Question

As pointed out in the case, the SEC does not require companies to have their quarterly financial statements audited. What responsibilities do audit firms have with regard to the quarterly financial statements of clients? Should quarter statements be audited?

Need to be 550 words with references

Answer 1

Responsibilities of Audit Firms for Quarterly Financial Statements :-

Quarterly financial statements are required for publicly-traded companies, but private businesses may produce them as well. Quarterly statements for publicly- traded companies are not required by law to be audited. However, audits provide a level of authority and security to investors. Audited statements are reviewed by outside parties to ensure the report's accuracy and completeness. If quarterly statements are audited by the company itself, the review team must meet the same principles and follow the same guidelines that would apply during any audit.

Audit Defined

An audit is a detailed examination of a business's financial records. There are two types of audit. An external audit is used to verify the content of reports meant to be provided to investors. An external audit is meant to ensure that the books contain all transactions, that all financial statements reflect the current financial status of the business, and that the statements are drafted using Generally Accepted Accounting Principles. An internal audit is meant to ensure the smooth operation of the business. It focuses on detecting fraud, promoting efficiency and monitoring results for internal decision making.

Management Assertions

When a business compiles financial statements, its management asserts something about each number and bit of data that it records. An external audit is meant to test these management assertions. The five major assertions are existence, completeness, ownership, valuation, presentation and disclosure. The existence criteria demonstrates that the assets, liabilities and equities exist, and the transactions that gave rise to revenues and expenses occurred. Management also asserts that the statements are complete, or contain all of the relevant financial transactions and balance sheet items. The accuracy component asserts that every item in the statements is correct. The valuation element establishes that all items listed in the report are reported at the correct value. Finally, the auditor must ensure that the statements are presented in conformity with current accounting standards.

Audit Evidence

The auditor must conduct tests to obtain sufficient evidence that demonstrates that the statements comply with management's assertions. The auditor will test the business's controls, which are the safeguards management has put into place to ensure that the financial data is accurately recorded, and the completeness of the information in the statements. To reasonably demonstrate that an assertion is true, the auditor must gather sufficient evidence to support that claim. What evidence is sufficient depends on the risk of the company misstating the element of the financial statement being tested and the quality of the evidence.

Interim financial statements are not usually audited. Given the cost and time required for an audit, only the year-end financial statements are audited. If a company is publicly-held, its quarterly financial statements are instead reviewed.