MYSTERIOUS WORLD OF A
by JAMES K. LOEBBECKE
Director—Auditing Programs, Executive Office
Audits are constructed [ike icebergs: what is visible—the auditors report—is a minor portion of the total bulk. Most corporate financial people understand that the auditor's opinion on the fairness of a company's financial statements is based on a general set of professional standards—and that these standards help assure the quality of the work performed. But few non-auditors realize the extent of the activities required for the auditor to deliver his opinion.
Should the non-auditors be concerned about the nature of an audit? I think so, particularly if one is a member of executive management, the audit committee, or the board of directors. These groups have direct dealings with auditors. They make accounting and systems decisions, provide data to auditors to facilitate the audit, respond to auditor inquiries, and discuss a myriad of problems with the auditors. Such matters can certainly be dealt with more effectively by persons who understand the workings of the audit process.
From the auditor's perspective, an audit is a method by
which he becomes reasonably satisfied, at an acceptable cost, that the economic events that represent the client's operations have been properly reflected in its financial statements. The balance between reasonable satisfaction and acceptable cost is important. For although the auditor must perform all work necessary to reach a proper opinion, there are economic limits to the scope of his work. Thus, a series of judgments must be made about trade-offs between audit costs and the value of the information to be obtained.
The concepts of reasonable satisfaction and acceptable cost also give a clue to what an audit is not. It is not a guaranty that there are no misrecorded transactions, incorrect accounting judgments, omitted disclosures, or committed frauds. However, the chances of these condi-tions existing in a material amount are greatly minimized through the audit process. They are minimized to the point where only a small fraction of all auditors' opinions have been found to be incorrect when professional standards were diligently followed.