Clarifying the International Auditing Standards Implementation - Essay Example

Auditor scepticism: A study on the UK case and the measures to address auditor scepticism 0 Introduction Industrialization has resulted to widespread growth in business mainly through pooling together savings of investors which has led to a various companies having a large number of shareholders. This can be attributed to the fact that most limited companies are created with the intention of having widespread shareholding (Collier 1993, p. 27). The shareholders need assurance regarding the quality and accuracy of the company accounts and other information from the directors who serve as their agents. This has made audit to be very important in instilling confidence of both the public and investors in the companies. Auditing requires critical judgemental and technical competence under seemingly very complex circumstances (El-Moukammal 2009, p. 104). This essay will be conducting an intuit study on the degree of scepticism which auditors need to take into consideration while conducting an audit exercise that can be said to be of high standard that meet international standards (Financial reporting council 2010). The concern is particularly timely especially now in the wake of banking crisis with the regulators challenging audit firms on whether the auditors demonstrate sufficient scepticism. To show how this is important, the Audit Inspection Unit (AIU) annual report that has been recently released places most emphasis on exercise of greater professional scepticism (Financial times 2013). An audit is an independent examination of and expression of an opinion on the financial statement of any economic entity by an appointed auditor in fulfilment of that appointment and in compliance with the relevant statutory obligation. The purpose of an audit has always been to provide the users of the accounts who mostly are the stakeholders with assurance that the information provided to them by the directors is reliable (Grfay & Medhat 2007, p. 33). Despite this, with the society becoming more complex with each passing day, there has been concern with the increased incidences of the decision makers being provided with unreliable information (Edmund 2005). While the responsibility for recognition , measurement and disclosure for the financial reports have been bestowed upon the companies and their directors, professional scepticism has increasingly become a critical part of a high audit quality and essential in creating market confidence in the quality of financial reports (Gray & Manson 2008, p. 142). 2.0 A Culture of Professional Scepticism According to the definition of the Auditing Standards, professional scepticism is referred to as the attitude including a question of mind and being alerts to various conditions that may indicate possible misstatement resulting from either error or fraud and plays a critical role in assessing audit evidence (Hassink, Bollen, Meuwissen, & De Vries 2009, p. 142). It is important that professionalism be maintained and exercised throughout the planning and performance of an audit. This essay will, therefore, will be evaluating critically the issue of auditor scepticism which has of late raised concern not only amongst the stakeholders in the UK companies, but also globally. Additionally, the essay will offer an evaluation on how the accountancy profession has tried to address auditor scepticism in the UK and provide numerous recommendations as regards the same issue (Humphrey, Turley & Moizer 1993, p. 409). To gain a deep understanding on the issue, the essay will emphasize on how auditor scepticism has become a cause of concern for the various stakeholders of companies based in UK using examples. The essay will be taking into consideration important issues which arise great interest to various governing bodies like the Auditing Practices Board (APB) which provides Auditing Standards in addition to the Professional Oversight Board (POB) which monitors the activities of involved in audits. For audit partners and staff to be considered to be having a strong understanding of the business, appropriate knowledge on the industry and a full understanding of the financial requirements can be said to be the main supporters of professional scepticism. Various studies have postulated that a culture of professional scepticism is characterised with a strong and consistent information from firm management. Additionally, it mainly involves changing the extent or scope and nature of audit procedures making it quite important for both the staff and partners to avoid compromising professional scepticism and audit quality while struggling to meet strict deadline and withstand budget pressures (Vanasco 1996). Auditors need to take professional scepticism and have a critical review of the policies applied in order to determine whether the applied policies make sense. As a matter of fact, he should ask himself various questions like whether the treatment reflect the substance of the transaction under consideration and analyse and try to determine whether there are more than meets the eye if the transactions under study fail to make sense (Vanasco, 1996, p. 46). The stakeholders and staff should not seek for excuses with the aim of identifying and promptly addressing arising issues while on the other hand the management must be willing to offer the necessary support to the stake holders in making their decisions. Amongst the key elements is ensuring proper professional scepticism levels. Most stakeholders, the management and all interested parties who make their decisions from audited financial statements have high expectations of the orders in regards to their exercising professional scepticism. The recent past has seen auditors lose or fail to maintain their respect from the stakeholders and the management due to increased incidences of failure to exercise professional scepticism while doing an audit of the financial statements of various organizations. The Australian Securities and investments commissions audit inspection and surveillance activities have made observations of instances where auditors seem to be relying too much on the explanations and representations of the management without exploring contradictory evidence might be apparent from the audit. Additionally, the explanations and representations of the management tend to give less regard which is not sufficient as regards to historical outcomes applied in auditing financial records and critical in assessing the reasonableness of the assumptions which underlay estimations (Rose 2011). Greater professional scepticism can be exercised by the auditors by exercising total review of the judgements of the management making sure that they exercise professional scepticism while making assumptions in areas to do with fairness in assessment of value, impairment of goodwill and other intangibles, recognising and measuring deferred tax assets and on reviewing future cash flows relevant to making considerations on going concern of the organization (Puttick, Esch & Kana 2008) There has been an increase in occasions where auditors approach highly subjective and judgement situations by rather than seeking for evidence that challenge their clients judgements, auditors have increasingly obtaining audit evidence corroborating with the clients judgements. Amongst the aspects in the audit that auditors need to be alert on include inconsistent and contradictory evidence, aspects of the documents casting doubts on the reliability of the financial documents and response to raised enquiries, the management making it difficult to access required documents, situations that indicate fraud and identifying different circumstances that would require application of additional audit procedures. Various studies indicate that auditors in most UK audit firm do not apply the required scepticism while undertaking their audit assignment especially when taking an audit on potential fraud on goodwill and other intangibles (Smith, Omar, Idris & Baharuddin 2005, p. 84). The various situations identified include application of evidence that is not sufficient enough to support appropriateness of growth rates and discount rates without taking into consideration the deteriorating actual performance, the ever rising uncertainty on prediction about cash flows, less regard to the absence of reliable valuation benchmarks and cross-checks, auditors insufficiency on sensitivity analysis and most importantly a lot of significance being placed on past cash flows when in the real sense the focus is on assessment of cash flows forecast (Rose 2011). Auditors should apply international financial reporting standards which various studies postulate to be based on principles, their framework and their underlying principles. This may be quite important in determining accounting treatment applicable in situations of different transactions (Peter 2010). Additionally, auditors need to apply applicable previous treatments in new audit new standards or audit knowledge. Under such situations during audit, it is advisable that the auditor become quite objective while re-evaluating decisions made during previous years which introduces into practice objectivity and regularity. As a result of recent recession on the world economy, many companies have been affected thereby raising the chances of impairment of the value of goodwill and other intangibles. Auditors have relied heavily on corporate finance specialists from their firms as a result of the complexity and significance placed on postulating the fair value measurement and asset impairment. Additionally, some studies have indicated that despite the specialists explicitly describing the various limitations of their work and the limit or extent to which they should be relied upon, the engagement teams have continued to place undue dependence on corporate finance conclusions. Auditors while analysing the issue should a proper and unbiased evaluation of all relevant applicable facts, alternative views that can be applied which incorporates literature reviews and application of oversee approaches. Auditors should always strive to incorporate genuine and interpretations of the various accounting and auditing standards while being firm in rejecting those that are contrary to the universally accepted standards and which the management intends to apply so as to produce an outcome that favours them. Auditors therefore have to put into consideration scepticism while analysing management explanations in order to identify any significant variations in the laid down analytical procedures. auditing standards demand that the audit evidence provided by the management and the deduced audit evidence obtained during the audit need to be in concurrence with the accumulated knowledge of the auditor during practice and his understanding of the operations of the client as opposed to the rising issue of the auditors being accepted or hired on face value without further validation on their suitability being made (Rose 2011). A situation that has been singled out is the substantive analytical procedures which require development of reasons that are estimate and corroborating for variances to be considered as independent audit evidence. The promotion of the findings of these findings with the incorporation of the audit committee members and the organizations management are important in encouraging them to recognise and act on the important contributions that can be made to offer support to advancement of the a culture of professional scepticism. Consequently, the benefit of open communication and critical judgements involved should be promoted amongst those preparing financial statements and the organisation’s Annual Report which in the process responds to the challenges raised in the audit (Martinov-Bennie, Cohen &Simnett 2011, p. 669). 3.0 Conclusion What defines the essence of any audit is how the audit team expresses their professional scepticism. This is because it professional scepticism determines the quality of each judgement undertaken during the audit which goes a long way in determining the overall effectiveness of the whole audit process in its objective of addressing the challenges it faces in meeting the needs of the shareholders who entirely rely on it (Puttick, Esch, & Kana 2008). Hence, the perception and reality of expression of professional scepticism give meaning and reaffirm the confidence the users of the financial statements place in the audit which determines the confidence they have on the audited financial statements of their investments. From the essay, it is quite evident that proper application of professional scepticism in the auditing exercise requires that the auditor possess a mind-set with rigorous questions which offers enough challenge to the assertions of the management with some degree of doubt which reflects the expectations of the shareholders whom in the real sense the audit is normally intended to (Kan 2007). This therefore demands that all judgements made in course of the audit be founded from the perspective of the shareholder. This requires presentation of hard evidence that back the made judgement which further informs about the assertions of the management about the statements giving a true and fair view that is persuasive and convincing enough to the shareholders including the stakeholders as regards the appointed auditors risk assessment. The application of an acceptable degree of professional scepticism is an important skill for auditors. If the auditors are not prepared to challenge the assertions of the management, they will not be able to serve their role well with independence of deterring fraud and being with confidence able to confirm that the financial statements of a company show a true and fair view of the affairs of the company. However, auditors should take caution and avoid taking scepticism too far to the extent of challenging everything even when the situation in the running of the affairs of the company how a true and fair view thus in the process slowing down the publication of its financial statements thereby risking unnecessary costs incurred in redoing the audit. A debate should be stimulated and the stakeholders made to accept conclusions set out from the audited financial statements and become enlightened about the role and nature of professional scepticism in exercise of audit. Additionally, the auditing profession and the audit firms should be encouraged to give considerations to the various implications of the conclusions we have come up with both for their business models and their corporate culture and the approach they give to audits and the implementations of such changes since they are very critical in responding the identified challenges which include the need to reflect the perspective of the shareholders and the other stakeholders in exercising their professional judgement. While it is actually true that sceptical behaviour mostly concerns with the behaviour of individual audit professionals, the professional firms and the general audit teams should also play an important role in exercising professional scepticism. Among the various ways in which firms can play their role in enhancing professional scepticism include assessing for relevant attributes during the recruitment process, taking special concern during training to focus on recognition of error and negotiation skills, putting in place performance evaluation and promotion systems which offer rewards to auditors exhibiting appropriate professional scepticism and ensuring that they periodically review the various processes and streamlining them to professional scepticism (Kumar & Sharma 2006). Additionally, they should put in place measures and make the auditors understand the decision aids like checklists and the requirements of documentations or standard procedures and most importantly offering incentives in order to promote challenge among colleagues in the audit process (PCAOB 2010). Lastly, not only should the conclusions be implemented in the United Kingdom, but should be rolled out internationally which will aim at identifying the different ways in which the various International Standards on Auditing might be developed to ensure better reflection of the various conclusions that we have come up with during this study. This will be essential in clarifying the international auditing standards implementation review. 5.0 References Collier, P.A 1993. Audit Committees in Major UK Companies. Managerial Auditing Journal, 8(3), pp.25-30 El-Moukammal. H 2009. Auditors’ Code of Ethics. The Certified Accountant, 3rd quarter (39), pp. 102-105. Financial reporting council 2010. Auditor Scepticism: Raising the Bar. (Pdf) available at: http://www.frc.org/uk/getattachment/2a1e0146-a92c-4b7e-bf33-305b10fcd/Discussion-Paper-Auditor-Scepticism-Raising-the-ba.aspx > [accessed 21 January 2013] Financial times 2013, Auditor Independence Scepticism: Establishing a common understanding and reaffirming its central role in delivering audit quality. [Pdf] available at http://lexicon.ft.com/Trem?term=auditor-independence > [accessed 08 February 2013]. Grfay, SM & Medhat, E. 2007. Professional Scepticism of Auditors: A CROSS-CULTURAL EXPERIMENT. Professional Scepticism of Auditors; a cross- cultural experiment. 1(1), 3-34. Gray, I & Manson, S 2008. The Audit Process. 4th ed. Hampshire, UK: Cengage learning EMEA. Pp. 104-147. Hassink, H.F.D, Bollen, L.H, Meuwissen, R.H.G, & De Vries, M.J 2009. Corporate Fraud and the Audit Expectations Gap: A study among business managers. Journal of international accounting, auditing and taxation, 18 (2009), pp.85-100. Humphrey, C.G, Turley, W.S & Moizer, P 1993. The Audit Expectations Gap in Britain: An Empirical Investigation. Accounting and Business Research, 23, pp.395-411. Kan, E 2007, Audit and Assurance: Principles and Practice in Singapore. Chang cham road: CCh Asia Pte Ltd. Kumar, R & Sharma, V 2006. Auditing: Principles and Practice. New Delhi: PHI Learning Pvt. Ltd. Martinov-Bennie, N, Cohen, J &Simnett, R 2011, Impact of the CFO’s affiliation on auditor independence. Managerial Auditing Journal, 26 (8), pp. 656-671. PCAOB 2010, auditing standard No. 12: identifying and Assessing Risk of Material Misstatement. Available at: [Accessed 29 January 2013] Peter, W 2010, “Healthy Scepticism.” Financial Director: Print. Puttick, G, Esch, SV & Kana, S 2008, the Principles and Practice of Auditing. 9th ed Cape Town: Juta and Company Ltd. Rose, O 2011, lack of audit scepticism trips E&Y. Available: http://www.accountacyage.com/aa/news/2096642/lack-audit-scepticism-trips. Last accesses 11th Feb 2013 Smith, M, Omar, NH, Idris, SI & Baharuddin, I 2005. Auditors’ Perception of Fraud Risk Indicators: Malaysian Evidence. Managerial Auditing Journal, 20(1), pp. 3-85. Steven, B 2010, Audit expectations. Chartered Accountants Journal of New Zealand. The Expectations Gap Auditing Standards 1988, Journal of Accountancy Vanasco, RR 1996, Auditor Independence: An International Perspective. Managerial Auditing Journal, 11 (9), pp. 4-48. Read More