To prove the existence assertion, the auditor will physically inspect each of these fixed assets. Premier Homes owns $150,000 in fixed assets, including machinery, equipment, and vehicles used for home construction. Witnessing that growth, Premier’s tax accountant, Bob, recommends an annual business audit. Her firm generated $1 million in sales last year, and the company is growing rapidly. Auditors use the existence assertion to address this risk.Īs an fictional example, let’s say Julie Myers owns and operates Premier Homes, a home construction business. ![]() A company may be tempted to inflate the dollar amount of assets in the balance sheet, to make the business appear more valuable. The existence assertion, for example, addresses whether or not the assets listed on the balance sheet actually exist. Auditors conduct work by reviewing assertions, and if there is evidence to support a particular assertion. An external auditor may have to perform more work for a client that does not have an internal audit function.Īn audit opinion from an external auditor is considered more reliable than work performed by an internal auditor because the CPA firm must be independent to issue an opinion.Īn audit is an opportunity for a CPA firm to give you a second opinion on the accuracy of your financial statements. ![]() Large companies have an internal audit department, but smaller companies do not. In fact, a CPA firm may rely on some of the work performed by internal auditors. Internal auditors perform many of the same procedures that external auditors complete. Independence means that the only compensation that the CPA firm receives is the fee for the audit, and the CPAs cannot perform tax, consulting, or any other work for the audit client.Īn internal auditor, on the other hand, is a company employee, and these auditors are not independent. It’s important to understand the difference between external and internal auditors because they each serve a different purpose.Ī CPA firm performs an external audit, and the accounting firm must be independent of the business under audit. An audit is performed to provide a higher level of financial assurance to stakeholders. Stakeholders-including investors, creditors, and regulators-rely on the accuracy of financial statements. If there are weaknesses in any internal controls, the auditor must disclose the weaknesses. These controls are put in place so that the business can produce accurate financial statements, and prevent assets from theft. ![]() Internal controls : Finally, most audits require an auditor to assess the effectiveness of internal controls.The audit opinion states that the financial statements were prepared in accordance with a specific set of rules. must use Generally Accepted Accounting Principles (GAAP), while governmental and not-for-profit firms use different sets of accounting rules. Regulatory requirements : The financial statements must be prepared based on a set of accounting rules.An audit is designed to identify financial statement errors. In this context, the word “material” means an error or missing information that is large enough to impact the reader’s opinion of the financial statements. Financial statements : An auditor reports whether or not the financial statements are free of material misstatement.The results are reported in a written audit opinion, and the language in the opinion defines an audit. A business audit is a documented evaluation of whether or not a company’s financial statements are materially correct along with the standards, evidence, and assumptions used to conduct the audit.
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