The Effects of E-Commerce on Auditing - Coursework Example

1 2 To complete intro The Internet can be further described as a powerful global force which causes a revolution in traditional business practices as these businesses have to rethink and modify their strategies to best suit the marketplace. E-Business is not without its its complexities and these must be fully understood and navigated if a traditional business is to make a successful transition from one paradigm to the next. The effects of E-Commerce on Auditing There are key areas of auditing which would be affected by the transition from traditional to e-commerce business and those areas will be the focus of this paper. Education is the first aspect of any successful transition. The fact that e-commerce influenced the automation of the auditing process makes it necessary for auditors to be trained in that field. The transition gave rise to the need for specialist and this indicates that specialized training will have to take place. The authors Nikoloyuk, March and McNiven, identified four approaches that Audit executives seem keen to use. These are: increase in IT training; Working jointly with It auditors; ensuring It auditors keep their skills current; and encouraging research and establishing networks of expertise. 3 It is not viable for auditors to take leave of work and go back to school to learn the mechanisms needed to serve the new auditing scope. To deal with this aspect of the transformation on-the-job training is the strategy employed by the audit executives. The authors recorded that ,"Some audit executives are using external contractors to "off load" some of the regular work. Freed up internal resources are then being used to get in-house auditors trained in the use of technology." (pg 91). Nikoloyuk et al: further related that Audit executives use the strategy of increasing "audit teams with external specialists." These teams are used to train "internal resource" to become "internal specialist." Changes: Like many other businesses auditing has had to change and modify its practices to best adopt to the growth of technology. Businesses have moved away from the traditional methods and are becoming more and more technologically advanced. If auditing is to remain alive it too will have to adopt to these changes. More so, as their main clients are in fact businesses. Kumar in his work 'The Technological Auditor', noted that, "Accountants and Auditors are not always on the cutting edge of technology." Auditing by nature is not a very transparent job. The process of the job relied on a lot of paper work . This goes against the very nature of E-commerce where the paper work is almost non-existent. Auditing stands a chance of becoming obsolete if adaptations are not made. Companies were disgruntled by the former auditing process as they 4 viewed the as being too expensive and burdensome. In response to these and other concerns Kumar relates that the "US Public Company Accounting Oversight board (PLAOB)" responded to these concerns by "encouraging auditors to become more consistent and transparent in the way they conducted audits." This discontent among businesses and the realization that e-commerce was always moving away from the traditional were indicators that change was on the horizon for the auditing profession. These changes would include; more transparency. The maximizing of special auditing skills on a global basis. Rationalization of the controls. Increased focus on value-added services by auditors. Formerly businesses would schedule the auditing of their firm based on their "point-in-time" system where they would carry out internal assessments to "identify high risk areas of the business." This system soon become redundant as companies sought to comply to the Sarbanes-Oxley. The regulation stipulated that firms would now have to make their financial statements readily available for auditing. (Kumar pg1). Audit Risk: The switch to automated auditing comes with added risk and challenges. The risk that an e-commerce business faces are many and varied. Internet activities leave the entity 5 vulnerable to hackers, viruses and on-line fraud. There are other key e-commerce related factors that an auditor will have to be able to identify as a part of e-commerce risk to the customer. Here are two examples of taken from the International Auditing Practice Failure to ensure that contacts evidenced only by electronic means are binding. Noncompliance with taxation and other legal and regulatory requirements, particularly when Internet e-commerce transactions are conducted across international boundaries. (6) There are also auditor associated risk. Nikoloyuk, Mache and James in their journal revealed that there was a split in the auditors views on the risk e-commerce might have imposed on their profession."Several audit executives felt that e-commerce and the delivery of government services electronically have not introduced any new risk to their audit universes as yet. Other Auditor executives shared the view that several old risk are simply moving to the forefront." (pg 88). Other concerns raised by Audit executives include fraud and reputation damage. They point to the problems at the control of the technology as the reason for fraud being so visible. Fraud is not a new risk. Some aAudit executives are of the view that the "profile of business risk is changing, moving from financial risk to to technological risk." (pg 90). With the increase of fraudulent activities, forensic science have become a natural part of the business. 6 Regulation: Auditors are governed by various regulatory bodies. These include: The International Auditing and Assurance Standard Board (IAAB) and the International Federation of Accounts (IFAC). These regulatory bodies establish professional standards which guide and govern the auditor. (Exposure Draft 2007). The ISA 500 Exposure Draft for April 2007 will serve here as an example for how these bodies effect a regulation. The Draft focused on a regulatory guideline for auditors to "obtain sufficient appropriate audit evidence." This was seem as a "Fundamental audit requirement ." (pg 4). The IAASB, through this regulation sought to "improve the clarity of its International Standards." A review of regulations are referred to as redrafting. The International Standard on Auditing is a composure of regulations to guide auditors. The aim of this draft was to expose the regulation to auditors then invite comments from them concerning its applicability.It is important that auditors be regulated as this will aide in transparency. Prem Sikka in her work, "Some questions about the Governance of auditing firms", relates that "recurring audit failures undermine confidence in corporate governance." Authority is invested in the regulatory body to deal with breeches of the auditing standards and "ethical guidelines" accordingly.(pg 2).National regulators should communicate with their counterparts so as to share information on "regulated entities that operate in more than one jurisdiction." (Thomadakis pg 2). The author further relays her views on the regulation of 7 auditors by stating that regulators should, "adopt the same or similar, standards and principles so as to ensure that regulation creates conformity and does not become a source of divergence." (pg 2). In the author's view, all of this can only be achieved if regulatory bodies are able to share confidential information. Financial Reporting: "Audits are independent appraisals of an organization's accounting, financial, and operational systems. The two major types of financial audits are the external audit and the internal audit." (Griffin pg 632). With e-commerce auditing being a relatively new role for auditors they have to follow the established guidelines to effect a viable financial report. Abu-Musa, in his his work on auditing e-business propose that "By carefully applying audit standards and increasing their It knowledge, external auditors can improve the quality of audited financial statements of e-business." (pg 34). Auditors may be faced with the challenge of obtaining all the financial information needed to carry out the report. Here Abu-Musa relates that, "Without full and unrestricted access to an E-Business data auditors are ill equipped to deal with the challenges posed by the engagement." He further notes that external auditors face a new challenge in that they have to conduct the auditing of financial statements of e-businesses based on the Generally Accepted Auditing Standards (GAAS). (pg 34) . Auditors are given guidelines which address audit issues such as. "valuation, presentation, measurement, and disclosure of 8 material assets, liabilities, and specific components of equity presented or disclosed at fair value." (J. Hodges 2001). One of the most modern presentations used in financial reporting is Digital Reporting. There are two levels. Level one and level two but level two is the one that comes in for mention here. In the document Digital reporting- Moving to the next stage, level two is said to be "capable of of delivering real benefits." The document further relates that this method of reporting is "relevant to decision makers at each stage in the business reporting 'supply chain." (pg 4). Whereas auditors where used to conducting an audit for a business once per year they are now called in more frequently. With the e-commerce now become the core of business operation managers are now able to prepare their finacial staements electronicallly using the real time accounting system (RTA). The use of this system means that most of the business' "financial information and audit evidence are available only in electronic form." (Zabihollah Rezaee, Continuous Auditing...). An auditor with competent e-commerce skills is more suited for the job as he would be required to: Understand, so far as they may affect the financial statements: The entity's e-commerce strategy and activities. The technology used to facilitate the entity's e-commerce activities and the IT skills and knowledge of personnel, and 9 The risk involved in the entity's use of e-commerce and the entity's approach to managing those risks. Going Concern: Many e-commerce businesses carry out financial transactions online. These transactions form a part of the financial statements which would need to be audited so as to ascertain the true financial position of the company. If the auditor assigned does not do a thorough check some transactions may go unnoticed if there was an attempt to erase them. When conducting an audit in relation to establishing growing concern the auditor needs to keep a sharp eye out for mistakes or fraudulent activities. The principle which drives this assumption, is that if a business continues to use its assets for the intended purpose , "it will generate future cash revenues, and the value of those revenues will exceed the assets book value. If this is the case then the auditor will leave the assets on the books as historical cost. (Price, Haddock, and Brock 529). Nearon comments that, "Most dot-coms are not expected to survive , and in such an environment auditors should carefully consider" the authority invested in them to execute their own judgment of the case. (27). Following the correction in the stock market in 2000, many dot-com businesses suffered significant losses. (26) Auditors aught to take care that they do not grant going status to businesses that have to seek alternative funding in order to stay afloat. 10 Auditor Independence: Businesses may have put their own auditing committee in place to control their internal affairs. Outside directors are drafted into the committee to ensure that evaluations are done objectively. "One function of the committee is to engage the company's independent auditors and review their work." (Needles, Powers and Crosson 16). Like Certified Public Accountants, Independent Auditors "have no financial or other compromising ties with the companies they audit. This gives the public confidence in their work." (Needles et al 31). There is a need to make auditing a relevant and indispensable service within the present business environment. This can only be gained through a revolution that will see auditors being e-commerce competent. The IT sector will continue to effect changes in auditing. The profession's IS auditors will play an essential part in keeping the profession's head above water in the IT driven world. Continuous auditing is fast becoming the norm. As was rightly highlighted by Zhas et al. (2004), "E-Businesses continually upgrade their systems and make significant modifications." The life span of these business' operating and application systems stretches to just two years (40). IS auditors, therefore have to ensure that they continuously upgrade themselves so as to stay current. They have to be equipped with the technical skills to "evaluate (...) the encrypton technology used, net work security architecture and security technologies such as firewalls, intrusion, detection and virus protection." (38). A knowledge of these serve as the 11 auditors new tools to getting the job the done. It was mentioned before that the changes effected by e-commerce in businesses requires specialists auditors who will be able to fulfill the need for proper auditing. An auditor who is only equipped with the traditional paperwork know-how, would not qualify to conduct auditing in an e-commerce business. It would be very much like sending a plummer to do a carpenters job. An independent auditor cannot afford to be caught ill-prepared to do his job. Accordingly the auditing profession on a whole will have to ensure that new graduates of the profession enter the working world e-commerce ready. This would serve to avert a re occurrence of the fall out that the profession experienced recently. Softwares and programmes developed for automated auditing should be introduced as a part of the academic training for auditors. The author Zhas and his counterparts in their work (2004), related that "Many new technologies are expected to influence the audit practice over the next five years including data mining, security tools such as digital certificates, and ERP security tools." Four years later we have certainly seen many changes and improvements take place in IT sector. This is not likely to come to an halt anytime soon and as become more like a natural part of life. We can conclude then that e-commerce is here to stay and due to its nature of constantly developing, it would be best for all to adopt and educate themselves accordingly. The auditing sector can only gain from training IS specialist who will be ready to execute their roles with competence. 12 Works Cited Abu-Musa, Ahmad. A. (2004) "Auditing E-Business:m New Challenge for External Auditors", The Journal of American Academy of Business, Cambridge, March 2004, pp 28, 38,34,36. Griffin, RickyW. Management. Boston: Mifflin, 2002. Hodges, J. (2001). "Internal Auditor", IFAC Proposes New Guidance, December 2001. Jain, Subhash. Marketing Planning and Strategy. Cincinnati: South-Western,1993. Kumar, Parimal. (2006) "The Technological Auditor: How Automation Is Changing Auditors Roles", ISACA 2006, . Needles, Belverd, Marion Powers and Susan Crosson. Financial and Managerial Accounting. Boston: Mifflin, 2002. Nearon, Bruce H. CPA's place in the new paradigm: Auditing E-business The CPA Journal November 2000. 13 Works Cited Nikoloyuk, Gerald M. Sunny Marche and James McNiven. "E-Commerce impact on Canadian public sector audit practice", International Management of Public Sector Management, Vol 18 No 1, 2005. Price, John M. David Haddock and Horace Brock. College Accounting. Boston: McGraw-Hill, 2003. Rezaee, Zabihollah. (2001) "Continuous Auditing: the audit of the future", Managerial Auditing Journal 16/3 MCB University Press [ISSN 0268-6902] [2001] , pp150. Sikka, Prem. University of Essex, UK Department of Accounting, Finance and Management,. Thomadakis, Stravos B. (2005) "The Regulation of Audit: National Responses and The International Public Interest.", Seminar Hosted by the New Zealand Institute of Chartered Accountants Auckland, New Zealand, November 16, 2005, pp 2. 21 April 2008. 13 Works Cited Zhas, Ning. David C. Yen. I-Chiu Chang and Chi Yi Taiwan. "Auditing in the E-Commererce era", Information Management and Computer Security Vol. 12 November 5, 2004. Extra Material Digital Reporting-Moving to the next stage. Exposure Draft April 2007/ ISA 500, "Considering the Relevance and Reliability of Audit Evidence, Proposed Redrafted International Standard on Auditing", 2007 New York. International Auditing Practice Statement 1013 Electronic Commerce- Effect on the Audit of Financial Statements, pp 5-6. Read More