Audit to Draw the Actual Business Scenario - Essay Example

Audit Contents Introduction 3 Auditor Rotation and Its Requirements 3 In case of Internal Auditor and Audit Committee 4 In case of External auditor 5Arguments Supporting Mandatory Audit Firm Rotation 5 Arguments against Mandatory Firm Rotation 7 Effects of Mandatory Audit Rotation on Profession 8 Additional Factors that Influence Auditor (s) Independence 8 Conclusion 9 References 11 Introduction Audit can be defined as the inspection which is generally organized for the official purpose and the investigation is focused mainly on accounting practice of a company. It is a documented and well planned activity. It is a systematic and independent procedure for examining data, operations, financial statements, quality management, records, and financial performances for a specific purpose of that organization. Most of the cases the specific purpose is providing securities and reducing risk free factors within the organization. Usually a qualified person or group of persons will take responsibilities for conducting the audit work and the person is called as auditor. Auditing procedure is also applicable in case of stock and inventory management because this is also an area where high chances of corruption take place. Many organization has own internal audit department by which the company can control and monitor business activities after certain period or as and when necessary. External auditors will generally visit any company once in a year to provide more biased free judgment about the financial position of the company. Independent reports are required by auditor to increase the faith of stake holders on the company’s activities and attract more amount of capital for the purpose of business. For the above mentioned reasons rotation of auditors are also important which is recognized as precaution to save the interests of all the parties who are related in the business activities. Auditor Rotation and Its Requirements Auditor rotation also can be said as independence of auditor and this method can be applied on both internal and external auditors. At the time of conducting audit of any particular company day after day or year after year then he will get information about all the strategies the company has taken or will going to take. They can make friendly relationship with the management and employees of the organization which will affect to provide unbiased opinion about the current condition of the company (Loughran, 2010). So this is clear that auditor rotation is required for the independent opinion of auditors. There are generally 3 types auditor can be observed. These are external audit, internal audit and audit committee. In case of Internal Auditor and Audit Committee In case of internal auditor independence means bias free opinion from those parties whose interests may be affected by the audit operation or the disclosure of auditor’s report (Clayman, Fridson and Troughton, 2012). Poor governance, inadequate risk management, inadequate internal control etc. are few reasons where conducting internal control is necessary. The reporting activity by an audit committee actually shows the independence of management of the company. Through this process the codes of ethics are also can be maintained by the company (Moeller, 2009). Maintaining the ethics is a very crucial part in case of auditor’s rotation. Ethics is generally recognized as systematic concept which shows the right path and omit wrong practices. It is also known as the scientific process which lead the ideal human characters. In case of business activities ethics helps to set authoritative principles to do all the work in proper and legal way so that interests of any concerned will not be affected. A business is always is a part of society (Kumar and Sharma, 2006). So ethics should be applied to save the interest of the society and for the benefit of the general people. In case of audit it is required for a positive professional attitude and stakeholders, public can expect an unbiased judgment from such activities (Ridley, 2008). Use of ethics will also increase the auditor’s reputation. Ethics should be applied in case of production, sales & marketing, finance, intellectual property, human resource management etc. Ethics prevent an auditor from misrepresent information and provide a guidance regarding law at the time of doing audit work. ACCA codes of ethics are applied to maintain a standard which is followed in the international ground. Here five principles are very stringently maintained and followed by the auditors. These five principles are integrity, objectivity, confidentiality, professional behaviour, professional confidence and due care. IFAC codes of ethic are used in case of conflict interests, breach of codes, rules and regulations etc (Campbell and Houghton, 2005). In case of External auditor In case of external auditor, rotation is required to provide independence from those entities whose interest may be hampered after publishing the financial statement and detailed auditor’s observation about the company. In this case ethics also help to find out the right path and provide guidance to an auditor for doing his work in a right and proper way (Pickett, 2006). There are so many laws have been implemented by the government of the different countries for continuing the practices of auditor’s rotation in the business context. The ministry of corporate affair in India has been implemented the rule which is related to auditor’s rotation. It says that this is a mandatory practice for every listed company, unlisted companies which have more than INR 10 crore share capital, all private companies which have more than INR 20 crore paid up capital and also those companies which have minimum INR 50 crore public deposits (Jones, 2011). Arguments Supporting Mandatory Audit Firm Rotation In many cases this is observed that big companies change their external auditors. Financial experts are saying that mandatory of auditor’s rotation will stop the monopoly of the big audit firms such as PWC, KPMG, E & Y and Deloitte. As per the rules firms can appoint an external auditor for 5 to 10 years maximum. If the tenure is for short term period then there is a chance to get appointment for more 3 years as an extension period. This practice will make the audit procedure more serious than the earlier days (Ridley, 2008). In US, government has been implemented audit rotation after every 3 years. Big companies appoint one of the big 4 companies such as Deloitte in few years and after that they will appoint another big 4 companies like PWC for next years. Examples of such big companies are Vodafone, Marks & Spencer’s etc (Gillis, 2014). Barclays, the famous British bank appointed PWC as an auditor for a long period. In the 18th century there was rule to retain any external auditor for 48 years. As a result the company faced huge financial disaster as the auditor’s report was unable to show the actual financial scenario of the company to the management. Many big companies such as AIG, Lehman Brothers and GM have faced the same problem from that old set of view. From the year 1974 mandatory auditor’s rotation has been found in Italy. A survey report in the year 2002 said that 90 % business owners in Italy are very much happy with their audit work which also provided sustainable growth to their respective businesses (Puncel, 2007). In recent years many companies have applied the mentioned guidelines and got benefits. In the year 2014 PWC wins the audit work of HSBC bank. This is the 1st time PWC will do the audit work for this multi national bank and before that there was another auditor who was doing audit work for this bank. So here the bank has taken initiative to rotate its auditor for getting better picture about the organization through the work of audit (Madray, 2008). Vodafone, the world famous mobile phone company enlisted their name in London Stock exchange in the year 1991 and since that time Deloitte was the auditor of this company. But in the year 2014 (in the month of March) PWC has taken the responsibilities to do the audit work for this company as UK government has implemented mandatory rule that no company can sustain their external auditor for more than 10 years (Burke, Guy and Tatum, 2008.). This new regulation has been implemented in the countries which are related to European Union and this has injected a greater competition in the audit market of UK. On the other hand Marks & Spencer has selected Deloitte as their new auditor. Previously PWC was their auditor who worked for them more than 87 years since 1926. Unilever, another world famous product manufacturing company replaced PWC with KPMG as their external auditor for the purpose of audit and book keeping duties. All these rotations are happened due to the mandatory rules and regulations implemented by the different country’s government (Houghton, 2010). International standard of accounting has revised its audit standards after certain period or if specific requirement will arise such as auditor’s rotation. For example- Number 240 stated that auditor’s responsibility is to identify fraud cases or any kind of material misstatement which arises intentionally or unintentionally. A greater risk is associated in such kind of material misstatement which is generated from misappropriation of asset or improper financial reporting. Number 260 states that auditor’s responsibility is to communicate with charged and also with governance (Phillips, 2009). Arguments against Mandatory Firm Rotation There are so many arguments which are against the auditor’s rotation. Many expertise and business entrepreneur say that rotation of audit has hampered the work of audit and it also help to decrease the quality of work. As per their view independence, professional scepticism and objectivity are required to enhance the audit work. Mandatory firm rotation is not required at all for the said purpose (Puncel, 2007). As per view of PWC this can be said that independence, professional scepticism and objectivity are the base of high quality audit work and through this procedure the firm can achieve the targets and gain the confidence of the investors. The quality of financial reporting will also be increase through such process. There is a huge cost which has to be incurred by the company when they will appoint a new auditor for their audit work. This incremental cost factors will affect the price of their product and services or it will affect their amount of revenue and profits in a financial year (Vona, 2011). The mandatory rotation may comply the management of the company for selecting such audit firm which has not the highest level of expertise related to industry. Confusion may be arising among investors that why the company has chosen new auditor and they become worried to think about any unwanted situation or any reason that will affect their interests which are related to their investments. The effectiveness of audit committee will be decreased for such mandatory rotation. They were involved to further verify the auditor’s work and then they will judge about the requirement of changes of audit firm. Here providing their judgment in case of changing audit firm is not valuable as it is mandatory by the government. So their initiative to verify the auditor’s work also will be decreased (Gramling, Johnstone and Rittenberg, 2012). Effects of Mandatory Audit Rotation on Profession There are few observations which are related to effects of mandatory audit rotation on profession. The observation says that auditor rotations improve the quality of audit work and reduce the chances of fraudulent (Vona, 2011). There is no such evidence which will prove that mandatory firm rotation would help to reduce audit firm concentration. A study conducted by Bocconi University stated that the concentration has been increased more and the audit market can handle better to manage risk factors than the earlier days (Chambers and Rand, 2010). Additional Factors that Influence Auditor (s) Independence There are so many other factors that influence the auditor’s independence. These factors are as follows - Size of Audit Firm, Level of competition in the audit service market, Tenure of audit firm for serving audit work for a particular client, Amount of audit fees, Audit Committee, Management Advisory Services (Pickett, 2010). Apart from that some terminologies need to be clear before conducting any audit activities which will also provide independence at the time of doing work. These terminologies are mainly going concern, Materiality, Accounting estimates, True and fair view and Audit opinion (Knapp, 2012). Going concern refers to the continuous business operation the organization has done and will do in the future. Without continuous operational existence the assets of the business will not be utilized and if these are not utilized properly so there will not be any requirement to do the audit work. Materiality is a concept through which auditor can observed that financial statements are prepared after considering all the material aspects or not. If not then issues will be raised that statements are not accurate and some discrepancies are there in the financial accounts (Clayman, Fridson and Troughton, 2012). Accounting estimates indicate the approximate figures which are generally appear in the financial statements but these have not any precise means of measurement. This kind of estimation is based on the auditor’s judgment and their expert opinion (Harris, 2012). True and fair view represents financial statements of organization clearly define the position of the organization and these are free from any kind of material misstatements. All the information in these statements is true and faithful. Last but not the least audit opinion is the summary of the observations the auditor can realize from the auditing work which will help to take corrective decisions for the betterment of the organization. Conclusion At the part of conclusion this can be said that audit is an independent work process which is helping to draw the actual scenario of any business organization. Internal and external both auditors are responsible for providing unbiased opinion. They will not give any kind of decision; only represent a clear view about the financial condition of any company. There are so many international accounting standards which help to do business activities without maintaining any country’s boundary. Some ethics should be followed to do such kind of activities. There are so many advantages and disadvantages in auditor’s rotation but advantages are more than the disadvantages and disadvantages can be avoided if proper steps can be taken in right time. References Burke, F. M., Guy, D. M. and Tatum, K. W. 2008. Audit Committees: A Guide for Directors, Management, and Consultants. Chicago: CCH Group. Campbell, T. and Houghton, K. 2005. Ethics and Auditing. Sydney: ANU E Press. Chambers, A. and Rand, G. 2010. Operational Auditing Handbook: Auditing Business and IT Processes. Beijing: John Wiley & Sons. Clayman, M., Fridson, M. and Troughton, G. 2012. Corporate Finance: A Practical Approach. New Jersey: John Wiley & Sons. Gillis, P. 2014. The Big Four and the Development of the Accounting Profession in China. Bingley: Emerald Group Publishing. Gramling, A., Johnstone, K. and Rittenberg, L. 2012. Auditing. Boston: Cengage Learning. Harris, G. 2012. Mandatory Audit Rotation: An International Investigation. Houston: University of Houston. Houghton, K. A. 2010. The Future of Audit: Keeping Capital Markets Efficient. Canberra: ANU E Press. Jones, M. J. 2011. Creative Accounting, Fraud and International Accounting Scandals. West Sussex: John Wiley & Sons. Knapp, M. C. 2012. Contemporary Auditing. Ohio: Cengage Learning. Kumar, R. and Sharma, V. 2006. Auditing: Principles and Practice. New Delhi: PHI Learning Pvt. Ltd. Loughran, M. 2010. Auditing For Dummies. New Jersey: John Wiley & Sons. Madray, J. 2008. Compilations & Reviews 2008-2009. Chicago: CCH. Moeller, R. 2009. Brinks Modern Internal Auditing: A Common Body of Knowledge. Beijing: John Wiley & Sons. Phillips, A. 2009. ISO 9001:2008 Internal Audits Made Easy: Tools, Techniques, and Step-by-step Guidelines for Successful Internal Audits. Mexico: ASQ Quality Press. Pickett, K. 2006. Audit Planning: A Risk-Based Approach. Beijing: John Wiley & Sons. Pickett, K. 2010. The Internal Auditing Handbook. Beijing: John Wiley & Sons. Puncel, L. 2007. Audit Procedures 2008. Chicago: CCH. Ridley, J. 2008. Cutting Edge Internal Auditing. Beijing: John Wiley & Sons. Vona, L. 2011. The Fraud Audit: Responding to the Risk of Fraud in Core Business Systems. Beijing: John Wiley & Sons. Read More