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May 23, 2011
Guide to Auditing Is Designed to Help Investors
    by Robert Kropp

The Center for Audit Quality publishes an In-Depth Guide to Public Company Auditing, to help individual investors understand the auditing process and its role in assuring accurate financial reporting.

The Center for Audit Quality (CAQ), a nonprofit public policy organization, has published an In-Depth Guide to Public Company Auditing, a document designed to help investors better understand "the external audit process for public companies and the role the audit plays in our capital markets," according to CAQ.

In 2009, CAQ published Guide to Public Company Auditing, which, according to the new document, provided "an introduction and overview of the key processes, participants and issues related to public company auditing." The In-Depth Guide, however, gives investors "a behind-the-scenes look inside the financial statement audit process to provide further insight into the work the independent auditor performs to issue an audit report."

The Sarbanes-Oxley Act, passed by Congress in 2002 in the wake of several high-profile scandals involving the financial reporting by public companies, requires that corporate management be responsible for internal control over financial reporting (ICFR). The law mandates that public companies with market capitalizations of $75 million or more have management's assessment of the effectiveness of ICFR, as well as the financial statements themselves, independently audited. The auditors themselves are overseen by the Public Company Accounting Oversight Board (PCAOB), also established by Sarbanes-Oxley.

In addition, Sarbanes-Oxley mandates that "Instead of company management, the audit committee of the board of directors is now directly responsible for the appointment, compensation, and oversight of the work of the external auditor," according to the In-Depth Guide. Members of the audit committee must be independent directors.

The audit report that is issued includes an introduction, in which the financial statements that were audited are identified; a description of the nature of the audit; and the opinion of the independent auditor. The auditor issues a standard unqualified position when he or she concludes that the company's financial statements are presented accurately. Explanatory language can be added to a standard unqualified position in certain cases.

"Financial statements with a qualified, adverse or disclaimer of opinion represent a substantial deficiency in the reporting requirements for a company's filing," the guide states. "As a result, the SEC (Securities and Exchange Commission) would be expected to require the company to take corrective measures."

"The CAQ's continuing dialogue with individual investors indicates that many in the marketplace do not fully understand the scope of the audit process and the responsibilities placed on public company auditors," Cindy Fornelli, the Executive Director, stated. "The Guide will inform our future investor education initiatives. We are planning to develop additional investor educational initiatives in the coming months."

CAQ recently added a For Investors section to its website, where reports are archived and links to additional resources are provided.


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