Academic journal article Journal of Accountancy

Common Myths about Audits

Academic journal article Journal of Accountancy

Common Myths about Audits

Article excerpt


1. Auditors certify the financial statements. Actually, auditors do not certify, or guarantee, the financial statements; rather, they provide reasonable assurance--within the context of materiality--that the financial statements conform to generally accepted accounting principles. In other words, an audit adds credibility to management's representations in the financial statements.

2. An unqualified audit opinion indicates the financial statements are correct. An unqualified audit opinion does not mean the financial statements are correct to the exact penny--it just implies the statements aren't wrong by a material amount. In other words, any mistatements aren't large enough to affect a typical user's judgment.

3. Auditors check all of the company's transactions. Because of the number of transactions involved, a 100% audit would not make sense economically. Instead, auditors test selected transactions. The selections may be based on a statistical sample, an informal sample or a selection of large and unusual items. The auditor determines how much, what and when to test--and what the test results mean.

4. Audits are designed to detect minor fraud. Audits are planned to render an opinion on the overall financial statements. An audit provides reasonable--but not absolute--assurance that material misstatements--errors and fraud--will be uncovered. Thus, the auditor does not look for minor fraud, such as petty cash theft.

5. An unqualified opinion on the financial statements means a company's internal controls are sound. The auditor needs to obtain enough knowledge about the entity's internal control structure to plan the financial statement audit. The auditor may also obtain evidence about the effectiveness of certain aspects of the internal control structure. However, a financial statement audit is not directed toward finding weaknesses in internal control; an unqualified opinion on the financial statements provides no assurances about internal controls.

6. Auditors determine which accounting principles are used. …

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