The annual financial statements of large corporations are used by great numbers of stockholders’, creditors, government regulators and members of the general public.
What assurance do these people have that the information in these statements is reliable ‘and is presented in Conformity with generally accepted accounting principles? The answer is that the annual financial statements of large corporations are audited by independent certified public accountants (CPAs).
An audit is a thorough investigation of every item, dollar amount, and disclosure which appears in the financial statements, (Keep in mind that many ledger balances and other types of information are combined and condensed in preparing the financial statements. Consequently, only material items appear in the financial statements.) After completing the audit, the CP As express their opinion as to the fairness of the financial statements. This oppinion, called the auditors’ report, is published with the financial statements in the company’s annual report to its stockholders. A report by a CPA firm might read as follows:
To the Board of Directors and Stockholders XYZ Company; We have audited the accompanying balance sheet of XYZ
Company as of December 31, 19 … , and the related statements of income, retained earnings, and cash flow for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit includes examine, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 19 … , and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
Certified Public Accountants
Over many decades, audited financial statements have developed an excellent track record of reliability. Note, however, that CP As do not guarantee the accuracy ‘of the financial statements; rather, they render their professional opinion as to the overall fairness of the statements. ‘Fairness’ in this context, means that the financial statements are not misleading. However, just as a physician may make an error in the diagnosis of a particular patient, there is always a possibility that an auditor’s opinion may be in error. The primary responsibility for the reliability of the financial statements rests with the management of the issuing company, not with the independent CP As