Question

Which of the following statements best describe management's and the external auditor's respective levels of responsibility for a public company's financial statements?

a. Management and the external auditor share equal responsibility for the fairness of the entity's financial statements in accordance with GAAP.
b. Neither management nor the external auditor has significant responsibility for the fairness of the entity's financial statements in accordance with GAAP
C. Management has the primary responsibility to ensure that the company's financial Statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.
d. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides a guarantee that the statements are free of material misstatement.

Answer 1

Management is primarily responsible for ensuring a company's financial statements comply with GAAP, while the external auditor provides reasonable assurance of no material misstatements, not a guarantee. This reflects the distinct roles in corporate governance for accurate financial reporting.

Step-by-step explanation:

The correct statement that describes management's and the external auditor's respective levels of responsibility for a public company's financial statements is: Management has the primary responsibility to ensure that the company's financial statements are prepared following GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.

Therefore, answer c is the correct choice.

It's important to note that the external auditor does not guarantee that the financial statements are free of material misstatements but rather ensures that they provide a reasonable level of assurance. This subtle difference is critical to understanding the separate roles that each party plays in the financial reporting process.

Management's responsibility includes maintaining effective internal controls and presenting accurate financial information, which is a pivotal part of corporate governance.

In contrast, an external auditor reviews the financial records and certifies them to be reasonable, thereby building trust among investors and the market. A robust corporate governance system, encompassing the board of directors, auditors, and large investors, is essential for accurate and reliable financial reporting as shown in the failure of such systems in the case of Lehman Brothers.