Why auditors exists in the world?

This paper will discuss professional responsibilities and ethical obligations in auditing by understanding why auditors exists and analyzing the need for professional ethics in auditing, their duties and their powers on their issuance of their opinions on financial statements, their report on the internal control. The paper will likewise connect their auditor’s responsibilities and ethical obligations with the nature and objectives of financial statement audit. 2. 1 What are professional responsibilities and ethical obligations of auditing?

Professional auditors

Auditing as used in this paper refers to external auditing which is performed by professional auditors.

To discuss and analyze such professional responsibilities and ethical obligation would necessarily require dealing with the external auditors. Professional auditors are also called independent auditors or those that are practicing public accounting. They are different from internal auditors who are employees of companies. These independent auditors are not therefore employees of their clients but they are independent from their clients even if they will have to be paid of their audit fees from their clients.

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The nature of independence is one that is not only theoretical but there is a professional Code of Ethics that requires these external auditors to be independent in mind and attitude with their clients as far their function of rendering external auditing to their clients is concerned. What then are ethical obligations of auditors? The ethical obligations of auditors are those that are particularly defined in the professional code of ethics. The same would in effect be connected with the performance of their professional responsibilities in the discharge of their functions.

Why auditors exists in the world?

To understand therefore why these auditors are endowed with their professional responsibilities and ethical obligations, it is necessary to dig why they exist in the world. Why auditors exists in the world? The economy needs to be managed well and to do the same there is need to know how much are values of these resources. To value of resources could be measure d by the amount of resources consumed by entities and individuals (Samuelson, and Nordhaus, 1992).

It is from this context that reliable accounting and financial reporting must be produced in order to aid society in allocating resources in an efficient manner. Since the obvious and primary goal of managing the economy is to allocate limited capital resources to the production of those goods and services for which demand is great, it is but expected to see that economic resources are attracted to the industries, the geographic areas, and the organizational entities that are shown by accounting measurements to be capable of using the resources to the best advantage.

To argue for the other side, it would be reasonable to infer that inadequate accounting and reporting would have the effect concealing waste and inefficiency which will in effect prevent an efficient allocation of economic resources. On the premise that the management of business organization would most likely paint a better picture than what is actual about their financial performance and financial condition (Bernstein, 1993; Brigham and Houston, 2002), the need to have professional auditors which help in ensuring the reliability of information would not be difficult to accept.

Thus, the contribution of the independent auditors in the process of providing information to users is in providing credibility to the information. Credibility in this sense, means that information is acceptable or plausible in the human mind, and that it can be relied upon by users of information other than management. These users may include stockholders, creditors, government regulators and other interested parties who will use the information to make various economic decisions (Whittington & Pany, 1995).

To illustrate, the decisions about whether to invest in the organization, or to lend funds to the organization one would most likely have to rely on credible accounting information. Given the reality that economic decisions materialize under conditions of uncertainty, the obvious risk goes with reality that the decision maker will select the wrong alternative and incur a significant loss. Affording the credibility to information by auditors had therefore the actual effect of reducing the decision maker’s risk.

The information risk

The said risk may be more precisely called the information risk, which is the risk that the financial information used to make a decision may be materially misstated (Whittington & Pany, 1995). The auditors adds the credibility through audit of the financial statements which is the regular means by which business corporations and other entities make their report on financial information about their operating results and financial position for the existing stockholder and the general public.

The modifier-word “audited”, when used to describe financial statements particularly the balance sheet, statements of income and retained earnings, and statement of cash flows, would mean a set of these statements as accompanied by an audit report prepared by the independent public accountants, where the said auditors are to express their professional opinion as to the fairness of the company’s financial statements (Whittington & Pany, 1995).

Normally, financial statements prepared by management may be available to outside users in the same way that management may use the same financial information for decision making. However, these financial statement are not yet audited by independent accountants which may necessarily leave a credibility gap. Management would just be in effect making self-serving representation about their financial statements. Thus, it is also logical to expect that a company reporting on its own administration of business, can hardly be expected to be entirely impartial and unbiased.

If one compares the situation to a boxing game, the judge cannot be expected to be fair if he is also the coach of one of the boxers. Independent auditors are only considered as such if they have no material personal or financial interest in the business that they are auditing. Their reports can be expected to be impartial and free from bias if they are at least independent from management notwithstanding their receiving their audit charges or fees from the said clients (Whittington & Pany, 1995).

Without audit by the independent auditors, the alternative is to have unaudited financial statements which may have been honestly, but carelessly prepared. In such situation the liabilities may be been understated and excluded from the balance sheet or the company assets may have been overstated as a result of arithmetical errors or simply due to the lack of knowledge of generally accepted accounting principles.

Understating the liabilities or overstating the assets is making more favorable than financial picture for the company than actual. On the aspect of income statements, lack of audit may negligently exaggerate net income such as when revenue expenditures were capitalized or making an advance recording of sales transactions but which were not yet matched by delivered goods to customers or services rendered to clients (Whittington & Pany, 1995).

The possibility of deliberately falsifying

Another possible consequence of the unaudited financial statements is the possibility of deliberately falsifying the same with the purpose of concealing theft and fraud or as a means of making an undue inducement for the readers of the financial information to invest in the business or extend credit. The deliberate falsification of financial statements may be considered as exceptional, however, their occasional occurrence could wreck havoc to lives of many people who will make decisions based upon misleading statements (Whittington & Pany, 1995).

In summary, it can be asserted that unaudited financial statements will be considered less reliable than statements that have been audited by independent auditors. While accidental errors, lack of knowledge of accounting principles, unintentional bias and deliberate falsification of financial statements may depart from GAAP, the departure must considered as material by the auditor for the latter to assert the effect of opinions which could either be qualified, unqualified, adverse or disclaimer of opinion (Whittington & Pany, 1995).