There are various perspectives about audit that are incorrect. In this article, I will summarise the key misconceptions and provide some background as to the issues at hand. In this article, I am reviewing the role of the external auditor.
Auditors deal with a concept called materiality. This means that only material exceptions will have an impact on the auditor’s opinion. Materiality is a function of the size (magnitude) and nature of an item. Misplacing a 50 shillings receipt is not material for an organisation whose turnover is in the millions.
Auditors are not required to discover all errors and fraud. They are only expected to carry out procedures that would enable them to detect material error and fraud. Since they rely on information that is provided by the client, there is always the risk that the client may purposefully misrepresent facts to the auditor. Provided they exercise professional scepticism when carrying out their work, they cannot be held liable for negligence.
Auditors are only interested in systems that have an impact on financial reporting. This includes the financial accounting system/software and any other system that has an impact on the financial statements. This includes an inventory management system, the payroll system and the like.
Unmodified opinion is the only opinion that indicates that the financial statements give a true and fair view. Modified opinions (of which a qualified opinion is one) indicate that there is a disagreement by the auditor as to whether the financial statements give a true and fair view.
The audit work starts with audit planning, then proceeds to audit fieldwork and concludes with audit completion/reporting. Planning and completion steps of an audit normally happen offsite and they are handled by the more senior members of the audit team. Audit fieldwork where the actual review of documentation on site may account for only 25-50% of the costs.