The Financial Statement Audit

Summary

This video explains the role of external auditors in reviewing and verifying the financial statements of public companies. It outlines the audit process, from risk assessment to evaluating financial controls, and the importance of skepticism and objectivity throughout. The auditor’s team checks for errors or fraud, testing evidence supporting the financial statements. After completing the audit, the auditor issues an opinion that is crucial for investors. The video highlights the responsibility of auditors in ensuring transparency and accountability, and emphasizes the importance of their work in maintaining trust in financial reporting.

Takeaways

• 😀 Public companies are required to release annual financial reports, including statements on their performance from the previous year.
• 😀 External auditors, such as Johnny Law, are responsible for reviewing the company's financial statements and providing an independent opinion.
• 😀 The audit committee, an independent group within the company's board, oversees the audit process and hires external auditors.
• 😀 The audit team consists of CPAs and professionals with expertise in various areas, assessing risk factors related to the company's finances and operations.
• 😀 Risk assessment identifies potential errors or fraud in financial statements, guiding the audit procedures.
• 😀 If a material misstatement is found during the audit, it is treated as a significant issue, requiring corrective actions.
• 😀 The CFO and their team provide necessary documentation and information regarding the company's internal control over financial reporting.
• 😀 Audits may take weeks or months and can involve examining global operations and various aspects of the company.
• 😀 External auditors must apply professional judgment and follow auditing standards to form a reasonable assurance on the financial statements.
• 😀 If the audit reveals issues, the auditor may issue a qualified or adverse opinion, signaling red flags for investors and the SEC.
• 😀 The audit process includes reviewing significant judgments and conclusions, and all work must be documented in audit workpapers before the final report is issued.

Q & A

What is the role of public companies in financial reporting?

Public companies, those traded on stock exchanges, are required to release annual reports with financial statements showing their performance from the previous year.

Who is responsible for auditing a company's financial statements?

An independent external auditor is responsible for reviewing the company's financial statements and issuing an opinion, as required by the SEC.

What is the function of an audit committee?

The audit committee, composed of independent members of the company's board, is responsible for hiring the external auditor and overseeing the audit process, ensuring the financial reporting and internal controls are accurate.

What is the role of the external auditor during the audit process?

The external auditor, led by an audit partner like 'Ledger,' is tasked with assessing the risks in the company’s financial statements and ensuring there are no material misstatements due to errors or fraud.

What does a risk assessment involve in an audit?

A risk assessment in an audit identifies potential risks like complex transactions, weak financial controls, or industry-specific issues, which may affect the accuracy of the company's financial statements.

What is meant by 'material misstatement' in financial statements?

'Material misstatement' refers to errors or fraud that could significantly distort the company’s financial statements and mislead investors or other stakeholders.

How does the audit team ensure the financial statements are accurate?

The audit team tests the evidence supporting the financial statements, evaluates the overall presentation, and verifies the company’s internal controls to ensure the financial data is accurate and complete.

What happens if the auditor finds issues with the financial statements?

If the auditor identifies issues or material misstatements, they may issue a qualified or adverse opinion, signaling concerns for investors and requiring the company to address the problems.

Why is it important for audits to follow PCAOB standards?

Following PCAOB (Public Company Accounting Oversight Board) auditing standards ensures that audits are performed with the proper judgment and experience, providing reasonable assurance that the financial statements are free of material misstatements.

What happens after the audit is completed?

After completing the audit, the auditor's opinion is included in the company's annual report filed with the SEC and published online. This opinion helps investors understand whether the financial statements are reliable.