What are the common misconceptions about auditing and auditors?
Sadly, many people have a rather negative impression of the word audit. Many associate an audit with international corporate collapses since auditors had some role in these. Others think that an audit involves someone who has accounting knowledge and prepares an entity’s year end financial statements. Still, there are others who believe that the auditors’ sole duty is to review their work and report to management about their shortcomings. Some believe that an audit is performed in order to detect if there are any fraudulent activities taking place within their company.
As a result of these misunderstandings, auditors have a stigma associated with their work. Many clients are defensive and not helpful which makes the audit extremely difficult. This has a direct impact on the cost of an audit.
What is an audit?
An audit is basically a combination of substantive, analytical and verification procedures performed by auditors to obtain sufficient evidence to be able to ultimately provide an opinion as to whether the financial statements are fairly presented.
The purpose of the audit is to protect the shareholders of the company as well as any other party that may have a financial interest in the company. These may include creditors, revenue services, potential investors and banks.
It is not the auditors’ responsibility to prepare the financials nor is it the responsibility of the auditors to prevent or detect fraud. Although the detection of fraudulent activities may be built into procedures performed while obtaining evidence about fair presentation, it is not the reason behind companies having annual audits. Contrary to many clients’ beliefs it is also not the purpose of the audit to “check-up” on the work of specific employees.
By performing and being able to rely on tests of control, an auditor can reduce the tests of detail to be performed. This would reduce the time taken to audit a specific section which would directly reduce the cost of an audit.
What are the benefits and value derived from an audit?
1. A lot of emphasis is placed on audited financial statements.Potential investors and shareholders would be satisfied if an unqualified opinion is given by the auditors since they know that auditors have the relevant knowledge and qualification and most importantly that the auditors are independent of the preparations of the financials. Banks for example would want an audited set of financials before even considering a loan application.
2. An audit also helps identify any internal control deficiencies and areas of concern. In their management letter, auditors highlight controls that they found were not operating effectively. They would also indicate the possible consequences of these deficiencies and make recommendations for resolving the problems.
3. Auditors also provide insight into areas that are working but that could be performed more effectively. Auditors work in many different client environments and are exposed to varying business processes and the practical knowledge of what works well and what doesn’t can be shared with their clients. Thus recommendations made by auditors can give their clients a competitive edge.
How can clients assist with the audit?
1. Management should be forthcoming with information and their time. As auditors are expressing an opinion as to how fairly management has prepared the financials, it only makes sense that a great deal of questions are directed towards senior management.
2. Client staff should be open and willing to assist the auditors. Management should include in the performance contract of employees a measure of how well the audit went. In this way, client staff would view the auditor’s request for information as part of their job requirements and not as a “favour” that they are doing for the auditor over and above their daily responsibilities.
3. Attitudes of management should be changed from viewing audits as a costly and necessary evil to something that is performed to assist them in running their business in a more effective manner and to add value by identifying areas of risks. If the correct tone is set by management, this would filter down to junior staff.
How can auditors assist in dispelling the darkness around auditing?
In order to humanize them and remove the masks of these phantoms called auditors, audit firms should make a concerted effort to have audit lunches with the client (management and employees) before as well as after the audit. By meeting with the client and explaining to them the work that the auditors are going to perform, the purposes behind the procedures being performed, the role that each staff member of the client would play in the audit and the benefits of having an audit, auditors would be able to successfully obtain information from clients in a timely manner.
The relationship between the client and the auditor is an essential element of a successful audit. The cost savings in time and money from the audit firms’ perspective far exceed the initial cost investment in audit lunches and client relations and would undoubtedly dispel any darkness of doubt and uncertainty surrounding auditing.
Theashen Vandiar CA(SA) Project Director: Auditing and Members’ Advice at SAICA.