Quiz 1: An Introduction to Assurance and Financial Statement Auditing


Auditing Auditing describes reliability, relevance, and analytical and logical skills of the financial information theoretically. All other accounting concepts help the user to learn rules and techniques of preparation and analysis of financial information. Auditing enables business managers, consultants, investors, regulatory agencies and creditors to take right decisions on financial aspects of the entity. Auditing also ensures that the financial information pertaining to the entity is reliable, credible, relevant, and time bound.

Auditing of the financial statements The audit of the financial statements ensures that all the activities recorded in the financial statements of the governmental entity are presented in accordance with the required laws, regulations, and agreements. There is a constant demand for auditing services in a free-market economy. There is a demand for auditing services because it is necessary to prove financial statement reliability to decision makers that want to use it. Agency relationship between an absentee owner and a manger is another reason behind the demand for auditing in a free-market economy. Agency relationship produces a conflict of interest due to the information asymmetry that exists between the owner and manager. Therefore, the agent agrees to be monitored as part of his employment contract. The AICPA's (American Institute of Certified Public Accountants) auditing standards are applicable to both the private sector and public sector audits. GAGAS (Generally Accepted Government Auditing Standards) restricts the non-audits related work as it weakens the independence conceptual framework and standards. GASB (Governmental Accounting Standard Board) requires the external auditors of the state and local government entities to at least audit the basic financial statements that include government-wide financial statements and the funds financial statements. In the year 1926, prior to Securities Act 1933 and Securities Act 1934 , around 80% of the companies listed on the New York Stock Exchange were being audited by independent auditors.

Agency Relationship Agency relationship prevails between the owner and the manager. This relationship creates natural conflict of interest due to information asymmetry. Managers and owners have different opinions and goals regarding "true" information on the financial position of the firm. The manager knows more information and also the results of operations of the concern than the absentee owner. If there is a good relationship between both the parties, they may tend to manipulate the information.