Defining the Role of Financial Statement Auditors
March 15, 2017
Financial statement auditors (independent auditors) have a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether error or fraud (Public Company Accounting Oversight Board, PCAOB, 2015).
SAS No. 99, Consideration of Fraud in a Financial Statement Audit, requires auditors design financial statement audits in a manner that ensures reasonable chance of detecting misstatements due to error or fraud in financial reports. Under this guidance, auditors must follow a three-step process. First, gather information related to risks of misstatements in financial reports. Second, analyze and assess risks of misstatement regarding an entity’s programs and controls. Third, apply the information obtained to the structure and application of the audit. Throughout the financial statement audit process, auditors must formally discuss and document the potential for misstatement in the financial reports. Also, auditors must assess and document the risk of management override of internal controls.
Other required assessments auditors must perform include retrospective reviews of accounting estimates and business rationales for unusual transactions. Also, auditors must use the fraud triangle in assessing risks. The three parts to the fraud triangle are pressure/, opportunity and rationalization/attitude, and these components appear in most fraud cases (Hopwood, Young, & Leiner, 2012).
Inside an organization, an internal auditor has the responsibility to actively monitor compliance with policies and behavior relating to internal control. Internal auditors provide independent, objective assurance and consulting that is designed to add value and enhance an organization’s operations (Hopwood, Young, & Leiner, 2012).
Several components are vital to the internal auditors and what they do. For example, independence of the internal auditor is accomplished by reporting directly to the board of directors. The independent internal auditor may investigate or report directly to the CEO without fear of retaliation as well. Another component is that risk management starts with the organization’s objectives and desired level of risk. Also, internal auditing is a continuous process and it should be performed in a planned and consistent manner. Internal auditors help enhance the effectiveness of risk management, control and governance processes. Regarding fraud detection, the internal auditor detects and reports fraud and also manages the design and operation of the processes that prevent, detect and remedy fraud (Hopwood, Young, & Leiner, 2012).
Author Cason Benham is a former Big 4 auditor with over 10 years of combined experience in public accounting and information technology services. His experience includes services to regulated banks and publicly traded companies, expanding across many industries, including corporate, banking, technology and health care. He provides tax, audit and accounting services to individuals and businesses, relating to tax matters within the United States.
Cason has recently joined EMIA as their Banking/Finance Correspondent.