Management Integrity: The Lynchpin of a GAAS Audit

Vincent J. Love, CPA/CFF, CFE, and Thomas R. Manisero, JD

Management's integrity is a key element in the efficacy of an audit conducted in accordance with generally accepted auditing standards (GAAS) as practiced in the United States. When management's integrity is in question, the underpinning of a GAAS audit may be destroyed. This can occur because a GAAS audit does not contemplate an examination of the accounting for every economic event affecting the enterprise. Instead, the performance of a GAAS audit involves the use of verification and evaluation techniques and other procedures that focus on a limited number of transactions, as well as financial ratios and analytics, rather than doing the more extensive verification generally associated with a fraud or internal audit. Moreover, an enterprise's financial statements are management's representations, and the embodied assertions that are tested in a GAAS audit are management's assertions. Management's integrity is the critical element in determining if an independent auditor can rely on the many oral and written representations made by management during the auditing process. An independent auditor must decide whether to accept or reject management's explanation of nonroutine transactions—matters requiring the application of judgment and, in some instances, representations concerning future actions. These situations often represent the greatest risk areas in an audit.