Audit & Assurance: The Development of Auditing over the Period - Essay Example

Audit & Assurance: The development of Auditing over the period Introduction Accounting scams which also involved Auditors in several cases like Enron (2001), Bristol-Myers Squibb (2002} and Lehman Brothers (2010) scams in US and Satyam Computer Services (2009) in a developing country like India have undermined the integrity of the professionals in the field, and the efficacy of the auditing system in general. Increasing complexities in the business operations and the financial transactions over a period of time underlined the inadequacy of the auditing system, especially after liberalization of the economies and globalization. Therefore the international institutions and the accounting bodies have recognized the need for streamlining the Auditing practices to meet the emerging challenges. International Accounting Standards have been the first step in the right direction to address the issues evolved over a period of time, considering the international implications imposed by the cross border transactions worldwide. Not only the shift in methods of operations and the procedures involved in financial services, but also, the developments that have been continuously taking place in the production processes, information technology, media and the latest technological innovations such as mobile telephony, Global Positioning System (GPS), Social Networks, etc. necessitated revisiting the techniques adopted in auditing as well. The methodologies adopted in relation to auditing need to take into account these industrial and technological developments to enhance the efficacy and lend flexibility to the procedures in line with the fast changing environment. The international Federation of Accountants (IFAC) was set up during 1977 with a view to bring about uniformity in the profession on a global scale. The concept of ‘Assurance’ is of recent origin, has generally come into existence after the companies have resorted to computerization of accounting during1980s. The various accounting scams in the corporate history have only strengthened the resolve to improve the professional standards in line with the technological developments and to enhance the level of transparency, and this paper seeks to study the development of auditing over the period of time. When computerization gathered momentum, the important problems identified in the auditing process were mainly related to the understanding of the concept of the system adopted (especially the software), compatibility of the program with the established accounting practices or the guidelines, the efficacy of the program to discern the pitfalls or discrepancies and the ease with which the cross verification process could be handled with any degree of confidence were of paramount importance. Similarly, the knowledge and the experience on the part of the professionals entrusted with this task have become very important factors for a successful audit. Consequently, the accounting courses have undergone great changes to reflect the changing needs. Auditing is closely interlinked to other disciplines such as law, information technology and statistics. The accountancy and auditing institutes throughout the world have been continuously upgrading the syllabus to keep in tune with the developments to equip the students with the requisite knowledge and expertise. The study reveals that there is tremendous scope for specialization in the profession or establishing divisions based on specialization in the auditing companies, because, unlike the traditional auditing, the manner of conducting an audit has undergone revolutionary changes, and the profession should be open to embrace the complementary advantages of knowledge in the specified sectors for effective performance. Auditing and Assurance – Historical perspective Pearson Education (p.8) states, “At the second International Congress of Accountants in 1926, Limperg also presented a set of auditing concepts, which became known as the theory of inspired confidence. Later, his theory was called the theory of rational expectations (Blokdijk, 1979). Limperg’s theory can be characterized as dynamic. It connects the society’s needs for reliable financial information to the technical possibilities of auditing to meet these needs”. In line with the evolutionary process, the phenomenon of Corporate Social Responsibility extends beyond the conventional approach to auditing. The word ‘Assurance’ has been used earlier in a limited sense with reference to the certification works undertaken by the auditors. But, it connotes different dimension in the profession under the changed circumstances in relation to auditing. The responsibility of the auditors should be viewed in a very larger perspective considering the phenomenal changes that have been taking place in the corporate setup. “External auditors are required to anticipate and keep up with the changing needs of the public, as well as changes in financial markets, corporate structure and information and communication technologies. Thus, the audit profession should evolve to meet new market needs, taking into consideration regulators’ measures regarding the types of services provided by auditors and the changes the standard-setters and regulators envisage in the areas of accounting and auditing standards”. (Pearson Education, p.5) Corporate Social Responsibility calls for the companies to take into account the environmental and social needs in their strategies for corporate sustainability, without compromising the needs of future generations to meet their own needs. Therefore, the role of the auditors has changed significantly over the period of time, not only based on the intricacies involved on account of the technological advances, but also their responsibility towards all the stakeholders including society. Impact of I. T. Revolution in auditing Innovations in software technology have brought about intricacies in its wake in addition to the ability to account and process large volume of accounting and other information. The auditors in the changed scenario have been required to ensure that these processes comply with the standard accounting practices as enunciated by the guidelines of the professional bodies / government agencies. It should also be ensured that the checks and balances are in place to avoid malpractices, and there are proper authorizations at all levels in the implementation of the system. This necessitates training to the existing professionals in the systems adopted, and to create new breed of professionals with knowledge, skill and expertise in the field to make the auditing and assurance services meaningful with regard to the systems, sub-systems and audit trail. The institutions worldwide, for example, the ICAEW has continuously upgraded the curriculum for the new students taking into account the above aspects and offers several certification courses to the existing professionals to upgrade their skills. Information Systems Audit and Control Associations globally have developed applicable standards to meet the growing needs of the profession. The guidelines are provided for applying the standards to IT Audit and Assurance. Globalization Consequent upon globalization in the recent decades, need has been felt in the world community that for any system to be effective, it should be globally accepted and practiced. This necessitated global approach to the accounting standards and financial reporting. The academic institutions have rallied to meet the emerging challenges and requirements of the world community, and auditing whether financial, cost or management audit has been changed to ‘Auditing and Assurance’ (in lieu of Auditing) to reflect the evolutionary shift in imparting education as well. Auditing and Assurance Standards (AAS) The International Auditing and Assurance Standards Board is, in coordination with the accounting bodies of various countries, establishes international standards on auditing and assurance with the aim of enhancing quality and uniformity of practice worldwide and to inculcate and strengthen confidence of the world community in financial reporting. IASSB states “The International Auditing and Assurance Standards Board (IAASB) marks a milestone in Warsaw, Poland in July 2007, when it meets for the 100th time in its 29-year history” and in the late 1980s the IAASB approved exposure drafts on the assurance framework. In the year 1985 “The IAPC recognized that a fundamental way to protect the public interest was to require the application of a core set of internationally recognized auditing and assurance standards”. Only in the year 2001 the International Audit Practices Committee (IAPC) was proposed to be rechristened / reconstituted as International Auditing and Assurance Standards, which came into effect during 2002. Erstwhile auditing practices in relation to the financial statements of the companies had been increasingly felt inadequate, because the assurances related to the audit had not gone beyond the purview of the financial statements; to be precise, the reasonableness and accuracy of the financial statements. Therefore, assurances in respect of the other areas which could be comprehensively covered under ‘Corporate Social Responsibility’ became important in the evolution of the economy, though financial audit nevertheless primarily forms the basis for assurance to the various stakeholders connected to the companies. But, the interlinking of the company, its stakeholders and the community in which the company survives makes it necessary to approach the process of auditing in a larger perspective for ‘Corporate Sustainability’ in the long run. Levels of Assurance The auditing and Assurance Standards have been issued based on the nature of the assurance provided or the type of engagement undertaken by the auditor. Assurance, in the context of the framework discussed, refers to the auditors’ opinion as to the reliability of the statement made by the company (one party) to the stakeholders including the society. The auditor assesses the evidence collected (or provided) as per the standard guidelines or procedures and expresses an opinion. The degree of satisfaction achieved, therefore, the level of assurance is dependent upon the generally accepted accounting principles and the procedures used. In an audit engagement, the auditor may express a high level of opinion, but not absolute level of assurance. The auditor in his report may express positively that the information subject to audit is free of material misstatement. In a review engagement, the auditor may state that the information subject to review is free of material misstatement, a form of negative assurance. In other cases, the auditor’s report may be based on the factual findings and the users are expected to assess for themselves the findings reported and draw their own conclusions. However, it should be remembered that the involvement of the member of the accounting institution, for example Member of the ICAEW, is considered as a vital factor in making use of the information, though there is no assurance or opinion expressed in the report. Based on functional differences, the auditors can be classified into external auditors and internal auditors. The internal auditors are appointed by the management with the specified nature of duties or scope of work. The external auditor is appointed by the owners (say shareholders) in accordance with requirements as per the statute. Therefore, the scope of the work of the external auditor is determined by the statute, and the external auditor is independent of the management of the organization. Other Dimension of Auditing There are several responsibilities imposed on the companies which include legal, economical, ethical and social responsibilities. The various stakeholders of the company including the community are affected by the business operations of the companies. The governments throughout the world have enacted laws relating to environmental protection, pollution, conservation of natural resources, etc. International bodies and NGOs have developed standards and issued guidelines with regard the best practices to be adopted by the corporate companies on such issues. The auditors should take note of these guidelines in discharging their responsibilities and consider various other relevant issues such as Water Treatment, Waste Disposal, Effluents Management, Renewable Energy and Recycling. Close coordination with the internal auditors and cost auditors is very essential as they are directly involved in day to day activities in an organization. Industrial revolution which started in UK and spread over to the world caused severe threats to the environment over the period of time, and the industrial growth is not sustainable in the long run unless the environmental issues are attended to on priority basis. To-day the social responsibility is mainly borne out of reputation risk perspective. Incidences such as improper corporate governance activities, regulatory measures taken against the companies and misconduct of the senior managers could impair the business or sometimes the survival of the companies. But the scope of CSR is not limited, but includes several aspects such as environmental pollution, human rights and animal welfare. Broadley (2006) states, “Auditing is a public responsibility…The auditor does not have direct corporate governance responsibility but rather provides a check on the information aspects of the governance system”. Companies also request their statutory auditors to perform a review of certain Corporate Social Responsibility (CSR) indicators. KPMG (2009) Audit of PRP Group is a case in point, and the audit has been performed to provide limited assurance with regard to, inter alia, Carbon Dioxide Emissions and Women’s Dignity and Rights. The responsibilities may include CSR activities in relation to the other environmental aspects and business ethics. There are also industry specific guidelines with regard to audit report content. For example, NBOG (Notified Body Operations Group) has issued guidelines for Regulatory Auditing of Quality Management Systems of Medical Device Manufacturers – Part 3: Regulatory Audit Reports [1] highlights the best practices that should be applied under the Medical Devices Directives. Environmental audit has been undertaken by the companies some times for business considerations also. For example in the case of ISO 14000 accreditation or for the issues related to health, safety and risk control measures, environmental audits becomes necessary. “ISO 14000 is actually a series of international standards on environmental management. It provides a framework for the development of both the system and the supporting audit program” (ISO 14000 / ISO 14001 Environmental Management Guide) International standards and position in UK and other countries According to Financial Reporting Council, which is planning for Convergence of UK and International Accounting Standards, “The ASB has set out its plans for the future of UK accounting standards in the light of the move to the mandatory use of International Financial Reporting Standards (IFRS) for the consolidated accounts of EU listed companies”. It is pertinent to note that the statement ‘Improvements to Financial Reporting Standards 2010’ contains material in which the International Financial Reporting Standards Foundation (IFRS Foundation) holds copyright and which has been reproduced with the permission of the IFRS Foundation’ appearing in the front page of the Financial Reporting Standard: Improvements to Financial Reporting Standards 2010, indicates that most of the IAS have been adopted in U.K. By and large, International Financial Reporting Standards (IFRS) have been adopted by many countries in the world. The accounting and assurance standards in the context of the countries may vary on certain points with the International Accounting Standards. This may be due to the level of economic growth, judiciary and legal structure in the country and other factors. For example, Dr Nigel Sleigh-Johnson, Head of ICAEW’s Financial Reporting Faculty of ICAEW states “The very detailed and specific rules in the current standard made hedge accounting very difficult. It was hard for companies to explain their strategies and for users of financial reports to understand how the hedge accounting results related to them… Reaching an agreement on accounting for financial instruments in general and on hedging in particular is critical if convergence between the two sets of accounting standards is to become a reality”. Conclusion It could be observed from the study that the auditors should keep abreast of the developments taking place in technological and the social perspectives. Continuously updating the skills is very important for increasing the level of integrity and efficiency in the auditing process. The institutes of Chartered/Cost/Management Accountants in different countries conduct specialized programs to meet the growing needs of the profession. For example the Institute of Chartered Accountants in England and Whales offers courses of study for ICAEW members on various fields ‘to top up their existing knowledge and identify further learning or development needs’. (www.icaew.com, 2010) The auditing firms should form specialized teams with the proper mix of team leaders and assistants with relevant skills and industry experience. Developing specialization in the field ensures effective auditing process, and encourages the professionals to acquire knowledge in different fields in addition to the basic qualifications required for the profession. This will enable the team to plan and develop the audit program taking into account the characteristics of the industry, system of accounting, software used and the internal checks and balances in the system. Word count: 2658 excluding ‘References’. References Broadley, D., 2006. Auditing and its role on Corporate Governance. Delotte. [online] Available at: [Accessed 1 January 2011].  Financial Reporting Council, 2004. Convergence of UK and International Accounting Standards. [online] Available at: [Accessed 1 January 2011].  IASB’s hedge accounting proposals are incomplete but could represent an improvement IASB’s hedge accounting proposals are incomplete but could represent an improvement Financial Reporting Council, 2010. Financial Reporting Standard – Improvements to Financial Reporting Standards 2010. Accounting Standards Board. [online] Available at: [Accessed 1 January 2011].  IASSB, International Auditing and Assurance Standards Board: A brief History of its Development and Progress, [online] Available at: [Accessed 1 January 2011].  ISO 14000 / ISO 14001 Environmental Management Guide, 2007. ISO14000 Series Environmental Management Systems. [online] Available at: [Accessed 1 January 2011].  KPMG Audit, 2009. Statutory auditors’ report on the limited review of certain Corporate Social Responsibility (CSR) indicators. [online] Available at: [Accessed 1 January 2011].  NBOG, 2010. NBOG Best Practice Guide - Guidance on Audit Report Content. [online] Available at: [Accessed 1 January 2011].  Pearson Education, An Introduction to Auditing and Assurance, [online] Available at: [Accessed 1 January 2011].  The Institute of Chartered Accountants in England and Whales, 2010. Specialist qualifications and programs. [online] Available at: [Accessed 1 January 2011].  IASB’s hedge accounting proposals are incomplete but could represent an improvement IASB’s hedge accounting proposals are incomplete but could represent an improvement IASB’s hedge accounting proposals are incomplete but could represent an improvement IASB’s hedge accounting proposals are incomplete but could represent an improvement The Institute of Chartered Accountants in England and Whales, 2010. IASB’s hedge accounting proposals are incomplete but could represent an improvement. [online] Available at: [Accessed 1 January 2011].  Read More