Auditing: Understanding the Auditor's Report
Cory Campbell
ACCT 439-Section 1
AS1
1-30: It has been stated that auditors must be independent because audited financial statements must serve the needs of a wide variety of users. If the auditor were to favor one group, such as existing shareholders, there might be a bias against another group, such as prospective investors.
a. What steps has the external auditing profession taken to minimize potential bias toward important users and thereby encourage auditor independence?
---The external auditing profession as a whole has became more concentrated on maintaining auditor independence and it is now one of the cornerstones of quality auditing. One way that independence can be violated is when an auditor shows bias towards an important user of the financial statements. Management, stockholders, bondholders, and taxing and regulatory companies are all important users that the profession has tried to avoid showing bias towards. The SEC has written principles that show independence is impaired when an auditor acts as management or an employer of the audit client or if the auditor is in any position of advocacy for the company. The AICPA also states that there are safeguards in place to avoid independence problems. Some that prevent potential bias are audit partner rotations of every 5 years, not allowing nonaudit work to be done by the external auditor, and rotation of senior engagement personnel. Overall, many things have been done to prevent potential bias towards particular users because it ruins the integrity of auditing.
b. Refer to Exhibit 1.2 and describe the users of audited financial statements and the decisions that they need to make based on reliable information.
---There are many different users of these statements such as management, stockholders, bond holders, taxing authorities, court systems, vendors, and many others. The thing they all have in common is that they are using the statements to make important decisions that affect their company both in
ACCT 439-Section 1
AS1
1-30: It has been stated that auditors must be independent because audited financial statements must serve the needs of a wide variety of users. If the auditor were to favor one group, such as existing shareholders, there might be a bias against another group, such as prospective investors.
a. What steps has the external auditing profession taken to minimize potential bias toward important users and thereby encourage auditor independence?
---The external auditing profession as a whole has became more concentrated on maintaining auditor independence and it is now one of the cornerstones of quality auditing. One way that independence can be violated is when an auditor shows bias towards an important user of the financial statements. Management, stockholders, bondholders, and taxing and regulatory companies are all important users that the profession has tried to avoid showing bias towards. The SEC has written principles that show independence is impaired when an auditor acts as management or an employer of the audit client or if the auditor is in any position of advocacy for the company. The AICPA also states that there are safeguards in place to avoid independence problems. Some that prevent potential bias are audit partner rotations of every 5 years, not allowing nonaudit work to be done by the external auditor, and rotation of senior engagement personnel. Overall, many things have been done to prevent potential bias towards particular users because it ruins the integrity of auditing.
b. Refer to Exhibit 1.2 and describe the users of audited financial statements and the decisions that they need to make based on reliable information.
---There are many different users of these statements such as management, stockholders, bond holders, taxing authorities, court systems, vendors, and many others. The thing they all have in common is that they are using the statements to make important decisions that affect their company both in