An Auditor's Responsibilities With Respect to Prospectus

Audited financial statements provide a measure of assurance for investors.financial charts image by Chad McDermott from Fotolia.com

When companies want to raise money from the public, they have to register the particulars of the offering, including information about the company's finances, with the Securities and Exchange Commission. The company's auditors, who are independent certified public accountants, examine a company's financial statements to make sure that they are accurate. Investors get input about a company's offerings through a prospectus, which also includes audited information about the company's finances, to decide whether they want to invest in the company.

Assurance About Financials

A company auditor is responsible for providing assurance that a company's financial statements are in order. He audits the company's financials and he is reasonably sure that the financials are free from any material misrepresentation, either intentional misrepresentation through fraud, or inadvertent misrepresentation through error. Investors who read a company's prospectus act on the assumption that its financials are accurately portrayed.

Another function that auditors are responsible for is to verify that a company is a going concern. This means that the auditor verifies beyond any substantial doubt that the entity will continue to be in business for at least another year. The auditor bases this evaluation on knowledge of conditions that exist and events that occurred prior to issuing the audit report. The auditor obtains this information through auditing procedures. If there is any doubt about whether the company will continue to be in business, the auditor should discuss with the management what steps they are taking to ward off such risks. If necessary, the auditor should provide information about such risks in the audit report.

Generally Accepted Accounting Principles are the standard accounting principles that public companies follow. They provide a standardized framework for comparison and provide assurance that the company is following legitimate accounting policies. The auditor has to issue an opinion about whether a firm's financials are in conformity with GAAP. For an investor reading the company's prospectus offerings, this provides a measure of comfort that its financials are in order.