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Auditors and auditing

Opinion by: Arben Selimi

The Securities and Exchange Commission (SEC) requires each public company (those companies whose shares are publicly traded on the stock exchange) to hire an auditor to examine its financial statements through an audit process. This auditor is an accountant who is not an employee of the company and is licensed by the state to practice the auditing profession. He must audit (or examine) the Company’s records and give an opinion on whether the Company’s financial statements have been prepared in accordance with the financial reporting standards. The auditor is also responsible for providing reasonable assurance that the financial statements are free from material misstatement or fraud.

The financial statements are prepared by the management of the company, they are also responsible for them, not the auditors. Management must sign a statement stating that the financial statements have been prepared in accordance with financial reporting standards.

The difference between accounting and auditing

Accounting records, classifies and summarizes economic events within a company. The summary of these events results in the preparation of the financial statements.

An audit, on the other hand, does not deal with the preparation of financial statements, but evaluates these statements to determine whether they have been properly prepared in accordance with accounting rules and whether all events that occurred during the period in question have been included.

There are three main types of auditors:

Licensed auditors

Provide audit services, preparation of tax statements, as well as management consulting. Licensed auditors may be self-employed or may be employees of an audit firm. It can be a small audit firm with only one individual, or an international firm with thousands of employees such as KPMG, Deloitte, etc.

Internal auditors

Are hired by the company to audit the company’s own records and set up an internal control system. The work of these auditors and the reports they produce are based on the requirements of the company’s management. They mainly perform compliance audits (to ensure that the accounts are in compliance with company policies and applicable laws) and performance audits (review of the efficiency and effectiveness of the company’s activities). Performance audits examine whether resources are being used efficiently. Through performance reports the company’s management receives information based on which it makes decisions that help the company become more profitable.

State auditors

Are individuals that perform the audit function in state/government organizations. These auditors are independent of the organizations they audit. Such is e.g. Kosovo National Audit Office, or the United States General Accounting Office, etc.

Why auditing is important

Ordinary people (non-accountants) find it difficult to fully understand the financial statements published by companies or government organizations. The auditor’s report gives readers and users of financial statements assurance that the information presented therein is in accordance with accounting and financial reporting standards. The audit also provides assurance that the financial statements are free from material misstatement and fraud.

Assurance stems from the fact that the auditor reviewing the financial statements is independent of the management of the company/government organization.

Thus, when any public company publishes its annual report/financial statements, audited by a professional auditor, we can be assured that the figures presented therein  are accurate, complete and relevant to the reporting period.

But audits also have limitations. Many people believe that the auditor can stop or detect all fraud within a company, but this is not the case. Although auditors apply procedures to detect fraud, they cannot detect or disclose every case of fraud.




author of the opinion can be reached at: arben@thejournalbiz.com
editor of the article is; arsim@thejournabiz.com