The purpose of a financial statement audit

A financial statement audit exists to increase the confidence that investors, lenders and other users can place in financial statements prepared by management. Under ISA 200 the auditor's overall objective is to obtain reasonable assurance about whether the statements as a whole are free from material misstatement, whether caused by fraud or error, so that the auditor can give an opinion on whether they are prepared, in all material respects, in accordance with the applicable financial reporting framework (for example IFRS Accounting Standards).

Who does what. Management prepares the financial statements, chooses accounting policies, makes estimates and designs the internal control needed to prevent and detect misstatement. Those charged with governance (often the board or an audit committee) oversee that process. The auditor's job is to form and express an independent opinion. An audit never moves management's responsibility to the auditor — the audit is performed on the premise that management accepts those responsibilities.

Reasonable assurance is a high level of assurance, but not absolute. It can't be absolute because of inherent limitations: financial reporting involves judgement and estimates; most audit evidence is persuasive rather than conclusive; auditors test selected items rather than everything; and fraud can be concealed through forgery or collusion. A need for timeliness and a sensible balance between cost and benefit are legitimate, but ISA 200 is clear that difficulty, time or cost are not valid reasons to skip a procedure for which there is no alternative.

Three ideas run through every ISA: professional scepticism (a questioning mind, alert to contradictory evidence), professional judgement (applying training and experience to the facts) and compliance with ethical requirements, including independence.