Materiality in Auditing - Essay Example

Materiality in Auditing College Materiality in Auditing Introduction The importance of conducting a financial auditis interrogating and reporting on whether various financial statements have been made in accordance with viable financial reporting framework. During the auditing process the auditor is ought to decide the financial statements that should be audited and the level of materiality in reference to quantity and quality of the misstatements that are important in determining material. Materiality will therefore focus on the importance of balances, transactions and errors that may be presented in the financial statements in order to shallow down to truth and fair view of the entity (Bartikowski & Walsh, 2011, pp. 39-44). For effective comprehension of current material audit, it can be necessary to know the importance of materiality in auditing, the possibility of auditors secretly using materiality levels, and the possibility of the latest auditing regulation changing the audit practice in reference to materiality disclosure. The success of many organizations is realized through information that they have about their product, market or other external factors. The globalized economy offers crucial information that has been given by various companies creating an external environment that adopts decisions and all the involved stakeholders elaborate and supervise tasks with the right professionalism interest. Therefore, financial audit seeks to give credible information that is used in the decision-making process to foster efficiency functioning at the operations in the economic and capital market levels. According to Webster, Auditing can be regarded as verification of records and accounts mostly on the financial accounts. The verification can be said to indicate a professional reasoning, which acts as an instrument of achieving certain objectives of a given entity so that we can assess discrepancies identified by a controlling frame that enables the elimination or the reduction of the highlighted discrepancies (Kelly, 2013, pp.5). The various processes of financial audit are developed and governed by legislation of different countries. The collected by auditors becomes very significant especially in erroneous omissions or presentation can influence the users to make economic decisions based on financial statements. An audit plan in such above scenario is necessary to enable detect erroneous presentation that is necessary from the quantitative point of view. Materiality presents the importance of omission or the erroneous presentation of the available accountancy information thus influencing the thinking of reasonable people that matters on information to change. Materiality adopted will capture the value on the report through which omissions, errors or mistakes are pinpointed in the accounts and evaluated individually or cumulatively. Consequently, it paints a true, accurate and complete image of the financial position and the performance entity. The major consumers of the financial audit report are mostly the shareholders. They learn how the business is conducted leading to making of strategic decisions and it is made assessed by financial auditor. In order to understand the level of materiality the financial auditor is needed to know, the target user to address, noting the link between information availed by the user and the process of decision-making and understanding decisions the user can uphold on the bases of financial statements. Information can be reported in three views so as to strengthen performance sustainability, first stakeholder-focused reporting that reports to those they impact on including the staff ,local communities and above all customers on issues that can be related to them. The approach targets to achieve consensus on matters vital to stakeholders and evaluating how effective it can be measured. The second is Investor responsibility-focused reporting that focuses on the reasoning that investors should be committed to wider sustainability together with financial performance. Such kind of a movement could fit in UK Pension Act (2000) that suggests that pension funds should report on their environmental and social policies. Third is the risk-based reporting that handles the interface between investor interests and sustainability reporting because they have an influence on financial performance (Weerawardena &Mort, 2006, pp.21-35). It has been widely accepted that understanding environmental and social performances can assist the investors to predict and thus they are able to manage opportunities and risks. In all the above approaches, they advocate for better sustainability reporting but each has a specific set objective on what to ultimately disclose because secrecy is necessary to retain a successful organization. Two important remarks must be made by the financial auditor regarding the risk and materiality. Giving substantive and not absolute assurance on the certainty of financial statements, including suggestion of a certain risk even in cases the financial auditor does not have reservations. The financial liability is confined to the information evaluated by financial auditor in reference to professional reasoning. Various factors define materiality, first is the relativity of materiality, which can be significant to one entity but insignificant to another. Relativity of materiality puts significance in varied sizes that is applicable to absolute values quantified by the financial statements. Comparison terms can be used in cases that profitability level is not well defined based on other comparison basis such as total assets, turnover, and net assets. With qualitative factors affecting materiality being committing of fraud. Fraud is significant even on an equal value level and insignificant in unintended error. The impacts of having presenting errors with significant value, is that they may be a change in evolution trends even though the level identifies insignificant value. It can be argued that the culture of secrecy creates public distrust among the corporate members. Sharing information breaks the culture of secrecy and enables the rebuilding of essential business and society contract, having trusted information it will gain demand by stakeholders who participate in economic, social and environmental impacts of the business, and by people entitled to ensure better financial performance of the investments(Carucci & Lerro, 2010, pp.3-10 ). However, in some cases disclosure is not feasible because indiscreet open books may be troublesome due to competitive and legal reasons. According to a report compiled by Accountability and CSR Europe’s report, acknowledges the dangers involved in reporting and it becomes costly and tricky box exercise and fails to bring the anticipated environmental, social and economic corporate performance outcome. In fact such developments results to deprive of trust from the stakeholders because they feel that something is being withheld from them. Therefore, some corporate organizations prefer holding some information, which can interpreted to secrecy. It is advocated that public reporting should target information users and help them make logical and consistent decisions that are timely and geared towards taking actions that are relevant to their vested interests at their various capacities as employees, citizen, customer or neighbor. UNEP has been given as an example of their “Trust us” reporting that intended to increase the size of information provided in reporting. However, CSR benchmark survey indicate that despite UNEP being a big company reporting environmental and social issues, neither the general public or campaigners have confidence in business to take care of the planet and its people. Importance of materiality secrecy Secrecy is important in ensuring that corporate remains competitive, safe guarding legal requirements or trying to hide criminal activities within the corporate. Materiality secrecy protects new products that are being developed; trade secrecy laws protect special manufacturing techniques or even the numbers of consumers of a certain brandy. Secret societies are also use secrecy to attract members who feel a sense of importance among the members of the organization. Material secrecy also helps crucial information related to health or even financial reports that are being prepare. Majority of global countries have come up with an expansion of outsourcing government tasks and individual business in order to increase efficiency and effectiveness in the respective countries. Auditing IAASB being a body with an objective of developing auditing and assurance standards has the responsibility to set high-quality auditing and assurance standards that concur with national and international standards. The body ensures uniformity all over the world so as strengthen public confidence all around the global in relation to auditing and assurance professionalism. With the rising challenge of capital markets, financial reporting disclosure of models, alternative statements and assumptions is becoming necessary in order to give useful and credible information. Therefore, the stakeholders are welcome to comment on issues related to financial statements being disclosed. So far, IAASB has been identified questions for regulators, investors, auditors and preparers. Stakeholders are normally encouraged to provided answers to questions they find most appropriate (Frynas, 2009, pp.6-9). Financial reporting presents challenges because both investors and preparers have to support the new disclosures based on important disclosed data centered on the financial statements , auditors determine how underlying concepts and standards of auditing apply to the disclosures of financial statements in their auditing. Auditors ought to address disclosures in order to plan and perform the audit (Steele, 2014, pp.23). To improve the need for disclosure of information IAASB has given a discussion paper has been exploring a wide range of perspectives and views related approaches of disclosures and auditors. DP focuses on disclosures needed by financial reporting framework during financial statements. ISAs being neutral in relation to financial reporting frameworks, DP is prepared in regard to disclosures required by International Financial Reporting Standards (IFRSs) which issued by (IASB) to act as the frame of reference. To increase the complexity and length of financial statements disclosures of the accounting policies it involves the breakdown of items into small categories that in order to facilitate the user of the financial statements to understand the movements in the balance sheet items. A notable disclosure was that majority derived from accounting systems and few auditing challenges were presented(Parker,2004,pp.12) .Auditors were able to address the issue of financial statements being misstated because of the disclosure through audit work and the most outstanding disclosure was related to numbers in the financial statements In a bid to counter complexity in financial reporting, financial statements should include traditional disclosure .IAASB for the necessity of DP the following forms of disclosures under contemporary financial statements such as component of line items that are broken down into lesser categories and movement analyses of the item can be achieved. Entities information such names of group entities, creation of share capital payments that are dividend. Reasons and judgments – judgments have to be made on the application of accounting policies and reasons for decisions and reasons have to be made. Assumptions /inputs/models – will entail the disclosure of information of material that is necessary during the calculation of items such as the discount rates, possible ranges of values, growth rates and effective interest rates. Descriptions of internal processes will revolve around the disclosure of processes and procedures involved in the management of financial instrument risks. The disclosure of the fair value of the amount recorded on the balance sheet while using different measurement parameter such as the historical cost like the disclose of fair value on the reclassified financial assets. Sources of estimation disclosures- these disclosures gives the user an incite of the measurement variability of an item found on the financial statements. The major challenge with disclosure has been to develop disclosures framework. Such a framework could have made it possible to come up with standard setters for logical consistency and balanced disclosure requirements. Royal Dutch shell was created by merging of the UK-based Shell Transport and trading together with Royal Dutch petroleum. The company is ranked the second largest company in the world concerning revenue and being among the six gases and oil “super majors.” According to 2013 data, the largest investor was Capital Research Global Investors having 9.85% shares. The second is Blackrock with 6.89% .Surprisingly Shell was equal to 84% of the Netherlands’s GDP of $555.8 billion. Royal Dutch shell is active in every sector of oil and gas industry including, production and exploration, refining, marketing and distribution, petrochemicals, trading and power generation. In the 90 countries, they have operations about 3.1 million barrels of oil is produced daily. Royal Dutch Shell Company The Royal Dutch shell’s form of ownership is by virtue of ease formation and the details of ownership are not disclosed. This form of ownership has its advantages and disadvantages; the first advantage is that the owners of the corporations, Limited Liability Company incur limited liabilities. The Meaning of this that, the owner of the company is not liable to lawsuits brought against the company. However, some people see this as a disadvantage because these can be translated to lack of transparency in regard to beneficial ownership. Another disadvantage could be that billions of dollars are wired through domestic shell companies without scrutiny and the money can be used to finance terror activities and facilitating money laundering. Conclusion In conclusion, Materiality of any given organization or a corporate is important because it was has made the business stand and has its own unique identity that characterizes the business. However, it necessary uses information responsibly to avoid fraud and money laundering being wired through the company due to lack of accountability and transparency. References Bartikowski, B. and Walsh, G. (2011). Investigating mediators between corporate reputation and customer citizenship behaviors. Journal of Business Research, 64(1), pp.39-44. Carlucci, D. and Lerro, A. (2010). Foreword: investigating the role of intellectual capital in todays business landscape. Measuring Business Excellence, 14(4), pp.3-10. Frynas, J. (2009). Beyond corporate social responsibility. Cambridge: Cambridge University Press. Kelly, D. (2013). Death, taxes, and a skinny no-whip latte. New York: St. Martins Press. Parker, R. (2004). Bad business. Waterville, Me.: Thorndike Press. Steele, J. (2014). Warren buffett. [S.l.]: HarperCollins e-Books. Weerawardena, J. and Mort, G. (2006). Investigating social entrepreneurship: A multidimensional model. Journal of World Business, 41(1), pp.21-35. Read More