AS 1001: Auditor Responsibilities and Functions
Understand the standard, AS 1001, that establishes the independent auditor's role, purpose, and the principles governing their professional judgment.
The Public Company Accounting Oversight Board (PCAOB) establishes auditing standards for public companies in the United States. These standards govern the work of independent auditors who examine a company’s financial statements. A key standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit, outlines the auditor’s basic duties. This standard sets the stage for the entire audit process by defining the purpose and underlying principles of an independent financial statement audit.
The Auditor’s Primary Objective
The objective of an independent auditor is to express an opinion. This opinion addresses whether a company’s financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. This framework is typically Generally Accepted Accounting Principles (GAAP). The auditor’s report, containing this opinion, provides credibility to the financial statements, which is relied upon by investors, lenders, and other stakeholders.
The auditor’s work culminates in a formal report that either affirms the fairness of the financial statements or explains why such an affirmation cannot be made. This process is designed to enhance confidence in the capital markets by providing an external and objective evaluation of a company’s reported financial position and performance.
Distinguishing Auditor and Management Roles
A clear line separates the duties of a company’s management from those of its independent auditor. Management holds the responsibility for preparing and presenting the financial statements. This includes making the necessary judgments and estimates that are integral to financial reporting and designing, implementing, and maintaining internal controls to ensure the information is accurate.
The auditor’s responsibility, in contrast, is to plan and perform the audit of those financial statements and the company’s internal control over financial reporting. To illustrate, management is the builder of a house, responsible for its construction and integrity. The auditor acts as a home inspector who examines the finished structure and reports on its condition.
Core Principles of Audit Conduct
To fulfill their objective, auditors must adhere to specific principles of professional conduct outlined in PCAOB standards. One such principle is the exercise of due professional care, which requires the auditor to perform their duties with the skill and diligence of a reasonably prudent and competent professional. This standard of performance applies to all aspects of the audit, from planning the engagement to gathering evidence and forming an opinion.
A second guiding principle is the maintenance of professional skepticism. This is an attitude that includes a questioning mind and a critical assessment of audit evidence. It requires the auditor to remain alert for conditions that may indicate material misstatement due to error or fraud, without being overly suspicious or adversarial. Professional skepticism is a mindset that influences every judgment the auditor makes throughout the engagement.
Finally, an audit provides reasonable assurance, not an absolute guarantee. This is a high, but not absolute, level of certainty. An auditor cannot provide a guarantee because of the inherent limitations of an audit, such as the nature of financial reporting, the use of testing, and the possibility of collusion or management override of controls. Therefore, an audit conducted in accordance with PCAOB standards may not detect every material misstatement.