Accounting 101

An audit is the third and most extensive service. An audit is appropriate for businesses that must offer a higher level of assurance to outside parties.

Businessperson Checking Invoice With Magnifying GlassAn unqualified opinion from a CPA after an audit provides reasonable assurance to outside parties that the entity’s financial statements fairly present its financial position and results of operation in accordance with certain accounting principles. An audit includes such procedures as confirmation with outside parties, observation of inventories, and testing selected transactions by examining supporting documents.

A public or private company may engage a CPA to audit its financial statements and to issue a report that provides the highest level of assurance that the financial statements are presented fairly in conformity with generally accepted accounting principles. In an audit, as in a review, the CPA must be independent of the client and the financial statements must contain all required disclosures.

To gather evidence on the reliability of the financial statements, the CPA performs search and verification procedures. The CPA generally confirms balances with banks or creditors, observes inventory counting, and tests selected transactions by examining supporting documents. In addition, the CPA contacts sources outside the client organization to gather information that may be more objective than that obtained from internal sources. For example, the CPA usually obtains written confirmation from a client’s customers about amounts owed to the client at a specific date.

By accumulating this type of evidence, the CPA tries to reduce the risk that the financial statements will be materially misstated. The auditor then issues a report stating that the financial statements are presented fairly, in all material respects, in conformity with generally accepted accounting principles.

An audit is planned and performed with an attitude of professional skepticism; that is, the auditor designs the audit to provide “reasonable assurance” that significant errors or fraud will be detected. However, irregularities or fraud concealed through forgery or collusion may not be found. An audit provides a reasonable level of assurance that the financial statements are free of material errors and fraud. An audit does not, however, provide a guarantee of accuracy.