The overall objective of the audit of the financial statements of an entity is to gather and evaluate audit evidence of sufficient quantity and appropriate quality in order to form, and communicate to the users of the financial statements, an audit opinion on the reliability of the assertions of management inherent in those financial statements for the purpose of adding credibility to those assertions.
Principal objective: The principal objective of a financial statement audit has evolved over time (see Brief History of Auditing) until, around 1940, it was accepted as being to provide an opinion on the reliability of a matter that is the responsibility of another party. In a financial statement audit, the financial statements of the entity is the 'matter' that is the responsibility of the other party, and the 'other party' is the management of the entity.
How the objective is achieved: The principal objective noted above may be expanded by including a reference as to how the objective is achieved. Auditors achieve their objective by gathering and evaluating audit evidence. The evidence needs to be of such quantity and quality that the auditor is able to form an opinion on the financial statements. Thus, it may be stated that the objective of the audit of the financial statements of an entity is to gather and evaluate audit evidence of sufficient quantity and appropriate quality in order to form an opinion on the financial statements prepared by management. The word 'quality' refers to the relevance and reliability of the evidence and 'entity' includes entities such as partnerships, trusts, government departments, quasi government organizations as well as corporate entities. The objectives of the audit of financial statements are the same, irrespective of the entity to which the financial statements relate.
Financial statements are simply a collection of assertions: For example, the expression "Inventory, at cost, $100,000" in a set of financial statements is in fact an assertion by management that, inter alia, inventory actually exists, that it is owned by the entity at balance date, that it cost $100,000 and that there is no other inventory. The objective of an audit can thus be expanded to gather and evaluate audit evidence of sufficient quantity and appropriate quality in order to be able form an opinion on the reliability of the assertions by management inherent in those financial statements. Financial statements are considered 'reliable' if they are, in all material respects, complete, valid and accurate. That is, financial statements are reliable when they contain no material misstatements, which is, in effect, what management asserts when they prepare the financial statements.
Why an audit is performed: Auditors perform an audit so as to add credibility to management's inherent assertions included in the financial statements. If the audit is to have any value, the auditor's opinion as to the reliability of the assertions must be communicated to the users of the financial statements. The auditor 'communicates' the results of the audit through the audit report, a document, often just one page in length, that is attached to audited financial statements and that sets out the scope of the audit (i.e. the work the auditor has performed) together with the auditor's opinion on the reliability of the assertions inherent in the financial statements. Financial statement 'users' include such groups as shareholders, suppliers, customers, lenders, borrowers, potential investors, and regulatory authorities. Accordingly, the objective may be expanded to gather and evaluate audit evidence of sufficient quantity and appropriate quality in order to form, and communicate to the users of the financial statements, an opinion on the reliability of the assertions of management inherent in those financial statements for the purpose of adding credibility to those assertions..
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