What an Auditor Does and Doesn’t Do

In the past, companies and tax-exempt organizations often relied on accountants from their audit firms to assist in reconciling accounts, preparing the adjusting journal entries, and writing financial statements. Smaller organizations often lacked the level of accounting sophistication necessary to carry out these tasks. Relying on the audit firm often made sense from the perspective of efficiency and cost containment.

New requirements by the American Institute of Certified Public Accountants (AICPA) and a host of related regulatory guidance issued by the Securities and Exchange Commission (SEC), the General Accounting Office (GAO, and the U.S. Department of Labor (DOL) have prompted an increased focus on auditor independence over the last decade. These days, the standards generally restrict the non-attest services like tax or consulting services that auditors may perform and the circumstances under which those services may be allowed. The increased regulations serve to muddy an already often-misunderstood set of expectations.

What Auditors Do

The outside, independent auditor is engaged to render an opinion on whether a company’s financial statements are presented fairly, in all material respects, in accordance with financial reporting framework. The audit provides users such as donors, lenders and investors with an enhanced degree of confidence in the financial statements. An audit conducted in accordance with GAAS and relevant ethical requirements enables the auditor to form that opinion.

To form the opinion, the auditor takes a risk-based approach to gather appropriate and sufficient evidence and observes, tests, compares, and confirms until gaining reasonable assurance. The auditor then forms an opinion about whether the financial statements are free of material misstatement, whether due to fraud or error.

Some of the more important auditing procedures include:

At the completion of the audit, the auditor may also offer objective advice for improving financial reporting and internal controls to maximize a company’s performance and efficiency.

Effective December 15, 2021, the Auditing Standards Board issued Statement of Auditing Standards 134 Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements. This standard was intended to overhaul the presentation of the independent auditor’s report and aims to enhance the communicative value and relevance of the report. The standard also introduces the concept of communicating “Key Audit Matters” (KAMs) within the independent auditor’s report. KAMs allow the auditor to disclose the most important things identified in the audit and note them on the face of the report. Ultimately this allows for audit reports to be customized for individual entities. It is important to note that an auditor can only disclose KAMs when specifically engaged to do so.

What Auditors Do Not Do

For a clear picture of the role of external auditors, it helps to understand what you should not expect auditors to do. The emphasis is on “independent.” Many people are surprised to learn that auditors do not take responsibility for the financial statements on which they form an opinion. The responsibility for financial statement presentation lies squarely in the hands of the entity being audited.

Auditors are not a part of management, which means the auditor will not:

This list is not all-inclusive. In short, the auditor may not assume the role and duties of management. In practical terms, there are a number of tasks you should not expect your auditor to perform:

Management’s Responsibilities in an Audit

The words, “The financial statements are the responsibility of management,” appear prominently in an auditor’s communications, including the audit report. Management’s responsibility is the underlying foundation on which audits are conducted. Simply put, without management having responsibility for the financial statements, the demarcation line that determines the auditor’s independence and objectivity regarding the client and the audit engagement would not be as clear.

It is important for a company’s management to understand exactly what an audit includes as well as the role of the auditor. The auditor’s responsibility is to express an independent, objective opinion on the financial statements of a company. This opinion is given in accordance with auditing standards that require the auditors to plan certain procedures and report on the results of the audit, while considering the representations, assertions, and responsibility of management for the financial statements.

As one of their required procedures, auditors ask management to communicate management’s responsibility for the financial statements to the auditor in a representation letter. The auditor concludes the engagement by using those same words regarding management’s responsibility in the first paragraph of the auditor’s report.

Auditors cannot require management to do anything or to make any representation. However, to conclude the audit with the hope of a “clean” unmodified opinion issued by the auditor, management must assume responsibility for the financial statements.

Auditing standards are very clear that management has the following responsibilities fundamental to the conduct of an audit: