Sep 12, 2014

    The auditor's role: Finding lapses and helping fix them

    WE REFER to the commentary, "No guarantee that audits will catch fishy business" (My Paper, Sept 2).

    The writer has correctly stated that the auditor's role is to express an opinion on whether the financial statements, as prepared by the management, are free from material misstatement.

    However, we wish to point out some misconceptions regarding an audit and the auditing profession.

    First, a misstatement is not the same as fraud. Fraud is an intentional act to deceive. Material misstatements may include errors that are intentional or unintentional. The former could be fraudulent in nature, whereas the latter are genuine mistakes.

    The auditing profession understands that fraud is a real business risk. Fraud is not easy to detect, especially if it involves collusion or where utmost effort has been made to cover the act.

    Second, we would like to clarify the scope and value provided by an audit.

    Before expressing an opinion, the auditor will identify key risk areas within the business which have a higher potential for significant errors in the financial numbers, and perform robust audit procedures on them.

    Key risk areas are selected because, as rightly noted by the writer, it is impossible to audit all aspects of the company.

    Upon discovering errors, the auditor will discuss with the management the significance, possible root causes and implications of the errors. The management will be required to quantify the errors and rectify the financial statements to reflect the true financial position and performance of the company.

    For example, a risk area for a retail business would be its inventories. If the actual quantity of inventories differs from what is reflected in the company's records, the auditor will discuss the implications of the error with the management. The financial statement will then have to be amended accordingly by the management to record the correct inventory quantity. In addition, the auditor would help determine what caused the error so that the control systems can be improved to prevent such errors from recurring.

    Hence, the value of an audit comes from addressing high-risk areas, helping the management identify internal control lapses and recommending appropriate improvements to the firm's internal controls. This enhances the confidence of the intended users on the reliability of the financial statements.

    Third, we would like to clarify that ethics and integrity are hallmarks of the auditing profession. It is in maintaining a high standard of ethics which enables the auditor to make sound professional judgment. If required, auditors will not hesitate to issue qualified audit opinions.

    For more information on the auditor's role, please refer to