Risks Facing Auditors in Relation to Management Practices - Essay Example

Auditing Student’s Name Institution Auditing Risks Facing Auditors In Relation To Management Practices Auditors face many challenges as they try to discharge their duties as professionals. These challenges are the risks they encounter during the auditing process. One of these risks is conflicts of interest (Hopkin, 2012). Most of the auditors face this risk, as there may be ties between the auditor and the business or client. In any case, the auditor and the financial manager of the company are related, they are likely to conspire and interfere with the records. Conflict of this kind is typical whenever one party stands a chance to benefit from the activities that are being embarked on by the other party. The client may request the relative to make adjustments on the financial records portraying higher profits made by the company, which is not the reality. The reports given will, thus, be false and gives a poor reputation of the auditing firm (Leung et al., 2011). The client ends up suffering in the end as the financial records do not match the actual transactions. It can cause the company to decline, as the resources on paper are not the ones in circulation. The auditing firm may suffer a great deal too if such occurrences leak to the public. They end up losing clients, as their services are not trustworthy. Auditing firms can also face the risk of fraud. Auditors handle very sensitive and relevant information about their customers (Jubb et al., 2012). In case this information leak and get into wrong hands, there are higher chances that fraud may occur. They may be bribed to give out such information. The client, thus, may suffer from fraud and lose many of the resources. The auditors must practice strict confidentiality in order to ensure the information in their possession is safe (Hopkin, 2012). The auditing firm, as well as the client, should keep good records of their activities. Those, who access such files, are to be a people of integrity. They should see into it that everyone observes strict internal control processes. It will help in keeping fraud at bay in all their transactions. Transparency and accountability are critical factors that should be upheld by those involving themselves in auditing process. The client too is to control the flow of his or her information to make sure the secrets do not leak out. Auditors may at times give misleading financial statements. It could be due to wrong calculations done, and this often misleads the stakeholders. As an auditor, one should possess sound knowledge and precision in the field (Jubb et al., 2012). It will assist him or her to give proper calculations using the company’s financial information. The companies, thus, prefer to employ those with the qualification to avoid miscalculations. They ensure to crosscheck the work and calculations before it is compiled. It is significant to present honest and accurate financial information. The risk at times goes hand in hand with that of conflict of interest (Arens et al., 2013). The auditors, thus, may leave out crucial information when doing the audits. For there to be a proper examination, there is need to follow rules and regulations that guide the auditing process. The principles are to be followed by all the people involved to ensure the integrity is upheld. Audit Deficiencies Auditing process may meet many deficiencies, as it is undertaken. First, there is failure to capture enough audit evidence (Gramling & Watson, 2009). The information got may not be exhaustive and hence the examination gives only shallow report about the financial statements of the company. It becomes difficult to pinpoint all the faults in the business transaction and establish areas that need correction. It makes it hard to adopt such reports and implement. Secondly, there may be the lack of professionalism in the process. There are scrupulous auditors, who do their work just for money. They show minimal concern to give their best in their work and end up doing shoddy work for the clients. The third deficiency is inadequate planning of audit (Leung et al., 2011). Planning has several advantages especially in the success of any process, and it may fail if it lacks. The auditors must set and predict the time it would take them offer the services. The client, therefore, can also have all the resources needed put in place for the success of the whole process. Fourthly, the auditors rely mostly on inquiry as evidence of their work. It creates loopholes in the entire process, as the information given may be just to please the auditor. It may also be modified to achieve the desired result. The evidence should be one that instills confidence in the work. Fifthly, accountants at times fail to get enough evidence to provide the management estimates. It could be due to intimidation by those in managerial positions. They feel inferior and do not get all that they require for their work (Gramling & Watson, 2009). They end up giving less information in their reports. The sixth deficiency is inadequate confirmation of the accounts. Those in charge of preparing the financial records sometimes give just an overview of the reports. They could also be summary reports hence it becomes difficult to unearth the truth about the financial records of the business. The auditors themselves also at times find it to be hectic going over all the accounts kept over a long period (Moroney et al., 2013). They, thus, rush over them and conclusively come up with their verdict. The seventh is failure to reveal all parties involved in the course of business transactions. The companies may decide to keep the other partners they do engage with anonymous. They feel that this may help them evade taxes or tariffs and make more profit. It is against the rules of the country and may be penalized if detected. The eighth is over-reliance by the auditors on internal controls (Arens et al., 2013). They firmly believe that there are set-ups in the companies that guide the integrity of all the employees. It is an unfortunate assumption as all the people may not be with integrity. There could leakages within the enterprise and hence the need to be cautious. The ninth is lack of independence. The management most of the times tend to interfere with the auditing process as it may fix them too. They control the outcomes of such events in their favor (Gramling & Watson, 2009). An independent body will be most suitable in places where those in management positions are influential. Lastly, there is always inadequate supervision as well as review. The monitoring of the work is minimal, and no follow-ups are usually done after it is compiled. The mistakes made become difficult to realize. They will only be noticed later after the report is on its implementation stage. Audit Principles There are set rules and regulation that guide the auditing process. The auditors are to register and ensure they follow them to the letter. It is a requirement that the financial reports or statements are of high quality and exclusively transparent (Jordan & Clark, 2011). It is to help in reducing the cases of the auditors and in-house accountants being prosecuted now and then. They are the financial controllers, and most of the times attempt to steal from the company. The auditor should first be in agreement with the clients on terms and conditions of the services. In cases where they are mandated he or she engages with those in the management of the premise or those responsible for governance (Leung et al., 2011). The public-sector auditors establish a formal understanding with the legislature. They come to an understanding of the roles and duties of management and those of the auditor. The auditing process involves reporting to those with oversight roles on such matters on behalf of the government. The engagement may not be illustrated in the appointment letter as they are already in the set rules and regulation. The auditor is free to develop as well as express an opinion about the financial statements prepared by the oversight committee (Jordan & Clark, 2011). Those in governance have to be given a copy of the audit’s scope and timing. He or she should cover important qualitative areas of the auditing process that include accounting policies and estimates (Moroney et al., 2013). There should be a mention of disclosures on financial statement. The public accountants may start their work even if the set standards have not been met. There are established principles giving directions to be followed in such scenarios. Reports indicate that rules facilitate creativity in presentation of the financial statements given. The rules guide a way in which the analysis and presentation are done (Moroney et al., 2013). There must be a logical way that applies to all. It means by convention that qualified accountants can interpret all the reports. The rules are open, and many tend to employ other means of data breakdown provided the law does not prohibit it. They argue that since they are not going against the principles, they are always right (Jordan & Clark, 2011). They cannot be charged with any offense but only bring innovation on their work. The managers avoid being burdened with routine work hence encourage new ideas brought to the table. The auditing principles have to establish the proper recording of the financial statements that make it easy for auditors to go through it. It minimizes time wastage as the interpretation takes place faster. Reactions from Clients after an Auditing Process As the verification process concludes, the customer is given the report for further action (Ettredge et al., 2011). It is carried out at equal intervals of period especially annually. In cases of transparency and accountability, the client should not be disillusioned after receiving the reports. They should instead be glad to have all their records set straight. The process if properly conducted should create more accountability among the members in the company. It offers a way to establish whether all funds got by the entity are well documented and taken to the bank. It should indicate that the expenses were on the organization’s activities and not other unauthorized sections. The management team has to approve all the expenditures of the entity (Moroney et al., 2013). It clears the air in situations where there are allegations of the management misconduct. The process also gives an account of all assets belonging to the company and confirms whether records and registers are well maintained. It offers checks and balances. The financial reports are thoroughly scrutinized and propose areas that need improvement. The charitable organizations have to develop financial statements, as they are prone to investigation (Ettredge et al., 2011). They are required to show their validity and for government to recognize them. The funding agencies always require an audited financial report. They will have to audit the statement to offer them better terms of asking for more funds. The people in management positions always have stress as auditing is done. They have a feeling of their mischievous ways of manipulating the company’s resources being unearthed. The auditors always feel proud after doing some good job. They have the sadist kind of heart more so if they realize there was a lapse in the reports. There is always a feeling that the reports must at least have an error (Arens et al., 2013). The auditors are believed to be in a position to identify mistakes in their audit and those, who do not, are perceived not to have done the best in the process. The process is, thus, viewed as one with malice as it always results in sacking of officials found guilty. It makes the whole auditing process to be considered as a faultfinding mission. It is in good faith that the parties involved should be open minded and not reading mischief in the process. It should be a process that sets things right in the running of the organization. Both parties are to make a great contribution towards its success. All the resources, which may play a significant role to facilitate its undertaking, are to be in place. The auditor should be seen to be independent during his or her analysis (Ettredge et al., 2011). Those in management should not cause interference to give them credit. The adoption of the report should be by all stakeholders and the implementation facilitated by all as well. The places, which need correction, are to be rectified as fast as possible to eliminate the mistakes finally. The process should be done periodically. It will be influenced by the economic times and the expenses needed to accomplish the whole process. References Arens, A. A., Best, P. J., Shailer, G. E, Fiedler, B., Elder and Beasley (2013).Auditing, Assurance Services & Ethics in Australia, (9th ed.). Pearson Australia, NSW. ISBN 976-1-4425-3936-5 Ettredge, M., Heintz, J., Li, C., & Scholz, S. (2011). Auditor realignments accompanying implementation of SOX 404 ICFR reporting requirements. Accounting Horizons, 25(1), 17-39. Gramling, A. A., & Watson, M. G. (2009). Analysis of peer review reports: A focus on deficiencies of the Top 20 triennially inspected firms. Current Issues in Auditing, 3(2), A1-A14. Hopkin, P. (2012). Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers. Jordan, C. E., & Clark, S. J. (2011). An examination of audit reporting for accounting principles changes. Journal of Applied Business Research (JABR), 12(3), 1-8. Jubb, C., Rittenberg, L.E., Johnstone, K.M., and Gramling, A. (2012). Auditing & Assurance – A Business Risk Approach. (3rd ed.). Cengage Learning. New Zealand. ISBN 978-0170188524 Leung, P., Coram, P., Cooper, B.J., and Richardson, P. (2011).Modern auditing and assurance services. (5th ed.). John Wiley & Sons, Brisbane. ISBN 978-1-74216-845-6 Moroney, R., Campbell, F., and Hamilton.J. (2013).Auditing: A Practical Approach.John Wiley and Sons, (2nded.). Brisbane. ISBN 978-1-74216-594-3 Read More