Auditing Profession in Business Environment - Essay Example

Auditing Profession in Business Environment Overview In accounting, an auditor is a person making an independent report to the members of a company as if its financial statements are properly prepared according to the requirements of the Company Act. Role of an auditor The main purpose of an auditor in to verify and review financial statements of a company as well as to give a decision about those financial statements. An auditor also reviews the systems and controls, the accounting records and then gives his comments on all the marked weaknesses in their audit report. This urges the top level of the business to strengthen their operations. An auditor also plays the role of giving statistical analysis on the effectiveness and clarity of the accounting policies of the company. True and Fair View Sometimes it may appear to be a little uncomfortable when an independent expert pores over your figures but in return, the surety that the financial statements are true and fair.  True and fair view means that the financial statements represent the financial position and performance of the entity faithfully and that the financial statements are absolutely free from material misstatements (Evans 2003). The expression “true and fair view” is not defined strictly in the accounting literature; but we can derive, as to its meaning, the following general conclusions: The word True implies that the financial statements maintained are factually correct and prepared in accordance with applicable reporting framework for example the IFRS and they do not have any material misstatements that can result in misleading the users. Misstatements may be a result of omissions of transactions & balances or material errors occurring in the financial statements. While, Fair means that the information provided in the financial statements is faithful and without any element of objectivity and they depict the economic substance of transactions rather than their legal form only. Importance of true and fair view True and fair presentation of financial statements is worldwide recognized responsibility of the directors of companies according to the corporate law of many countries for instance in the Companies Act 2006 of UK. Therefore, at the time of giving an audit opinion, the auditors must keep in mind whether such responsibility has been fulfilled by the directors. An express statement, to be given by the auditors, of the true and fair view of the financial position and performance of the entity is required by the Company law of certain areas. Professional requirements of an auditor Audit professionals should have significant knowledge regarding current developments in audit of historical financial information in order to respond properly to issues occurring in the business environment. It is, therefore, important that continuing development programs and education for audit professionals should include coverage of relevant developments and current issues. An auditor is required to apply his professional skepticism while performing an audit. Professional skepticism requires an auditor to be alert to some factors, for example: Information that helps bringing into question the reliability of responses to inquiries and documents to be used as audit evidence. Audit evidence contradicting other audit evidences obtained. Circumstances suggesting the need for audit procedures in addition to those required by the ISAs. Conditions that are expected to indicate a possible fraud (Mock & Turner 2005). Professional judgment is also very important to have a proper audit. This is for the reason that the informed decisions required throughout the audit and interpretation of relevant ISAs and ethical requirements cannot be made without applying relevant experience and knowledge to the circumstances and facts. Professional accountants are also required to have relevant and complete practical experience before adopting the role of an audit professional. This period is required to be intensive and long enough to allow them to demonstrate that the necessary professional knowledge; professional ethics, values attitudes and professional skills have been acquired by them. A significant proportion of the duration of the practical experience should be spent in the field of audit of historical financial information. It is highly recommended that the required experience of audit is obtained from an organization that is able to provide the required audit experience under an engagement partner’s guidance. Legal Requirements of an auditor Side by side with professional requirements, an auditor also has certain legal requirements which he must comply with. The first and most important challenge and responsibility of an auditor is to assure that no fraud is committed in the financial statements. It does not mean that an auditor has to perform the audit with an investigation mind set. He only has to apply performance procedures and professional skepticism mentioned in the auditing standards. An auditor can even be accused if a set of financial statements contain a fraud and he signs the same without taking any steps to make the financial statements seem true and fair. This is very important from an auditor’s perspective to detect and point out a fraud to make it easier for the users of financial statements in making right decisions (Beasley & Carcello 2008) Another legal requirement for an auditor is to be careful in giving any qualified opinion in respect of an entity. This may result in a civil wrong and the entity, in return, may proceed to the courts against the auditor. Hence, it is extremely important for an auditor to be very sure about his opinions regarding the audited accounts. Importance of Audit For most of the organizations (such as larger charities, companies and clubs) publishing of an audited financial report once a year is their legal responsibility (Whittington & Pany 2006). But majority of experts are of the view that the real importance of the audit procedures goes far beyond ‘ticking a box’. Having unbiased and independent auditors confirms that claims of an organization regarding its financial position, and all the procedures behind these claim, are mostly true and fair. It is very important for numerous reasons, depending on the others’ point of view.  For example: Shareholders and investors:  These people are the owners of the organization but will not be involved closely in its routine running in many cases.  So an independent audit will surely be very interesting to them, as it would provide them a trusted second opinion on the financial statements of the organization and gives, in turn, a view of as to how well the entity is being run. Finance Directors or Company accountants: They are essentially in charge for the finances of the organization to be audited and, mostly, going through an audit is about peace of mind and confidence for them. Further, these days, most audits will have a look at the finances as well as ‘internal control systems’.  Usually, these systems are well established by the specific design of computer systems and, for example, ensure that clear policies and rules control the authorization of transactions. Finally, many finance directors and company accountants also appreciate working close to auditors, believing they are able to help solve complex problems regarding accounting, offer a world class and a very professional advice on problems ranging from business processes to governance and keep them updated with the latest rules, regulations and techniques. Financial analysts:  What is the worth and the value as a whole of an organization’s shares is determined by these people.  They determine this by analyzing and commenting independently on its financial position and also predicting about its success in future.  Audited accounts are an important tool for financial analysts because they provide independently checked and unbiased information on which the work is to be based. Regulators:  The regulators are independent organizations that oversee a variety of industries in order to ensure that individual firms are operating legally and fairly.  They use audited accounts as a part of each firm’s ongoing monitoring or helping with more specific investigations. Other stakeholders: The results of an audit process, depending on the organization of which the audit is carried out, may be truly interesting to other stakeholders, for instance journalists, politicians and the general public (Brennan 2006). The benefits and limitations of audit5 Public companies are compulsorily required to have statutory audit of financial statements. Following are some the advantages of performing financial statements audit: Government authorities like Central banks and Tax authorities accept audited accounts with good confidence. Auditing the accounts detects the frauds and errors in them. These audited accounts further provide guidelines on keeping such errors or misstatements from recurring in the following years. Audited accounts are given priority and have greater authority compared to the unaudited accounts. These accounts have more reliability and carry more trust of the users. Audited accounts relating to previous years are evaluated in order to determine the repayment capability in case the entity desires to access finance from financial institutions such as Banks. Carrying regular audits of accounts result in a fear among employees of the accounts department and helps exercise a sufficient moral influence on the client’s staff to preventing them from committing errors and frauds. Audited accounts provide ease to settle claims in case of retirement or death of a partner. In case of loss of property on the occurring of the event against which the property is insured, audited accounts facilitate early and easy settlement of the claims with the insurance company. Audited accounts are treated to be the basis for determination of the value of the business in case the business is to be sold or purchased. Accounts audited by a qualified auditor helps the management in understanding the financial conditions of the business and also helps to decide on various matters such as setting up an internal audit department or report into the internal control system of the organization etc. Disputes, on payment of higher wages and bonus, between the labor unions and management can be resolved amicably if the accounts are audited by any independent auditor. In case a new partner is admitted into the business, the audited accounts will help a lot in negotiating the terms and conditions with the joining partner. A general idea regarding the financial position and growth of the business will be taken by the new partner by having a look at the audited accounts of last 3 years. Limitations Audits do not assure the future viability of the organization that is audited. In addition, the efficiency and effectiveness of management is not assured by an audit. Furthermore, the auditor cannot and is not expected to reduce an audit risk to null and therefore cannot perfectly assure that the financial statements are completely free from any sort of material misstatement due to an error or fraud. The reason is that there are some inherent limitations of an audit resulting in most of the audit evidences, on which the auditor bases and concludes his opinion to be, to being persuasive instead of being conclusive. These inherent limitations are as follows: Nature of the financial reporting. Need for an audit to be conducted within reasonable time and cost constraints. Nature of the audit procedures (Bazerman, Morgan & Loewenstein 1997). References Evans, L. (2003). The true and fair view and the ‘fair presentation’override of IAS 1. Accounting and Business Research,33(4), 311-325. Mock, T. J., & Turner, J. L. (2005). Auditor identification of fraud risk factors and their impact on audit programs. International Journal of Auditing, 9(1), 59-77. Beasley, Mark S., & Carcello, Joseph V. (2008). GAAS Guide 2009: A Comprehensive Restatement of Standards for Auditing, Attestation, Compilation, and Review. Chicago, IL: CCH Inc. Whittington, R., & Pany, K. (2006). Principles of auditing and other assurance services. Boston, MA: McGraw-Hill/Irwin. Brennan, N. (2006). Boards of directors and firm performance: is there an expectations gap?. Corporate Governance: An International Review,14(6), 577-593. Bazerman, M. H., Morgan, K. P., & Loewenstein, G. F. (1997). The impossibility of auditor independence. Sloan Management Review, 88. Read More