The Role of the Independent Auditor

Independent CPA auditors are like referees in the financial reporting arena. The CPA comes in, audits the business’s accounting system and methods, and gives a report attached to the company’s financial statements. Publicly owned businesses must have their annual financial reports audited by independent CPA firms. Any privately owned businesses have audits done because they know that an audit report will add credibility to their financial reports.

An auditor judges whether the business’s accounting methods follow generally accepted accounting principles (GAAP). Generally, everything is in place, and the financial report is reliable. But at times, an auditor will wave a yellow or red flag. Some indicators of potential trouble include when the business’s capability to continue normal operations is in doubt because of what is known as financial exigencies, which could mean a low cash balance, unpaid overdue liabilities, or significant lawsuits that the business doesn’t have the cash to cover.

An auditor must exercise professional skepticism, meaning the auditor should challenge the client’s accounting methods and reporting practices to make sure that its financial statement conforms with accounting standards and are not misleading – in short, the financial statement is fairly presented. Indeed, the words “fairly presented” are the exact words used in the auditor’s report.

A good auditor needs technical know-how and knows how to be tough on the accounting methods of the client. His job is to be the agent of the shareholders and other users of the business’s financial report. It’s incumbent on an auditor to strictly uphold GAAP and not let any irregularities slide.

Several well-known companies have engaged in accounting fraud recently, and the CPA auditors did not discover fraud. Enron is one of these companies. In this case, the auditing firm Arthur Anderson was found guilty of obstruction of justice because it destroyed audit evidence.