Preparing Financial Statements and Auditors’ Independence

Therefore, the independence rules do not require the audit committee of the plan sponsor to pre-approve audits of the employee benefit plans. Audit committees are not precluded, however, from establishing policies to do so. The terms “audit” or “audited financial statements” in this Nonprofit Audit Guide© refer to the work product resulting from the independent examination of a nonprofit’s financial records by a licensed certified public accountant (also referred to in this Guide as the “auditor,” or the “auditing firm”). Specifically, questions have been raised in recent years as to the extent to which an auditor can assist an issuer client with the drafting or editing of note disclosures without being viewed as auditing his own work or “closely participating” by performing a management function. Since an auditor’s opinion is not piecemeal with regard to note disclosures, but rather applies to the financial statements taken as a whole, this author believes that assessing the effect of such drafting is rightfully a matter of degree—and also a matter of professional judgment. A small government that is not able to prepare its financial statements in conformity with generally accepted accounting principles may nonetheless possess the skills, knowledge, and experience necessary to oversee the financial statement auditor’s preparation of GAAP financial statements on their behalf.

But with the recent development every firm are expected to prepare financial statement in order to know the financial position of the organization so that stakeholders can make decisions . While all gatekeeper roles in producing high quality financial disclosures are critical, it is undisputed that assurance provided by independent public accountants improves the quality of financial disclosures and, in turn, such assurance is a critical component of our capital markets. Academic studies demonstrate that assurance provided by an independent auditor reduces the risk that an entity provides materially inaccurate information to external parties, including investors, by Preparing Financial Statements and Auditors Independence facilitating the dissemination of transparent and reliable financial information. Research also shows that an independent, high quality audit improves the credibility of financial statements reducing risk to investors, thereby lowering the cost of debt and the cost of equity for the company. Additionally, companies often benefit in other ways from the services of an independent auditor. In a recent survey, 77% of public company respondents stated that their independent auditor provided important insights about the company. The example APS in this interpretation is one where an existing CPA practice (“Oldfirm”) is sold by its owners to another entity (“PublicCo”).

Advisory services are permitted

For Audit PurposesThe primary purpose of an audit is to conduct an independent and unbiased verification of all financial and non-financial material information to ensure that it is in line with what the management has reported. The January AICPA Reviewer Alert distinguishes the SKE requirement from safeguards saying, “Client SKE should not be viewed as a safeguard, but rather a mandatory condition before performing any nonaudit services.” Notice the safeguard is something the audit firm does–and not an action of the audit client. ABC Company is unhappy with the conclusion of the audit report and threatens to switch auditors next year. A familiarity threat exists if the auditor is too personally close to or familiar with employees, officers, or directors of the client company.

Auditors are obligated to perform their duties for the public benefit in exchange for exclusive professional privilege. As for a moral perspective, auditors are professionals, with professional obligations to the public. They should not engage in any activity that appears to impair their effectiveness as professionals, regardless of the totality of their incentives .

Responsibility to the Profession

Auditors, therefore, develop good relationships with management to keep the job of the client. They may not, therefore, be independent of the corporate management. A. Indirect Superiors and Other PublicCo Entities may not have a relationship contemplated by interpretation 101-1.A [ET section 101.02] (e.g., investments, loans, etc.) with an attest client of Newfirm that is material.

For example, if a company fails to disclose a significant transaction or other event that the SEC believes is necessary, trading of that company’s securities can be halted until the matter is resolved. Such regulatory actions can cause a huge financial loss for a business; thus, compliance is viewed as vital. Not surprisingly, companies that have audits are able to get loans at lower interest rates than comparable organizations that do not have their financial statements subjected to examination (Blackwell, et. al., 1998).

Financial Accounting

The ideal of auditor independence has been clearly stated for a long time. The determination of the appropriate level of detail for the pre-approval policies will differ depending upon the facts and circumstances of the issuer. However, a key requirement is that the policies cannot result in a delegation of the audit committee’s responsibility to management. As such, if a member of management is called upon to make a judgment as to whether a proposed service fits within the pre-approved services, then the pre-approval policy would not be sufficiently detailed as to the particular services to be provided. Similarly, pre-approval policies must be designed such that the audit committee knows what services it is being asked to pre-approve so that it can make a well-reasoned assessment of the impact of the service on the auditor’s independence.

• Regulation D requires an issuer conducting an offering under Rule 506 to provide, among other things, certain financial information to any non-accredited investors in that offering.
• 2.PEEC has concluded that Newfirm may not perform an attest engagement for PublicCo or any of its subsidiaries or divisions.
• If you prepare financial statements for your audit client, you have a significant threat.
• Any approval of services by the Chairperson pursuant to this delegated authority shall be reviewed by the Audit Committee no less frequently than in connection with the next successive annual assessment of the independence of the independent auditor.
• For purposes of this document the terms accountant and auditor are used interchangeably.
• In addition, auditors should evaluate the significance of threats to independence created by providing any of the above services (a-d), document the evaluation of the significance of such threats and the firm’s conclusion.

Safeguards vary depending on the facts and circumstances of an audit and in some cases, multiple safeguards may be necessary to address a threat. Where the Audit Committee has approved an estimated fee for a service, the pre-approval applies to all services described in the approval .

Word Processing and Assembly of Financial Statements

Appropriate actions, as deemed necessary, should be taken based on the results of the review. In the preceding example, the homeowner, of course, plays the role of management and the plumber plays the role of https://simple-accounting.org/ the financial statement auditor. The homeowner is fully responsible for the operation of the garbage disposal, just as management is fully responsible for the fair presentation of the financial statements.

• To the best of the authors’ knowledge, none have researched on how audit independence affects financial reporting credibility.
• As such, if a member of management is called upon to make a judgment as to whether a proposed service fits within the pre-approved services, then the pre-approval policy would not be sufficiently detailed as to the particular services to be provided.
• If the separate entities under common control have autonomous financial and business operations, and the audit firm audits one of the entities, that audit firm may be able to apply the “not subject to audit” exception to entities that it does not audit.
• Prepare and transmit participant statements to plan participants based on data collected through the member’s electronic or other medium.
• Accounting SystemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities.

The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management during the performance of the audit. However, the auditor’s responsibility for the financial statements he or she has audited is confined to the expression of his or her opinion on them. An audit firm could impair its independence under the general standard of Rule 2-01 if it were to propose on prohibited non-audit services before the end of the audit and professional engagement period. For instance, proposing on prohibited non-audit services while the firm is still the auditor heightens the threat, both in fact and in appearance, of audit team members acquiescing to management in order to increase the firm’s chance of winning the prohibited non-audit services engagement. Management and the audit committee should consider the facts and circumstances before pursuing any discussion with its auditor about proposing on any prohibited non-audit service while the auditor is performing audit procedures to issue its final audit report. Financial reports as stated in Igben are meant to be a formal record of business activities and these reports are meant to provide an overview of the financial position and profitability in both short and long term of companies to the users of these financial statements such as shareholders, managers, employees, tax analyst, banks, etc.

Footnotes (AS 1001 – Responsibilities and Functions of the Independent Auditor):

PublicCo has subsidiaries or divisions such as a bank, insurance company or broker-dealer, and it also has one or more professional service subsidiaries or divisions that offer to clients nonattest professional services (e.g., tax, personal financial planning, and management consulting). The owners and employees of Oldfirm become employees of one of PublicCo’s subsidiaries or divisions and may provide those nonattest services.

• In the spirit of Independence Day, it’s a good time to review the rules for auditor independence.
• Lastly, before concluding the audit, the auditor must obtain a representation letter from management that confirms responsibility for the preparation and presentation of the financial statements in accordance with the applicable financial reporting framework.
• F1, F2 and F3 are the working functional relationship in this study used to determine the relationship between the impact of auditor independence on credibility of financial reporting in the Nigerian Banking Sector.
• They provide a wide range of services in diverse capacities and sectors.
• In these circumstances, fees for each accountant should be separately disclosed as they are both “principal accountants.”