are required by the Public Accounting Oversight Board (PCAOB) to also express an opinion on the effectiveness of internal control over financial reporting (Louwers et. al., 2011).
Despite the variety of companies and industries being audited, the auditor report comes in a standardized format and often read exactly the same way. The wording in the reports id designed so users can easily determine whether accompany obtained a standard unqualified opinion or a nonstandard opinion (Church, Davis, & McCracken, 2008). The audit report is often called a “pass/fail” model in that the auditor’s opinion is either that the company’s financial statements are fairly presented (pass) or not (fail) (Ciesielski & Weirich, 2012). The report basically indicates what the auditor examined, how it was examined, and the auditor’s opinion on the conformance with GAAP. The ideal scenario is that the users study the financial statements themselves with the assurance that...