THE IMPORTANCE AUDIT REPORT AND ITS IMPACT ON BUSINESS FIRMS

THE IMPORTANCE OF AUDIT REPORT AND ITS IMPACT ON BUSINESS FIRMS

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

In the early civilization, the method of recording accounts were so crude and the numbers of transaction to be recorded were small and as such every individual was able to put down all his transaction. As man became more civilized, system of checks were applied to their public account thus increasing the need for some system of checks upon persons, whose business was to record the receipt of disbursement of money on behalf of others.

The ancient records of auditing are continued principally to public account; there is clear indication that from an early date, it was customary for an audit of the account of minors and estimates to be performed. The person whose duty it was to make such as examination of accounts became known as on auditor, the word derived from the Latin words “AUDIRE” which means to “HEAR”.

The auditor’s report is the primary means by which the auditor communicates with investors and other financial statement user’s information regarding his or her audit of the financial statements. As it exists today, the auditor’s report identifies the financial statements that were audited, describes the nature of an audit, and presents the auditor’s opinion as to whether the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the company in conformity with the applicable financial reporting framework. This type of auditor’s report has been commonly described as a pass/fail model because the auditor opines on whether the financial statements are fairly presented (pass) or not (fail). Theodore J. Mock, Jean Bedard, Paul J. Coram, Shawn M. Davis, Reza Espahbodi, and Rick C. Warne,(2013).

Academic research suggests that investors and other financial statement users refer to the existing auditor’s report only to determine whether the opinion is unqualified because it does not provide any other informational value about the particular audit. Glen et. al, (2011).

During the Board’s outreach activities over the last three years; many investors have expressed dissatisfaction that the content of the existing auditor’s report provides little, if any, information specific to the audit of the company’s financial statements to investors or other financial statement users. During a financial statement audit, auditors obtain and evaluate important information concerning the company, the company’s environment, and the preparation of the company’s financial statements. Many investors have indicated that they would benefit from additional auditor reporting because they do not have access to, or may not be aware of, much of this information. Additionally, many investors indicated that auditors have unique and relevant insight based on their audits and that auditors should provide information about their insights in the auditor’s report to make the reports more relevant and useful.

Additionally, the auditor’s report is undergoing change globally. Several international standard setters and regulators, such as the International Auditing and Assurance Standards Board (“IAASB”), the United Kingdom’s Financial Reporting Council (“FRC”), and the European Commission (“EC”) have been working on similar projects to change the auditor’s report. Bryan et. al (2008).

After extensive outreach conducted over the last three years, the Board is proposing two standards under it s statutory mandate to “protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports”.

The proposed standards are intended to increase the informational value of the auditor’s report to promote the usefulness and relevance of