"The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework, which enhances the degree of confidence that intended users can place in the financial statements. An audit conducted in accordance with GAAS and relevant ethical requirements enables the auditor to form that opinion."
They have been very specific here with the terms they use and the terms they do NOT use in describing the purpose of the audit:
- "financial statement users": When designing the strategies and procedures for the audit, the audit firm needs to determine who are the financial statement users, and base their strategies and procedures on the needs of those users.
- "to provide an opinion": That's it - no more, no less. The purpose of the audit is to say yes or no, pretty much. It doesn't say the purpose is to prepare the financial statements or for the auditor to adjust the books or get the financial statements to be accurate. It is merely to provide an opinion.
- "financial statements": Under GAAS, the auditor is providing an opinion on the financial statements, nothing else. For example, it doesn't say the auditor provides an opinion on whether management has been effective in leading the company's initiatives, or whether internal controls are designed and operating effectively, or whether the company is in compliance with contracts or rules and regulations, or whether the company's future viability is secured; it merely says the auditor provides an opinion on the financial statements. Now, throughout the audit, the auditor will consider the examples just listed in determining risks and responses to those risks, but that will only be in an effort to get assurance over the financial statements, not necessarily to provide an opinion on the examples just listed. Other standards besides GAAS provide rules for those types of engagements.
- "presented fairly": So, do the company's financial statements follow all the rules of their decided financial reporting framework?
- "in all material respects": This means the auditor isn't expected to find every error or misstatement; only those that would alter a decision of the financial statement users, were they to know about that misstatement. What is material and what is immaterial is a very subjective matter and requires extensive judgment on the part of the auditor. As such, an entire section in GAAS has been devoted to materiality considerations.
- "with an applicable financial reporting framework": A financial framework is a set of rules that give guidance for the accounting methods to use in the financial statements, and how the accounts and disclosures should be presented (e.g., GAAP, IFRS, cash basis, tax basis, etc). Important to note with this phrase is that GAAS doesn't require any particular financial reporting framework to be used: the company can use any framework that its financial statement users prefer; the auditor's job is merely to say whether the financial statements were in accordance with that framework (i.e., the opinion).
- "enhances the degree of confidence": All of the previous bullet points can be summarized as having this ultimate goal. Notice it doesn't say the audit gives ABSOLUTE confidence; it merely enhances the confidence. Due to the time and cost constraints on the auditor and management, it would be inefficient to obtain absolute confidence in the fair presentation of the financial statements. The auditor needs to understand the financial statement users and design appropriate procedures in order to perform an effective AND efficient audit.
- "GAAS and relevant ethical requirements". By following these standards and requirements, the auditor should be able to provide this opinion with a high degree of confidence.
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