Why The Need For Audit

The cost of financial statements audit has been increasing significantly year on year basis.  Many are those who do not see the value this service add to the business.  However, owners and directors continue to pay huge sums of money to auditors to have their books audit even in situations where audit is not a statutory requirement.  Today we will take a brief look at what motivates entities to have their financial statements audited.

1.      Statutory Requirement

For many public companies they have no choice but to have their financial statements audited annually.  In most jurisdictions, the country’s companies code has clear requirements for annual financial statement audit by independent qualified person/body.

2.      Owners assurance

Many companies have broad shareholders and obviously not all these shareholders are and/or can be involved in the day to day management and administration of the business.  Management of the company is in the hands of few appointed directors.  To know the performance of the company, the directors are required to present financial statements reports to the shareholders.  The shareholders would like to be sure that the reports presented are not misleading, does not contain significant errors and all the relevant information have been made available to them. Financial statements audit gives owners the assurance that the financial statements are the true and fair reflection of the performance of the business.

3.      Assurance for management

Management is responsible for the preparation of the financial statements. The reports are produced from volumes of transaction in many cases and the possibility of errors may be high.  Also financial reporting is becoming complex especially for entities operating in many jurisdictions.  Having the independent auditor who has world class expertise reviewing auditing the financial statements gives management the confidence and peace of mind that their figures/reports are true and fair.

4.      Control System assessment

Management design and implement control systems to prevent fraud and errors in their accounting systems. Nowadays financial statements audits include the assessment of the controls systems in place.  Therefore financial statements audit gives stakeholders the reassurance that an expert has assessed the sufficiency, strong and effectiveness of control systems in the company.

5.      Compliance

Some companies are expected to comply with some regulatory requirements.  Special mention could be made of financial institutions like banks and insurance companies.  Regulators get some level of assurance of compliance through financial statements audit.

6.      Assurance to third parties

Normally, the auditor reports to the shareholders.  However, the entity transacts businesses with so many other third parties like banks, suppliers and customers and these parties are interested in the performance of the entity.  Financial analysts use the financial statements for performance assessment, evaluation and forecasts.  All these parties will want to be reassured that the financial statements are not misleading.   Financial statements audit adds the needed credibility.

 

From the above, we can say that many stakeholders have embraced financial statements audit because of the need to add credibility to reports and the expertise of the auditor in handling complex and technical issues.

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