Auditing as the Activity When the Auditor Goes Over the Financial Statements - Assignment Example

Audit Quality INTRODUCTION: Auditing(Whittington, 1995) is defined in the layman's term as the activity when where the auditor goes over the financial statements( Meigs, 1995) done by the bookkeeper or accountant. The auditor is divided into the external and the internal auditor. The Internal auditor is the employee of the company being audited who cannot give an audit report. The external auditor is a person who is hired by the company to give an auditor's opinion as to the correctness or fairness of the financial statements. When the auditor sees that if the representations in the financial statements are in violation of International Accounting Standards, then the auditors recommends the adjustments that must be made to correct or set into order the financial data found in the balance sheet, income statement, statement of cash flows and others. The auditors are looked upon by the readers of the financial statements to give assurance that the data presented are free from MATERIAL errors or irregularities. The readers of the financial statements need the financial statements in order to help them in their decision making. You are required to write an essay discussing the above finding. Your essay should cover the following: - An evaluation of the current UK regulations that attempt to ensure audit quality. At present, auditors are held liable for fault due to negligence or incompetence doing audit work. Also together with regulation and reputation liability acts as a discipline on audit quality in a context where shareholders and other third parties rely on financial information that is audited and paid for by the company audit( Dipiazza, 2000) client. A good example is the Enron case. The audit staff of Arthur Andersen was charged for being negligent in performance of the audit function. Arthur Andersen has now been relegated to the side walk while the remaining big four have remained walking in the major highways handling the major and juice clients of the entire United States and overseas. Current regulations are: IAASB International Framework for the Assurance Engagements. ISA 200 Objective and General Principles Governing an Audit of financial Statements ( Oct, 2003) ISA 240 Fraud and Error. This auditing standard explains the procedures in the audit of Fraud (Zea, 2002) and Error. This audit standard also tells the penalties, especially criminal offenses like being jailed, for gross negligence in auditing the clients' financial statements. Fraud is defined as intentional misstatement either by the company employee (who steals money or property and conceals the errors) or the management itself. The management sometimes does this fraud in order to present a better picture of what the company is in reality. This is what we call, in the accounting parlance, as window dressing. ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements This auditing standard specifically instructs the auditors to determine if any laws have been violated by the false information presented in the financial statements. One such law of the land is the Income Tax Law, The Property Law, and the Contract law. ISA 220 Quality Control for Audit Engagements. Quality control of engagements means that each engagement must be done with real professionalism. Professionalism means that all auditing standards and auditing procedures must be followed whenever practical or possible. There must be a constant evaluation of audit performance ob all audit team member so that recommendations and corrections can be implemented so that the next engagement will be better and faster than the prior one. Quality audit means that all audit procedures are made to ensure gathering all relevant and material data as soon as possible. IAPS 1010 The Consideation of Environmental Matters in the Audit of Financial Statements. One audit procedure in environmental audit is to see to it that no environmental laws have been violated. An environmental law example is the waste disposal law where the factory waste water must be disposed upon in accordance with environmental laws to prevent polluting the environment. Another Environmental law is the Air pollution law. The smoke exhaust tower coming from the factory must be very high enough to people will in the neighborhood not breath the health endangering fumes. ISQC 1 Quality Control for Audit, Assurance and Related Services Practices (http://media.wiley.com/product_data/excerpt/26/04708632/0470863226.pdf) Another reference is regulation 94 of the United Kingdom Companies Act of 1862 requires the auditors to state in their audit report that in their Opinion, the Balance Sheet is a full and fair Balance sheet, containing the particulars for regulation and drawn to exhibit a true and correct view of the state of the Company's Affairs. And another line that states that such report shall be read, together with the Report of the Directors at any ordinary meetings. (http://media.wiley.com/product_data/excerpt/26/04708632/0470863226.pdf) Auditors are required to assess risk that errors and irregularities (Whittington & Pany, 1995) may occur in the financial statements Based on his or her assessment of the possible risk, the external auditor then designs the audit program which is broken down to auditing procedures that that will give reasonable assurance that errors and irregularities that are material to the financial statement presentation are implemented. The auditor must exercise due professional care in planning, performing, and evaluating the auditing process. We must take note that the job of the external auditor is to have reasonable assurance and not absolute assurance that the company did not commit fraud. One of the United Kingdom laws that accountants and companies must follow is the INCOME TAX LAW. The external auditor must see to it that the financial statements are presented with high probability that no fraud occurred so that the external users of the financial statements will rely on the auditor's audit report that no fraud had occurred when he or she audited the company. The Auditors are required to evaluate how effective the client's entities' management of risk The Auditor must examine the framework to prevent misstatements of whether by fraud or another way in every audit engagement. All audit staff members must communicate their findings to prevent instances when the staff members fail to appreciate the significance of the apparent minor irregularities which may be more powerful sinister situation. - A discussion of possible reasons why finance directors may believe audit quality has declined. As a result of the Enron incident which was audited by Arthur Andersen and many other companies that submitted false financial statements, the auditor's responsibility now to think of the client as having an intention to submit false financial statements whenever there is a chance to do so in order to defraud the government of taxes payable. And when the company produces financial statements showing that the sales or revenue is overstated by such a big amount when in reality the actual amount is smaller. This is done in order have the bank approve the company's application for a BIG long term business loan or personal loan. The readers of the financials statements have put their trust in the external auditors to give assurance that the financial statements presented by the companies are true or what they represent to be. The financial statement users are generally divided into the customers who want to know if the company will continue to exist so that if the customer will know that the company will close shop then the clients can start looking for other product replacements. Another user group is the creditor section. They will use the information given by the financial statements to determine whether to continue with the credit terms accorded the company or not. Thru experience, the finance directors have seen one external auditor from the newly opened auditing firms and the seasoned auditors of the big four auditing companies. and compared their actual auditing procedures. It is very clear that in most cases, the auditors from the big four auditing firms do audit work better and faster and give audit decisions better than a newly passed Certified Public Accountant or Chartered Accountant. As they say, experience is the best teacher. - An evaluation of actions that have been taken in recent years, or could be taken in the future, to maintain audit standards. One major action is that whenever the external auditor did not follow all auditing procedures and auditing standards in the performance of his or her audit and his or her negligence will result to glaring financial statement misrepresentations, then the auditor will have to be criminally answerable for misrepresentations. - A conclusion as to whether you believe the Accountancy Age findings are valid. The conclusion of the Accountancy age is valid. It is true that only the big four auditing group have passed the auditing criteria of Accountancy Age. But on their second survey, the Accountancy Age group has discovered that there are other auditing groups that have passed the rigid quality standard of Accountancy Age but, again, there are many auditing groups that have failed the standards set by Accountancy Age. The accountancy Age is right when they said that the quality of audit performance has decline through years. As proof, the Enron case above which was audited by one of the Big five auditing companies before was even made into a movie and shown worldwide. This caused the downfall of Enron's auditing firm Arthur Andersen. Now there is only the Big Four auditing firms and other smaller auditing firms. According to the Companies Act of the United Kingdom, auditing procedures and standards have changed for the better for auditing procedures regarding detection of fraud and error to attest to the credibility of the Balance sheet and Income statement and financial statement purposes. According to Lawrence book AUDITING: A Practical Manual for Auditors in 1892, the objectives of audit are to detect fraud, to detect technical errors and the last is detection of errors in principle. (http://media.wiley.com/product_data/excerpt/26/04708632/0470863226.pdf) The new audit procedure states that auditors must give assurance not only of the credibility but also of the integrity of financial information and how useful is the data gathered for decision making processes. This is very important because the readers of the financial statements rely so much on the auditor's audit report. ((http://media.wiley.com/product_data/excerpt/26/04708632/0470863226.pdf) It is true that the findings of the Accountancy Age are true because only the big four are prepared enough to implement the new auditing standards and procedures. The new auditing firms are still at a lost as to which auditing procedures to implement and how long and how wide will the audit program extend. The audit staff of the big four auditors are generally experienced and trained by senior auditing staff so they can audit better the companies assigned to them. CONCLUSION: It is true that the quality of auditing has declined in our present time. There have been many cases of company coming up with false financial statements which have been audited by external auditors. One reason given by external auditors is that auditors only give audit reports stating that the financial statements are fairly presented. In short, the audit report only states that there is higher probability that the financial statement are fairly present than if the balance sheet, income statement and statement of cash flows are not accompanied by an auditor's report that the financial statements data are what the real assets, liabilities and capital are. A good example is the Enron and Arthur Andersen where the fraudulent financial statements that were audited by Arthur Andersen caused the downfall of Arthur Andersen. Arthur Andersen was, before this incident, one of the Big five auditing firms in the United States serving clients from around the world. This is the reason the United Kingdom, the United States, the European countries and others have grown more strict in the performance of an audit. The income tax law, the property law and other laws are also connected to the correct presentation of financial statements. The new audit mentally of the audit staff has been changed to "if there is a possibility the client will violate international accounting standards, then the client will do at the first available opportunity. So we must remember that after all the statements above, companies and financial statement users prefer to use financial statements that are audited than if they were not audited at all. REFERENCES: Whittington, R., Pany K., Principles of Auditing, Irwin Press, London, 1995 Half, R., Management Resources. ( http://media.wiley.com/ product_data/excerpt/26/04708632/0470863226.pdf) Zea, A., , Exclusive, Massive Fraud Risk in UK Audit, Accountancy Age 02 May 2002 http://www.frc.co.uk/apb/ DiPiazza, S., Student's Manual of Auditing, The Guide to Uk Auditing Practice Price Waterhouse Cooper Staff, London Meigs, et al., Financial Accounting, McGrawHill, London, 1995 Read More