Audit Standards Important for Auditors - Essay Example

In Market Societies, Auditors Are Remunerated By The Client Company Rather Than By An Independent Body. This, Inevitably, Makes Them Dependent Upon Directors For Their Fees And Profits. Auditing Firms May Legitimise Their Status by Appealing To Profession Table of Contents Introduction 3 Fundamental Principles of Professional Ethics Underlying an Audit 4 Audit Standards and Sections of the Corporations Act Relating To Independence 6 The Nature and Development of the Audit Expectations Gap 8 Audit Expectations Gap and Financial Crisis 9 Conclusion 10 References 12 Introduction The fundamental principles of professional ethics are of significant importance with respect to the accounting profession. The code of ethics of International Federation of Accountants is essential because the profession is based on public interest and the task performed by auditors extending beyond the client company to the general public. The International Federation of Accountants (IFAC) has set ethical standards for the accounting profession that includes integrity, objectivity and confidentiality linked with the auditing profession and many more. The auditors offer their service to the external client companies that in turn has raised the issue of independence both in case of internal as well as external auditors. The auditing practices and the dependence of the auditors on the client company have increased to a large extent for the purpose of remuneration rather than to act as an independent body. The absence of independent body has raised the reliance on other companies (Sikka & et. al., 2009). Various audit standards and sections of the Corporations Act 2001 in the context of independence have been effective measures for ascertaining that auditing functions are performed ethically (Kaplan Financial Limited, n.d). In this respect, the essay focuses on the audit standards important for auditors to accept such standards as fundamental principles to perform operations ethically. In addition to this, the paper examines the nature of audit expectation and its various components. Furthermore, the factors affecting the expectation gap has also been analysed. The audit expectation gap has been analysed on the basis of financial crisis of 2008 and its impact on the auditor’s role. Fundamental Principles of Professional Ethics Underlying an Audit The need for ethical code arises in case of auditing; as the accountants are needed to work with respect to the public interests and they hold the position of trust in the society. It is the responsibility of the professional accountants to work in the interest of general public and to maintain the reputation associated with accounting profession. International Federation of Accountants (IFAC) is responsible for setting the standards of auditing that are likely to be followed internationally (International Federation of Accountants, 2006; Kaplan Financial Limited, n.d.). Some of the major issues faced by the global organizations in terms of auditing standards are related to quality assurance and related services provided by auditors. The International Ethics Standards Board for Accountants has developed professional ethics underlying the audit profession and is followed and maintained globally. The fundamental principles of IFAC define the approach that the accountants must follow as well as indicate the nature of professional ethics as regarded to independence. The fundamental principles of IFAC specify that the accountant should be straightforward with respect to the profession of auditing as well as relationship with the clients’ business. The person involved with the accounting profession should not show biasness with respect to various judgements (International Federation of Accountants, 2006; International Federation of Accountants, 2013). With the advancement in the accounting profession, it becomes the responsibility of the auditors to maintain the standards of professional knowledge with respect to the development in practices (Sikka & et. al., 2009). It is the liability of the accountants to ensure that a client company or the employers receive the best professional competency skills and knowledge in terms of auditing functions. According to the principles of accounting, the auditors need to provide professional services to the client companies with the aim of maintaining the ethical standards. The professional ethics underlying an audit also has the potential to raise confidentiality issue with respect to the accounting standards. The fundamental principles to auditing indicate that the accountants have to maintain full confidentiality of the information gained as a result of the relation to a client company. In the context of confidentiality, the principles indicate that the acquired data should not be used either for personal benefit of profession or in the interest of third parties. Furthermore, the professional auditors need to obey the law with respect to the professional behaviour required as well as are required to avoid all the actions that have the potential to affect ethicality in the profession of auditing (International Federation of Accountants, 2013; Kaplan Financial Limited, n.d). In the context of independence, the code of ethics designed by IFAC states that internal audit of an organization must possess an independent statues of its own. In addition to this, the internal audit department of an organization is required to directly inform the auditing issues to the members of the board of directors without the involvement of the third party. The auditing practices are likely to be complicated due to the fact that the auditors are engaged in providing the consultancy services to other client companies. Moreover, the engagement of the auditors in the client’s services results to an increase in dependence upon other client companies with respect to the auditors’ fees (Kaplan Financial Limited, n.d). According to Sikka & et. al. (2009), the auditors must be independent and should be free from the control of a client company. It has been further argued in the context of independence that it is crucial so as to ensure that the auditors are able to hold their objectivity with respect to the auditing profession. The fundamental principles of the auditing profession define independence of mind as well as appearance. ‘Independence of mind’ defines a state that enables the auditors to conclude the financial decisions without any compromising with respect to the professional laws and regulations (Benjaminsson & Doherty, 2012). Independence of auditors’ mind defines their self ability to deal with a particular issue of auditing or any situation. In addition to this, independence of mind also enables the auditors to act honestly and perform various exercises according to the professional norms. On the other hand, appearance indicates perceived independence. In this context, it is essential for the auditors not only to act, but also appear independent in terms of behaviour. Furthermore, the absence of some crucial activities in relation to auditing could lead different investors as well as the other individuals to perceive the presence of unavoidable risk due to the lack of auditor’s independence (International Federation of Accountants, 2013; Sikka & et. al., 2009). Audit Standards and Sections of the Corporations Act Relating To Independence The Corporations Act of 2001 defines the independence of both the external as well as internal auditors with respect to the financial interests of a client company and associated businesses. According to the Corporations Act, the autonomy of the internal auditor defines independence from the self-interest of other parties that has the potential to affect the overall results of auditing. On the other hand, independence in the context of external audit defines the freedom of the auditors from the parties that has potential effect on the overall financial statement of a business. The section 290 and 291 of the Corporations Act 2001, deals with the independence requirement of audit. The Corporation Act in the context of independence deals with the issue of integrity well as objectivity principle of auditing. In addition to this, the sections 290 and 291 are identified as the framework to evaluate various threats to independence and to minimise or to reduce it to an acceptable level (Accounting Professional & Ethical Standards Board Limited, 2010). The section 290.1 of the Corporations Act 2001 represents the requirement of independence with respect to involvement in auditing and finally to conclude the financial statement of a business. The section 290 involves assurance engagement with respect to review and audit. On the other hand, independence requirements other than audit and review engagement are involved in the section 291 of the Act. The section 290 of the Act in the context of public interest states that the members involved in the audit team or concerned firms are independent of the audit client. According to the Corporations Act 2001, independence in the context of auditing comprises independence with respect to mind and appearance. When the members to audit are unable to determine solution to reduce the effect of threats, then it becomes essential for the members to end their association in auditing activities (Accounting Professional & Ethical Standards Board Limited, 2010). The members refer to the Corporations Act 2001 in order to determine the obligations while performing audit or review. The parliament of Australian jurisdiction defines the independence of the auditors general. Furthermore, it defines the scope of the auditor general as well as indicates the norms for the appointment as well as removal of the auditors. The auditors provide their service to a client company that in turn raises the issue of compensation. The section 240 of the Corporations Act 2001 deals with fees and the type of remuneration. The section 240.1 of the Act defines the terms of negotiation with respect to compensation of the auditors. According to the Act, the members involved in the public service are allowed to quote fees that are likely to be appropriate with respect to the service provided. In the context of independence, there exist threats with respect to the fees quoted by the members based on the fundamental principles. For instance, the threats involved may be the self-interest of the members that is like to affect the competency skill of the professionals or the performance standards. In addition to this, low fees quoted by the members of the auditing firm have the potential to affect the overall performance of auditing. The section 240.2 of the Act identifies the fees quoted by the members and the services offered by them are the two factors that results to the existence of threats in the accounting profession. The paragraph 290 of the section 240 indicates some of the safeguard measure that has the potential to reduce the level of threat to an acceptable level. For instance, minimising the dependence on a client company has the tendency to reduce the threat involved in the profession. In addition to this, consulting with the third party is also likely to reduce threat to members (Accounting Professional & Ethical Standards Board Limited, 2010). The Nature and Development of the Audit Expectations Gap The aim of the auditors is to examine the financial statement of the client companies independently. The report prepared by the auditors is likely to follow the accounting standards and is expected to be fair in terms of the financial statement. The auditors and public hold different views regarding the responsibility performed by the auditors. These differences in view have raised the concept of audit expectation gap. The expectation gap defines the difference between the actual performance of the auditors and the perceptions of the users (Ebimobowei, 2010). One of the major reasons for the existence of the gap is the nature of audit and the existence of high expectation on the part of the users of financial statements. Some of the major causes for the existence of audit gap are misunderstanding with respect to the role and duties of the auditors. In addition to this, the limitation of the auditing standard and lack of performance on the part of auditors may also result to expectation gap in auditing. Furthermore, the unavailability of data or information required for auditing may also result to expectation gap (Ebimobowei, 2010). On the other hand, the increase in expectation of corporate also has the potential to raise the requirement of auditing, which in turn is likely to result into expectation gap. According to Salehi (2011), three components of expectation gap are “reasonableness”, “deficient standards” and “deficient performance” (p. 8382). Reasonableness is the gap between the expectation of the society and actual reasonable performance of the auditors. The main reason for the existence of reasonableness gap is lack of awareness about the audit practices and the expectations of the companies. In addition, deficient standards indicate the gap between the expectation of duty that the auditor is likely to perform and the standards set by law. The deficient performance can be defined as the gap between the perception of the society with respect to the performance of auditors and the expected standards (Salehi, 2011). Audit Expectations Gap and Financial Crisis The global financial crisis has raised the issue with respect to the role as well as effectiveness of auditors’ performance. The financial crisis of 2008 has raised the concern among the regulatory enquiry to improve the role of the auditing committees. Therefore, the board members of an organization maintains the financial report and to ensure that the auditing process is performed with honesty. The western countries of the world have faced banking and financial crisis since late 2007, which has affected the availability of credits that in turn has raised the issue of credit crunch. The financial crisis of 2008 has reduced the supply of credit from the financial institutions (Saladrigues & Grañó, 2014). According to Chen & Zhang (n.d.), the financial crisis of 2008 has raised a number of issues in the context of accounting and other related inadequacies. One of the major reasons for the financial crisis is the failure of the audit firms to determine bank crisis. The risk model is used by the auditors to identify the potential risks involved in a business with clients. The financial crisis of 2008 has raised the extent of risks faced by the auditors. The financial crisis not only affects the organization, but also the internal audit activities. In addition, a significant change in the economic condition has the potential for auditors switching. The financial crisis affected the performance of the firms, which is one of the major causes for change of the audit practices (Jamil al-Saffar, 2012; Association of Chartered Certified Accountants, 2011). The economic crisis reflects negative impact on the financial system that in turn has the potential to affect the transaction process of the banking sector. The auditors play a crucial role in the financial market and are responsible for concluding the financial statement of an organization. It is the responsibility of the auditors to provide vital information about the financial position of an organization. However, financial crisis or other economic condition has the potential to affect the role performed by the auditors. In addition to this, during financial crisis, it becomes very difficult for the auditors to identify the means through which the management values its valuable assets. The auditors are responsible for preparing the financial statement and in this context; any kind of false statement is likely to affect the role of auditors (Jamil al-Saffar, 2012; Stiglitz, n.d.). Conclusion The auditors provide their services to different firms in terms of remuneration from a client company rather than on independent company. It has been identified that the fundamental principles of the professional ethics are to be followed by the auditors in the context of auditing. The importance of ethical code in the context of auditing arises due to the public interest linked with it. The fundamental principles of IFAC are the base that defines the auditing standards and are to be maintained to ensure the quality of audit. The sections of Corporations Act of 2001 has been analysed in the context of independence. The Act of 2001 defines independence of the auditors from the financial interest of the clients’ firms. The Act identifies two aspects of independence that is mind and appearance. In this respect, it has been recognised that section 290 and 291 of the Act are seemed to be associated with the independence of the auditors. Furthermore, the threats linked with auditing have been discussed for having a better understanding of negative aspects that may occur for non-adherence with the accounting principles. The audit expectation gap has been evaluated to determine the existence of gap between the actual performance of the auditor’s role and the expectation of a company. The audit expectation gap has also been analysed in the context of financial crisis of 2008. It can be concluded from the above analysis that financial crisis affects the role played by the auditors, which in turn has changed as well as led to the adoption of new audit principles for mitigating the gaps in auditing expectations. References Accounting Professional & Ethical Standards Board Limited, 2010. APES 110 Code of Ethics for Professional Accountants. Institute of Public Accountants. [Online] Available at: http://www.publicaccountants.org.au/media/101686/1-apes-110-code-of-ethics-for-professional-accountants-december-2010-final.pdf [Accessed April 26, 2015]. Association of Chartered Certified Accountants, 2011. Audit Under Fire: A Review of the Post-Financial Crisis Inquiries. About ACCA. [Online] Available at: http://www.accaglobal.com/content/dam/acca/global/PDF-technical/audit-publications/pol-af-auf.pdf [Accessed April 26, 2015]. Benjaminsson, E. & Doherty, L., 2012. Independence in Fact and In Appearance: A Study of Regulatory Demands As Made Evident Through Practice. Abstract. [Online] Available at: http://www.diva-portal.org/smash/get/diva2:546244/FULLTEXT01.pdf [Accessed April 26, 2015]. Chen, H. & Zhang, M., No Date. Audit Reaction on Financial Crisis. Abstract. [Online] Available at: http://www.aabri.com/SA12Manuscripts/SA12116.pdf [Accessed April 26, 2015]. Ebimobowei, A., 2010. An Evaluation of Audit Expectation Gap: Issues and Challenges. International Journal of Economic Development Research and Investment, Vol. 1 Nos. 2 & 3, pp.121-141. International Federation of Accountants, 2013. International Ethics Standards Board for Accountants. Handbook of the Code of Ethics for Professional Accountants. 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Saladrigues, R. & Grañó, M., 2014. Audit Expectation Gap: Fraud Detection and Other Factors. European Accounting and Management Review Vol. 1 Iss 1, pp. 120-142. Salehi, M., 2011. Audit Expectation Gap: Concept, Nature and Trace. African Journal of Business Management Vol. 5, No.21, pp. 8376-8392. Stiglitz, J. E., No Date. The Financial Crisis of 2007/2008 And Its Macroeconomic Consequences. The Sources of the Problem. [Online] Available at: https://www0.gsb.columbia.edu/cfusion/faculty/jstiglitz/download/papers/2008_Financial_Crisis.pdf [Accessed April 26, 2015]. Read More