Auditing and Assurance the Nature of Audit Quality - Book Report/Review Example

Auditing and Assurance: The Nature of Audit Quality CONTENTS Page Introduction 3 Statutory Definition of Audit Quality 4 Nature of Audit Quality 5 Ensuring Audit Quality 8 Conclusion 9 References 10 INTRODUCTION 1. DEFINITION AND PURPOSE Various studies have defines and audit as not only independently examining financial statements of an organization, but also expression of an opinion of an appointed auditor who may either be internally or externally sourced as to whether the financial documents of an entity comply with both the International Financial Reporting Standards (IFRS’s) and the international Accounting Standards (IAS’s). The main purpose of auditing and assurance is to provide the users of financial documents, mainly the organization stakeholders with the assurance that the reported information by the directors is not only reliable, but also reflects the true position of the organizations statues. The advancement of technology and the nature of the current business environment have made it a matter of concern especially as regards in increasing tendency with which the stakeholders are being provided with information that is incorrect. Audit quality has increasingly become very essential as regards bestowing confidence in the quality of financial report in addition to providing a great safety measure employed in close monitoring of the activities of the activities of an organization. 2. THE INCREASING NEED FOR AUDITING There has been a recent widespread growth in pooling of resources by various investors as result leading into companies having a huge shareholder population. Industrialization has resulted to widespread growth in business mainly through (El-Moukammal, 2009: 102-105). It is therefore important that shareholders be assured of the quality and the accuracy as regards the accounts and other information of the companies they have invested in from the directors running the day today activities of the company. Audit therefore plays the very important role of imparting public and investor confidence in the financial statements of the companies. It is therefore important that not only critical judgement, but also procedural competence be employed be employed in order not to compromise the quality and outcome of the audit. 3. In a bid to gain an in-depth understanding of the subject, this study will place most emphasis why the audit quality continues to become a serious cause of concern amongst various company stakeholders. Additional, other issues to be critically evaluated will include important issues arousing great interest to governing bodies like Auditing Practice Board (APB) which plays the important role of the provision of Auditing Standards as well as the Professional Oversight Board (POB) which is entitled with monitoring and providing checks to the various activities that are involved in financial statements audits. STATUTORY DEFINITION OF AUDIT QUALITY According to the definition of the Auditing Standards, audit quality is referred to a process systematic examination of the systems of a company with an aim of determining compliance with the defined quality processes. Audit quality is an indicator of possible misstatement resulting from either error or fraud and plays a critical role in assessing audit evidence. It is important that systems quality be maintained and exercised throughout the planning and performance of an audit. This report will, therefore, will be evaluating critically the issue of auditor quality which has of late raised concern not only amongst the stakeholders of entities, but also globally. NATURE OF AUDIT QUALITY WHY AUDIT QUALITY? Audit quality provides appropriate knowledge on the industry and an in-depth understanding of the financial requirements of a company. Auditors need to ensure audit quality while at the same time having a critical review of the policies applied in order to determine whether the applied policies reflect the true image of the financial statements and also the internal systems. Quality audit plays and important role in analysing whether the treatment of the various financial statements components provide a true reflection of the substance of the transaction under audit or try to determine the existence of any anomalies which may make the transaction under consideration not to make any sense. The increase in instances where auditors fail to conduct the organizations audits as required and in line with the set up standards mainly resulting from increase in incidences where there is failure in exercising professional scepticism. This has resulted unto most auditors loosing respect accorded to them by company shareholders. A case in point is the instance where the Australian Securities and Investment Commission during its inspection and surveillance of audit activities pointed out instances where auditors have tendencies of too much reliance on the different explanations and representations provide by those preparing the financial statements and the managements of the various institutions without necessarily exploring the various contradictions that might be found during the audit exercise. Additionally, the various managements of the numerous organizations have shown tendencies of giving less regards while providing true information to the different stakeholders as well as not providing critical assessments of the provided information. This has proved to be of great impact when it comes to making decisions to be presented to the stakeholders of different organizations. Greater audit quality can be exercised by the appointed 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 company. Among other critical issues identified to be affecting quality regards the different occasions involving highly subjective and judgement situations where it was evident that instead of auditors seeking evidence challenging the judgement provided by the client, they on the contrary showed tendencies of seeking for evidence that corroborated with the judgement provided by the client. This draws attention to different auditing aspects auditors should be aware of which include provision of contradictory evidence on the different aspects of documents casting doubts on the reliability of financial documents while at the same time raising quarries. Also, it was identified that there was increase in incidences where the management was continuously making it difficult to access or failing at all to provide access to the required documentations on different aspects indicating fraud and lack of auditor’s independences during the audit exercise. Several studies that were carried out in some of the UK audit firms indicate that auditors do not apply the required levels of audit quality while carrying out their audit assignment especially when undertaking an audit on potential fraud on goodwill and other intangibles assets of the company. The study revealed that the auditors give evidence that is not sufficient enough to show the appropriate growth rates and the discount rates without taking into account 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. AUDIT PRACTICE Auditors should practise international financial reporting standards which various studies postulate to be based on principles, their framework and their underlying principles. This is important in determining accounting treatment applicable in situations of different transactions. 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. 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(Martinov-Bennie, Cohen &Simnett, 2011: 656-671). 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 of the quality systems of the company while undertaking their analysis should use proper and unbiased evaluation measures of all the relevant facts, alternative views that can be applied which incorporates literature reviews and application of oversee approaches. Auditors should always strive to incorporate genuine 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. ENSURING AUDIT QUALITY Therefore, auditors have to put into consideration the highest levels of audit quality while analysing management explanations in order to identify any significant variations in the laid down analytical procedures. Auditing standards require that the audit report provided by the management and the one obtained during the audit should be concurrent with the knowledge of the auditor during his practise and understanding of operations(Gray,& Manson, 2008: 104-147). 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. 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 rose in the audit(Humphrey, Turley, & Moizer, 1993: 395-411). The findings reinforce the importance of management in encouraging them to identify and act on the contributions that can be put in place to offer support to a better culture of audit quality. Audit quality also helps in providing ways on how to eliminate the problems and apart from reporting the areas that do not conform the auditing standards, audit quality should report good practises since this ensures continual improvement. 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 quality. To show how this is important, the Audit Inspection Unit (AIU) annual report that has been recently released and it places most emphasis on exercise of greater professional internal quality systems. CONCLUSION The importance of any audit is defined by how the team carrying out the audit expresses professionalism and independence in the quality systems of a company(Kumar & Sharma, 2006). This is because audit quality 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. From the report, it is clear that incorporating audit quality in the auditing exercise requires that the auditor possess a mind-set with difficult 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 help them make decisions on the rising issues. The auditing profession and the audit firms should be made to understand the implications of the conclusions they have come up with and also the approach they give to the audit and the implementations of the changes because they are very critical in responding to the identified challenges as this will help to reflect the perspective of the shareholders and the other stakeholders in exercising their professional judgement. Lastly, not only should the conclusions be implemented in any single country, 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. REFERENCES 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 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 Gray, I & Manson, S 2008. The Audit Process. 4th ed. Hampshire, UK: Cengage learning EMEA. Pp. 104-147. 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: Read More