Auditing Theory and Practice - Essay Example

Auditing Theory and Practice Auditing Theory and Practice Aims of the Frameworks and the Modalities to Achieve Them Ethical Standards Aims The purpose of the Ethical Standards is to provide guidelines to auditors for complying with ethics underlying the audit. This would help to gain the trust of users in the financial statements being audited. In case, these ethical principles are not complied, the confidence in financial reporting will be disrupted, which will hurt the profession. Modalities to Achieve the Aims The professional bodies have been working on the ethical standards for a long time. Consequently, they enlist principles and threats to them. Moreover, the professional bodies also provide examples explaining threats so that an understanding is conveyed in more detail. They also provide details of safeguards against them. If only threats to the ethics are explained and solutions to them are not given to auditors, then they will get frustrated in complying with the regulations. Safeguards are auditor friendly in the sense they provide them different course of actions in case of non-compliance. This helps the auditors to protect their commercial interest (Miettinen, 2008). International Standards on Auditing Aims The objective of the international auditing standards is to standardize the audit procedures on a global basis. This is as per the need of the time because multi-nationals are expanding. The concept of trans-national auditing has also increased. Modalities to Achieve Aims The International Auditing and Assurance Board have presented more than 25 Auditing standards. The standards cover the topic from the stage of selection of the audit client to the stage of the issuance of the Audit report. The standards cover risks and procedures to identify them. Now, IAASB has presented more clarified auditing standards. The standards provide their objectives, the requirement to fulfill the objective and application material to enhance the understanding of the users. IAASB calls for feedback from different accounting bodies, which enhance the acceptability and usage of the standards. International Standard on Audit Quality Aims These standards aim at identifying the main factors that impact the audit quality. The aim of such standards is to enhance the quality of audit and standardizing the global practices of audit. Modalities to Achieve Aims The Standards setting body have discussed the factors of quality audit. Each factor that contributes to quality is then explained in much depth. For example, if the staff’s quality is of importance to the audit quality then the quality of the competent staff is explained further. Although, the framework does not provide an exhaustive checklist of factors, but it facilitates auditors to a reasonable extent. The professional bodies have enacted a system of audits of the audit firms for the audits they have conducted. The firms are then rated for their quality. High rating makes it more probable for the audit firms to be selected by huge clients. Such audits of the firm’s audit procedures ensure that the quality is being maintained. Secondly, the linkage of the ratings with the appointment created their interest in complying with the quality audit requirements. Part B 1. Ethical Standard 5 Objective The objective of the ethical standard 5 is to let the audit partner identify the potential threats that could adversely affect the objectivity and independence of the audit. The standard therefore provides guidance to the partner for taking further safeguards that would either eliminate or reduce the threat to an acceptably low level. Due to commercial reasons, the audit firms have started providing the non-audit services to their audit-clients as well. This creates threat to the independence and objectivity therefore, the standard provides a guideline for dealing with such situations. The Standard also establishes the responsibility of the Engagement partner and the Ethics partner while dealing with such potential threats. The Standard especially emphasizes on the documentation of the whole process that was conducted for addressing the threat. Example Suppose an audit client approaches the Partner to provide the facility of payroll processing. The scope of the assignment was just restricted to the processing and not included the whole HR functions such as hiring. The partner, paying importance to the fees agreed to provide the services. When the team went for audit, they did not check the payroll in detailed assuming that it must be correct as our firm does it. The opinion given was unqualified reporting problems in the audit. Subsequently, during tax audits, regulators got to know that the payroll included many ghost employees. The partner was held liable because he did not identified the potential threats. Had the partner complied with ES 5, he would have discussed with Ethics partner, giving the payroll service to a different manager or partner. If the threat was significant, then he must have backed out from the provision of the service. Non-compliance with ES 5 leads to inappropriate opinion being given. 2. ISA 210 Objective The objective of ISA 210 is to provide a ground for the management and the auditor to establish their respective roles. The standard provides the preconditions of the audit. Preconditions include the determination of the financial reporting framework. Management should recognize its responsibility for the establishment of internal controls. Auditors should be give access to all the accounting records. ISA 210 provides a clear line between the responsibilities of management and auditor. ISA 210 also provides guidelines for the continuation of the recurring audits. The change in terms of the engagement shall be discussed well before the audit commences. ISA also provides terms and the contents of standard engagement letter. ISA aims at providing the framework of decision-making, which facilitates the acceptance and rejection of the audit engagement (IFAC, 2009a). Example A client X has appointed the firm for its audit. The audit firm being in the hurry does not discuss the terms of the engagement. It was conveyed by the client that we are a small client and all the accounting ledgers and vouchers are prepared. Your team just needs to verify the transactions. Realizing the fact that the audit client is small in size, the firm sends their relatively inexperienced staff. That staff spent more than 15 days at the client and the audit did not complete. When the manager asked the team about the status of the audit, the team replied, “we are still working preparing the vouchers. The client is rude and asked us to do this only.” This activity was out of the scope of the audit. Non-agreement on the terms of the engagement resulted in wastage of time and other resources to the firm. 3. ISA 300 Objective The objective of ISA 300 is to provide guidelines for planning for the audit so that the audit is conveyed in an efficient and effective manner. For this, ISA provides details of the planning stages. The main objective of the standard is to provide a drill down approach to the audit so that the audit gets in the right direction. ISA also provides guidance for the quality of the human resources to be deputed to the audit. This includes ascertaining the education, experience and professional affiliations of the team. ISA 220 also envisages the documentation requirements relating to the audit so that the execution of the audit comes to the knowledge of the reviewer. This helps in forming an appropriate opinion (IFAC, 2009b) Example Client X liabilities have decreased by 145% during the year. The audit manager assumed that the increase is because of good cash flows generated during the year. The Audit manager was new to the client and industry, therefore did not have much knowledge of the conditions surrounding the client. He made the team to direct their efforts on other account balances. At the year-end, when partner reviewed the file, he came to realize that the industry in which client operated declined during the year. The revenue increase in fake and liabilities are credited as revenue. This happened because of the non-compliance with the guidelines of resources to be deployed. In severe conditions, the deviating from IAS 300 can lead to inappropriate opinion being issued. 4. ISA 570 Objective The objective of ISA 570 is to enable the auditor to assess the going concern assumption taken by the management. Financial Statements are prepared on the basis of Going Concern, which means that the management assumes the life of the business more than one year. The standard provides inquiries to be made with the management with regards to the going concern. The standard provides guidelines for ascertaining the going concern, which includes the assessment of the cash flows of the entity. The objective of the standard also includes the communication between those charges with the governance and the auditors. If there is any uncertainty for the going concern then the company should communicate that to those charged with governance (IFAC, 2009c). Example Client X had current ratio of 0.5. The company was meeting its cash flow requirements by way of running finance. The auditor did not address this condition and it got worse afterwards. The company liquidated in the next year as it was unable to pay the liabilities. Audit opinion did not draw the attention of users to this aspect. In such non-compliance, the auditors may be jailed as it happened in case of Enron (Time, 2014). References IFAC. (2009a, December 15). ISA 210. Retrieved from http://www.ifac.org/sites/default/files/downloads/a009-2010-iaasb-handbook-isa-210.pdf IFAC. (2009b, December 15). ISA 300. Retrieved from http://www.ifac.org/sites/default/files/downloads/a031-2010-iaasb-handbook-isa-300.pdf IFAC. (2009c, Decemeber 15). ISA 570. Retrieved from http://www.ifac.org/sites/default/files/downloads/a031-2010-iaasb-handbook-isa-570.pdf Miettinen, J. (2008). The Effect of Audit Quality on the Relationship Between Audit Committee Effectiveness and Financial Reporting Quality. Vaasa: University of Vaasa. Time. (2014, March 25). Behind the Enron Scandal. 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