The External Audit Report - Essay Example

?Audit Table of Contents Introduction 3 A Brief Perception on the Purpose of the External Audit Report 3 A Brief Explanation about How and Why the Wording has Evolved in the External Audit Report 4 A Critical Appraisal of the IAASB’s Proposals, Possible Alternatives and Expected Reaction from Stakeholders 6 A Critical Discussion and Comment on Possible Future Developments In Relation To Audit Reporting 7 8 Conclusion and Recommendations 9 References 10 Bibliography 12 Introduction The ‘International Auditing and Assurance Standard Board (IAASB)’ was formed in the year 1978 and formerly it was known as ‘International Auditing Practices Committee (IAPC)’. In the year 1991, the different principles of IAPC principles were recodified as ‘International Standards on Auditing’ (ISA). In the year 2001, a widespread evaluation regarding the IAPC was commenced and in the year 2002, it was re-established as the IAASB. In the year 2003, IAPC was accepted as a series of restructuring regarding the auditing guidelines in order to further reinforce the setting-standard procedures. The IAASB mainly contributes in delivering auditing process related information clearly to the public as much as possible (International Federation of Accountants, 2011). This paper intends to analyse and critically discuss the development of the wording of the external audit report and the IAASB’s proposals on its further improvement. A Brief Perception on the Purpose of the External Audit Report An external audit report is considered as an assessment concerning the business operation, internal control, governance and financial reporting of a particular company. This report i.e. external audit report is primarily organized by external auditors belonging to different government agencies and other public accounting organizations. The core objective of preparing an external audit report is to deliver a self-governing evaluation as well as unbiased appraisal regarding a firm’s internal governance (Saint Helena Audit Service, 2006). The ‘International Auditing and Assurance Standards Board (IAASB)’ is typically regarded as an autonomous standard-setting body that provides valuable guidelines about the preparation of an external auditing report. The major purpose of the IAASB is to concentrate on public interest by setting superior quality of international values. Moreover, the guidelines and core values of IAASB focuses upon the improvement of quality and consistency of auditing practices all over the world and also reinforce the public confidence towards international auditing (International Federation of Accountants, 2011). By taking into concern the medium term strategy, the basic objectives of IAASB include the following attributes emphasising upon public interest (International Federation of Accountants, 2011). The attributes are as follows: Controlling effective stability regarding international financial aspects, Improving the importance as well as role and providing quality assurance towards the auditing services within the context of today’s financial condition and Initialising clarity as well as successful execution of auditing standards (International Federation of Accountants, 2011). A Brief Explanation about How and Why the Wording has Evolved in the External Audit Report Since the year 1980, when the auditing standards are required to be maintained effectively within the external auditing report, it has been identified that the stakeholders face several issues about the pronunciation and the wordings content in the report. Due to these several problems, the auditing report has undergone several changes in order to improve both its quality as well as clarity that would be helpful for the auditors to fulfil the expectation of the stakeholders. In the year 1994, David Woodliff, Professor of finance and accounting, conducted a research study regarding the audit expectation gap. The primary reason of the study is to identify the dissimilarities between the users of financial report and the message of the auditors that are communicated through this report. The data related with this study are accumulated through a mailed questionnaire to the accountants, shareholders and directors among others. The outcome of this study analysed that there was effective dissimilarities between the old and new auditing reports. It was viewed that the modified wordings content in the new auditing report had a noteworthy impact upon the beliefs of the managers and the auditors. Moreover, the modified wordings in the new auditing report avoided certain differences but also viewed to be arising new dissimilarities among the auditors and the various groups of readers (Salehi, 2011). Contextually, this research suggested that change in words content might alter the beliefs of the message that are communicated through audit reports. Moreover, it is also analysed that if the gap were to be decreased, then wordings of the audit report should be specific and easy to understand. Therefore, external audit reports should be prepared with easy and specific word content in order to avoid audit expectations gap. Within an external audit report, the phrases such as “We conclude that”, “In our Opinion”, “It appears reasonable that” and “ensure, assure or insure” needs to be avoided in order to maintain new setting-standard procedures by a significant level (Albrecht, 2007). A Critical Appraisal of the IAASB’s Proposals, Possible Alternatives and Expected Reaction from Stakeholders The IAASB always intend to emphasise on the improvement of the external audit report on an international basis in order to reinforce and harmonize the report quality through clarification of ISA. By taking into concern the various aspects of audit report, the IASSB suggested certain guidelines in order to improve the report that makes by an auditor (IAASB, 2011). The guidelines have been provided hereunder. Readers should always ask for the report clarification in order to improve their ability to follow the instruction and easily understand any complex financial report, Reliable transparency is required about the key point contents within the audited fiscal statement and The current guidelines of ISA should be properly maintained by every auditor (IAASB, 2011). In relation to the improvement in an external audit report, certain valuable alternatives are also provided by certain organisations such as European Banking Authority. The authority suggests that auditors should avoid the repeating words that already provided on the financial statement by the management. Besides, an external audit report should concentrate upon enhancing transparency regarding the audit procedures and also must include the management’s perception while adopting any major decision (European Banking Authority, 2012). IAASB conveyed that the word content in an external audit report should be entirely based upon the reliability of the stakeholders. The joint commission of IAASB conducted a research in the year 2006, where they accumulated several feedbacks of stakeholders all over the world regarding the improvement of external audit report. Moreover, the report also provided valuable feedbacks regarding “expectation gap” and “information gap” that broadly affects the readers especially the investors (Chesterton, 2012). A Critical Discussion and Comment on Possible Future Developments In Relation To Audit Reporting According to ‘Institute of Chartered Accountants in England and Wales (ICAEW)’, there exist immense possible future developments in relation to audit reporting. The possible future developments would ultimately improve the quality of the audit report and will also enhance the confidence of the investors. In this similar context, auditors should improve the communication language in order to appropriately evaluate the users’ expectation. Moreover, the auditors ought to be assuring long term sustainability in the future in relation to audit reporting. In addition, the information content in the audit reports should improve the communication among the internal, external and the audit committee. The ‘Invitation to Comment (ITC)’ recommends an analytical direction that must be followed by the IAASB for the future development of the audit report (ICAEW, 2012). In this similar context, IAASB has attained a general conformity where number of improvements within the auditor report should be required in near future. Moreover, IAASB realised that the guidelines regarding the improvement of auditing report should be circulated effectively throughout the globe. Moreover, the board also states that essential information about the financial matter should be included within the external auditing report, where auditors take necessary decision and subsequently comprehendible by the readers about the financial statement. This financial information would be necessary as well as understandable by the ‘Public Interest Entities (PIEs)’ which comprise a few listed entities that should be delivered for taking the necessary judgement of the auditors (IAASB, 2011). The conclusion facts of the auditors are effectively based upon the managements’ appropriateness about the preparation of the financial statement so that it is feasible for every stakeholder as well as shareholder to understand the content material of the auditing report. In order to determine any inconsistency material content between the reviewed or audited monetary information and other pertinent statement, it can be stated that auditors’ should recognize the aforementioned aspects on the basis of their evaluation about the other applicable financial information. With regard to maintain clarity within the external auditing report, auditors should make accurate evaluation of the financial statement while preparing the reports. As per the guidelines of IAASB, well-known placement should be required about the auditor’s perception as well as other specific entity information within the auditing report. In order to offer transparency about the performed auditing reports as well as clarify the individual accountabilities of the auditors, management along with Those Charged with Governance (TCWG) belonging to ISA audit, the suggestions like delivering the investors with the information about the major contributors in an auditing procedure can be employed by a financial institution (IAASB, 2011). Conclusion and Recommendations On the basis of the above discussion, it can be stated that the roles that play by the auditors are quite crucial in this present financial scenario. Transformation of accounting standards and emergence of new rules or policies makes potential changes among the auditors, shareholders and auditing committees. The IAASB always provide specific guidelines in order to make aware to the auditors as well as to make its both external as well as internal audit reports. The improvement in an external auditing report would eventually create a strict boundary among the management, its governance structure and roles as well as responsibilities of the audit committee. It is recommended that IASSB should focus upon the minimization of ‘gap expectation’ so that every auditor can maintain the aforementioned aspect while preparing an external audit report. References Albrecht, T. (2007) What assurance to expect from Internal Audit? An external audit view. Ernst & Young [Online] [Accessed on 19th December 2012] http://ec.europa.eu/dgs/internal_audit/pdf/conference_2007/albrecht.pdf Chesterton, G. K. (2012) Developments in Auditing and Assurance. Sage Publication [Online] [Accessed on 19th December 2012] http://www.sagepub.com/upm-data/9687_011396Ch5.pdf European Banking Authority. (2012) International Auditing and Assurance Standards Board. [Online] [Accessed on 19th December 2012] https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved=0CFIQFjAE&url=http%3A%2F%2Fwww.eba.europa.eu%2Fgetattachment%2FPublications%2FOther-Publications%2FComment-letters-by-CEBS%2FAuditing%2F2012-10-15--EBA-comment-letter-re-IAASB-on-auditor-reporting-.pdf.aspx&ei=RKDRULiVL8zQmAW49oHQAg&usg=AFQjCNEm1etgK6WgJnMLIODg4xXsKuGjCg&sig2=GmKKMxdPHKvfwYxQEkbzeA&bvm=bv.1355534169,d.dGY International Federation of Accountants. (2011) About IAASB. [Online] [Accessed on 19th December 2012] http://www.ifac.org/auditing-assurance/about-iaasb International Federation of Accountants. (2011) Terms of Reference. [Online] [Accessed on 19th December 2012] http://www.ifac.org/auditing-assurance/about-iaasb/terms-reference International Federation of Accountants. (2011) IAASB Annual Report. [Online] [Accessed on 19th December 2012] https://www.ifac.org/publications-resources/2011-iaasb-annual-report IAASB. (2011) Improving the Auditor’s Report. [Online] [Accessed on 19th December 2012] http://www.ifac.org/sites/default/files/publications/files/Auditor_Reporting_Invitation_to_Comment-final_0.pdf ICAEW. (2012) The Future Of Audit. [Online] [Accessed on 19th December 2012] https://www.icaew.com/~/media/Files/Technical/Audit-and-assurance/audit-and-assurance-faculty/icaew-briefing-the-future-of-audit-april-2011.pdf Saint Helena Audit Service. (2006) A Brief Guide to: External Auditing. [Online] [Accessed on 19th December 2012] http://www.audit.gov.sh/publications/briefguide_extaud.pdf Salehi, M. (2011) ‘Audit Expectation Gap: Concept, Nature and Trace.’ African Journal of Business Management, Vol. 5, no. 21, pp. 8376-8392. Bibliography American Institute of CPAs. (2012) AICPA Comments on IAASB’s Proposals to Improve Auditor Reporting [Online] [Accessed on 19th December 2012] http://www.aicpa.org/advocacy/cpaadvocate/2012/pages/aicpacommentsoniaasb%E2%80%99sproposalstoimproveauditorreporting.aspx ACCA. (2012) Enhancing sustainability and competitiveness: The role of auditing in the Caribbean [Online] [Accessed on 19th December 2012] http://www.accaglobal.com/content/dam/acca/global/PDF-technical/audit-publications/pol-afb-esac.pdf International Federation of Accountants. (2011) IAASB Indicates Future Direction of Improved Auditor Reporting; Consults on Value, Viability, and Illustrative Report [Online] [Accessed on 19th December 2012] http://www.ifac.org/news-events/2012-06/iaasb-indicates-future-direction-improved-auditor-reporting-consults-value-viabi Schilder, A. (2010) Future of Auditing: Audit Quality, Implementation and Innovation. Victoria University of Wellington [Online] [Accessed on 19th December 2012] http://www.victoria.ac.nz/sacl/cagtr/pdf/slides-arnold-schilder.pdf Read More