The New Audit Report - Essay Example

January 13, The Audit (Report) Introduction The new audit report has a more detailed format. The paper delves on the new audit report format. The paper focuses on the causes and effects of the new audit report format. The new report format details the responsibilities of the external auditor and audit clients’ management officers. Perceptions of the External Auditors’ Report purpose There are two major perceptions on the external audit report. First, the audit report affirms whether the financial reports are fairly presented, true, qualified or adversely reported. Second, the audit report must be enhanced in order to keep abreast of the new financial report requirements. The two major perceptions are in line with the Audit Report’s adding significant credibility to the companies’ financial statements. A credible financial statement is a good basis for making a more informed management decisions as well as stakeholders’ decisions (Asare, 2009). Consequently, the IAASB is currently processing the enhanced auditor’s report. The IAASB’s research focuses on adhering to the different stakeholders’ demand for a more informed audit report. The new audit report will serve as a global solution to global popular demand for a change in the current audit reports’ standardized formats. The stakeholders’ audit report request is grounded on the growing complexities of the financial reports. The stakeholders include the investors, residents, managers, community, and employees. The standard audit report formats include the qualified opinion format, unqualified opinion format, and the adverse opinion format. The same board correctly affirms that international leaders must do their share to ensuring the audit report contains additional information needed by the decision makers. A more informed audit report contains additional relevant and valid information pertaining to the fairness or trueness of the financial report data (IFAC.org, 2013). How & Why Explanation of the evolution of the external audit report wordings The new audit report will include some notable changes. One of the major changes is to necessarily allow the external auditors to include comments to their audit reports (Gold et al., 2009). One of the reasons for the changes are necessary is that the comments will deliver additional relevant and valid information to the stakeholders, in terms of auditor’s specific audit responsibilities and tasks. The external auditor’s favorable comments will surely encourage the investors, community leaders, creditors, customers, and other affected stakeholders to invest or enter into any relevant business transaction with the company. In this regard, the IFAC accounting board is currently conducting research on the optimum framework, format, and other additional requirements that will be incorporated in the enhanced external auditors’ audit reports. The board will determine the proposed objectives of the auditors’ comments. In this regard, the board members received several third party or stakeholders’ proposals that lead to the compulsory requiring of the external auditors to add a conclusion portion. The portion will present the relationship of the implemented audit procedures to the going concern concept and materiality concept of accounting. Likewise, the proposals include requiring the external auditors to make a conclusion on the relationship between the implemented auditing procedures and other information that are included in the companies’ financial reports. In addition, the new procedures of the enhanced report include requiring the external auditors to include the external audit engagement audit partners’ names in the external audit report blank (IFAC, 2014). With the introduction of more financial report requirements, the automatic path is for the traditional audit report’s consequently parallel enhancement. The enhanced report will favorably adjust the traditional audit reports to snugly fit the new end of accounting period financial report requirements. The new audit report will similarly indicate whether the new financial report details are true or fair. To be fair, the audit report should indicate that the financial report details are not made to favor one or a minor group of stakeholders. Further, there are several reasons for the popular sentiment to enhance the audit report. A research conducted showed that the audit report statements are very confusing. Many of the uneducated users of the financial reports cannot understand the terminologies used in either the audit reports or the companies’ financial reports. One research shows the users of the audit report do not understand the meaning of the term “level of assurance” mentioned in the auditors’ external reports. Some external auditors equate level of assurance as materiality level. An audited account which does not quality as material will not affect the decision of the stakeholders or decision makers (Turner et al., 2009). In addition, the same research affirms that the standard audit report does not discuss the sample size. The audit report is based on the findings on a certain percentage of the total amount. If the findings of the sample size are false or fraudulent, the auditors’ reports normally assume that all the amounts in the same account are false or fraudulent. The audit report does not explain in detail the size of the audit. For example, the sample size for receivables is the list of 5 percent or 10 percent of the total debtors. A sample size representing 60 percent of the total number of payables is better than the sample size representing only 3 percent of the total number of payables. The wrong sample size will lead to a wrong audit report. Next, the standard audit report does not mention the details of the chosen audit samples. For example, the auditor may wrongly choose ten customers as part of the company’s payables sample size. The wrong choice generates a wrong audit report finding. The customers owe money to the company. On the other hand, the payables account represents amounts that the company must pay its creditors. Creditors include suppliers who deliver raw materials to the company on account (the purchase amount will be paid at a later date). The wrong sample elements will generate a wrong audit report. Finally, the unqualified standard audit report does not mention about the internal controls’ quality. Poor internal control will lead to more errors and fraudulent financial report amounts. Strong internal controls will reduce or even eliminate avoidable errors and fraudulent financial report amounts. Critical Appraisal/Explanation of IAASB’s recent pronouncements (reactions of the stakeholders to the auditors’ report) The IAASB’s latest announcements are in line with giving more assurance to the stakeholders, users of the audited financial reports, that the financial reports are indeed true and fair. A true and fair financial report complies with all financial reports standards. The standards include the international accounting standards (Needles et al., 2012). The ISA 700 sets forth the new auditor responsibilities (Gold et al., 2009). Further, the wordings of the IAASB ISA 700 better discusses the distinct responsibilities of companies’ management and the external auditors (FRC, 2013). The new wordings include a detailed description of the auditor’s actual audit procedures performed. The new wordings will remove the cloud of doubt as to what the external auditors actually performed during the entire audit process (Gold et al., 2009). The new wordings clarify the auditors’ responsibilities in terms of the companies’ internal control procedures. The auditors’ responsibilities include explaining the audit scope. Consequently, the stakeholders will better understand the responsibilities for the true and fair presentation of the financial reports. Likewise, the stakeholders will better understand the detailed audit procedures implemented by the external auditors. The report avoids instances where the court jurors expect the external auditors to seek for the smallest amount of fraud in the preparation of the financial reports (Gold et al., 2009). Furthermore, the IAASB’s latest announcements are in line with giving higher assurance that the financial statements are not fraudulent or erroneous. The research affirmed stakeholders insists that the audit procedures must report fraud amounting to a minimum of 3.5 percent the total Income Statement reported sales figure. The same research indicated the auditors must report fraud amounting to at least 6.4 percent of the total assets figure. In addition, the research respondents understood the words reasonable assurance to indicate an estimated 80 percent of the financial statement figures are not fraudulent (Asare, 2009). The announcements include indicating in the auditors’ report that the companies’ management officers are primarily responsible for the true and fair presentation of the financial reports (Watkins, 2009). Moreover, the reactions of the new audit report form are no longer kept dark. The users will know what the external auditors actual did during the entire audit process. The users are freed from assuming possible or impossible audit procedures, as usually is the case with the prior standard audit report format (Idowu, 2011). The new audit report format makes the users understand the exact responsibilities and tasks of the external auditors. Consequently, the users of the audit report will place primary responsibility on the management for all fraud discoveries and error occurrences (Hay et al., 2014). Conclusion/Final Observations Based on the above discussion, the new audit report format keeps abreast with the latest financial reporting requirements. The new audit report format clarifies the responsibilities of both the audited companies’ management officers as well as the companies’ external auditors. The new audit report shows whether the financial statements are fair or true. Consequently, the stakeholders will put primary blame on the companies’ management for the auditors’ reports fraud discoveries. More importantly, the new audit report details the actual external auditors’ audit procedures. Evidently, the new detailed report format indicates the separate responsibilities of the external auditor as well as the audit clients’ management officers. References: Asare, S., 2009. Investors, Auditors, And Lenders Understanding of the Message Conveyed by the Standard Audit Report. Orlando: Northeastern University. FRC, 2013, June 3. Illustrative Example of a U.K. Auditors Report Reflecting the Requirements of ISA (U.K and ireland). [Accessed January 12, 2015, from https://www.frc.org.uk: https://www.frc.org.uk/Our-Work/Publications/Audit-and-Assurance-Team/ISA-700-%28UK-and-Ireland%29-700-%28Revised%29/Illustrative-example-of-a-UK-auditor-s-report.aspx] Gold et al., 2009. Financial Statement Users Perception of the IAASBs ISA 700 Unqualified Auditors Report in Germany and the Netherlands. New York: Auditing Standards Board. Hay et al., 2014. The Routledge Companion to Auditing. London: Routledge Press. Idowu, S., 2011. Theory and Practice of Corporate Social Responsibility. London: Springer Press. IFAC., 2014. Auditor Reporting. [Accessed: 11 January 2015 from http://www.ifac.org/auditing-assurance/projects/auditor-reporting] IFAC., 2014. Auditor Reporting. [Accessed: 11 January 2015 from IFAC: http://www.ifac.org/auditing-assurance/auditor-reporting-iaasbs-1-priority] Needles et al., 2012. Principles of Accounting. London: Cengage Learning Press. Watkins, J., 2009. CIMA official Learning System Financial. London: Elsevier Press. Turner et al., 2009. The Unqualified Auditors Report. New York: Turner et al.. Read More