Accountancy Faculty's Commentary in Wall Street Journal
Does Your Auditor Understand Your Business?
Solomon and Mark
Peecher make a case for business-informed auditing in an commentary
published in the Wall Street Journal on May 25, 2004.
Solomon, professor and head of the Department of Accountancy and
the R.C. Evans Endowed Chair in Commerce, and Peecher, associate
professor and Deloitte & Touche Teaching Fellow, draw on their
collective 40 years of experience as audit scholars when they urge
the members of the Public Company Accounting Oversight Board "to
adopt a framework requiring auditors to obtain a deep understanding
of the businesses that underlie public companies' financial statements."
Say the faculty members:
"A deep understanding of business is central in what we
call "strategic-systems auditing." Two premises of SSA
are that accounting systems reflect business risks and performance
in fallible, incomplete, and untimely ways, but that financial
statements should reasonably reflect these business realities.
As such, auditors must conduct business-informed tests and amass
business-informed evidence before they can draw reasonable conclusions
about the veracity of financial statements."
Unless the PCAOB grounds its rulemaking in a SSA framework, subsequent
rulemaking by PCAOB that requires seemingly far-reaching substantive
tests will yield insubstantial evidence and amount to fool's gold,
say the authors. In order to judiciously interpret audit evidence,
auditors must possess a deep understanding of the business reality
-- the business model and processes -- that underlie the financial
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