Shareholders and creditors rely on a company’s financial statements to reflect the financial status of the business. However, they need assurance that the information on the statements is credible and reliable. Standard audits by public accountants provide this assurance.
A standard audit is a yearly event for public companies. Their financial statements are audited by public accountants and the audit reports are then published with the statements as verification. The audit report is written to the board of directors and stockholders, not to management since it is management’s statements that the auditors are evaluating.
The standard audit report is divided into three paragraphs.
1. Introductory Paragraph
The introductory paragraph establishes the author of the audit. It details the financial statements being reviewed. It attests the financial statements are the responsibility of the management whereas the auditors’ responsibility is to offer their opinion of these statements.
2. Scope Paragraph
The scope paragraph’s purpose is to illustrate how the audit was conducted. It declares the audit was performed in conjunction with the generally accepted auditing standards (GAAS).
Next, it asserts that the objective of the audit was to grant reasonable assurance of the financial statements. Absolute assurance is not possible. But tests are conducted on the supporting evidence of the financial data.
After the testing is performed, sometimes theft, fraud and illegal acts are revealed. But normally, a standard audit is not designed to focus of these crimes.
3. Opinion Paragraph
The opinion paragraph expresses the auditors’ opinion of the financial statements. In other words, to conclude the financial statements are presented fairly in accordance with the generally accepted accounting principles.