Chapter 5, Problem 1Q

To determine

Describe the roles and responsibilities of management and independent auditors in the financial reporting process.

Explanation of Solution

Financial reporting:  Financial reporting is the procedure to communicate the information obtained from the financial statements prepared. It is necessary to disclose the data to various stakeholders as various decisions needs to be taken by the stakeholders.

Generally Accepted Accounting Principles: They are commonly known as GAAP. It is a collection of generally practiced and followed rules and standards of accounting. GAAP provides global guidelines for preparation and disclosure of financial statements of public companies. It is created and developed by International Accounting Standards Board (IASB).

Public Company Accounting Oversight Board (PCAOB): A non-profit organization established by Sarbanes-Oxley Act of 2002 that ensures the application of auditing standards by the independent auditors to minimize the audit risk.

The roles and responsibilities of management and independent auditors in the financial reporting process can be explained as follows:

• The management includes the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) who are responsible for the precision and correctness of the financial statements, and to conform that the statements prepared, are in accordance with the Generally Accepted Accounting Principles (GAAP).
• Independent auditors are entrusted with the responsibility to conduct thorough examination of financial statements ensuring the fairness of accounting information provided, through adherence with the mandatory accounting standards. The auditors are also required to follow the auditing standards prescribed by the Public Company Accounting Oversight Board (PCAOB) that minimizes the audit risk.