Importance Of The Overall Audit Industry - Research Paper Example

Importance Of The Overall Audit Industry Introduction Audit is the process of systematically examining and conforming to the books of accounts maintained in a business. Audits are conducted by both the internal and external entities of a company. The process is used for verifying the results as shown by the financial statements of a company like the profit and loss statements and the balance sheet. Audit can also be defined as the critical and scientific review of the accounting systems and internal control system employed by an organization in their business and corporate processes to achieve sustainability, compliance and conformance. Audits are generally done with the help of documents, vouchers, explanations and information received from the internal entities of a company and through the use of the external standards and guidelines set up by the authoritative and regulatory bodies in the accounting and auditing industry. The objective of audit started with the conformance of the daily accounts of a company. However, today this process has assumed a much magnified and crucial role with its objective shifting from the general assertion of accounts to the detection of frauds and errors, compliance with legal requirements as well as to attain other business and corporate goals like risk minimization, quality maintenance, cost minimization and control, benefit maximization, achievement of sustainability through financial and operational compliance etc. This research paper aims at discussing the different dimensions of auditing processes in big and small firms across the globe, with extensive focus given on the large companies. The different dimensions and features of auditing processes and the overall audit industry are studied through an analysis and discussion of the requirements of internal and external auditing processes, the types of audits, the existing and emerging trends of audit, the costs and benefits of auditing activities and the impact of the federal laws like the Sarbanes Oxley Act on the rules and procedures of audit on a global platform. Background and scope Audit is a much significant concept in the global business world. The necessity of controlling fraudulent practices by different small and big companies is one critical factor which has highlighted the importance of audit in the last few decades. Also, the multiple number of accounting and auditing scandals like that of Enron Scandal (2001), WorldCom Scandal (2002), HealthSouth Scandal (2003), American Insurance Group Scandal (2005), Lehman Brothers Scandal (2008) which led to the Great Financial Recession (GFC) of 2008, Bernie Madoff Scandal (2008), Satyam Scandal (2009) etc. have made it clear that the need for maintaining appropriate accounting standards and ensuring that the companies comply to these standards is high. Also, these practices are extremely necessary to set up a transparent and justly functioning global business environment. Therefore, this domain of study is extremely relevant for the conducting a research work. There are varied aspects involved in the audit systems and also, many new trends and requirements have emerged in this industry which makes the scope of studying these aspects more relevant. In overall, this research paper is expected to be in line with the existing literatures prepared and presented in this domain and also pave the way for future research works in the similar line of subject. Research objective Both the primary and secondary research objectives are formulated for this study. The research objectives are designed in a suitable manner so that they are simple and yet cover all the dimensions included in this research. The research is then conducted according to the main requirements of achieving the research objectives. The primary research objective for the research is given below: To study, discuss and evaluate the auditing systems and processes in large companies. The secondary research objectives formulated for the study are given as follows: To discuss the importance of audit processes. To discuss the types of auditing used in the practical world. To disuses the costs and benefits of the audit process in the modern business worldly. To identify and explain the emerging trends and patterns in the audit industry. To focus on the role of Sarbanes Oxley Act on the audit activities of different companies. Research hypothesis The research involves the selection of a null hypothesis and an alternative hypothesis. The null hypothesis that is taken up is that the actual benefits gained by companies from auditing are higher that the audit costs incurred by the companies. The alterative hypothesis is that the audit costs incurred by companies are more than the actual benefits derived from the auditing processes. H0- Actual benefits from audit > costs incurred in audit. H1- Actual benefits from audit < costs incurred in audit. Literature Review Audit can be defined as the process of independent and systematic examination of data, records, statements, performances, and operations of a company for any stated purpose. These data, statements and performances may be measured on financial and non financial terms to evaluate the level of compliance and effectiveness of a company in functioning according to the legal and other requirements of the industry or the nation in which it is conducting the business. As per the work of Cahan and Zhang (2006), in auditing processes, the auditor studies and evaluates the propositions that are placed in front of him for the examination, collection and evaluation of evidences and presentation of judgments on the basis of these evaluations (Cahan and Zhang, 2006, pp.49-82). These judgments of the internal and external auditors are then communicated to the stakeholder groups and authorities through the pretention of an audit report. Khurana and Raman (2008) have discussed in their work that the process of audit is not limited to financial audit (Khurana and Raman, 2008, pp.115-140). There are few other necessary types of audit which are risk audits, operational audits, internal control audit, environmental management audit etc. Other common types of audit that have emerged with the new trends in the industries are department reviews, information system audits, integrated audits, investigative audits and follow up audits. All these types of audits have emerged as important corporate activities due to the shifting requirements and expectations of the global stakeholder groups of different companies and industries. As per the arguments presented by Knechel and Vanstraelen (2007), the auditing processes not only help to ensure transparency and authenticity in their financial and non financial reporting processes but these are also useful in improving the effectiveness of various other corporate and business processes like risk management, corporate governance, operational processes, project management, internal controls and quality management (Knechel and Vanstraelen, 2007, p.113). The costs of audit are mainly related to the maintenance and management of audit data. The storage and access of data for audit purposes in big companies incur high amounts of expenditure. Other than these, the cost of processing these data is also a significant audit cost incurred by companies. As per the work of Carcello and Nagy (2004), the cost of storage of audit data is the highest cost of auditing. The amount of data that is stored and retrieved for auditing depends on ancillary factors like the number of machines used, the number of user of these data, the degree and frequency of use of these data and the necessary degree of security in storing these data (Carcello and Nagy, 2004, pp.55-69). The Sarbanes Oxley Act (SOX) was established in 2002 as a way of controlling the fraudulent practices in accounting and auditing. This Act is also known as the Public Company Accounting Reform and Investors Protection Act and is one of the most effective federal laws of the United States of America. This Act was formulated and implemented in 2002 following the gigantic auditing and accounting scandal of Enron Corporation in the year 2001. Since then the Sarbanes Oxley Act (SOX) has acted as an important law that has set enhanced standards for auditing and porting for all the publicly managed accounting firms, boards and management functioning in the United States of America. As per the work of Blouin, Grein and Rountree (2007), the Mandatory Audit Firm Rotation (MAFR) has emerged as one of the most striking trends in the audit industry in the recent years (Blouin, Grein and Rountree, 2007, pp.621-650). The Mandatory Audit Firm Rotation (MAFR) has been taken up as a standard audit procedure in many nations across the globe as a way to reduce the chances of fraudulent auditing and reporting. According to this new system of audit every company will have to obligatory change the external audit company after a period of five years. This is expected to ensure transparency, unbiased opinion, auditor’s independence and subsequently the improvement of audit quality (Blouin, Grein and Rountree, 2007, pp.621-650). Other than this, trends of implementing automation, increased use of information technology, implementation of globally accepted standards and procedures, auditor independence and using audit as a way of reducing risk and increasing operational effectiveness are other emerging trends seen in the global industries. Research methodology The research methodology is the process by which data for the research are collected, analyzed and interpreted. This research involves the use of both the qualitative and quantitative research designs. The use of qualitative and quantitative data and methodologies are done because this enables the researcher to take up a holistic view of the whole domain of study. Apart from that the consideration of the quantifiable as well as the non quantifiable data ensures that all the measurable and non measurable aspects of the audit processes are adequately considered in the research work. The qualitative research design is also used with the aim of creating an exploratory view for the whole research. The research involves the collection of both primary and secondary data. The primary data is collected through the implementation of the focus group study. In the focus group study, a group of 10 people from different audit roles are selected and interviewed in order to document and analyze their beliefs, attitudes, opinions and suggestions regarding audits. The focus group study is conducted by the interviewer who is the researcher himself and a well trained moderator whose function is to steer the discussions and flow of the focus group study in the desired direction. The secondary data is collected from relevant academic sources like company reports, audit publications, government reports, articles, journals, newspapers, audit reports, audit guidelines, academic books, other research works etc. The sources of secondary data are selected carefully so that the collected data for the research are valid, authentic and relevant for the study. Findings and Analysis Both the primary and secondary data collected from the data collection methodologies are suitably interpreted and analyzed by different statistical and non statistical data analysis methods so that the research objectives are appropriately met with. The analysis of the collected data indicates the role and dimensions of audit processes have become starkly different from what they used to be a decade earlier. It is found that the financial sustainability issues have made the organizations of all scales and industries to sit up and notice the growing importance of ensuring adequate and complaint audit practices in the businesses. Also, the different regulatory authorities in the auditing industry have been striving to devise and implant new standards and Acts like the Sarbanes Oxley Act etc. to ensure better compliance and effectiveness of audit processes in companies across the globe (Raghunandan, Dasaratha and Read, 2001, pp.105-118). The results of audit are expected to add value to the stakeholder groups and help to create a transparent, ethical and responsible image for the companies among the stakeholder groups (Douglas, Prawitt, Smith and Wood, 2009, pp.1255-1280). The auditing processes have multiple benefits for the companies. It can also be identified from the analysis that the financial and operational costs associated with audits are increasing on a continuous basis. This is because; auditing has become a mandatory function for survival and success in the continuously and dynamically evolving global landscape of businesses. As per the analysis, it can be established that though the costs of audit are high, yet every company functioning in the current corporate environment has to invest sufficiently in the internal and external audit activities because they are not only necessary for compliance but are also essential for continued existence and success. The audit processes are also essential for stakeholder value creation in any company, irrespective of the industry to which it belongs. It is found that the Sarbanes Oxley Act has brought about the first major shift in the mandates regarding the audits of public companies. Following the introduction of this Act, The assessment of internal audit controls has emerged as a necessary step in the mechanism of assuring that the future systems audit need to be more technology based, outsourced and automated. The findings from the research also suggest that the audit field is facing the urgent need of implementing more computerized systems so as to ensure higher reliability and accuracy (Spira and Page, 2003, pp.640-661). The audit engagements, if based on computerized, automated and technology based platforms are likely to be more effective in reducing fraudulent practices and ensuring accuracy. Conclusion Audits are thus identified to be one of the most significant corporate activities. It can be said that auditing has improved to a higher extent in the recent times, but the techniques of audit need to be improved more in order to keep pace with the real time economic systems. The approaches of auditing that were effective in the past have now started to fade and need to be replaced by newer techniques and methods that would help to establish sustainability, transparency and compliance at all levels of a business. Major adjustments may be required to be made in the auditing processes in the future years as well. These adjustments should encompass new techniques, systems and automated processes. The future audit adjustments should include the considering of making suitable changes in the frequency and timings of audits, higher implementation of analytics and technology in the audit processes, mandating the established provisions regarding accounting policies, re examination and review of audit concepts like auditor independence, audit information quality and materiality and adoption of all inclusive examination in the audit processes. References Blouin, J., Grein, B. & Rountree, B. (2007). An Analysis of forced auditor change. The Accounting Review. Vol. 82(1), pp. 621-650. Cahan, S. F. & Zhang, W. (2006). After Enron: Auditor conservatism and ex-Andersen clients. The Accounting Review. Vol. 81(1), pp. 49-82. Carcello, J. V. & Nagy, A. L. (2004). Audit firm tenure and fraudulent financial reporting. Auditing: A Journal of Practice & Theory. Vol.23 (1), pp. 55-69. Douglas F., Prawitt, J. L., Smith, A. & Wood, D. A. (2009). Internal Audit Quality and Earnings Management. The Accounting Review, Vol. 84(4), pp. 1255-1280. Khurana, I. & Raman, K. K. (2008). Audit firm tenure and the equity risk premium. Journal of Accounting Auditing and Finance. Vol. 23(1), pp. 115-140. Knechel, W. R. & Vanstraelen, A. (2007). The Relationship between Auditor Tenure and Audit Quality Implied by Going Concern Opinions. Auditing: A Journal of Practice and Theory. Vol. 26(1), p. 113. Raghunandan, K., Dasaratha, V. & Read, W. J. (2001). Audit Committee Composition, Gray Directors, and Interaction with Internal Auditing. Accounting Horizons, Vol. 15(2), pp. 105-118. Spira, L. F. & Page, L. (2003). Risk management: The reinvention of internal control and the changing role of internal audit, Accounting, Auditing & Accountability Journal, Vol. 16 (4), pp.640 – 661. Read More