Financial Reporting Council: Audit and Assurance - Essay Example

? Audit and Assurance Introduction The present day global economy calls for any business organization to build trust in the business and above all institute trustworthy advisors before creating value. This calls for responsible and strong corporate governance that is acceptable in the business environment and congruent to the guidelines of the regulatory bodies such as the Financial Reporting Council (FRC). A number for scandals have taken place not only in the United States but also across the globe mostly related to corporate governance, which has caused upheaval among various stakeholders of the company ranging from equity owners, government, and the public at large, which calls for strict measures to build trust among various stakeholders of the company. One of the major scandals that the United States has witnessed with respect to corporate involves the Enron scandal and as such, a number of measures have been put in place to build trust in corporate affairs. According to Gray and Manson (2011; 22) auditing has been used for a number of years to provide surety for honest dealing in company affairs but this measure falls short taking into consideration that auditors have been found to be colluding with business leaders to perpetrate fraudulent acts. Presently, besides auditing, assurance engagement has been made part of business operations in order to increase confidence of the stakeholders in the business. Assurance Engagement Assurance engagement refers to an engagement whereby an assurance practitioner explains a view aimed at enhancing that the degree of confidence of the intended consumers against the evaluation of the subject matter relative to the set criteria. Assurance refers to an individual or an organization charged with the responsibility of providing assurance service whether in public practice, public sector, commerce, or industry (Vallabhaneni 2005, 378). Assurance engagement may be carried out to enhance the confidence of the consumers rather than the responsible parties about the presented information. For instance, consumers of the financial reports of an organization range firm government, shareholders, credit institutions, potential investors, suppliers and some extent employees rather than board and top executives who were in charge of the operations of the organization. This means that assurance will only be important to the stakeholders of the organization rather than the board and management who were responsible for overseeing effective performance of the organization. In most cases, the responsible parties often do evaluation of the subject matter. Assurance to the stakeholders that the organization affairs are conducted as per the requirements of the law is much more important to the stakeholders especially investors than the performance of the organization. Investors want to see that businesses are operated honestly, so that they can earn good returns from their investment in terms of dividends or capital growth and need can only be satisfied through acceptable corporate governance. Vallabhaneni (2005; 213) states that stakeholders to the company must be assured that the reported financial statements reflect a true and fair view of the company affairs and above all, they are free from Errors, Fraud, and Irregularities (EFI). According to Cosserat and Rodda (2009; 383) the stakeholders also want surety that the organizations internal control systems are effective and capable of guarding the company against Errors, Fraud, and Irregularities. Finally, the stakeholders both internal and external need assurance about the governance and management of the organization affairs. It is noteworthy that a number of sources are available for assurance in the organization, which include both internal and external and it is in the best interest that an organization makes use of the available sources of assurance to inspire confidence of various stakeholders in the business. Audit Committee The board is expected to establish an Audit Committee consisting of at least three members with an independent non-executive member of the board. It is required that at least one of the members of the audit committee should have fresh and relevant financial experience as per the requirements of the International Auditing and Assurance Standards Board (IAASB). The Board should be responsible for appointing the chair of the Audit Committee from the members. All members of the Audit committee should satisfactorily meet the requirements of the independence of the directors and audit committee stipulated under the guidelines stipulated by the Financial Reporting Council (FRC). Just like in the case of an external auditor, Audit committee must consists of independent members (Gray & Manson 2011; 57). Good practice dictates that audit committee members should consist of independent non-executive board members, as this will ensure that their views are free from influences that may jeopardize professional judgment. Independence of the Audit committee members will also facilitate objectivity, integrity, and professional skepticism among members of the committee. The terms of reference of the audit committee including assigned responsibilities as well as the delegated authority by the board should be made public. The progress of the Audit Committee in the verge of fulfilling its assigned responsibilities should reported by the department on period basis. Notable purpose of the Audit Committee involves representing and helping the Board of Directors in its oversight over the quality and integrity of, (i) the independence, performance, and qualification of both the internal and external auditors (ii) financial reporting and accounting practice (iii) Company’s compliance with the legal and requirements and (iv) financial statements and controls (“Audit Committee Charter”2011).. Effective corporate governance relies so much on the above mentioned practices and thus to uplift the confidence of the stakeholders of the organization the audit committee must ensure that it delivers its responsibilities effectively to provide the necessary assurance. The Rights and Responsibilities of the Audit Committee The terms of reference of the audit committee, which is always stipulated by the Board of Directors, states the rights and responsibilities of the Audit committee. A number of stock exchanges globally ranging from London Stock Exchange in the UK to those of the USA such as NASDAQ, the NYSE, and AMEX have recommended varied responsibilities to the Audit committees of all the public trading companies (Walo & Keinath, 2009). The responsibilities are expected to provide the necessary oversight that would enhance the confidence level of various stakeholders to the company. Oversee the financial reporting and accounting process Companies always use annual and quarterly financial statements to inform their shareholders about the operations and progress of the company. The audit committee in consultation with the management and independent auditors should review the company’s annually audited financial statements before they are presented to the public. The same case should apply to financial statements and reports issued quarterly. The audit committee has the responsibility to review corporate disclosures contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The audit committee in consultation with the management and independent auditors should do further review and discussion on organization’s earning press releases including financial information issued to rating agencies and analysts. Review and discussion of the earnings press releases and earnings are important in ensuring that the misleading information does not get to the public (“Audit Committee Charter”2011). Review and discussion of the financial reporting and accounting process is an important for enhancing assurance in the sense that it ensures that stakeholders receive financial reports that are free from errors, fraud or irregularities. The stakeholders have the surety that an independent party is counterchecking the operations of external auditors and the management to ensure that no one engages in unscrupulous dealings. Oversight of the Financial Statements and Controls In consultation with the internal and the external auditors, the Audit committee will review that integrity of the company’s internal control systems and financial statements. In the verge of delivering this critical role the Audit committee tend to gather and discus with the management and auditors all the reports gathered from them in relation to the, (i) Adequacy of the company’s Internal Control System (ii) vital accounting standards applied by the company (iii) the alternative treatment of the financial data as per the terms of the Generally Accepted Accounting Principles (GAAP), (iv) changes in the company’s accounting principles (“Audit Committee Charter”2011). The audit committee is entrusted with the duty of ensuring that the company’s management puts in place and followed adequate internal control systems. The Audit committee should always be making use of internal audit function in order to monitor adequacy of the internal control systems and the degree to which the controls are adhered to the respective departments (Walo & Keinath, 2009). The Audit committee should periodically review the impact of regulatory and accounting initiatives on the organizations financial statements. The Audit committee should always be in charge of reviewing discrepancies in the preparation of the financial reports between the independent management and the management. The responsibility of oversight of the financial statements and controls provides assurance that the published financial statements give a true and fair view in the sense that it assist in ensuring that the organization’s internal control systems are adequate enough to meet the assurance needs of the stakeholders. Additionally, this responsibility also ensures that the company’s financial statements are prepared as per the requirements of GAAP. Risk Management It is the responsibility of the audit committee to discuss and review with the independent auditors and the management company’s policies relating to risk assessment and management. The committee should discus with the respective bodies major risk exposures of the company especially business and financial risks and the critical steps taken by the company to avert the looming danger through effective monitoring and control of such exposures. The committee will be carrying out reviews quarterly and annually with the Chief Performance Officer and other executives charged with the responsibility of oversight over the business risk and risk management. This responsibility will enhance confidence of the stakeholders in the business affairs in the sense that the enterprise and financial risk are properly managed considering that exposures will be monitored and controlled in advance and as such the business will be operating safely. Legal and Regulatory Compliance The Audit committee will be charged with the responsibility of reviewing with company’s counsel any arising legal issue that may have a significant influence on the organization’s operation or financial statements (Cosserat, & Rodda 2009; 89). The committee should also ensure that there is strict adherence to the to the company’s Code of Business Ethics and this task will involve review and investigation of issues related to the management integrity as well as conflict of interest. The Audit committee is also responsible for establishing necessary procedures that would enhance receipt, handling, and retention, of complaints relating to internal accounting controls, accounting and auditing issues as well as anonymous submission by the company pertaining suspicious accounting and auditing matters (Accenture, 2010). Ensuring proper maintenance of the internal audit function is also another important role of the audit committee. This responsibility of legal and regulatory compliance provides assurance to the stakeholders that the company’s financial statements are true and fair in the sense that it tries to ensure that the company adheres to acceptable Code of Business Ethics and above all the company avoid legal matter that could have negative impact on the company statement. Oversight of the External Auditor's Hiring, Qualifications, Independence, and Performance The past few years have witness significant expansion on the roles of the Audit committee in relation to monitoring the affairs of external auditors. The committee is charged with the responsibility of selecting, retention, compensation, replacing as well as oversight of the performance of independent auditors. The committee should mediate incase of conflict or disagreement between the management and the independent auditors regarding financial reporting and preparation of financial statements. The independent auditor will be accountable to the audit committee and as such, they will be reporting directly to the committee. The audit committee will also be responsible for the pre-approval of audit engagement terms and fees including non-audit engagement between the independent auditors and the company (Accenture, 2010). Besides pre-approval, the committee will also be responsible for establishing engagement policies and procedures for providing audit and non-audit services. It is paramount for the Committee to review the qualifications of the independent auditor by examining the report received from the auditor about the internal-quality control procedures; fundamental issues raised by the auditor’s current review of the internal quality control of the audit firm, investigations of the professional body or government within the past five years (Walo & Keinath, 2009). To ensure independence of the external auditor the audit committee will e expected to obtain a written report from the auditor about their relationship with the company. The responsibility of oversight of the external auditors enhance assurance of the stakeholders that the company’s financial statements are true and fair in the sense that it provides the guarantee that the financial reports of the organization will be provided by qualified, independent and accountable external auditors. Conclusion For a number of years Audit has been used by various entities ranging from private to public company to provide assurance to various stakeholders that the company financial statements are true and fair and above reflects the actual position of the company as per the year of operation. However, various shortcomings have been experienced with respect to application of audit as an assurance tool. This claim can be justified by the fact that a number of companies have in many instances colluded with the independent auditors to issue unqualified opinion when in real case the company’s systems of internal controls are not adequate to protect the company from Errors, fraud and irregularities besides the fact that the financial statements are not true and fair. The Audit committee was instituted to bridge the shortcomings of audit as the most reliable tool for providing assurance. Audit committee is mainly involved with oversight of the company affairs ranging from preparation of financial statements and reports, monitoring of internal control systems, external auditor's hiring, qualifications, independence, and performance and legal compliance. The oversight role of the Audit committee, which involves review, analysis, and discussions in consultation with the management, legal counsel, and independent auditors plays a significant role in enhancing the confidence and trust of the stakeholders in the company in the sense that the committee will act as a watchdog against fraudulent acts of the management and auditors. References Accenture 2010, Audit Committee. Retrieved October 29, 2011 from: http://www.accenture.com/us-en/company/governance/committees/Pages/corporate-governance-audit-committee.aspx Audit Committee Charter. Retrieved October 29, 2011 from: http://www.medtronic.com/corporate-governance/board-committees/audit-committee-charter/ Cosserat, G & Rodda, N 2009, Modern Auditing, 3rd Ed, New Jersey, Wiley. Eilifsen, A & Messier, W 2006, Auditing and Assurance Services, New York, McGraw-Hill. Gray, I & Manson, S 2011, The Audit Process, principles, practice and cases, 4th Ed, California, Cengage Learning. Vallabhaneni, S 2005, Wiley CIA Exam Review, Conducting the Internal Audit Engagement, Vol 2, New Jersey, John Wiley and Sons. Waloa, J & Keinath, A 2009, Audit Committee Responsibilities. Retrieved October 29, 2011 from: http://www.nysscpa.org/cpajournal/2004/1104/essentials/p22.htm Read More