Auditors seem frequently to say, “The financial statements are the responsibility of management.” They initiate the audit process using those words practically word for word in engagement letters, documenting the understanding of the audit with management.
As one of their required procedures, auditors ask that management’s responsibility for the financial statements be communicated to the auditor in a representation letter. The auditor concludes the engagement by using those same words in the first paragraph of the auditor’s report.
Auditors cannot require management to do anything or make any representation. However, to conclude the audit with the hope of an unqualified opinion issued by the auditor, management has to assume the responsibility for the financial statements.
Auditing standards are very clear that management has the following responsibilities fundamental to the conduct of an audit:
- To prepare and present the financial statements in accordance with an applicable financial reporting framework, including the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatements, whether due to fraud or error
- To provide the auditor with all of the following:
(a) All information, such as records and documentation, and other data relevant to the preparation and presentation of the financial statements
(b) Any addit41ional information the auditor may request from management
(c) Unrestricted access to those within the entity if the auditor determines it necessary to obtain audit evidence
Importance of management’s responsibility
“Management’s responsibility” is the underlying premise on which audits are conducted. It’s the foundation on which auditors base their required ethical adherence to the auditor’s independence and objectivity regarding the client and the audit engagement.
Simply put, without management having responsibility for the financial statements, the bright line to determine the auditor’s independence and objectivity would not be as clear.
The auditor often may make suggestions about the form and content of the financial statements or even assist management by drafting them, in whole or in part, based on information provided by management. In those situations, management’s responsibility for the financial statements does not diminish or change.
The auditor’s responsibility is to express an opinion on the financial statements in accordance with auditing standards, based on the representations, assertions and responsibility for the financial statements by management.