Essay on Independent Annual Audit of Financial Reports

Published: 2021/11/15
Number of words: 1720

Auditing is the process that involves the evaluation of financial reports presented for a clear view of operations. Many business organizations conduct an audit of their documents both internally and externally. Accountants and experts do internal auditing within the company who work as employees. An external audit is conducted by an independent auditor hired by the organization to evaluate the reports (Gray and Manson, 2007). It is important to note that the internal audit report does not certify an external audit. It is used for internal operations of the company, while an external audit report gives an opinion on the state of their financial reports. The generally accepted accounting principles are meant to be followed for every organization. All companies must comply and conduct an independent audit of financial statements annually for better functionality. Financial markets need such information to understand the state of the company and make predictions of what is expected in the future. The paper aims to examine the importance of conducting an annual audit of financial reports for companies (Abbott, Daugherty, Parker and Peters, 2016). Understanding financial reports and dynamics in the market is essential for the economy, which forms a basis for the research.

Auditing of financial reports helps administer accountability in all operations of a particular business. All companies should ensure that their annual statements have been audited and certified according to the generally acceptable accountability principles (GAAP). Accountability is essential as it makes clear all operations that have been conducted regarding the finances of the organization. Accountability is vital in determining the integral position of the business (Bills, Cunningham and Myers, 2015). Companies in the financial markets must comply and ensure accountability, which reduces wastage of resources. A company that does not conduct an audit of their reports is at risk of wasting resources. When an audit report is out, an organization can detect areas that are acting as a challenge to the achievement of objectives. Professional auditors are guided by principle to deliver reliable information that can help improve the state of many companies. As such, accountability is a factor that can be achieved through auditing of annual financial reports of a particular organization.

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An audit report offers more credulity to the public regarding a public company’s operations (Lee, 1993). When a company conducts an annual audit of its financial reports and releases the information to the public, many tend to believe the company, improving its public image. With credibility in public, a company can improve operations and cover more customer base. Such situations result in increased sales and an eventual growth of the firm and its operations. Various governments in the world should task all companies to conduct an independent audit of their activities for transparency. A good public image is vital to an entity that has intentions of gaining a competitive advantage. A poor image is detrimental to any efforts made to increase customer base and operations. As such, an auditing report ensures an excellent public image as it offers credibility to the actions of a particular company Gray and Manson, 2007).

To shareholders, an audit report offers more comfort to the investment that they have chosen to venture made. Shareholders are an essential part of any company as they can determine the direction or continuity of the company. The reports offer an overview of operations and the expenditure that the organization has incurred. When an audit report is presented to the shareholders, they feel comforted having invested in that particular industry. Also, such reports can help shareholders make informed decisions on the right investment moves. As such, failure to present an audited report of financial statements might be a limiting factor in soliciting funds from various shareholders. There is a need to make it an obligation for all companies in business to release audited financial reports annually to establish a particular level of confidence amongst shareholders. Policies in place should support auditing for accountability, comfort, and credibility reasons.

Financial reports that have been audited give confidence in the financial markets and the economy in general. Once a company prevents an audit, many people in the market who are possible investors can use the information to make decisions on what they should do. Without an audit report, one cannot be able to predict whether the business will improve or fail. Such uncertainties in the financial markets hurt the operations of a business, making it difficult to improve. Confidence is essential for financial markets, and most governments should prioritize the release of such information to the public before trading. Every fiscal year should be concluded by the preparation of financial reports and a rigorous audit if the same reports. A transparent and swift auditing process helps a company build confidence among players in the financial market Gray and Manson, 2007). Lack of confidence in the market among players can hurt the reputation of an organization and lead to a consequential failure in the financial market.

An audit report offers a detailed overview of the present position of the company in the market (Sherer and Turley, 1997). Through auditing, many investors can decide to add more capital to the business or quit the industry. More revenue and less expenditure indicates that investors are getting a return on their investment, which makes the venture a viable opportunity. The reports indicate whether the company is doing what it should to gain a competitive advantage over the rest. A decrease in the amount of revenue earned is an indication of a failed business strategy. An audit report also highlights areas that an organization is facing challenges towards achieving set objectives. Such information is useful in devising strategic measures that can see the situation change for improved operations. The reports help adjust areas that have issues according to the business plan while improving on the ones that are doing well. With a thorough analysis of all factors that affect the operations of the company, auditing helps spell out the position that the company has taken in the specific industry. Auditing of financial reports should be made compulsory for improved functioning of financial markets and the whole economy.

Auditing of financial reports helps determine the reliability of various contributors to business operations (Flint, 1988). For instance, the report can indicate the incompetence of financial auditors to give a real picture of all transactions. It is crucial to know whether employees of the company are reliable to deliver the goals of the organization. Investors need assurance to as whether their business is going as planned hence the need to present an audited report of financial statements of a specified period. Also, the management needs the assurance that employees are doing their best to achieve the set objectives. Auditing of annual reports must be made compulsory in a bid to improve reliability and confidence in the financial market (Fu, Carson and Simnett, 2015).

Audited reports present a picture that makes it possible to compare an organization to its competitors in the industry. Comparison is essential to motivate an organization in business to do better. Companies on the top would want to maintain their position, and this can only be realized through hard work (Porter, Simon and Hatherly, 2003). Companies that have performed poorly are challenged to improve their operations for better business activities in the following financial year. As such, auditing reports can help increase competition among players in the same industry. Such a challenge proves to be healthy for any particular business that has the aim of doing better. There is a need to encourage companies to present their audit reports for comparison information obtained can be used by the management of businesses to assess the viability of the venture.

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The government needs information contained in the audited financial reports to determine any cases of tax evasion. Financial reports indicate the amount of taxes that the company has paid to the authorities, and this can determine the level of integrity upheld by the company management. In the case of evasion, the company is tasked to pay after explaining why it presented the wrong financial report at first. Tax evasion can attract litigation for an enterprise, which can hurt operations to the extent of closure. Government failure to implement strategic measures to determine cases of tax evasion can deny them a chance to collect millions of cash. As such, auditing helps detect any instances of corruption, embezzlement, and misuse of funds in an organization.

To sum it up, auditing is a necessary process that can determine the success of a particular business. It helps an organization establish viability and accountability as key pillars to organizational success. Also, financial auditing builds confidence and reliability as it provides valuable information useful in the financial market. Investors can use financial audit reports to make crucial decisions regarding any further investments. It is through auditing that confidence and accountability in the financial market are achieved. As such, the governments of various nations must consider making the process a compulsory matter to help create an all-inclusive financial market. The information contained in an audit report can act as a guide to what the organization should change to achieve a sustainable strategy in its operations. Annual auditing of financial statements should be made compulsory, considering all the advantages that are associated with the process.


Abbott, L.J., Daugherty, B., Parker, S. and Peters, G.F., 2016. Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research54(1), pp.3-40.

Bills, K.L., Cunningham, L.M. and Myers, L.A., 2015. Small audit firm membership in associations, networks, and alliances: Implications for audit quality and audit fees. The Accounting Review91(3), pp.767-792.

Flint, D., 1988. Philosophy and principles of auditing: an introduction. Macmillan Education.

Fu, Y., Carson, E. and Simnett, R., 2015. Transparency report disclosure by Australian audit firms and opportunities for research. Managerial Auditing Journal30(8/9), pp.870-910.

Gray, I. and Manson, S., 2007. The audit process: principles, practice and cases. Cengage learning EMEA.

Lee, T.A., 1993. Corporate audit theory. Chapman & Hall.

Porter, B., Simon, J. and Hatherly, D., 2003. Principles of external auditing. John Wiley & Sons.

Sherer, M. and Turley, S. eds., 1997. Current Issues in Auditing: SAGE Publications. Sage.

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