The Audit Of Financial Statements

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Introduction and Motivation

The audit of financial statements is mandatory for publically listed entities throughout the world. The auditor conducts various tests and based on the results forms an opinion on the truthfulness and fairness of the financial statements of the company and whether or not they are prepared in accordance with the financial reporting standards and are free from any material misstatement (Freedman, 2013). The purpose of auditing is to enhance the confidence of investors and to add credibility to the truthfulness of company 's true financial performance. However, there are some dos ' and don 'ts that an auditor must take care of. For instance, anything that threatens the independence of the auditor must be avoided as it adversely affects the truthfulness and objectivity of the opinion formed.
History raised questions about Australian rules concerning the independence of auditors and its role in contributing to the corporate collapse and the collapse of HIH insurance ltd (Ramsay, 2001). It is believed that if auditors had been objective in formulating their opinion on the statements or highlighted the risk of going concern of the firms, situation could have been handled better. Possible reason for auditor being unable to detect future threats here might be lack of independence from the auditing client.
Independence of the auditor from the client means independence of mind and appearance. The five major threats to independence of an auditor include
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