Audits Of Financial Statements Compared To Internal Audits

Audits Of Financial Statements Compared To Audits Of Internal Controls

Audits of financial statements are conducted primarily to provide an independent assessment of a company's financial reports, ensuring they present a true and fair view of the company's financial position and performance. The main objective is to enhance the credibility and reliability of financial information for stakeholders such as investors, creditors, regulators, and management. These audits help detect errors, fraud, or misstatements, thereby safeguarding the interests of those relying on the financial data. The benefits include increased confidence in financial disclosures, improved transparency, and adherence to generally accepted accounting principles (GAAP). Primary beneficiaries of such an audit are investors making investment decisions, lenders assessing creditworthiness, regulators ensuring compliance, and management striving for financial accuracy and integrity.

In contrast, an audit of internal controls over financial reporting aims to evaluate the effectiveness of a company's internal control systems in preventing or detecting material misstatements in financial statements. Its purpose is to provide assurance that the internal control mechanisms are sufficiently designed and operating effectively to support the accuracy of financial reporting. The benefits include early identification of control weaknesses, reducing the risk of errors and fraud, and increasing overall organizational efficiency. An important benefit for stakeholders, especially in jurisdictions like the United States with the Sarbanes-Oxley Act, is enhanced confidence in the integrity of financial reporting due to the strengthened internal control environment. This type of audit is also valuable for management, as it helps improve internal processes and control systems.

When evaluating audit evidence in support of an audit opinion regarding a company’s financial statements, certain characteristics make the evidence persuasive and adequate. Persuasiveness of audit evidence depends on its relevance and reliability, which are influenced by the nature and source of the evidence. For example, evidence obtained from independent external sources or corroborated by other evidence is generally considered more reliable than internally generated information. Additional characteristics include sufficiency and completeness; auditors must gather enough evidence to support their conclusions and ensure that they cover all relevant aspects of the audit. The use of appropriate audit procedures, proper documentation, and a professional judgment also contribute to the strength of the evidence. Reliable and persuasive evidence provides a solid foundation for auditors to form a well-supported opinion on the fairness of the financial statements and to detect possible misstatements or irregularities.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2020). Auditing and Assurance Services (16th ed.). Pearson.
• Association of International Certified Professional Accountants. (2020). AU-C Section 330: The Auditor’s Responses to Assessed Risks. AICPA.
• Public Company Accounting Oversight Board. (2012). Auditing Standard No. 5: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements.
• Humphrey, C., Moizer, P., & Turley, S. (1992). The audit expectations gap: The impact of the Cadbury Report on UK practice. Accounting and Business Research, 22(86), 227-237.
• Christensen, H. B., Lee, H. Y., Walker, R. G., & Wong, K. S. (2015). Earnings quality and the economic consequences of soft information in local and international markets. The Accounting Review, 90(1), 287-317.
• Goncharov, I., & Zhou, J. (2016). Internal control reporting and firm value: Evidence from the Sarbanes-Oxley Act. Journal of Accounting and Economics, 61(1), 188-206.
• Iliev, P. (2010). The effect of SOX internal control disclosures on firm risk. Journal of Accounting and Economics, 49(1-2), 94-117.
• Sanchez, M., & Hoque, R. (2019). Enhancing audit quality: The role of internal control. Accounting Horizons, 33(3), 45-63.
• Griffiths, A., & Wall, C. (2014). Auditing, Internal Control and Risk Management. Cengage Learning.
• US Securities and Exchange Commission. (2020). Financial Reporting Manual.