Auditing Essentials

Companies disclose important information when they register their securities with the SEC (US Securities and Exchange Commission) which often needs to be audited. What exactly is the purpose of auditing, who does it and what do investors need to know about it? Read on to find out.

What Is an Auditor?

By law publicly held companies, which file reports with the SEC, should submit accurate and complete financial statements conforming to accounting standards known as "Generally Accepted Accounting Principles" (GAAP).

Auditors are independent certified public accountants whose job is to examine those financial statements and provide a written report with their opinion whether the statements comply with GAAP. During the audit, they obtain understanding of the company's accounting controls and apply various procedures, such as observation, inspection of the company's books, inquiries, and others.

If auditors don't find the financial statements fair and conforming to GAAP in all material aspects they should request a change in the financial statements or decline the issuance of a standard audit report.

Purpose of the Auditing

The purpose of an audit is to provide additional assurance that a company's financial statements are reliable and accurate. This is important not only for investors to make right investment decisions, but also for financial institutions to decide whether to make loans to the company and for any other members of the public and business who deal with the company.

Sometimes auditors have another purpose. Some companies turn to internal auditors in order to make sure that the company's systems operate effectively.

Identify the Auditor of a Particular Company

How can you find out who audits a particular company? Well, the best way to do that is to check the most recent filings of the company by searching the EDGAR database. You can identify the auditor through the company's annual report on Form 10-K, under Item 8.

Additionally, don't forget to check any Form 8-K filings (under Item 4) after the company's annual report since this is where companies must announce the hiring of a new auditor.

Another option is to visit your local public library or business school library, or just search online. You can find a variety of resources that list publicly traded companies and their auditors.

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