How Does an Audit Enhance the Quality of Financial Statements

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One of the best sources of Information available with potential investors, managers and shareholders, for analysing the financial health of an organisation are its Financial Statements. In addition, preparation of financial statements is an authorized prerequisite for various companies. Accuracy of financial statements is important to an extent that a third-party is employed, by the businesses, to carry out an accuracy check. Moreover, state and federal agencies need companies to supply them with audited financial statements when their stock is traded in public.

The financial statements, audited ones, are expected to have no reporting errors, for instance data entry mistakes, as the auditors monitor the procedures of accounting companies employ to record invoices and transactions for the preparation of financial statements. This ensures investors and stockholders that the financial statements are an accurate representation of the company’s financial state.


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Information Asymmetry

Information Asymmetry is a modern word describing a situation where business falsifies its financial statements in order to present a wrong picture in front of its investors and shareholders. Such businesses will normally have two accounting setups; the actual accounts that are needed to operate the company and the accounts that are used to show governments and likely investors. This is the point where importance of an independent auditor is highlighted as their audit procedures will possibly be able to pinpoint deviation from accounting standards signaling fake financial statements.

Standardized

Responsibilities of auditors, in addition to testing accuracy of the data and information presented in financial statements, also includes ensuring consistency of financial statements with international and national accounting standards. For multinational corporations this consistency is especially very important as they have to follow varying accounting systems.

Reliable

Another quality that an “Audit” attaches with the financial statements is that it makes them Reliable for governments, potential investors, lenders and other stakeholders. Lenders normally ask for audited financial statements from their potential borrowers as they desire an auditor to stamp and approve their financial records. At times audited financial statements also help management in identifying corrupt employees who are involved in misappropriation of company assets and erase their footprints with fake transactions and invoices.

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