Why Auditing?

The two quotes above reflect mixed feelings people have about audits and auditors. In the process of establishing whether the information in a company’s financial statements is true and in compliance with the GAAP (Generally Accepted Accounting Principles), auditors are bound to make a thorough investigation of all 1. _______ to ensure that they match the original sales and purchase invoices and other documents. This means that an auditor’s job description includes being suspicious and asking a lot of annoying questions. Therefore it is no wonder that they do not usually win popularity contests and their role seems to be to disclose facts someone has deliberately hidden or misrepresented to achieve financial benefits.

If an auditor’s report states that financial statements are free of 2. _______, the company can breathe a sigh of relief, because that means that there is no false or missing information, caused by fraud (deliberate action) or error. The word ‘material’ implies having a significant influence on altering decisions.

On the other hand, the more cynical among us could describe the work performed by auditors in a joke which says that 2+2 to an auditor equals whatever the company that engaged them would like it to be. According to such dim views accountants have changed from watchdogs into salespeople. Independence is a prerequisite of proper auditing. However, companies often engage in practices known as 3. ___, i.e. looking for auditing companies that will grant them favourable opinions known as 4. __ ____. Since auditors are paid by companies and need future engagements it is only understandable that they will be reluctant to issue unfavourable opinions.

It comes as no surprise that in a study carried out in 2001 nearly half of the companies which later faced bankruptcy did not reveal a 5. ___ in previous auditor’s reports. This paragraph would have warned all interested parties that the company was facing serious financial difficulties. In real life it could be argued that auditors are sometimes hired on the basis of their creativity when it comes to 6. _____, or managing earnings, as they sometimes call it. It is simply a way of making things look better than they actually are, a struggling company could stay afloat with investors’ money until it can turn a true profit.

Benefits that can be obtained from a properly 7. _______ audit are numerous. Among others, it is a firm assurance for a company’s management and all its stakeholders that its financial statements are trustworthy for making important decisions. Every home should appreciate the presence of a fair and reliable watchdog who will demonstrate its loyalty by keeping a sharp eye on possible wrongdoings rather than cover them up. Otherwise, it could end up as another case of Enron – going down, and taking Andersen with it.