In God we trust, all others we audit

According to: "A statement of Basic Auditing Concepts" (American Accounting Association 1973), there are four conditions that create the need for the independent performance of the audit or attest function:

• Conflict of interest (between the user and the preparer of financial information)
• Consequence (significance to the decisions of the user of financial information)
• Complexity (of the subject matter and the process of conversion into information)
• Reformation (of the user of financial information from the subject matter and the preparer).

The economic role of the audit has been discussed by numerous authors, including Wallace (1980), who offers three alternative hypotheses:

• The Stewardship (or Monitoring) hypothesis: the audit provides assurance that nimbers reported by stewards to enable monitoring by principals are carefully prepared and free of material fraud.
• The Information hypothesis: The audit improves the quality of financial information used for investment decision making.
• The Insurance hypothesis: The auditor id jointly and severally liable for losses attributable to defective financial statements, so that based on courts' inclinations auditors can provide protection from an otherwise uninsurable business risk of investment.