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.

Definition of Auditing

Auditing has been defined by the American Accounting Association as:

•  A systematic process of objectively obtained and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. 

A very similar definition is given by Arens and Loebbecke: 

• Auditing is the accumulation and evaluation of evidence about quantifiable information of an economic entity to determine and report on the degree of correspondence between the information and established criteria.Auditing should be done by a competent independent person.
• It is interesting to note, however, that although standards set by professional bodies such as the American Institute of Certified Public Accountants (AICPA) or the international Audit Practice Committee(IAPC) provide extensive duidance on how audits are to be performed, they contain no explicit definition of what an audit is. Both sets of standards state the objective of an audit as the expression of an opinion.
• The objective of the ordinary examination of financial statements by the independent auditor is the expression of an opinion on the fairness with which they represent financial position, results of operations, and changes in financial position in conformity with generally accepted accounting principles.(American Institute of Certified Public Accounting 1972).
• The objective of an audit of financial statements prepared within a framework of recognized accounting policies, is to enable an auditor to express an opinion on such financial statements. The auditor's opinion helps establish the credibility of the financial statements.(International Audit Practices Committee 1980).
• The process of auditing is essentially concerned with the aggregation of evidence in support of the auditor's opinion. Indeed, Arens and Loebbecke (1994) emphasize the central role of evidence gathering:We believe that the most fundamental concepts in auditing relate to determining the nature and amount of evidence the auditor should accumulate after considering the unique circumstances of each engagement. 
• Audit evidence is expected to be persuasive rather than conclusive. 

The extent of appropriate audit evidence accumulation is set out in the third standard of field work (American Institute of Certified Public Accountants 1972):

• Sufficient competent evidence matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination.

The value of such evidence is clearly variable:

• Evidence matter varies substantially in its influence on the auditor as he develops his opinion with respect to financial statements under examination. The pertinence of the evidence, its objectivity, its timeliness, and the existence of other evidential matter corroborating the conclusions to which it leads all bear on its competence.(American Institute of Certified Public Accountants 1980)