Auditors are charged with the responsibility of expressing an opinion regarding the fairness and truth of financial statements. Nonetheless, not many people are able to appreciate the vital role played by auditors in the modern economy. In the absence of auditors however, the functioning of the modern corporate society, charged with the responsibility of producing most of the services and goods, could be hindered. Fraudulent restatements of earnings and financial reporting are becoming increasingly prevalent and for this reason, auditing (whether internal audits, government audits, or external audits) have gained importance. Because the modern day economy is full of corporate bankruptcies, regulators and investors alike demands that organizations provide them with accurate financial reports. Corporate accounting statements are very important because they provide a true picture of a firm’s financial situation, in addition to showing how the firm in question has managed to finance its operations, be it in the long-term, or short-term. In this case, the role of an auditor is to scrutinize the financial data of a company and ensure that there is accuracy and regulatory compliance. Therefore, an auditoir is a compoliance and accounting specialsit who sifts through the financial stareemnts and internal controsl of a firm. Auditors undertake detailed reviews of corporate mechanism and controls, in eefct seeing to it that the departmental heads closely monitors the operating risks associated with their respective business units. The roele of an interanal audoitrs is to concentrate on coprprate policies, and confirm thaqt thre are adequalte and effective business unitcontrols in as far as a firm’s operating environment is concerned. On the other hand, external aurostsrs are charged with the resposnbilisty of reviewing accounting mecanissm and procedures, and also to see to it that the proceuers in question are in line with the generaaly accepted accounting principles. In this regard, audtotsr play a very crucial role in ensuign that fimrs conform to regulations. Auditisr can only give firms a clean bill of health after they have reviewed and certified its financial stamenets. Favorable audit reports are good for buisnes because they transalet into incersed investor interest, good reputation, and reduced adverse regulatory initiatives.
Role of an auditor in a firm’s financial reporting
Firms that are involves in production for example, requires substantial investment in the form of a plant or machinery. Such an operation is very costly to finance and only ahandful of individual may have the necessary amount fo capiotal to manage such oepoartions. Howver, in the case of a corporation, the management can convine investors to finance such opeartiosn, but they need a guarancte that they shall get value for the moeny they have invested in the firm. In this case, the issue fo financial rep[orting becaoems very important fro such a firm and the invesortsr as well becvadue it not only shows how the moeny has been spend, but also the accrued benefits from the investeemnts made. Directors are often required by shareholeders to provide them with regular reports on how they have invested them money. Financial statements are also very important because the information allws investors to decide on the stocks to sele or buy. Shareholders are liekyl to doubht the truthfuleness or legitimacy of the financial records peraperd by the directors and for this reason, it is important to have a third party who wil authenticate such records. Thsisi how the roel fo a auditr comes in, in order vto reduce this infroamtion risk. Normally, the diercotrs will have to perapeers the finacia lsatteemnts, and then the shareholders have to appoint an indepednet aduoitrs who will then come in and examione the finaclia reports and give theri verdict to the shareholders.
The role of an auditor and the agency theory
Audits are important in the economy and in reinforcing trust, strengthening accountability and confidence in financial reporting. Therefore, audits improves economic prosperity, and increases the value and number of transactions that individuals might be willing to engage in. on the other hand, in recent years, we have witnesses a lot of corporate scandals and as a result, there is now an increase in the global demand for enhanced audit quality. The role of an auditor is to provide an independent check on the information provided to them by an agent. This is intended to enhance confidence and trust. The agency theory holds the assumption that the directors of a firm are likely to produce financial statements that portrays better performance of the firm that is actually the case. In the same way, the agency theory holds that the shareholders of a firm are likely to suspect that the financial statements that have been presented to the shareholders by the directors could in fact be misleading. However, as opposed to trusting in legislation as a way of fixing the situation, the agency theory predicts that the directors will more than likely be inclined to arrange for the services of an auditor. Therefore, directors acts as the agents of their shareholders, and they praise that they shall manage their investments in the firm. In return, the directors expects to be remunerated appropriately for their services. The agency risk holds that the shareholders are likely to suspect that their money will be misused by the shareholders. As such, shareholders are likely to expect more returns as the risk anticipated increases. An incerse in the reliability of the information that the directors provided to the shareholders reduces the anticipated risk. This also means that the cost fo capital for thje company in question wil also be less. Therefore, theccomapny is likely to invest in more profitable projects. According to the agency theory, the dierctosr fo a frim have an incestaive to seek the services of higfh quality aduosyrs as a way of reducing the agency risk, in the hope of incersign the firm’s capital, threby improving their own sattus as well. Another theory holds that adutign is like a from fo insuarcne. Sicne audotrs have to reimburse the shareholders in case of negligence, in this case, we can say that the shareholders have been ‘insured’ against poettmnial risks that could accompany misleading information botrce on fialse fiancle statements issued by ther firm’s directors.
An effective audit exercise calls for audit independence. In the late 19th and in the beginning of the 20th centuries, the concept of auditr indepnce experienced soem changed. When the SEC was establssiedh, it stressed on the creation fo staradrs for auditing and financial repoiritng. Conseqwunelty, aautors independce model shifted in favour of nuietrality and objectivity in reporting. The malw makes it manadatory that the corporate sector has to have its accounst audited. The same sattute also defines the rights, powers and duties of an auditor. The reason for this change is because duitrngh this time, thre was a massive shift in terms of capita;l from certain sources to capital obtained mainly from domestic sources. Thre was a ned therefore to ensure the separation of management and ownership, owing to the incersed role and signfifnance of autiidgn sand acocuntign. The main dutity fo the auditrs was to serve the interest of the proprietors, which involved the general public and shareholders. When the SEC was establssiedh, it stressed on the creation fo staradrs for auditing and financial repoiritng. Conseqwunelty, aautors independce model shifted in favour of nuietrality and objectivity in reporting. The malw makes it manadatory that the corporate sector has to have its accounst audited. The same sattute also defines the rights, powers and duties of an auditor. Audit independence is crucial owing to the need to separate the management and ownership of a business entity because the owners have to maintain a professional wathc on the management, In addition, since the management of a firm is charged with the responsibility of preparing financial statements related to the frim in question, the woehners needs tro be concenred asbout whom they can trust to ensure that the firm’s financial accounts are reliable. As such, if at all the audiotr’s reports are to be reliable, audit independence is mandatory. Otherwise, the reports are likely ont to be credible, meaning that both cerditosdr and investoirs would have very little cocfidence in such documents. The hallmark of the adutign porfessin is the independence of an auditor. In light of this, the indepencec of an auditor is often seen as a crucial elements in the business sector because it iads in protecting the interest of the different parties involved.