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External auditing in the function of managing financial reporting risks

Recent corporate scandals and financial crises intensified the need for introducing and strengthening the additional control mechanisms in the system of corporate governance, to reduce the risk of significant misstatements in financial statements. Traditionally, management is primarily responsible for adopting, maintaining, and reporting about the quality of financial reporting system within the company. However, external auditing provides the credibility to the financial statements and, in that sense, has an important role in enhancing the financial reporting quality. There have been many critiques of the external audit profession after the great corporate scandals. This was an incentive to highlight again the responsibilities of external auditors to ensure the integrity of the financial reporting process. This chapter aims to define financial statements auditing as an integral part of the corporate governance mosaic, and to analyse the organization and performance features of the financial statements auditing in enhancing the quality of financial reporting. Based on the relevant features and procedures of financial statements auditing, it is possible to explore their influence on reducing the risks of financial reporting. Furthermore, the existing scientific and expert audit models will be presented in order to improve the knowledge about the audit procedures. This chapter also analyses the internal controls over financial reporting as an integral part of an audit process model. Additionally, this chapter provides the overview of existing knowledge about specific aspects of financial statements auditing in reducing the risk of fraudulent financial reporting. In other words, the aim is to explore the risk factors that can contribute the incentives of stakeholders in the process of corporate governance to report fraudulent financial statements. Finally, the result of the complex and costly audit process is audit report. The intention is to present the possibilities in audit reporting based on an evaluation of the conclusions drawn from the audit evidence, conducted during the audit process. In short, auditors are important participants in the process of corporate governance. The fact that fraudulent financial reporting of companies led to the downfall of entire organisations and caused significant costs to shareholders obliged the regulators to redefine the role responsibilities and the expectation of all the surveillance mechanisms in the process of corporate governance. As a consequence, the external auditor's responsibilities have been increasing, which refers especially to obtaining an understanding and assessing the features of corporate governance structure and internal controls over financial reporting in the auditing process, in order to reduce the risk of fraudulent financial reporting.

corporate governance, financial reporting risks, financial statements auditing, external surveilance mechanism, fraud risks

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