The Role of Auditing and Assurance - Assignment Example

AUDITING & ASSURANCE AUDITING & ASSURANCE The role of auditing Auditors have the responsibility of assessing books ofaccount of a business entity. Records contained in journals, vouchers and other official documents used for business transactions are used for the purpose of ascertaining whether the recorded transactions are consistent with the financial position of the enterprise. The documents are usually prepared to verify whether the working results for a particular period. Auditors are supposed to show as precise financial situation of the businesses. A balance sheet is supposed to give a true reflection of the performance. Auditors go evaluate reports to ensure that they are accurately presented 1. The work of auditing should be conducted by independent professionals who demonstrate a high level of integrity. They should be honest, unbiased and sincere while discharging their duties. Most organizations experience cases of fraud, mismanagement of resources, and corruption among other vices. The vices are very costly to the organization and sometimes may be the beginning of the downfall of an organization. Most organizations lose their resources through fraudulent activities that are carried out by employees and sometimes senior managers. It is not easy to establish the fraudulent activities since it is performed by skilled individuals such as accountants. The cases might go easily unnoticed if a prima-facie approach is used to verify transactions. In order to unearth anomalies and discrepancies, a proper and independent investigation must be initiated. Auditors are the only professional that can be able to launch a thorough investigation that can assist the management discover fraudulent transactions and other illegal activities2. Auditing entails a number of activities. It analyses the books of account of an organization critically. Groups carry out numerous transactions that are recorded in the books of account. Conversely, fraudulent activities may take place during the recording stage. Accountants may alter the figure so that they can embezzle funds. The role of auditors is to look into the books to ensure no suspicious transactions have been recorded. In addition, they confirm the arithmetic accuracy of the documents that have been provided. Secondly, they are mandated with the responsibility of verifying the assets and liabilities of an organization. In the case of the body, the auditors had to undertake quarterly inventory counts. Furthermore, they detect and prevent errors and fraud from occurring. Finally, they report to the management n matters relating to the statement of income and the balance sheet. Financial reports must give a reflection about the company’s profits and losses. Additionally, the assessment must exhibit a true and fair view of the state of affairs of the organization during the end of a financial year. Also, they must ensure that the financial reports have been prepared according to the set laws3. Objectives of auditing The goals of auditors depend on the size of an organization. For small companies, auditors have the responsibility to ensure that all the cash receipts and payments have been entered in the right way. On the other hand, auditor’s objectives are different for a large organization. Precisely, they act as watchdogs for organizations. They detected errors and frauds and held responsible by the stakeholders of a company. The objectives of auditors can be classified into three categories namely, primary aims, secondary goals and finally specific goals 4. Identification and explanation of specific issues Transval Limited a company involved in the manufacture of plastic pellets is in need of an auditor who will discharge duties assigned accordingly. The current auditors seemed to have been engaged in a tussle with the board of directors because of a decision on whether to purchase new equipment for the company. The differences seem brought a conflict that made the directors threaten not to pay their salaries. Having been proposed by new audit partners for the enterprise it prudent to explain to the board of trustees on the importance of an independent audit firm. Some of the issues that will be considered before accepting or declining the offer they include, independence of the organization, the mandate outlined, accessibility of books of account, funding available, the nature of the top leadership, objectives of the employees, the level of competence of workers, the support given by all stakeholders and the auditing standards that the company applies 5. A). Independence Auditors must carry out their roles without having any form of interference from internal and external forces. An independent environment creates a conducive atmosphere at the workplace. An organization can have internal auditors. Internal auditors offer relatively cheaper services compared to external auditors. However, one of the shortcomings of allying the services of internal auditors is that they can be easily influenced to manipulate the books of accounts since they are well acquainted with the employees of the organization. Managers can control them to alter the books of account so that the firm can be seen to be profitable or making losses. On the other hand, external auditors are expensive to hire. However, it is difficult to manipulate external auditors to doctor the books of account since most of the external audit firms are mostly after building their brand name as the best audit firms. Whereas internal auditors can be bribed by their manager so as to cover up malicious activities, bribing external audits is dangerous. Some of them may end up reporting the case to law enforcement agencies. When auditors are left to carry out their tasks independently, they come with reliable reports that are used to implement measures that are favourable in accounting for the assets of an organization. In the case that was presented, auditors were not allowed to carry out their responsibility independently. The wrangles between the previous auditors and the board of directors are a clear indication that the company does not give auditors independence. For instance, the board threatened not to hire the auditors back because they differed from an important investment decision. Secondly, the board agreed to buy a new plant after a heated debate. Consequently, they threatened not to pay the salaries of the auditors. The examples illustrate how interference can adversely affect the work of accounts in an organization. Therefore working in such an organization as an audit partner might be impossible6. B).Accessibility of books of account Board of directors should be able to offer unlimited access to its books of accounts, assets and other materials that may be required to carry out the audit process. Auditors use information provided by the books of account to prepare their reports. When auditors are restricted from accessing the crucial documents required to make reports, it is impossible for them to carry out the responsibilities that they have been assigned7. C). Nature of the top leadership The new audit partner will have to evaluate the quality of the top direction of the organization. The leadership must not interfere with the process of hiring those who will work in the auditing work. In addition, the leaders must understand the auditing standards and must be competent enough in discharging their duties. Without the support of the top leadership, it will be impossible for the new audit partners to carry out their work efficiently. The top leadership is responsible for allocating financial resources. They must be ready to allocate sufficient resources to conduct the activity. Otherwise, the whole process may end up crumbling in the way8. D). Funding available Carrying out the audit process is an expensive venture. Enough funding must be provided. During the board meeting, the new audit firm will have to enquire into the financial resources that will be allocated to support audit work. Scrutinizing the books of account usually takes some time. Throughout the period, a lot of resources will be required to become a success 9. E).Mandate arising from stakeholders The role of the new auditors at the organization must come from the articles association of the company. Their duties must be clearly outlined in the company’s official documents. Outlining the responsibilities of auditors in the official records of the enterprise is an indication that stakeholder support the work of auditors10. F).Level of competence of staff Since the new audit firm will consist a total of four partners who are located within 50 miles apart in the South-West of England, it is imperative to consider the levels of competence of the staff. The four partners must be willing to work in unison so that the work of auditing the financial books of the organisation for it to become a success. Having a competent team will ensure that the activity will be conducted professionally and in accordance policies outlined by the regulators11. G).Support is given by stakeholders Stakeholders must be ready to offer support to the proposed audit firm. The support of stakeholders is mandatory since the activity involves financial matters that are very paramount issues to them. They must be informed the roles that the auditors will be performing otherwise they may fail to understand the audit process and view it as a method of confusing them so that funds can be embezzled. The endorsement must, therefore, receive approval from the interested parties so as to avoid conflicts due to lack of understanding12. H).Audit standards The management of the firm must be ready to abide by the auditing standards that have been set by regulatory bodies. The rules established by the organs are very imperative because they ensure that auditors discharge their duties in a professional manner. In addition, rules are applicable when it comes to report of findings. The company must be ready to the requirement otherwise the work of the proposed audit firm may be deemed to be irrelevant. Furthermore, the Companies Act requires that organizations must abide by the accounting standards when it comes to financial reporting13. Threats to objectivity A number of threats to objectivity exist. Some the threats include self-review threat, advocacy threat, thrust threat and intimidation threat. One of the threats to objectivity in the provided case that led to the provision of additional services requested by the company could be disagreements that arise due to a misunderstanding of the auditing standards that should be used. There is a possibility that disagreements may prop up on approaches that can be applied to audit individual items. The management and the proposed auditors may disagree on how to treat depreciation14. i).Intimidation Threat It is possible for the new audit firm to receive threats from some of the top managers of the business. From the incident that occurred were the auditors were threatened not to receive their pay, it possible that the trend is likely to persist in the future. Threats are usually given so as to destruct auditors from doing their work independently and report finding that favour those who hold senior positions. The Board used its influential position to threaten the previous auditors15. ii).Trust threat Once the new audit partner becomes acquainted with the managers, a good relationship is likely to prop up. Out of the relationship, mutual confidence is likely to be developed. Consequently, the new team will be tempted to treat everything presented to be an accurate reflection of the books of account. Trust is very risk because the managers may end up manipulating the documents knowing that the documents will not be carefully examined16. iii). Self-review threat Sometimes auditors may fail to perform the particular tasks that they have been assigned because of their personal reasons. Hence, it becomes difficult for them to attain the tasks they had been assigned17. iv).Advocacy threat Auditors are supposed to be non-partisan and should take neutral positions that will help an organization positively during controversial proceedings. They are not expected to act as defenders; rather, they are treated as watchdogs for the corporation. They are appointed to protect the interest of the stakeholders of an organization. They should not act as advocates for influential people when they are found culpable of fraudulent activities or mismanagement of resources18. Safeguards to mitigate threats Threats must be controlled posed to auditors. The mitigation measures are very imperative since they help reduce the severity of the risks that may adversely affect auditors in discharging their duties. Therefore, auditors must be able to handle situations that might derail them from performing their duties. Safeguards may include: A).It should be ensured that auditors undergo intense professional training frequently while they are in-service. The training programs will help in enhancing the integrity levels of the auditors. Contractual assignments will assist in ensuring that they strict to the code of conduct that guides auditors19. B). The management should spearhead a campaign within the organization to encourage auditors to career out their mandate without any fear or favour. Such campaigns will help the auditors to work independently, competently and in an honest manner. A campaign will help enhance integrity levels within the organization and encourage employees to co-operate with the auditors20. C). Proper internal structures need to be laid down to deal with ethical issues arising from auditing partners. An organization itself should be able to handle matters related to ethical questions in auditing. Those found guilty of violating the verification procedures should be reported to the relevant authorities for action to be taken against them. Punishing offenders will discourage those of having an intention of going against the policies that guide accountants21. F). Organizational culture can be used as one of the mitigation measures that can significantly reduce threats that auditors face. When a professional culture is instilled in employees, they will always uphold best practices that are directed towards achieving their long-term goals. A professional working environment will encourage auditors to work efficiently22. Description of audit risks Audit risk refers to a risk that arises as a result of an auditor having an invalid judgement when it is discovered that the financial statements of an organization have been wrongly represented. Material misstatement and detection risks are the main factors that lead to audit risk. The risk is significant because auditors mainly use summaries of financial transaction to come up with reports. Financial transactions for large companies are usually numerous, and it becomes hectic to analyse all the data. Consequently, it becomes appropriate to use a summary of information. It is from the summaries that audit risks originate. The two types of risks that arise are likelihood of material misstatement and detection risks. The system of quality control is designed to mitigate distortion and exposure risk23. Risk of material misstatement arises when the financial reports of an organisation are not stated accurately. According to the quality control standard number twelve, establishing and monitoring the risk requires examining the risks in two different ways. The first level is at the level of the financial statement whereas the second level is at the assertion level24. A detection risk arises when the methods used by the auditor cannot unveil misstatement of material facts. The risk is primarily affected with the workability of the methods that have used auditors when they are conducting an audit. Auditors may make wrong decisions by concluding that there are no errors that have been omitted25. Conclusion Ethical leadership at in any organization begins with the way the leaders perceive and conceptualize the surrounding business environment. Ethical leaders are supposed to create a favourable environment. The role of auditors is to detect errors and fraud and suggest ways and means of preventing them from recurring. An auditor should not work as a detective or someone hawing suspicion26. 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