Different Aspects of Auditing Nowadays - Essay Example

Topic: Auditing & Accounting Ethics Style: Harvard Pages: 11 An attempt has been made in this paper to comprehend different aspects of auditing specially emphasize on threats of independence, auditors liability, ethical dilemma and relationship between internal and external auditor with social responsibility. Question 1,3,4 and 2b have been attempted. In question 1 the different threats of independence as it is one of the most crucial characteristics of auditor. In question 2b, the ethical dilemma of the employee of a firm has been analysed with different point of view. In question 3 the liability of an auditor and the methods of limiting the liability have been discussed. In addition, in question 4 the responsibility in relation to external and internal audit toward the society has been discussed. Introduction Loebbecke A. (2000) stated that auditing has historically been concerned with the faithful and accurate accounting of economic resources. This concern arises from the imperative of maintaining accountability in the presence of agency conflicts between the management and owners of a firm. Over time, this notion of accountability has expanded as interest groups established new standards of performance. The underlying philosophy has, however been remained constant: essentially one of ensuring that accounting records have been kept and verifying compliance with generally accepted accounting principles.1 Evaluation of question 1 Hayes, R., Dassen R. , et al, (2005) addressed that the independence is one of the most pivotal traits of being an auditor. Hussy, R., (1999) has elucidated independence as the fundamental principle that the auditor must be, seen to be, independent to enable them to behave with integrity and make objective professional and business judgment. Independence could be of two forms as- (a) Independence in facts exist when the auditor is actually able to maintain an unbiased attitude throughout the audit and (b) Independence in appearance is the result of others’ interpretations of this independence. According to Hayes, R., Dassen R., et al (2005), independence is potentially affected by self-interest, self-interview, advocacy, familiarity and intimidation threats. To approach of this comment, the threats have been clarified as followed: ‘Self-interest Threat’ occurs when a firm or a member of the assurance team could benefit from a financial interest in, or other self-interest conflict with, an assurance client. Examples of circumstances that may create this threat include: Teoh, H. Y. & Lim, C. C. (1996) mentioned that self-interest threat occurs when, (1) any product or judgment of a previous assurance engagement or non-assurance engagement needs to be re-evaluated in reaching conclusions on the assurance engagement, or (2) when a member of the assurance team was previously a director or officer of the client, or was an employee in a position to exert direct and significant direct and significant influence over the subject matter of the assurance engagement2 Mintz S. M. (1997) pointed out that ‘Advocacy Threat’ occurs when a firm or member of the assurance team promotes or may be perceived to promote, an assurance client’s position or opinion to the point that objectivity may or may be perceived to be compromised. Such may be the case if a firm or member of the assurance team were to subordinate to their that of the client. Hussey R. (1999) addressed that ‘Familiarity Threat’ occurs when by virtue of a close relationship with an assurance client, its directors, officers or employees, a firm or a member of the assurance team becomes too sympathetic to the client’s interests. ‘Intimidation Threat’ occurs when a member of the assurance team is deterred from acting objectively and exercising professional skepticism by threats, actual or perceived, from the directors, officers or employees of an assurance client. When threats are identified, other than those that are clearly insignificant, appropriate safeguards should be identified and applied to eliminate the threats or reduce them to an acceptable level from the ethical point of view. Safeguards fall into three broad categories:3 (1) Safeguards created by the profession, legislation or regulation include the following: (a) educational, training, and experience requirements for entry into the profession ; (b) continuing education requirements; (c) professional standards and monitoring and disciplinary processes; (d) external review of the firm’s quality control system ;and (e) legislation governing the independence requirements of the firm (2) Safeguards within the assurance client include the following: (a) when assurance client’s management appoints the firm, persons other than management ratify or approve the appointment; (b) the assurance client has competent employees to make managerial decisions; (c) policies and procedures that emphasize the assurance client’s commitment to fair financial reporting; (d) internal procedures that ensures objective choices in commissioning non-assurance engagement (e) a corporate governance structure, such as an audit committee that provides appropriate oversight and communications regarding a firm’s services. (3) Safeguards within the firm’s own systems and procedures may include firm-wide safeguards such as follows: (a) firm leadership that stresses the importance of independence and expectation that members of assurance team will act in the public interest (b) policies and procedures to implement and monitor quality control of assurance engagements; (c) internal policies and procedures to monitor compliance with firm policies and procedures as they relate to independence; (d) policies and procedures to monitor and , if necessary , manage the reliance on revenue received from single assurance client; (e) Designating a member of senior management as responsible for overseeing the adequate functioning of the safeguarding system. By performing above safeguards could help mitigate the threats of the independence. Messier W. F. (2003) stated that the relative significance of a safeguard depends on its suitability with the facts and circumstances. Safeguards fashioned by the profession, legislation, or regulation, Safeguards put into operation by the attest client, Safeguards within the firm’s own systems and procedures, including policies and measures to implement professional and regulatory requirements. 4Thus in observation of Hayes, R., Dassen R., et al (2005) it is true that Independence is potentially affected by self-interest, self-review, advocacy, familiarity and intimidation threats. Answer to the question no. 2b: In this type of particular situation, the employee named Bryan has confronted ethical dilemma about the audit fees. There are three pertinent facts that deal with the ethical issue of the situation. They are: 1) The staff person has been informed that he will work hours without recording them as hours worked. 2) Firm’s policy prohibits this practice; 3) Another staff person has stated that this is common practice in the firm. Bryan has affected by the situation if the ethical dilemma occurs in the following way: Bryan is being asked to violate the firm’s rules and regulation. Working hours will be affected Payment will be affected Performance evaluation will be affected Attitude toward the may be affected. Bryan’s available alternatives could be: refuse to work the additional hours perform in the manner requested inform other staff named Charles that he will not work additional hours or will charge the additional hours to the engagement talk to the manager or partner about the Charles’s request refuse to work to the engagement quit working for the firm. The action is taken by Bryan may have consequences of reaction toward the firm The consequences could be following in response to the action taken by Bryan. Carey, P. & Simnett, R. (2001) stated that in deciding the consequences of each alternative it is essential to evaluate both the shot and long term effects. There is a natural tendency to emphasize the short term because those consequences will occur quickly, even when long term consequences may more important. For example, consider the potential consequences if Bryan decides to work the additional hours and not report them. In the short term he will likely get good evaluations for cooperation and perhaps a salary increase. In the longer term what will be the effect of not reporting the hours this time when other ethical issues arise. Messier W. F. (2003) considered the following similar ethical dilemmas Bryan might face in his career as he advances: a supervisor asks Bryan to work 2 unreported hours daily and 10 unreported hours weekly. A supervisor asks Bryan to initial certain audit procedures as having been performed when they were not Bryan concludes that he cannot be promoted to manager unless he persuades assistant to work hours that they do not record. Management informs Bryan that the audit fee will be increased $20000 if Bryan can find a plausible way it increase earnings $1.2 million. Teoh, H. Y. & Lim, C. C. (1996) pointed out that when such type of ethical dilemma occurs, even though it is the common practice of the firm, named Barton & Barton. What would happen to the firm if this practice results in undercharging of audit fees? The firm has stated rules and regulation are being violated. The firm may result in underbilling clients in the current and future engagement. The situation may affect firm’s ability to realistically budget engagements and bill clients. The situation may affect the firm’s ability to motivate and retain employees.5 In this type of situation only Bryan can decide the appropriate option to select in the circumstances after considering his ethical values and the likely consequences of each action. At one extreme, Bryan could decide that the only relevant consequence is the potential impact on his career. In general opinion Bryan is an unethical person if he follows that course. At the other extend, Bryan can decide to refuse to work for a firm that permits even one supervisor to violate policies. Many people would consider such an extreme reaction naïve. Evaluation of question no.3 Walter G. K. William C. B., Raymond N. J. (2006) addressed that in recent epoch, audit liability has turn out to be a matter of increasing apprehension. It has created a center of attention of practitioners and academics alike. In the features of large claims and the being higher cost of indemnity insurance envelop in around the globe. There has been a great deal of entrance by firms and institutes to changes in the law and focused on the standard of joint and several liability in exacting. In accumulation, a progress on issues of corporate governance and a general observation that directors would take a more positive role in corporate management has further prominent the issue.6 Smielianskas W.J. et al (2004) argued that auditing is a significant ingredient of the modern day’s corporate marketplace. A considerable body of experimental study has predictable the magnitude of auditors and the audit quality. On the other hand, in modern time, challenged by dormant revenues, wider sources of information, on-line access to databases, amplified competition, and more stylish and dependable accounting software, auditors have been enforced to reliant their services. The indication in next of kin to fee revenue places of interest the slow turn down in the importance of the statutory financial statement audit forms the standpoint of the public accounting firm.7 Overview of Proposed Schemes to Limit the Liability of Auditors Carey, P. & Simnett, R. (2001) mentioned that the elementary to the issue of litigation is the attitude of joint and several liabilities, which allows a plaintiff to recuperate entirely from any of the treasons who caused the losses independent of their relative responsibility. The straightforward rationale of joint and several liabilities is no doubt anticipated to make available the maximum opportunity for injured parties to recover their losses. The auditing occupation has act in response to a superficial ‘litigation crisis’ by lobbying for method to limit the liability of auditors. A recent report published by the International Federation of Accountants (IFAC) on Auditor’s Legal Liability has detailed a range of methods by which a limitation of auditor liability might be accomplished.8 Capping Gupta, K., (2006) reviewed as a wider suggestion, capping involves the statutory obligation of a limit to the quantum of liability for which a specific party can be held liable. This mechanism may take many forms including calculation as a multiple of the audit fees for a particular audit, or related to the amount of equity in the partnership, the amount of professional indemnity insurance cover or the assets of the partners. Gupta, K., (2006) also added that the multiple of fee charged limit assumes that there should be a nexus between the extent of liability and ‘the worth of the task performed as reflected in the fee paid for it’. It has been recognized that such a scheme would result in an incentive for the auditor to charge the smallest fee compatible with covering direct audit costs, and may result in the amount of work undertaken in carrying out the audit being determined by the desire to limit liability regardless of the risks involved in such a course of action. 9 Incorporation Incorporation efficiently limits claims to the assets of the corporation including indemnity and saves from harm the assets of innocent partners. Proportionate Liability Smielianskas W.J. et al (2004) mentioned that balanced liability distribute fault in the middle of all those responsible and may operate in a number of ways. It has enlivened when a defendant is partly at fault when a defendant is insolvent. Even a defendant’s balanced blame is less than a stated entrance. This efficiently means when the defendant is insolvent, the un-recovered loss will go down on the plaintiff, not the outstanding solvent defendants. Considerably, the statement of phase two of the ‘investigation into the Law of Joint and more than a few Liabilities’ recommended the implementation of a system of proportionate liability, in all actions in the tort of negligence in which the plaintiff’s claim is for property spoil or merely economic loss.10 Limited Liability Partnership Carey, J. L., (1970) added arrangement has been described as a ‘pseudo-corporation’, in the sense that limited partners are only accountable for the debts and obligations up to the amount they have agreed to put in to the firm. The most important benefit of limited liability partnerships is the conservation of unlimited liability of the commitment partner accountable for the audit whilst offering some fortification to ‘innocent’ partners. 11 Tandon, B. N. (2006) added that unequivocally the liability of auditors is a serious and polemic issue. It is clearly on the agenda of professional bodies; it is the subject of law reform inquiries and exercises judicial and legislative bodies internationally. Evaluation of question 4 Walter G. K. William C. B., Raymond N. J. (2006) addressed that the audit report is the most substantial output of the process that adds trustworthiness to the available financial statements. The peripheral auditors are occupied to express their estimation on the financial statements. It has shaped by the reporting entity. It also not possible for the peripheral auditor to scrutinise all financial aspects performed. The reporting articles during the audit period are encouraged. In that case lots of large companies have interior audit department to support external auditor. Moreover it helps restructure internal control system within the organisation and moderate the intrinsic risk to an acceptable level. Hayes, R., Dassen R., et al, (2005) mentioned that the capacity and objectives of internal auditing show a discrepancy widely and depend on the size and structure of the entity and necessities of its management. Customarily in-house auditing activities include one or more of the following: (a) Review of the accounting and internal control system; (b) Examination of financial and operating information (c) Review of the economy, efficiency and effectiveness of operations including non-financial controls of an entity. (d) Review of compliance with laws, regulations and other external requirements and with management policies and directives and other internal requirements. Relationship between internal audit and external audit Teoh, H. Y. & Lim, C. C. (1996) added that management establishes the role of internal audit and its purposes that differ from those of the exterior auditor who is selected to report separately on the financial statements. The internal audit purpose objectives vary according to management’s requirements. The external audit’s primary concern is whether the financial statements are free of charge of material misstatement. Walter G. K. William C. B., Raymond N. J. (2006) addressed that the other means of accomplishing their particular objectives are often similar. Thus positive aspects of internal auditing may perhaps be useful to determining timing, nature and degree of internal audit events. Internal audit is a part of the article irrespective of the degree of independence and neutrality of internal auditing. It can’t accomplish the same quantity of independence as required of the external auditor. Hussey R. (1999) mentioned that when communicates estimation on the financial statements the external auditor has solitary accountability for the audit opinion expressed and those responsibilities are not concentrated by any use made of internal audit. All verdicts relating to the audit of the financial statements are that of the external auditor.12 Hussey R. (1999) argued that the major function of audited financial statements is to create a center of attention of the individual investors who are likely to invest their money to the company. The individual investors formulate their economic decision on the way to the entity on the basis audited financial statements. The audited financial statements correspond to the entity’s fair presentation and don’t give the wrong impression about the investors. Carey, J. L., (1981) stated that the business world being complicated and inflamed the audit society could engage in recreation a key role from both sides counting investors and entity. But the audit society should preserve most favorable level of integrity, efficiency, professionalism and degree. If the audit society together with both internal and external auditor fails to perform their duty, the society may not be benefited. Furthermore, a mass execution condition could be occurring in the financial sector of the economy. Bibliography Carey, J. L., (1970), The Rise of the Accounting Profession: To Responsibility and Authority, 1937-1960 (1970), 3rd ed., New York, American Institute of Certified Public Accountants. Carey, J. L., (1981), Professional Ethics of Public Accountant, Ayer Co Publishing, ISBN-10: 0405135068 Carey, P. & Simnett, R. (2001), Audit Partner Tenure: Implications for Audit Quality and Mandatory Rotation Policy, Working Paper, Monash University. Hayes, R., Dassen R. , et al, (2005) Principles of Auditing – an Introduction to International Standards on Auditing, 2nd Edition, Pearson Education Limited, Harlow. Loebbecke, A. (2000), Auditing – An Intergraded Approach, Eight Edition, London, Prentice-Hall International (UK) limited Gupta, K., (2006), Fundamentals of Auditing, 6th ed., Tata McGraw Hill Book Co., New Delhi. Messier, W. F., (2003), Auditing & Assurance Services, Third Edition, London: McGraw-Hill Irwin. Mintz, S. M., (1997), Case in Accounting Ethics and Professionalism, 3rd ed,, New York: McGraw-Hill. Smielianskas W. J. et al (2004), Auditing- An international Approach; 3rd Edition, McGraw Hill; p-660 Tandon, B. N. (2006), A Handbook of Practical Auditing, 5th ed, Sultan Chand & sons, New Delhi, ISBN #: 8121920418 Teoh, H. Y. & Lim, C. C. (1996), An Empirical Study of the Effects of Audit Committees, Journal of Accounting, Auditing and Taxation 5(2). Tandan B. N (1997); A Handbook of Practical Auditing; 11th ed. Schand & Company Ltd Hussey, R. (1999) Oxford Dictionary Accounting; 2nd ed; Oxford University Press. Walter, G. K. William, C. B., Raymond N. J. (2006), Modern Auditing, Academic Internet Pub Inc., ISBN: 1428807640 Read More