Buacc3741 Auditing | Challenges For Assessment Answers

Answer:

With the due passage of time, the business has undergone a sea change and the role of the auditors is influenced. Auditors play a vital role in the functioning of the company and ensure that the investors are not duped by false information.  The auditing model and the role of the auditors is endowed with severe challenge because if changes are not seen then a second Enron can be on the cards. To improve the audit quality, it is important to have changes in the audit model. The current study will stress upon the role of the auditors, the audit quality and the function that is played by them.

Considering the Australian auditing model, the first and foremost job of the auditor is to report frauds. There is a vast difference between the other country auditing and Australian auditing. This is because the auditing of various countries believes the auditors are required to be watchdogs and not bloodhounds. It is the secondary function of the auditors to report frauds in the Indian position unlike the Australian position that considers it the primary function for its auditors. As per the Australian Auditing Guidelines and English Courts if the company is cheated by its senior employee and if this gets discovered by the auditor of the company, then it is the responsibility of the auditor to report such fraudulent activities of that employee to the management of the company or with the consent of management should inform directly to a related party as soon as possible thus eliminating corporate scams (Matthew et. al, 2015).

The basics of audit firms are evolving with upgrading technology. A highly educated team of auditors are the primary assets of audit firms. With their complex knowledge and experience this team provide intangible services. The auditor should possess knowledge and skills in the areas of communication, analytical thinking, critical thinking, investigative financial skills and technology as well. These are the most desirable skills a client looks for in an auditor. The demand for the requirement of the auditors enhanced since 2014 and it was the most significant change that took place in that year. With the audit report of the company, a better and clear picture of an organization can be drawn. Years before 2014, it was difficult for audit firms to hire and retain the professionals because of lesser pay and growth issues. Such professionals opted for working in tech companies rather than audit firms due to better growth, remuneration and work opportunities. With the new opportunities in auditing and updating technologies it has become easier for the audit firms to recruit auditors and retain them in long-term. This will also require audit firms to reconstruct their growth and appraisal pattern.

The responsibility of an auditor is far different from what people assume as an auditors’ responsibility. This is known as audit expectation gap. There are two areas as a result why such gap exists. The detection of fraud and the going-concern concept are the dominant areas for which such gap exists (Tadros, 2017). The roles and responsibilities of auditors are widely misunderstood even after undertaking research for years on the issue. In order to bridge this gap it is required to acknowledge and accept the fact that the task is a shared responsibility on the part of auditors (Livne, 2015). The failure in audit reports is assumed on a prior basis when a company crashes. The roles and responsibilities of auditors and especially the auditors who are charged with governance that can influence the quality of financial reporting needs to be further analysed. It is also required to conduct research on how to raise awareness in the investor community.

In 2012, a lot of alterations were made to ASIC’s audit regulation powers via the Corporations Legislation Amendment (Audit Enhancement) Act 2012. A lot of recommendations that were made by Treasury after Audit Quality in Australia – A Strategic Review, were implemented by this Act. Audit Quality in Australia – A Strategic Review was a consultant report of Treasury. According to the Treasury’s report the Australia’s audit regulation framework is stable and its framework is in order with the best international standards and therefore its framework does not require any alterations (Tadros, 2017). The significant alterations in the ASIC’s audit regulation powers are-

Annual transparency reports- It was required for the firms conducting audits to make their annual transparency reports available to public. It was applicable on firms conducting audits of 10 or higher Australian entities. Such Australian entities could be listed companies, authorized deposit taking institutions, listed registered schemes and insurance companies (Lapsley, 2012).

Independent function of the Auditor- The Act removed the existing auditor independence function from the FRC and in return formulated the auditor independence work of ASIC and the FRC. In order to plan and perform quality assurance reviews of audit work undertaken by auditors the FRC’s revised it functions that includes providing the Minister and the professional accounting bodies strategic policy advice and reports in context to the various systems and techniques implied by Australian auditors to ensure compliance with required legal requirements (Lapsley, 2012).

Audit deficiency notifications and reports- Audit deficiency notifications and reports are issued when audit firms fail in their audit reports. The ASIC has been designated with a power which is also subjected to certain terms and conditions to issue audit deficiency notifications and reports. Such reports are to be issued when the audit firms make specified failures in the exercise of its statutory audit functions and that when such specified failures are identified by ASIC and which according to ASIC is a prominent weakness in the auditor’s quality control system or poor conduct of audit that deteriorated the quality of the audit entirely.

Audit quality is a term used to define the efficiency in the audit conducted by an auditor and his audit reports. It is a term used to construe that whether the ultimate objective of the audit is fulfilled or not that is to have a confirmation of tracing down and reporting the errors, fraud, misleading and fabricated information in the company’s financial statements. It is a term used to determine the auditors’ report that is free of biasness and indicates if the financial reports of an organization depict true and fair view of its financial position and its performance as well (Sikka, 2009). The oversight and advisory board was appointed by the Australian government on account of the above concern.

There are 5 drivers of an audit quality-

1. The effectiveness and efficiency of the audit process- The audit process should be effectively and efficiently carried out in order to reap best results.
2. The reliability and usefulness of audit reporting- The audit report should reflect a true and fair view of the company’s state of affairs and its financial position. The audit report should be free from biasness.
3. The internal environment of an audit firm- The culture within an audit firm is also important for an auditor to conduct audit in best manner.
4. Factors outside of the control of auditors
5. The skills and personal qualities of auditors- The auditors should be skilled, highly knowledgeable and technologically updated.

Following are the inter-related factors that are involved in audit quality-

1. The ethical standards applied to the members of the professional accounting bodies, the professional qualities, experience, knowledge and incomparable skills of auditors and their personnel and the role and activities of the audit regulator (Sikka, 2009).
2. The legal framework related to audit regulation (including the auditor independence regime in the Corporations Act 2001, the company auditor registration system  and the accounting and auditing standards).
3. The Australian Securities and Investments Commission (ASIC).
4. Any such other bodies that are involved in the audit process that reviews the processes and practices formulated within audit firms.

Changes and developments keep on happening in the auditing field and so the professionalism also changes with time. It is seen that the enterprises are laying more attention to data analysis and their production. The condition of the companies can be way better if they perform well in the auditing department which can be done by combining the technology available with the professionalism and the skills which the auditing staff possesses (Geoffrey et. al, 2016). This would lessen the burden in the decision making and also generate value for the parties. For taking all the above mentioned steps, a lot of hard work is required because the data will increase way more in amount than expected. With hard work, it also requires massive storage bounds as the data will be in different formats like images, texts, sounds, videos and many more. These can be the path to a successful company but the auditing terms and the legal boundaries are not at all intact to let these techniques and atmosphere grow which is why the audit firms have been remaining insufficient to deliver to the expectations of the clients in any field (Hoffelder, 2012). Due to the inefficiency of the auditing firms and not being able to deliver, there are chances that their contracts can be cancelled which will deprive them of work also thereby signing a heavy loss to them.       

The auditing techniques will are prevalent in the current time includes the following that is a proper assessment of the of the client expectation with a strong emphasis on the type of business and the field in which the company is operating so that threats can be eliminated. Proper knowledge, as well as understanding of the internal environment needs to be understood (Sikka, 2009). Emphasis is laid on the structure of the internal controls with regular or periodic checks which ensures that the system is working well so that any material misstatements which occurs can be detected and also eliminated as soon as possible (Geoffrey et. al, 2016). Substantive techniques are also paid attention so that the analytical processes are kept intact and it is also seen that there are no fault in the transactions undertaken along with a periodic check on the ending balances also.  

It has been written in the rule books and also be stated that the auditor of a company is not the legal advisor of the same. The duty of the auditor is not towards the company but towards the shareholders of the company and to safeguard the practices and the thinking of the company is the real job of the auditor as written the regulations book (Merchant, 2012). The auditor should not be the one to impose a concern against the policies of the company. The auditor task is to analyze all the records and after proper calculations, present the true and fair financial position of the company in front of the shareholders. It should be seen by the auditor that they deliver in the best way they can bit also look after their independence issues with the company management (Gay & Simnet, 2015).

Duty to Provide A Fair View Of The Financial Affairs

The powers and the duties put up upon the auditor must be such that the auditor analyses the company records and confirms it that the financial statements including the balance sheets and the profit and loss accounts of the company presented till date when the new auditor joins are fair and correct (Fazal, 2013). Analysis of the balance sheets, profit and loss accounts along with conduction of enquires and reporting the data collected from such enquires to the auditing firm are all part of the first process that an auditor must undertake after joining the contract of the company’s audit. But in various countries no such special code or rules have been put up and the only board that regulates all the processing is the National Advisory Committee on Accounting Standards. Loopholes will exist in auditing till the day separate law codes are constructed to deal the same.       

The judgments of the auditors are made on the basis of the entire professional advantages so that the standards of the audit processes can have the best quality. “Professional scepticism” has been used in several different ways as because of the wide reach of it on the organizations and the individuals. The auditor should not make the decision regarding the honesty of the management without the proper analysis of all the data present (Cappelleto, 2010). The term “Professional Scepticism” may be defined as the attitude that consists of an interrogative nature and also is alert to find out and review the frauds and the errors that may have been made because of the misstatements and thus also perform an assessment of the audit evidence. ISAs standards have mentioned it clearly the auditors need to perform the auditing process by keeping in mind the use of “Professional scepticism” as the audit report may be misstated and thus a financial report should be carefully assessed (Kaplan, 2011). The professional judgment which is made by the experienced and knowledgeable individuals helps the organization to ensure that the information provided is having well balanced and circumstantial information that can be used to conclude about the firm’s position (Fazal, 2013). The process of professional judgment involves the identification of any type of vulnerabilities that have caused the statements of the firm to be misjudged and thus finding out the alternatives which may help the firm to find conclusions to the problems. The industry has faced a very bad time in the recent years and thus the use of the objectivity and professional scepticism have been proved to be helpful in reaching out to the appropriate conclusions (Elder et. al, 2010).

It is very necessary for the accounting industry to find out new and innovative measures that may prove helpful for the firm to ascertain the roles of the auditing and the assurance so that there can be a better method of financing in the 21st century (Hoffelder, 2012). In each of the cases, it has been clearly noticed that the auditing team and the top management of the organization are the main characters who assist to define the quality of the audit reports. It has also been noticed that it is necessary for the auditors to have a proper understanding of the firm and the environment so that all the statutory and the regulation standards of the firm are being upholder during the time of preparation of the audit report (Baldwin, 2010). It has been made very hard for the industry to cut down the cost and also take audit processes into consideration at the same time because of the increasing operating cost and also it is found that the use of the Clarified accounting International Standards is necessary for the preparation of the reports (Manoharan, 2011). These types of situations force the firms to have a proper check on the auditing processes so that the principles can be reviewed and the audit services can also be provided to the firm so as to facilitate the customers with the proper data on the basis of which they can conclude decisions regarding making investments in the firm.

References

Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press.

Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ, Melbourne

Elder, J. R., Beasley S. M., and Arens A. A. (2010). Auditing and Assurance Services. Person Education, New Jersey: USA

Fazal, H. (2013, May 13). What is Intimidation threat in auditing?.Retrieved from: https://pakaccountants.com/what-is-intimidation-threat-in-auditing/ 

Gay, G., and Simnet, R. (2015). Auditing and Assurance Services. McGraw Hill

Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons, 30(1), 143-156.  https://doi.org/10.2308/acch-51309  

Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.

Kaplan, R.S. (2011). Accounting scholarship that advances professional knowledge and practice. The Accounting Review, 86(2), 367–383. https://doi.org/10.2308/accr.00000031

Lapsley, I. (2012). Commentary: Financial Accountability & Management. Qualitative Research in Accounting & Management, 9(3), pp. 291-292. https://doi.org/10.1111/1468-0408.00081

Manoharan, T.N. (2011). Financial Statement Fraud and Corporate Governance. The George Washington University.

Livne, G. (2015, May 12). Threats to Auditor Independence and Possible Remedies. Retrieved from: https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full

Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management Misconduct?. The Accounting Review. [online]. 90(2), pp. 495-527. Available from https://doi.org/10.2308/accr-50871 [Accessed 15 May 2017]

Merchant, K. A. (2012) Making Management Accounting Research More Useful. Pacific Accounting  Review. [online]. 24(3), pp. 1-34. Available from https://doi.org/10.1108/01140581211283904 [Accessed 16 May 2018]

Sikka, P. (2009) Financial Crisis and the Silence of Auditors. Accounting Organizations and Society. [online]. 34(7), p. 868-873. Available from: DOI: 10.1016/j.aos.2009.01.004  [Accessed 16 May 2018]

Tadros, E. (2017) Appalling' audit quality could lead to next Enron: ASIC's Greg Medcraft [online]. Available from: https://www.afr.com/business/accounting/appalling-audit-quality-could-lead-to-next-enron-asics-greg-medcraft-20171030-gzb5q2#ixzz5BrDh3Ckohttps://www.ifac.org/global-knowledge-gateway/technology/discussion/why-accountants-must-embrace-machine-learning [Accessed 16 May 2018