6.2.4 External Audit: Arthur Andersen The purpose of the external audit is to overcome the “agency problem”; shareholders own the company but management run the company. The shareholders want to know that the company is being run in their best interests and that the financial statements presented to the shareholders by the directors are true and fair. An external auditor is therefore hired to give an opinion on the financial statements. This opinion must consider whether or not the statements are complete and presented correctly, whether all assets recorded do actually exist and are owned by the client and whether all items are valued correctly and recorded accurately. Audit techniques include substantive testing, controls testing and analytical reviews. An appropriate mix of these three techniques will increase the likeliness that the audit is of good quality; „audit quality‟ is the probability that an auditor will not issue an unqualified report for statements containing material errors (Watkins et al, 2004). Watkins et al have draw up an Audit Quality Framework, as shown in figure 5.
Figure 5: Audit Quality Framework
Source: Watkins et al (2004)
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