Conducting an audit on a company’s financial statements is not an entirely popular idea. Many managers still hold the belief that conducting external financial audit is too intrusive. Thus, there are those managers who believe that conducting an audit, despite the assured benefits is counter productive. For instance, the cost of hiring auditors is too prohibitive to most companies. Thus doing annual external audit requires extra funds which have to be accounted for in the company’s annual budget.
This is likely to lower the company’s profit margins. Additionally, as mentioned earlier, some managers feel that auditing can be too intrusive. According to the Center for Audit Quality, audit involves “examining available evidence in support of a company’s financial statements” (CAQ 2011).
Thus, access, by external auditors, to company’s sensitive financial information is risky since such information is likely to be leaked to competitors, who are likely to use such information against the company. These assumptions seem to be precipitated by the fact that external auditors’ overarching aim is to provide a reasonable assessment of a company’s financials performance. External audit reports fail to indicate absolute truths about a company’s financial position.
The assertions made above are likely to be perceived as demonizing external audit. However, external audit involves a number of practices beneficial to a company. According to Bragg (2011), one of the preliminary stages of financial auditing involves establishing the terms of engagement.
During this process an audit firm conducts its own evaluation of the reputation of the company to be audited. Audit firms normally desist from engaging with company’s whose reputation is questionable. Thus, shareholders in a publicly listed company are likely to establish the company’s reputation from the caliber of the company’s auditors.
Besides establishing the terms of engagement, auditing also involves establishing standards for quality control. In doing this, audit firms largely depend on the willingness of the auditee’s top management to collaborate with the external auditor in setting the tone for quality assurance.
As such, external audits are stern tests on willingness of the company’s top management to establish high standards of quality control. Additionally, establishing standards for quality control involves a number of activities. These include establishing policies within which professional auditing is to be conducted.
Thus, by conducting audits, external auditors help a company improve its internal quality control systems. This implies that by engaging external auditors, firms are able to enhance quality management. This enhances accuracy in financial reporting which translates to improved performance by the company.
According to Center for Audit Quality, no two companies are the same. Each company is unique, in terms of financial reporting. Each company also has its own unique auditing challenges which require customized auditing standards (CAQ 2011). Nevertheless, this does not imply that external auditors develop completely new sets of auditing standards for each firm. According to Craswell (1990) internal auditors rely in international accounting standards.
Thus, CAQ’s (2011) assertion that external auditors customize auditing standards depending on the uniqueness of the company’s auditing challenges ought to be taken in light of the fact that customization of auditing standards is based on the international financial reporting standards.
It is imperative to note that the international financial reporting standards form the core of globally recognized financial reporting standards. Thus, by engaging external auditors, publicly listed companies in Australian test their financial reporting against internationally accepted standards. This gives shareholders an idea of how the company is likely to perform in the global market.
According to Nicoll (2005) conducting external audits amounts to opening a company’s financial records to public scrutiny. Based on assertions made by CAQ (2011), this seems to be unpopular with managers. However, external audit reports are valuable tools with which shareholders establish the authenticity of a company’s financial position.
Additionally, by opening the financial books to public scrutiny, external audits assist company’s management as well as shareholders in comparing the company’ performance against other companies whose accounts are also open to public scrutiny. This helps to identify a company’s position with regards to competition. Thus, external audit of a company’s financial record helps in identifying its market position.
This also assists the company’s management in making accurate decisions for the future. Additionally, despite CAQ (2011) assertions that external audit reports are unlikely to portray the absolute truth about a company’s financial position, these reports are nevertheless very reliable in portraying a company’s financial position. Thus, shareholders are likely to use these reports in making decisions their investment.
Conducting external audit on a company’s financial performance has it merits and demerits. For instance, engaging reputable external auditors is very costly. Thus for a company struggling to meet profit targets, such cost seems unnecessary. Nevertheless, external audits are beneficial than they are disadvantageous.
Not only is the company able to measure its performance against competitions but also able to establish its market position locally and globally. Such reports indicate an almost near truth regarding a company’s position. Thus, they are valuable tools with which shareholders measure the true status of the company’s performance. From a shareholders point of view, external audit is necessary.
List of References
Bragg, S. 2011.The new CFO financial leadership manual. New Jersey: John Wiley and Sons.
CAQ. 2011. In-depth guide to public company auditing: The financial statement audit. [online] Web.
Craswell, A.1990. Who audits Australia? Sydney: University of Sydney Press.
Nicoll, P. 2005. Audit in a democracy: the Australian model of public sector audit. Ashgate Publishing, Ltd. Burlington, VT.