Financial accounting, mostly concern with the preparation and reporting of the annual financial statements of the company, allow stakeholders to make important decisions about the company. Without this service, the management team of the company that is not trained will prepare this financial information that are disclosed to various stakeholders. These may cause information to be inaccurate, and bias as the management might not be aware and comply with the standards and regulations set. Furthermore, management team will be selective in the areas of disclosure, which does not show the true and fair view of the current business position. Stakeholders might then be misled by this information and make incorrect decisions.
An audit is an independent opinion as to whether an entity 's financial statements are prepared in accordance with the applicable financial reporting framework, and thereby give a ‘true and fair view '. With auditing services, the company will be tested for errors and frauds, which gives them credibility if accounts are produced in accordance to the standards. Different stakeholders will benefit from this service, such as the company will be able to obtain a loan from the bank more easily, or shareholders feel safer in investing more into the company. However, the auditing team has to be independent to provide an unbiased opinion of the...
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... that the financial statement contain material misstatement, inherent and control risk, and the risk that the auditor fails to detect material misstatement, detection risk. Firstly, auditors adopt the risk-based approach where they analyse the risks associated with the client and direct their testing to risky areas thus there is a likelihood that they fail to detect a material statement and express an inappropriate audit opinion. Secondly, the auditors rely on the information provided by the responsible party and the staff members may collude in fraud to deliberately hide or misrepresent matters for the auditors. Lastly, the financial statements are prepared on the basis of judgement and estimates, auditors will be unsure if the information provided is free from error since auditors do not oversee the process of building the financial statements from start to finish.
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