Issues And Features Of The Audit Process - Term Paper Example

Issues And Features Of The Audit Process Table of Contents Safeguards to save the Independence of the Auditors 2 Conclusion 3 References 5 Introduction Financial auditing refers to the process of evaluating the financial information and determining whether they comply with the regulations and standards laid down for the public companies (Basu, 2010: 1.4; Kumar and Sharma, 2006: 2). The fundamental purpose behind independent auditing is the objective of getting impartial, unbiased opinion and avoiding any type of compromise, prejudice and conflicts in interest. Independence in auditing is done to ensure integrity in the process of auditing. Independent auditing is encouraged in organizations in order to protect the potential investors and shareholders from any mis-representation of the financial statement or fraudulent claims that are often made in the public companies (Gray and Manson, 2008: 98). Moreover, after the Sarbanes-Oxley Act (SOX) introduced in 2002, the appointment of independent auditor becomes mandatory for improving the auditing and accounting procedure. Many organizations are seen to appoint independent auditors, who are certified public accountants, responsible for checking their business transactions and financial records, yet not being affiliated with it (Singleton, T.W. and Singleton, A.J., 2010: 13). However, independent auditing is seen to suffer from a large number of threats such as, intimidation threat, trust or familiarity threat, advocacy threat, management threat, self-review threat and self-interest threat. Therefore, safeguarding the independence of the auditors becomes a major area of concern. This report focuses on the safeguards for the independence of auditors. Safeguards to save the Independence of the Auditors On recognizing the significant threat in dependence in the auditing process, the organization must decide on some safeguards in order to save the auditors. Some of the approaches that are considered by organizations are as follows: Mandatory rotation in the auditor: In a case where an external auditor is serving a particular client for many years, they often end up building relationships with their clients, which make them less skeptical about their work than that they would have been otherwise. The SOX Act has made it mandatory for the public company, who is the partner-in-charge, to rotate their auditors, at least every five years. However, for non-public companies, there are no such requirements for rotation of auditors. It has been argued that many of the public companies opt for periodical rotations of their auditors in order to bring in a fresh approach and assure objectivity in their auditing. A recent study released by GAO, on the cost incurred by organizations due to the mandatory rotation, suggests that the cost of rotation is quite high and certain safeguard measures can be used in this process (Rittenberg, Schwieger and Johnstone, 2008: 67). Peer review: Given that the work conducted by the auditor would be reviewed during, before and even after the completion, then it automatically reinforces the need for high-quality performance delivery and decision making. The Certified Public Accountants firms have managers and audit partners who review the work of the staff auditors. Furthermore, the audits of the public companies and other engagements are checked by independent audit partners, who provide the second review of the information, before the audit opinion is finally released. Apart from this, in many large organizations, there are separate programs for conducting internal quality review, where the managers and other independent groups perform the review and documentation of selected audits to ensure that work has been conducted objectively and meets professional standards (Rittenberg, Schwieger and Johnstone, 2008: 67). Appointing of Independent auditor and proper fee-setting body such as, the State or a State agency or a shareholder/stakeholder panel: Independent auditors are often referred to as external auditors. They are appointed by the organization in order to conduct the auditing of the financial information, since they do not have any vested interest in the firm, thereby ensuring unbiased reports. As they are not directly linked to the performance or activities of the organization, they are assumed to provide a clearer and fair view about the same. Moreover, many of the firms are seen to review their compensation schemes which will help them in adopting sound practices of accountability and high-quality audit documentation. Thus, while setting the fee, a proper fee-setting body is required to be appointed in order to monitor the appropriate allocation of the fee. State agencies and panel comprising of stakeholders and shareholders are most appropriate in this context. Audit committees: The boards of organizations are required to set up an audit committee, comprising of at least two to three members, including the non-executive and independent directors. The main task of the audit committee will be to monitor the integrity in the preparation of financial statements, review of the organization’s internal financial control, review and monitor the internal audit function as well as develop and implement the policies that would provide non-audited services. The audit committee should identify the matters that require improvement and immediate attention from the board and report the same to them. The presence of an audit committee is regarded as highly significant in implementing ethical standards while conducting the audit. The committee is also responsible for making recommendations in order to facilitate improvements (The Institute of Chartered Accountant, 2003). Conclusion In the ancient times, the businesses mainly involved cash transactions and auditing was restricted only to the details of cash inflow and outflow. As time passed and expansion of business took place, the work of auditing also expanded and engulfed other aspects. Today, financial auditing is concerned with providing reasonable assurance regarding the absence of misleading figures in the financial information and also, ensuring that no significant fraud has taken place in the organization. The above discussion has suggested various ways in which the independence of the auditors can be safeguarded, among which formation of an audit committee and peer review are most appropriate. These two methods are highly feasible in any type of organization, irrespective of size and involve no significant cost in the process. On the contrary, the other two methods such as, appointment of independent auditor and rotation of the auditors, are seen to involve high amount of cost, thereby making it feasible only for larger companies. The organizations can also opt for consultation services from other external auditing firms which can improve their internal control related to auditing. References Basu, S.K. (2010) Fundamentals of Auditing New Delhi, Pearson Education India. Gray, I. and Manson, S. (2008) The Audit Process: Principles, Practice and Cases Connecticut, Cengage Learning. Kumar, R. and Sharma, V. (2006) Auditing: Principles and Practice New Delhi, PHI Learning Pvt. Ltd. Rittenberg, L.E., Schwieger, B.J. and Johnstone, K.M. (2008) Auditing: A Business Risk Approach Connecticut, Cengage Learning. Singleton, T.W. and Singleton, A.J. (2010) Fraud Auditing and Forensic Accounting New Jersey, John Wiley & Sons. The Institute of Chartered Accountant (2003) Reviewing auditor independence (pdf) (Cited 19th December 2013) Available from http://www.icaew.com/~/media/Files/Technical/Audit-and-assurance/audit/guidance-for-audit-committees/reviewing-auditor-independence.pdf. Read More