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Preparing Financial Statements and Auditors' Independence

For many audit engagements, the auditors prepare financial statements. It is a common misconception that this is a part of the audit. However, preparation of financial statements is an additional service that is not a part of the audit.

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Management must understand that preparation of financial statements by the auditor does not change the fact that management is responsible for those financial statements. So, it is critical for management to understand what the extent of an audit is.

Purpose of an Audit

The purpose of an audit is for the auditor to express an opinion on whether financial statements have been fairly presented in accordance with either: (i) generally accepted accounting principles, or (ii) another acceptable financial reporting framework. If the auditor were responsible for preparation of financial statements, how could he or she express an independent, impartial opinion on those statements?

Professional Requirements and Division of Responsibilities

To protect the public interest, auditors must be independent when issuing an opinion on financial statements. As such, professional requirements under the auditing standards and the code of conduct have clearly identified the roles and responsibilities of the auditor and management during an audit. These roles and responsibilities are:

  1. The financial statements are management's responsibility.
  2. The opinion on financial statements is the auditor’s responsibility.

Professional requirements are properly satisfied if the auditor and management assume their responsibilities independently. However, when the auditor handles part or all of management’s responsibilities, the auditor’s independence and objectivity regarding the client and the attest engagement are impaired.

Preparing Financial Statements

When the auditor prepares financial statements, it is considered a non-attest service. According to the technical standards, the auditor’s service of preparing or assisting in preparation of the financial statements must be evaluated and appropriately documented. This helps verify whether providing the non-attest service while conducting the attest engagement impairs the auditor’s independence or not.

Auditor Independence and Objectivity

Can the auditor prepare the financial statements while being independent and objective? The auditor can do so if certain professional and practical considerations are met. For example, management must assign an individual with the necessary skills, knowledge and experience to oversee the auditor’s non-attest service of preparing financial statements. Management must also acknowledge and accept responsibility in writing for the auditor’s preparation of financial statements. Lastly, before concluding the audit, the auditor must obtain a representation letter from management that confirms responsibility for the preparation and presentation of the financial statements in accordance with the applicable financial reporting framework. This includes the design as well as implementation and maintenance of internal controls relevant to the preparation and presentation of financial statements.

Conclusion

It is important to understand that preparation of financial statements is the responsibility of management and not the auditor. In addition, it is important that the auditor’s assistance or involvement should not require the auditor to make management decisions; to create, prepare or change the accounting records and source documents; to initiate, process or authorize transactions on behalf of the management; to perform or set internal controls; or to supervise and manage client personnel. Observing the independent roles and responsibilities of management and the auditor is key to a successful audit.

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