Tax audits and litigation

Tax accounting
U.S. tax accounting refers to accounting for tax uses in the United States. Unlike most countries, the US has a broad set of accounting principles for tax purposes, agreed by tax law, which are divide and distinct from Generally Accepted Accounting Principles.

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Financial audits

Financial audits exist to add credibility to the indirect declaration by an organization's management that its financial statements fairly represent the organization's position and performance to the firm's stakeholders (interested parties). The main stakeholders of a company are usually its shareholders, but other parties such as tax authorities, banks, regulators, suppliers, customers and employees may also have an interest in ensuring that the financial statements are correct.

The audit is designed to amplify the possibility that a material misstatement is not detected by audit trials. A misstatement is defined as false or missing information, whether caused by fraud (including deliberate misstatement) or error. "Material" is very broadly defined as being large enough or significant enough to cause stakeholders to alter their decisions.

Audits exist since they add value through easing the cost of information asymmetry, not because they are requisite by law. For example, a privately-held company that does an issue securities on a public exchange might engage a firm to audit its financial statements in order to get more desirable loan terms from a financial institution or trade accounts with its customers. Without the audit, the lending party would not have assurance as to whether or not the company's financial position is accurate. In turn, the lender could price protect against this information asymmetry.

The exact form and content of the "audit opinion" will vary between countries, firms and audited organizations.

In the US, the CPA firm provides written assurance that financial reports are rather presented, in all material respects, in conformity with generally accepted accounting principles (GAAP), where the threshold for materiality is resolute via auditor's judgment.

Reference - Wikipedia