The Changes in the Auditing Environment - Essay Example

?Running head: auditing 7th December Introduction As companies engage in local and international operations, management have emulated various strategies in order to maximize the use of their financial resources to cater for the expansion of their firms. Similarly, managements have taken strategies to ensure accountability in the use of funds in order to create a strong positive relationship with the shareholders. One of practice that firms use to ensure reliable financial information is auditing. Auditing entails a systematic examination of records, financial performance, and statements. The auditor is responsible for collecting and evaluating the evidence in order to make an opinion on the financial position of a company. In the contemporary business world, various changes have been experienced as auditors embark on addressing the challenges that face them as professionals. Quality auditing by independent auditors is a vital aspect in that it ensures that capital markets are effectively working while at the same time public and investor’s interests are protected. This paper seeks to examine the changes in the auditing environment and the resulting challenges. Additionally, the paper will discuss key lessons that auditors can draw in order to capitalize on emerging opportunities. During the annual conference for American Accounting Association (AAA), the issue of auditing skepticism was noted as one of the key challenges that are faced in the field of auditing. According to the PCAOB, every audit who is focused at coming up with a fair view of the clients financial position must emulate professional skepticism throughout their audit process. This implies that firstly, the auditor should portray a general duty of care during their duties. Secondly, professional skepticism entails having a questioning mind on the appropriateness of the audit evidence (James, 2013). Thirdly, it comprises of there key elements that includes mindset, actions and attributes. The three aspects must be emulated together in order to come up with a quality audit. One of the major issues that results to change in the audit are the skeptical judgments arrived at during the audit planning. This can be due to the variation in the level of skills as well as the expertise of the individuals involved in the process. Additionally, auditing may be affected by the judgments of other auditors who have undertaken an audit process of a particular company. Being a complex issue that is experienced by auditors during their duties, skepticism entails various fields such as theory, auditing literature, corporate governance, business models and ethics among others. As a result of complexity of the auditing process in some companies, there has been a continued increase in the audit deficiency during the inspection of the financial information and records (Charan, 2005). According to McKenna (2011), majority of these deficiencies are caused by lack of adequate professional skepticism. Auditing standard calls for emulation of professional skepticism if an audit sees the possibility of a significant misstatement that may be caused by a fraud activity. During their duties, auditors should exercise professional skepticism especially during the gathering of information and evaluating the evidence. This implies that even if the auditor beliefs that the management team is honest, the auditor should not be satisfied with less persuading information. Another major challenge facing the auditing profession is hindrance to maintain its significance in the capital markets. It is vital to note that auditing plays an essential role of advancing capital formation. Similarly, it is subject to changes in demand. The profession faces significant choices of how and when to meet these changes. Though just like other professions, auditing must be in line with the public needs and regulate capital markets; it is faced by various factors that limit it. One of these factors is the statutory franchise. In order to ensure that public and investors interests are secured, all companies either private or limited are required to obtain an audit. Notable effect of the statutory franchise is that it prevents the auditing profession from obsolescence thus lowering the need of the auditors to adapt to the requirements of the markets. As a result, auditors are rendered unproductive in addition to the reduction of their motivation due to lack of natural incentive to effectively perform their duties and make adequate reports on the information required by the providers of capital. Audit profession is also affected by limited information by the audit committee on which they use as the basis to judge a quality audit. It is vital to note that an audit committee is vital in oversighting of financial reports. The members of the committee are drawn from the firm’s board of directors (AICPA, 2004). This implies that being members of a team that is responsible for monitoring accounting principles audit committee main duties includes hiring external auditors, monitoring control procedure, supervising the internal audit role, and monitoring ethical issues during audit among others. As a result of the involvement of the audit committee still in the process of auditing, there arise conflicts of interest. This is based on the fact that some members of the board may have personal financial interest that they are not willing to disclose to the auditors. As a result of the conflict of interests, the relationship between audit clients and the audit firm deteriorates resulting to poor process that raises ethical issues. Additionally, this limits the scope of auditors thus affecting the commitment to provide a fair view on the financial position of their clients. Another notable challenge facing the auditors is lack of technical experts within the audit committee. Even though the auditors are responsible of detecting frauds and evaluating the finances of the companies, they need to be assisted by someone with the general knowledge about the companies operations (McKenna, 2011). However, according to Jeanette Franzel Board Member of American Accounting Association, auditor’s duty is not only to give an opinion but also to provide guidance on how their clients will streamline their financial transactions. Thus, the auditors need some individuals within the audit committee who posses technical skills on the operations of the company. Despite their efforts to provide fair view of the company operations, there lack adequate support from the management especially to auditors who blow the whistle when they detect a fraud. According to AICPA (2004) more than 50% of the auditors who notice a fraud and report it to the investors and the public lose their clients within a short duration after revealing the fraud. This greatly affects the relationships between the firms taking such actions and auditing firms. On their part, the investors feel unsecured leading to withdraw their capital from the firms. Based on the increased challenges that auditors are facing in the contemporary world, auditing organizations such as PCAOB have emulated various strategies with the aim of capitalizing on the emerging opportunities. For example, the Auditing Standard No. 16 stipulates clear communication between the auditors and the auditing committee. Such communication is fundamental in protection of the public interest while at the same time ensuring that audit committees provides adequate information that is needed during the audit process (Perks, 1993). To deal with the issue of skepticism during the audit process, auditors should make the understanding of the firms a priority in various ways. For example, auditors should never hesitate to ask simple questions even if they feel that the questions might appear to be stupid. Similarly, auditors should insists that the heads of different departments of their client firms should attend meetings and seminars in order to appropriately understand their roles as well as the risks that are associated with their functions. Based on the increased business transactions, auditors are currently been faced with complex duties that are too much demanding. To deal with such challenges, auditors should take an initiative to update the approach to the organization policies two major ways. Firstly, they should establish a comprehensive framework for the entire process. This is attained by ensuring consistency and processes that are easy to update (Gomez-Mejia et al, 2008). Secondly, auditors should upgrading the company processes and ensure annual confirmation by the directors and the staff. Such process includes information technology security, data protection, and confidentiality among others. Conclusion Based on the important duties that auditor undertakes in private and public companies, there is great need for the management to offer sustainable assistance to auditors as a way of ensuring that investors get the correct information regarding their investment. On their part, auditors are faced with the challenge of skepticism. Auditors should portray a duty of care during the performance of their audit. Key way to ensure that such a challenge is effectively addressed is that auditors should take initiative to get more information from the management. This involves not hesitating to ask simple question and introducing a comprehensive framework as well as upgrading the company processes. References AICPA.2004. The Audit Committee Toolkit. New York: London. Charan, R. 2005. Boards That Deliver. New York: Jossey Bass Gomez-Mejia et al. 2008. Management: People, Performance, Change. New York: McGraw-Hill. James, D. 2013. Challenges Facing the Audit Profession and PCAOB Initiatives. Available from http://blogs.law.harvard.edu/corpgov/2013/05/02/challenges-facing-the-audit-profession-and-pcaob-initiatives/ McKenna, F. 2011. Auditors and Audit Reports: Is The Firm's. Forbes. Retrieved 22 July 2011. Perks, W. 1993. Accounting and Society. London: Chapman & Hall. Jeanette, F.2013. Auditor Objectivity and Skepticism – What’s next? Available from http://pcaobus.org/News/Speech/Pages/08052013_AAA.aspx Read More