Feller, the sole owner of a small hardware business, has been told that the busi

Question

Feller, the sole owner of a small hardware business, has been told that the business should have its financial statements audited by an independent CPA. Feller, having some bookkeeping experience, has personally prepared the company's financial statements and does not understand why such statements should be audited by a CPA. Feller discussed the matter with Farber, a CPA, and asked Farber to explain why an audit is considered important.

Required:

Describe the objectives of an independent audit. Identify five ways in which an independent audit may be beneficial to Feller.

Explanation / Answer

Objectives of an independent audit:

The objective of an independent audit is to express an opinion whether the financial statements are prepared in all material respects, in accordance with an identified financial reporting framework. The process has to include safeguards that make sure that the auditor, or the auditing firm, is truly independent.
  This means that the expressed opinion of the auditor is true and fair because of the evidence gathered by him independently and because of that independence the auditor is free of influence in mental attitude which could affect this opinion and credibility as an auditor.

Five ways in which an independent audit may be beneficial to Feller are:

·       The credibility of its financial statements - stockholders may invest in his business, because of the credible financial statements. Decision makers both within and outside the organization can use audited financial information with confidence that it is not likely to be materially misstated.

·       Reliability of information – As the financial statements are examined by independent auditor they are more reliable.

·       Business risks will be identified and prevented, he can reduce the risks by making various types of economic decisions.

·       He could decide properly on what strategies to be used in order to improve the business operation and its internal control.

·       Provide the require information to external user (investor, shareholders, creditors, bankers etc.)

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