The Role of Auditing in Business

A business that does not follow the accounting and ethics rules can be legally held liable for committing such offenses. Breaking accounting rules is an intentional way of misleading its investors, stockholders, lenders as well as the public about the company’s financial reports. This is where auditing sets in, in order to make sure that irregularities or discrepancies are avoided as much as possible. Certified public accountants, who normally do auditing functions, can be likened to highway traffic enforcers that strictly implement traffic laws to avoid hang-ups and ensure that traffic flow goes smoothly and steadily – only that they have a different field to play in, of course. Subjecting a business to an audit examination can reveal issues, problems and concerns about the company’s financial conditions, which it may not have been aware of.

Once the audit examination will have been completed, the auditor prepares a short summary declaring whether the company has prepared its financial statements or not, as stipulated in the Generally Accepted Accounting Principles or GAAP. Generally, businesses that are publicly owned are required to submit to auditing by independent CPAs every year. Publicly owned businesses usually see audit expenses as the price that they have to pay for venturing into public markets for its much needed capital as well as trading its shares in the public arena. Companies with stocks that are listed on the Nasdaq or New York Stock Exchange must be audited by outside accounting firms.

Even though federal law does not mandate private business to go into audit, these firms can still insist on having their financial statements audited anyway, in order to add more credibility to their financial reports. Moreover, it is up to the company owners to decide whether an audit is a reasonable investment if lenders do not consider audited statements necessary. Small-scale businesses, which usually could not afford audit expenses, instead consult an outside auditor to go over their financial statement and advise them on their financial reports on a regular basis. The auditor must be very stiff in performing auditing functions and exercise professional skepticism at all times. Furthermore, he or she should be careful not to make any opinion on the business’ external financial statements especially if s/he has not yet performed auditing procedures. Unless the auditor has thoroughly examined the figures reflected on the business’s financial statements, the auditor shall not have the right to comment on such matters.