ROLES OF AUDITORS IN INVESTMENT ANALYSIS

Role of auditors in investment analysis is one aspect of fundamental analysis and business valuation that the savvy investment gurus have long ago recognised and has reaped fortune from it. Your investment appraisal will be incomplete if you fail to recognise the role played by auditors in the whole process of analysing your investment.

The traditional role of auditors is to express professional opinion on a set of prepared financial statements. What this means is that third parties rely on the audited information to make investment decisions as the main reason why we audit financial statements is to give it some credibility. There has been series of debate surrounding auditor’s liability and audited company accounts. The current stance of the law is that auditors can be exonerated from material misstatements in the accounts if it can be proven that professional care and due diligence are the basis of the audit procedures.

Notwithstanding the above, the role of auditors in investment analysis still cannot be over emphasised. This article is written to discuss the important roles of auditors in whole process of investment analysis. The roles of auditors in investment analysis will be looked at from two perspectives.

AS A CONSULTANT

As a consultant, the auditor who in most cases acts as information systems auditor is bestowed with the responsibility of evaluating the overall systems in the organization- paying particular attention to the robustness of the internal control system. A vital element of investment analysis is to enquire into the security of the initial investment. Auditors provide useful information regarding the controls in a company. An investor would not in his or her right senses make stake on an investment that is highly vulnerable and liable to collapse due to bad internal control. Auditors in organization advice management on the best ways to reduce risk or manage risk (both at the strategic and operational levels) so as to improve efficiency thereby increasing the financial and operational value of an investment.

The auditor bridges the credibility gap that exists between providers of funds and users of funds, irrespective of the increasing audit failures.

TRADITIONAL ROLES OF AUDITORS

In this section are brief discussion of what auditors traditionally does in general and how they relate to investment analysis.

AS A STATUTORY AUDITOR | ENSURE COMPLIANCE

Auditor’s traditional role is to ensure that a company has met the legal requirement of a state. This role is very important as it goes a long way to tell the general public that the company is a law abiding entity. Compliance in fact is what most businesses of today is all about. Failure to comply with any relevant law is enough to send a business backing.

ADVICE MANAGEMENT

Auditors advice management on the efficiency of operations and the quality of internal controls. Where there are lapses, the auditor being information professional is in a better position to dole out professional advice that the management can rely on and make substantial progress.

BOOST THE CONFIDENCE OF THE GENERAL PUBLIC

Attracting investment is all about creating an enviable public relation. This public relation is partially hinged on what the auditors tells the general company about the company. In fact, confidence of the public is improved by the mere fact that a company’s account is audited. This reliance of the public on information that has been certified by an auditor is however a cause for worry as auditors’ liability is increased by this dependency.

EXPRESS PROFESSIONAL OPINION

Audit report is an essential part of an annual report of a company that contains professional opinion of an independent third party called the auditor. The major thing that is contained in the auditor’s report is the professional opinion of the auditor on the compliance of financial statement to set of accounting standards.

Investment analysis is an art that involves all hands to be on deck. The role of auditors in investment analysis is an invaluable role in the world of investment appraisal. At the very least, auditors perform loan audit.

THE ROLE OF AUDITORS IN THE CORPORATE GOVERNANCE OF MODERN AND FRAGILE BUSINESSES

The role of auditors in the traditional setting is to express professional opinion on piece of account statements prepared by directors of a company. The essence is to rend credibility to the said statements, and that is where the problem lies. So many people have in the past questioned the relevance of accounting and auditing if corporate collapse that are in most cases directly linked to accounting and auditing scandals are still the order of the day.
It is ridiculous and hard to comprehend the rationale behind heavy expenses that companies make out of shareholders fund if absolute assurance cannot be given. Auditing professionals tell you that reasonable assurance is what the profession can give and not absolute assurance. Well, this may be what is obtainable now but, it is definitely not what is adequate in today’s business world that is so fragile and susceptible to shocks that is exacerbated by improved information processing technology.
If the mainstream definition of corporate governance in accounting and finance which is the collection of control mechanisms that protects shareholders interest is upheld, it then suffix that auditors roles must be increased so as to ensure the soundness of corporate governance that is grounded in good business ethic.
The hardest part of increasing the role of auditing and auditors in corporate governance is identifying what needs to be done and how it should be done. This is where this article comes into play. The remainder of this article is devoted to discussing how to increase the role of auditors in the overall control of businesses for the benefit of all.
How to increase the role of auditors in corporate governance of modern business

AUDIT REPORT: WHAT EXACTLY IS AUDIT REPORT AND PURPOSE OF AUDIT REPORTING?

AUDIT REPORT: WHAT EXACTLY IS AUDIT REPORT AND PURPOSE OF AUDIT REPORTING?

WHAT IS AUDIT REPORT?

Audit report in common term is the expression of opinion by an independent third party in this case an auditor as to the compliance and fairness of a set of financial statement of a company.

This is why most audit report begins with the phrase ‘in our opinion….’ This is to say that management has the primary responsibility for the effectiveness of the entity’s internal control over financial reporting and fair presentation of financial statements in conformity with generally accepted accounting principles (GAAP) and going concern.

Audit reporting is the last stage of audit engagement which includes: obtaining/ retaining engagement, planning the engagement, carrying out substantive procedures, carrying out risk assessment, and subsequently reporting.

Sarbanes Oxley Act 2002 and Accounting Standard 5 (AS 5) mandate auditors to prepare a report that covers both the effectiveness of a company’s internal control over financial reporting and comprehensiveness of financial statements. The report on internal control is presented only if an entity is a Securities and Exchange Commission (SEC) registrant.

Purpose of audit report

I am sure you are aware that the official definition of auditing includes the phrase “…communicating those results to interested users.” If this is true, then audit report is a medium through which auditors communicate to users three specific comments/ assertions bothering around the financial statements, the conduct of the audit, and the company in general:

  1. Auditors / audit report tells us whether the financial statements are prepared in accordance with GAAP or International Financial Reporting Standards (IFRS). The auditor in the audit report must indicate how financial statements would appear if compliance with IFRS is satisfied in a case where there is no conformity.
  2. Auditors through audit report draw the attention of the users of financial information to any unusual aspects of the audit examination. Auditors usually face restrictions/ constraints while auditing a company’s books of accounts. This is more prevalent when auditing in a corrupt environment. So, it is through the audit report that auditor highlights this. Auditors can also use their report to tell the users of accounting information that certain portion of the audit report where conducted by another firm.
  3. The third purpose of audit report is to report to financial statements users any other matter affecting the entity. Substantial doubtsauditors expression of concern about a company’s ability to continue as a going concern in a situation where an entity is experiencing significant financial difficulty– is one thing that should be contained in the audit report apart from conformity with GAAP or IFRS. For example, auditors can highlight the effects of changes in accounting principles on the comparability of financial statements.

Auditors give standard report when three conditions are not met VIZ:

  1.  
    • The financial statements presents fairly the financial conditions, results of operations, cash flows of the company are in accordance with the provision of IFRS;
    • There are no unusual issues affecting the conduct of the audit; and
    • The auditors do not need to draw the attention of the users of a company’s financial statements to any transaction or events

But because things are not always normal, even in a normal situation, we have other types of audit report that auditors can make.

TYPES OF AUDITORS OPINION

Unqualified opinion: this is the kind of opinion that auditors express when the financial statements are prepared in accordance with the relevant legislation and present fairly the state of affairs in the company.

Adverse opinion: here, the auditor expressed the opinion that the financial statement does not conform to GAAP and does not represent the true state of a company’s affairs.

Limitation of scope opinion/ disclaimer of opinion: auditors make this kind of opinion when they are unable to express opinion.

Qualified opinion: this is the direct opposite of unqualified opinion.

CONCLUSION

At the beginning of this article, I promised to explain what audit report is and to tell you the reason why auditors prepare audit report which we have done. But, don’t forget the fact that auditing is just like financial accounting that is prone to changes. To this end, it will be in your own interest if you just spend some more time reading other articles in this website and buying some of the audit report books displayed below.

WHAT IS LIABILITY?

Liability is any obligation of outflow of resources that we are obliged to recognize as a result of what we have done in the past. Any outflow of resources that has economic value that we are committed to take responsibility of is known as liability. There are various kinds of liabilities that one can think of. Some of such liabilities are discussed below:

WHAT IS PROFESSIONAL LIABILITY?

Professional liability is the obligation that professionals like; accountant, lawyers, medical doctors, etc face as a result of factors like; negligence, incompetence, carelessness, etc. Example of professional liability is the auditors’ liability. Auditors face a lot of liabilities as a result of not meeting the expectation of users of audited information.

WHAT IS GENERAL LIABILITY?

General liability is that liability that has no limit to claims on assets of defendants. It is likened to an open source application where what you can do with anything is limitless. General liabilities are common in the insurance sector where insured make claims on subject that has a general cover.

WHAT IS LONG TERM LIABILITY?

Long term liability is the liability that spans over a period that is longer than six months. Bank loans are good example of long term liability. Obligations that are longer than six months are generally known as general liabilities.

WHAT IS CONTINGENT LIABILITY?

Contingent liabilities are liabilities that are provided for based on anticipated obligations. The accounting standard has made it more stringent to meet the requirement of classifying an item as contingent liability. This legislation is important as many business executives misused the room to include contingent liabilities in what I call ‘lax’ policies. Note that for an item to be seen as a contingent liability, a legal commitment to give out economic value must have been established.

WHAT IS vicarious LIABILITY?

Vicarious liabilities are those types of liabilities that a principal take responsibility of as a result of the action of agent. It is assumed that principals monitor the activities of the agents to ensure that they don’t put them into trouble. It should be however noted that facts of a case in the law court can be distinguished. A liability that arise when an agent leaves his principals assignment and engage in personal venture will be distinguished as not being vicarious liability and borne by the agent.

WHAT IS PUBLIC LIABILITY?

Public liability is the phrase used to describe the nature of certain kinds of businesses is accountable to the general public. This is the direct opposite of the ‘limited liability company’. Corporations that are owned and controlled by the government fall within the class of public liability company.

The keywords and phrases to be recognized from anything/ present in anything that will called a liability are’ commitment’ ‘obligation’ ‘economic value’ and ‘it must be as a result of past action’

Any situation that lack these keywords and phrases cannot be said to be a liability. I hope that this article has been able to answer the question ‘what is liability?