Creatures of Regulation

Auditors are not ‘creature of regulation’. The auditing role is to determine whether the report prepare by the manager conform to the contract’s provision. Thus, auditor’s verification of the financial information adds credibility to the report and reduces information risk, potentially benefiting both the owner and the manager.

Some might offer that audits are required by law, but this answer is true in certain circumstances only. Audits are often used in situations where they are not required by law, and audits were in demand long before laws required them. In fact, evidence shows that some forms of accounting and auditing existed in Greece as early as 500 BC.

While regulations such as statutory audit requirements account for some of the demand, they cannot account for all of it. For example, before statutory requirements for auditing were introduced in many European counties in the late nineteenth or early twentieth century, there were many examples of corporate entities including banks and insurance companies that had their financial statements audited.

Auditing is demanded because it plays a values role in monitoring the contractual relationship between the entity and its stockholder, manager, employee, and debt holder. Independent auditors have been asked to provide audit service because of their traditional reputation of competence, independence, objectivity, and concern for the public interest.

Auditor gathers evidence to evaluate fairness of agent’s financial reports. Auditor issues audit opinion to accompany agent’s financial reports. Adding credibility to the report and reducing principal’s information risk.

Reference

Messier Jr. W F. Auditing & Assurance Services- A Systematic

Approach. (4rd edition or later). McGraw-Hill / Irwin.