Some of the elements of the theoretical framework of auditing are shown in Figure 1.3. For each of these elements, describe the effect on an audit if the element were not true.

1. The data to be audited can be verified.

2. Short-term conflicts may exist between managers who prepare data and auditors who examine the data.

3. Auditors must have independence and freedom from managerial constraint.

4. An audit benefits the public.

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FIGURE 1.3 Some Important Elements of the Theoretical Framework of Auditing Element of the Theoretical Framework of Auditing 1. The data to be audited can be veri- fied. 2. Short-term conflicts may exist be- tween managers who prepare data and auditors who examine the data. 3. Auditors must have independence and freedom from managerial con- straint. 4. An audit benefits the public. Comments An audit requires that the proper quan- tity and quality of evidence be gathered. Data must exist in a way that it can be substantiated. For example, financial statements consist of account balances. and transactions that can be verified. Managers may feel compelled to pro- duce financial data favorable to their needs (temporary high earnings). Audi- tors should attest to data that is fair, not biased in favor of managers. The credibility of an audit comes from independence. The auditor must gather objective evidence without hindrance from the parties being audited and must report audit results objectively to the groups that need to know these re- sults. In some cases, the benefit is obvious from cost savings or detection of fraud. In other cases, misstatements, fraud, or misrepresentation is prevented by audits (for example, the lack of an audit could result in financial statements being is- sued that contain significant misstate- ment).