Lecture Video 2

LECTURE 2: THE AUDITOR’S OPINION

The next couple of components that we are going to look at are these in relation to our introduction. We’re going to take a look a little bit more at the auditor; we’re going to look at the difference between assurance and non-assurance engagements; we’ve spoken a little bit already about the concept of adding assurance. We now look at positions or engagements of the type of jobs where we actually don’t offer assurance and what type of things those are. We will then spend a little bit more time talking about our audit in terms of the financial statement audit engagement. Your auditing postulates are like the little building blocks of the auditing knowledge or the auditing technical, auditing as a science. And then we’ll talk about the profession itself in terms of the accounting and auditing profession.  

 

THE AUDITOR

So let’s take a look at the auditor, to begin with. The purpose of an audit, the reason that the auditor is there, is to enhance the degree of confidence that the users have in the financial statements. So when we talk about enhancing a degree of confidence, this is the same as talking about adding assurance. If we are enhancing the credibility, we’re enhancing the degree of confidence that someone would place in our financial statements.

As auditors, we are always doing this for the purpose of the users; we are always doing this for the user’s benefit. And in our little example about the car, this was the person buying the car. That is the user, the person who is going to be making a decision. So we’ve got to be very aware that as an auditor your job is to make sure that the user has confidence in the information that you are adding assurance about, because the user is going to be making a decision on the basis of the information that they are looking at, and they don’t want to make a decision on unreliable information.

This is done by expressing an opinion. It’s also very important that we realise that what we do as an auditor is not to give a guarantee about anything.  We’re not going to guarantee you anything; we’re expressing an opinion. And we will get more into why we can only express an opinion a little bit later.  

That the financial statements are presented fairly in all material respects in accordance with a framework.

These components, each of this terminology, and each of these words, we need to be very comfortable with in order to make sure that the rest of our detail comes along. So we’re going to talk a little bit about the concept of an opinion, the concept of presented fairly, and your material respects. All of these are very important bits of knowledge for our auditing process.   

 

AUDITOR’S OPINION

Let’s talk a little bit about our opinion. When a set of financial statements are prepared, it’s very important to realise that the people that are preparing the financial statements are going to be your directors. Those directors may not necessarily be the shareholders, but they are going to be preparing the financial statements. So any information in there will have been prepared by the directors.

The users are the ones who are going to be relying on that information. And they are going to be using this information to make, what we call an economic decision or various types of economic decisions. This could be whether or not they want to invest in the company. This could be whether or not they want to give loans or credit; whether they want to work for the company, give them tenders, whatever. The users are going to be making a decision on the basis of these financial statements, and therefore they are going to be relying on the financial statements, and they’re going to be relying on what the directors have put into those financial statements.

As we have seen already, it makes sense for a third party to stand in the middle here and this third party is going to be us as auditors. We will say to the users, “We will assess the financial statements. We will audit them, and we will give you an opinion on whether or not those financial statements are fairly presented. We will give you an opinion on whether or not you can rely on those financial statements.”   

Naturally, the user would be a lot more comfortable if it was a guarantee that they were going to get, but they’re not going to get a guarantee from us. And the question is, why? Why would we not be willing to express a guarantee? Why would we only be willing to give an opinion?

As you can imagine, a guarantee is 100% absolute assurance that these financial statements are correct. So why, as an auditor, are we not able to do that? Obviously, the users would be a lot happier if we did.

We don’t express an absolute assurance; we give what we call reasonable assurance. So our opinion gives the user reasonable assurance about the financial statements. And one of the main reasons why we can’t give absolute assurance is because of a limitation of resources. As an auditor we cannot go through every single transaction in the financials, we cannot recalculate every number. We were not in the company the entire year. We did not see every transaction happen. We didn’t look at everything that happened, we weren’t there to monitor everything, so it would be very dangerous for us to give an absolute guarantee when we weren’t there the entire year.

We’re going to be looking at a couple of details, we’ll look at a couple of transactions, but there is no way we have enough time to look at everything that we’d want to in order to give a guarantee. So we don’t. We cannot give a guarantee on the financial statements. Which is why we talk about the fact that we express an opinion about whether or not the financials are reliable.

Although it is an opinion, it is important to realise that it is a professional opinion. This means that it does carry some weight, it does carry quite a lot of weight and quite a lot of credibility. A professional opinion means that this opinion is put together by someone who is responsible and answerable to a specific institution, who has a specific level of studies and who is independent, and follows a certain code of ethics.

A professional opinion is very different from a daily opinion. If I say to you “Well, I really don’t like your hair, I really don’t like your clothes.” That’s an opinion. Take it or leave it. What is the difference between that and a professional opinion? We need to make quite sure we’re comfortable with that, so we understand although it is an opinion, it does have value.  

If I said to you, “I really don’t like that rash on your hand, I think you may have to cut your hand off.” As an auditing lecturer, it is very unlikely that you would take my opinion seriously, because I’m not a specialist in that area, I’m not a dermatologist. If I said to you, “Oh that rash on your hand looks quite uncomfortable, I think you’re going to have to amputate your hand,” there’s very little likelihood that you’re going to take my opinion seriously.

If, however, you went to a dermatologist, if you went to a specialist, and they said to you, “Oh I really don’t like that rash, I think you’re going to have to cut your hand off,” there is no question that you would rely on them more than you would rely on me. Their opinion will carry more credibility. It is still an opinion, but it carries more credibility. Why? Because you expect that they know what they are talking about because they are specialists. They are supposed to know what they are talking about. This is their field; this is their industry; this is what they do. And that is why their opinion would carry weight.

When you do go to this doctor though, understand that although you do go to him as a specialist, you trust him. Even though you don’t know him personally, you would make an appointment with someone, find the information online or wherever. You’d make an appointment with this dermatologist, you’d go and see them, but you don’t know them personally. You don’t ask to see their degrees, ask them how many years they’ve been doing this in practice, how many accidents they’ve had, how many people they’ve killed. You don’t go through a whole bunch of background information, so why do you trust this dermatologist? Why do you trust these specialists?

When you go to a doctor, and you trust a doctor to give you an opinion or medication, the reason you trust them is because they are associated with the medical profession in the country. It’s not necessarily them personally that you trust, it is the profession itself. So when we talk about a professional opinion, it is given by someone who belongs to a specific profession, and it is the profession that you trust. Even if you don’t know the person themselves, you’d say, “Well, I believe that he has to know what he’s talking about, because he is a professional.” He does belong to that particular profession, and they wouldn’t allow him to continue practising if he didn’t know what he was doing.

 

CONCLUSION

So again, some more concepts that we’ve added to our knowledge and understanding, is the fact that we express a professional opinion. That professional opinion gives us reasonable assurance rather than a 100% guarantee, and that is why users would rely on us as auditors, rather than the directors who prepared the financial statements.