The Center for Audit Quality is touting the role of auditors in capital markets with a consumer-focused guide to investors explaining what auditors do.
The “Guide to Public Company Auditing” is a broad, basic overview of the auditor’s role in providing assurance that a company’s financial statements are fairly stated. It explains the relationship between company management, the audit committee, and the auditors, and it describes how an audit is performed.
The guide also explains some of the touchy issues around auditing, such as the auditor’s role and limitations in finding fraud and auditors’ requirement to maintain independence from management.
The CAQ said it published the guide with hopes it will help investors and others with roles in public policy to better understand how auditing is done. The guide “is in line with the CAQ’s mission to foster confidence in the audit process and to aid investors and the capital markets,” said Cindy Fornelli, executive director of the CAQ. “By giving market participants the information they need to make informed decisions, public company auditors are responsible for an increasingly invaluable function.”
Auditors have long worked against what has become known as the “expectation gap,” or the perception that investors assume the audit is supposed to provide a guarantee against misstatements or errors in the financial statements. The guide points out that audits provide “reasonable assurance” but not absolute assurance. “Because auditors do not examine every transaction and event, there is no guarantee that all material misstatements, whether caused by error or fraud, will be detected,” the guide says.
The guide also explains that auditors are hired by and report to the audit committee of the board of directors, not management, to assure greater independence from management, which brings more professional skepticism to the audit.
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