The Purpose and Usefulness of Standard Audit - Essay Example

? The purpose and usefulness of standard audit report Introduction An audit report refers to the formal opinion or disclaimer, issued either by an independent external auditor or an internal auditor as a result of external or internal evaluation or audit performed, on legal entities or subdivision thereof. Subsequent presentation of the audit report to the user acts as an assurance service for the user to make decisions based on the audit results. Auditor report is the essential tool in financial reporting. Many third-party users require financial information certification by independent external auditor in order to attract investors. Normally, audit reports presents the external review of the financial information of a company, conducted by an accounting firm and shareholders use it in assessing the financial health of a company. The Financial Reporting Council (FRC) in UK recommended for the enhancement of the responsibilities in financial reporting for the audit committees through publicizing of expanded reports. The auditor reporting entails coordinated structure that leverages the resources by IAASB (Boeckman et al. 2013, p. 76). A standard report summarizes an audit by the public accounting firm about the liquidity strength of a company. Auditing process entails comparison of the findings to internal audits to identify any discrepancies or errors involved therewith. When the audit is clean, standard audit report results. The standard audit report is the most used audit report, and it ensures that companies do not defraud the investors. Failure of the audit reports to conform to the acceptable standards in accounting creates apprehension amongst the shareholders of the company (Boeckman et al. 2013, p. 77). The corporate finance statements and other investors express the concerns on the usefulness of standard audit reports (SAR). The Public Company Accounting Oversight Board (PCAOB) reacted to the concerns by issuing the standards; PCAOB standards (Boolaky 2004, p. 342). Characteristics of standard audit reports Standard audit reports depend on factors after auditors finish testing the internal controls and financial information of a company. Audit reports list the information on accounting errors identified during the audit process. Three types of audit reports issued by auditors include the qualified, unqualified and adverse. Qualified opinions indicate the violation of accounting standards; adverse report shows shortcomings of the company; while unqualified opinion shows not-material misstatements. Audit reports are beneficial to a company. Standard audit report indicates issuance of non-qualified opinion based on the financial information of a company. This allows for extension of business by seeking outside investment to enhance future operations (Carcello 2012, p. 22). Furthermore, standard audit reports entail warnings. Adverse or qualified audit opinions subject the company to further audits resulting in negative goodwill to the outside investors. Companies also experience regulatory fines from the government agencies due to misleading the public on the financial health of the company. Standard audit reports also contain the expert insight. The accounting firms issue information to companies and auditors on acceptable auditing standards (Carcello 2012, p. 24). Standard Audit Report (SAR) SAR changed insignificantly over the last 60 years. Audit reports had not changed prior to 1988 Statements on Auditing Standards (SAS). There were significant changes made on the audit report by the financial statements. Professions tried making changes in 1965, and SAS incorporated introductory, opinion and scope changes in the third paragraph. The changes enhanced the usefulness of the audit report by giving a comprehensive definition of audit, as well as maintaining effective communication of management responsibilities, and the auditor in order to reduce SASs expectation gap. The main objective of SAR is to enhance credibility of the financial statements by the management and enhance decision making (Citron & Richard 2004, p. 119). Pressures for improvement of SAR Concerns on SAR improvement are not new. Research indicates that the study of SAR since early 1978 has recorded the scores of auditors as well as thousands of working hours. Auditors have also expressed their need for the usefulness of SAR. There may be demands on financial information by users to receive a finely nuanced opinion from the auditors regarding the compliance of the company to the set standards. In 2008, the EU called for improvement of communication between investors and auditors. As a result, the Financial Reporting Council in UK has accomplished new reporting proposals. SAR represents the communication of auditor of the findings of various users on financial statements. Effectiveness of the communication is dependent on both the communicator and audience. SAR acts as the primary vehicle through which auditors present their findings to users to rid of any unintended communication gap (Garcia-Benau & Ana 2004, p. 238. Reviews Association of Chartered Certified Accountants (ACCA) body aims at offering first-choice and business relevant qualifications to the people of ability, application and ambition worldwide who seek for a rewarding career in finance, management and accountancy. According to ACCA, the auditors should incorporate into the standard audit report clear statement of the responsibilities used in reporting and reviewing the corporate governance and risk management arrangements. The body believes that any step to such measures requires commensuration of the legal protection for the auditors. The body also identifies the various ways of closing expectation gap by changing the public perception of the audit and moving closer to their perception. According to ACCA, undertaking evolution on the role of the auditor in reporting is crucial (Goodwin & Kamran 2006, p. 463). According to Ernst & Young, the wake of the financial crisis allows for enhancement of auditor reporting in order to contribute to the confidence of the investor. The body strongly advocates for the current efforts in exploration of the options that improve the auditor reporting, as well as encourages the development of SAR that is applicable to all entities globally. Ernst & Young supports single SAR for global use despite the size of the entity. The body also believes on the importance of comparability for the global markets and investors, and hence, the audit SAR should address consistency across all the jurisdictions. Also, SAR should be well presented to clarify on the responsibilities of the auditor and the management (Kwok et al. 2005, p. 75). For SAR to be effective, potential changes should be holistically considered, and all communication should be made to the financial information users. SAR is an element of the broader framework of corporate reporting that collectively provides reliable and appropriate financial information. Therefore, according to Ernest & Young, changes on auditor reporting must be made in the context of the potential improvements in the corporate financial reporting. This should include the potentially expanded reporting on which auditors can report. They advocate for collaboration of PCAOB and IAASB, as well as other international accounting standards and regulators towards the initiatives that improve the extent and nature of the corporate reporting. The coordinated efforts enhance changes within the auditor reporting by successfully addressing the information gap, as well as mitigate the inappropriate expansions on the role of the auditor (McEnroe & Martens 2001, p. 348). The International Federation of Accountants (IFAC) is a global organization that formulates international standards. It serves the public interests by contributing and developing strong international economies. The reforms by IFAC strengthen the standard setting processes on auditing. The Forum of Firms (FOF) is an organization within IFAC that conducts audits of the financial statements to be used across borders (Messier et al. 2005, p. 154). On its comment letter to IFAC, PwC global network believes in enhancing the auditor reporting. The organization believes on the possibility of achieving valuable enhancements towards achievement of valuable and informative reporting. It advocates for open and continuous dialogues among the auditors, regulators and stakeholders. PwC recommends for collaboration of IAASB and PCAOB towards development of global solutions (Kwok et al. 2005, p. 77). Case study: PwC The PricewaterhouseCoopers audit reports over the past years entailed the reflection on the rapid changes in the market place, and the complexities involved in increasing the expectations on the responsibilities, and roles of the auditor within the supply chain of corporate reporting. The design of PwC audit is such a way that it allows for flexibility by adapting to the needs of the multinational clients and the private companies. The audit methodology varies depending on the industry and the working practices. The organization operates under global audit methodology codified within the audit guide in PwC. The policy board on global audit establishes overarching direction and principles regarding the improvement and development efforts. The policy board also coordinates the response of the firm to international audit standards actions (Navarro-Garcia & Francisco 2010, p. 114). The global audit methodology steers the overseas groups on detailed development activities, as well as enhancing execution methodology through support tools and processes, which contributes to the training content. Steering group works with the implementation partners and central global team. Global Risk and Quality group must ensure that the implementation of methodology consistently corresponds with the quality reviews on an annual basis. The R&Q facilitates giving feedback to the process in order to allow the reaction to the practice issues t enhance continuous improvement. The outdated traditional audit phases in PwC entailed the discrete planning process, then to interim, after which it culminates to issuance of reports. The current PwC audit process entails interactive and logical process beginning with rigorous assessment of risks and culmination into robust communication of the audit results (Navarro-Garcia & Francisco 2010, p. 115). Therefore, the SAR from PwC facilitates a comprehensive understanding of the risks associated with businesses, and the company gives its perspectives regarding the controls and proper management of the business. The reports also avail the auditing information that facilitates running of business as well as reconciling internal information presented to the external shareholders. The PwC auditing firm aims at understanding the environment of the company, including the management of the company, in their validation of information used by the management in running the business through testing of controls and internal data used in measuring the performance (Navarro-Garcia & Francisco 2010, p. 116). Usefulness of Standard Audit Reports Users value SAR, especially based on the level of qualification of the audit report. The unqualified report is symbolic mostly because of its existence instead of the detailed content. The users of the report do not mostly read the auditor’s report; they merely identify its existence in relation to audited financial statements for an entity in which they are interested. As a result, the decisions and judgments on audited entity depend on detailed format and content of the SAR. However, the greatest challenge is the improvement of the communicative value of SAR. Normally, changing the expectation gap is challenging and expectation gap on purpose and scope of the financial statements’ audit, as well as the persistence of responsibilities and roles of the auditor, regardless of SAR descriptions on components of the audit (Simga-Mugan & Nazli 2005, p. 127). Increase in expectation gap increases due to added information on SAR about the responsibilities of the auditor and the management. The perceptions of the user regarding the quality and scope of the perceptions inextricably interlink. Others believe that the quality of the auditor’s reports increase with increased information from the editor. Nevertheless, the incorporation of additional information by users in the audit reports is unclear. Users mostly suggest for additional reporting on the matters covered by financial statements audit and the matters lacking in the financial statements audit (Simga-Mugan & Nazli 2005, p. 127). SAR has been useful in making lending and investment decisions. The report also enhances the assessment of validity of financial statements and provides a level of confidence to the future viability of the company. SAR contains information on management of the company, and this provides guidance to the company on sound investment. This also enables the company meet its strategic goals, enhances fraud detection risk (Boolaky 2004, p. 342). Conclusion Research indicates that SAR is crucial in reducing the costs incurred by the agencies towards the management of private information. Therefore, SAR can be considered as an important tool in decision making during lending and investment making. Moreover, since average investors have a high likelihood of depending solely of the publicly available audited statements, lenders have a high likelihood of obtaining collateral from borrowers, and this facilitate decision making. Assessment of information through SAR is normally free of fraud. The fraudulent financial reporting intentionally misstates the financial statements. The users should carefully assess the financial statements to ensure that they are free of fraud. SAR also assures confidentiality regarding the future viability of the company through reading the reporting and affirming it. This bridges the gap between auditors and users, and this ensures high confidentiality in viability. According to auditing standards, SAR should not give any indication on the management of the company and soundness of the investment. Rather, SAR depends on fair statement of financial statement. References List Boeckman, P., David, J. G., & Nilufer, V. B. (2013). Twelfth Annual Institute on Securities Regulation in Europe: Overcoming Deal-making Challenges in the Current Markets, New York, NY, Practicing Law Institute. Pp. 76-78. Boolaky, P. K. (2004). The Importance and Usefulness of Financial Reporting of Municipalities: A Case Study of Municipalities in Mauritius. International Journal of Accounting, Auditing and Performance Evaluation 1(3), pp. 342. Carcello, J. C. (2012). What Do Investors Want from the Standard Audit Report. The CPA Journal 8(1). pp. 22-28. Citron, D. B., & Richard, J. T. (2004). The Comparative Impact of an Audit Report Standard and an Audit Going-Concern Standard on Going-Concern Disclosure Rates. Auditing: A Journal of Practice & Theory 23(2), pp. 119-30. Garcia-Benau, M., & Ana, Z. (2004). Audit Reports on Financial Statements Prepared According to IASB Standards: Empirical Evidence from the European Union. International Journal of Auditing 8(3), 237-52. Goodwin, J., & Kamran, A. (2006). The Impact of International Financial Reporting Standards: Does Size Matter? Managerial Auditing Journal 21(5), pp. 460-75. Kwok, W., Chee, C., & David, S. (2005). Power and International Accounting Standard Setting: Evidence from Segment Reporting and Intangible Assets Projects. Accounting, Auditing & Accountability Journal 18(1), pp. 74-99. McEnroe, J., & Martens, S. (2001). Auditors and investors' perceptions of the Expectation Gap. Accounting Horizons 15(4), pp. 345-358. Messier, W., Martinov-Bennie, N., & Eilifsen, A. (2005). A review and integration of empirical research on materiality: Two decades later; auditing. A Journal of Practice & Theory 7(3), pp. 153-187. Navarro-Garcia, J., & Francisco, B. (2010). An Empirical Insight on Spanish Listed Companies’ Perceptions of International Financial Reporting Standards. Journal of International Accounting, Auditing and Taxation 19(2), pp. 110-20. Simga-Mugan, C., & Nazli, H. (2005). Convergence to International Financial Reporting Standards: The Case of Turkey. International Journal of Accounting, Auditing and Performance Evaluation 2(1/2), pp. 127. Read More