The Main Drivers of Audit Quality - Assignment Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Title : Audit quality Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2011 Question 1 Audit quality is a process that entails conveying independent and appropriate professional view points on financial statements that are to be backed by objective judgements and necessary evidence. This is attained by acting in accordance with audit and ethical requirements in order to enhance objectivity, integrity and professional competence when preparing financial statements (Bank for International Settlements, 2008). Question 2 The main drivers of audit quality The UKFRC came up with five drivers of audit quality which were also endorsed by the International Forum of Independent Audit Regulators (IFIAR), as drivers of audit quality that can be used within the international context (The Treasury, 2010). One of the drivers of audit quality is that of the internal culture within an audit firm. According to Financial Reporting Council (2008) the internal culture enhances audit quality by ensuring that audit quality is monitored across and within firms in order to encourage personal attributes that are necessary for audit quality. Also the internal culture can facilitate the development of audit quality through giving support to partners as they exercise their personal judgment. In addition the internal culture can assist in creating an environment where achieving high quality is the first priority (Financial Reporting Council, 2008). The Australian Treasury holds the view that audit firms in the country usually perceive their internal culture as seriously essential in enhancing audit quality. The Treasury report (2010) further reveals that within the framework of the Australian regulation, there is basically a strong drive to develop a culture of excellence in terms of audit quality. Treasury report (2010) highlights that, another way of enhancing a culture of excellence in audit quality is by getting the framework of Australian audit regulation to be in line with those of corresponding developments of regions such as UK, the EU and the US. This entails initiating discussions with various stakeholders about whether they view the Corporations Act as being valuable or whether it should be amended to allow firms to publish their annual transparency reports on their websites, as it occurs in the Statutory Audit Directive and the Quality Control Reports (QCRs) of EU countries. The publication of such reports will facilitate bridging of the expectation gaps of audits. Credible evidence has been presented to support the fact that Australian audit firms view their internal culture as an essential factor in developing audit quality. This perspective is supported by ongoing initiatives such as the audit inspection program, emphasis on professional judgment, the ongoing inspection program for auditors, the ending of the FRC’s Banarra report and the observations of the AQRB. Another driver of quality audit is the personal qualities and skills of audit staff and partners. According to the Treasury report (2010), stokeholds should acknowledge that personal qualities and skills of audit staff and partners are essential factors in enhancing audit quality. This is due to the fact that auditing can be described as a service that is knowledge based whereby the primary input is the expertise or skills of the staff and individual auditors. Treasury therefore proposes that it is essential to develop the expertise or skills of the staff. In addition audit firms should also consider retention, support and attraction of the staff. Financial Reporting Council (2008) proposes that it is also essential for the staff to understand the businesses of their clients and also they should strive to enhance audit quality. Audit process effectiveness is another essential driver of audit quality. The effectiveness of the audit process involves a fair and true view of financial reporting (Leung et al, 2011). This involves compliance to accounting standards as highlighted by the Corporations Act. Treasury also perceives effectiveness of the audit process in terms of adopting of professional judgment by auditors as opposed to utilizing the tick-a-box’ approach as propagated by the framework of Austrian audit regulation. Effectiveness of the audit process is also facilitated by promoting consistency of audit quality with international requirements. Treasury recommends that consistency with international standards can be met through international Forums such as the (IFIAR) International Forum of Independent Audit Regulators (Treasury report, 2010). Another driver of audit quality is the reliability and usefulness of audit reporting. Audit reporting is expected to produce effective communication to the audit committee. As a results audit reporting should lead to creation of audit quality by ensuring auditors report what is fair and true as required by the applicable regulations and laws. In addition audit reports are supposed to be conveyed clearly and in a manner that can advance financial reporting (Financial Reporting Council, 2008). Factors outside auditors control also affect audit quality. There are factors outside the control auditors that bring about positive implications on audit quality. According to the Financial Reporting Council, (2008) audit regulatory environment is one of the factors outside the auditor’s control that brings about positive implication on audit quality. This environment should ensure that appropriate agreements are met. In addition the reporting deadlines should be flexible enough to effective execution of audit financial statements. In addition shareholders should give support orders in situations that are appropriate. Question 3 Co-regulatory framework for ensuring audit quality in Australia The audit regulation framework is an essential driver to audit quality. Australia adopted various regulatory frameworks in order to enhance audit quality. One of the co- regulatory frameworks adopted is that of Auditor independence under the Corporate Act. Auditor independence is an important factor in the context of enhancing audit quality due to the fact that the lack of independence weakens the ability of an auditor to make judgements that are objective that can result to the creation of confidence is the audit process. The provision or regulation on auditor independence is contained in Corporate Act Division 3 of Part 2M.4 (Treasury report, 2010). The regulatory framework of auditor independence as highlighted by the Corporate Act entails; A general obligation for auditor independence, A specific obligation requirement which entails restrictions of broad range of financial and employment relationship between the auditor and individuals connected to the audit client and the auditor. The broader requirement of auditor independence applies to service arrangements that are non- audited. This involves services undertaken between the audit client and the audit firm. This provision gives power to the ASIC to object a particular no- audit service agreement that is perceived to create an objective or subjective threat to the independence of the audit process. The Australian quality control standard is another co-regulatory framework for ensuring audit quality in Australia. The (AUASB) Auditing and Assurance Standards Board was instituted by the CLERP 9 Act to work as a statutory body that is independent under subdivision 227A of the 2001 Australian Securities and Investments Commission Act (Treasury report, 2010). The role of the Auditing and Assurance Standards Board is to advance the growth of a single framework of auditing standards that can be used across the globe. Where possible, the AUASB has adopted international auditing standards in order to enhance conformity with the international auditing standards. In addition the board devised the ASA Australian Standards on Accounting which institutes mandatory requirements and gives explanatory guidance on the precise responsibilities of personal concerning quality control procedures that are to be used in financial reporting. Australia’s audit regulation framework and market behaviour is another co-regulatory aspect. This resulted to developing amendments on the corporate legislation through the Corporations Legislation Amendment Act in 2007. The regulation was meant to develop a positive transformative impact on the market behaviour in the audit field. Treasury report, (2010) acknowledges the fact that audit requirements and financial reports usually apply in the dynamic market environment as a result it essential from time to time to keep reforming the available regulations in order to keep abreast the changing market developments and legislative frameworks in jurisdictions oversees. As a result a change made on the current regulatory framework is basically a way of enhancing quality audit. Mutual recognition of the Australian audit regulation frameworks and those that exist oversees is another co-regulatory framework for ensuring audit quality in Australia. Close international cooperation between oversees regulators and ASIC is directed towards the national interests of the country due to the fact that there is increased globalization in the capital markets. The interaction creates mutual agreements which further results to improving audit quality in Australia (Treasury report, 2010). Responding to the global financial crisis is another emerging issue that has pushed regulatory agencies, Australian government and auditing standard setters to develop action plans in order to deal with the challenges arising from the crisis. Responding to the financial downturn has therefore become a co-regulatory framework for enhancing audit quality in Australia. Question 4 One of the similarities raised by the both the Audit Inspection Program Public Report for 2009-2010, and the ICAA Annual Report on the Quality Review Program for the Year Ended 30th June 2010 ,is based on the aspect of improving audit quality in Australia. Both reports noted that the economic downturn brought about various challenges in auditing practices. As a result both reports proposed the need to design effective mechanisms of improving audit quality in order to overcome the challenges brought about by the financial crisis. For instance, the Audit Inspection Program Public Report (2009-2010), proposed that in response to the global financial crisis and as part an ongoing review of the program, there was a need to raise the amount of audit arrangements files chosen for reviewing. In addition a risk based criteria was to be utilized in selecting audit areas for review and engagement files for firms(Australian Securities and Investments Commission ,2011) .The Annual Report on the Quality Review Program (2010) on the other hand propagated taking advantage of Australia’s unique position in order to overcome the economic crisis when relatively unscathed. The institute therefore designed various programs to deal with the crisis. This includes extensive training for auditors, provision of guidance and tools to the committees and increasing interaction with auditors from external environments (Institute of Chartered Accountants in Australia, 2010). Another similarity in the issues raised by the two reports is that both reports highlighted some of the potential deficiencies or deficiencies that exist in the procedures, policies and practices adopted by certain audit firms which do not facilitate quality audit. The Audit Inspection Program Public Report (2009-2010) raised issues of deficiencies such as situations whereby auditors use highly subjective and judgmental balances in order to attain audit evidence that substantiates as opposed to challenging the judgment of the clients. Another deficiency raised by the report is an attitude of professional skepticism which has arisen when undertaking quality audit (Australian Securities and Investments Commission, 2011). The Quality Review Program (2010) on the other hand identified deficiencies such as departure from upholding professional standards and also trends of non compliance quality audit requirements (Institute of Chartered Accountants in Australia, 2010). The difference in the issues raised by the reports is based on the fact that the Inspection Program Public Report for (2009-2010) focused more on compliance to the requirements of reporting disclosure and auditing standards. The report recommended compliance to the requirements raised by the Corporations Act, as they are supposed to be met by auditors from all registered companies. In addition the report proposed that there should be adequacy in the meeting of timelines by auditors as specified by the section 311 of the Corporations Act (Australian Securities and Investments Commission, 2011) . The Annual Report on the Quality Review Program (2010) on the other hand did not focus on compliance but rather on reviews. The report proposed number of reviews to be undertaken by the auditing practice. The areas highlighted for review include ethical requirements, monitoring, engagement performance, leadership responsibility for quality and human resource (Institute of Chartered Accountants in Australia, 2010). Question 5 The main requirements of the Auditing Standards and Ethical Statements that relate to audit quality include; Audit documentation under the Australian Auditing Standards (ASA 2300) is one of the requirements of auditing standards. This particular standard requires that an auditor should put in order audit documentation that provide suitable and sufficient record based on the auditors report (Institute of Chartered Accountants in Australia, 2010). The audit evidence under the ASA 500 is another key standard. The standard requires that an auditor should acquire adequate evidence on which the opinions made can be based on. Auditor responsibility in terms of putting into consideration fraud in financial audit reports is another essential standard stated in ASA 240. This requires that the auditor should asses and identify the risk of misstatement on the basis of fraud that may occur at the financial and assertion report levels. Also the auditor should design and evaluate controls that are entry related in order to evaluate whether they can be implemented. Furthermore the standard requires that audit procedures are performed and designed in a manner that enhances risk management (Institute of Chartered Accountants in Australia, 2010). The going concern as highlighted by ASA 570 is another key standard. This requires that the auditor should analyze the ability of the entry to proceed as a going concern. Quality control of firms is another essential standard stated on APES 320. The standard requires that a structure of quality control is established in order to offer a reasonable assurance that the staff and the practice complies with regulatory, professional and legal requirements. The analytic procedures, as highlighted by ASA 520, recommends that analytic procedures are applied in order provide an understanding of the entry environment and its planning before making any opinion about the financial report (Institute of Chartered Accountants in Australia, 2010). The Subsequent event as highlighted by ASA 520, recommends that an auditor should perform processes that are designed to bring about adequate audit evidence that all events that took place until the date the report may to some extent require disclosure of financial adjustments. Understanding of the audit and its environment outlined by ASA 315 provides recommendation for understanding of misstatement of materials in a financial report audit. The standard requires that the auditor and the engagement team should first of all perform risk assessment in order to fully understand the risk environment. In addition the auditor should also have an understanding of specific items of the entity environment which includes the components of internal controls (Institute of Chartered Accountants in Australia, 2010). References Australian Securities and Investments Commission (2011) Audit Inspection Program Public Report for 2009�10, viewed 01/09/2011 Bank For International Settlements (2008) External Audit Quality and Banking Supervision. Basel, viewed 01/09/2011 www.bis.org/publ/bcbs146.pdf Financial Reporting Council *(2008) The Audit Quality Framework, viewed 01/09/2011 Institute of Chartered Accountants in Australia (2010) Annual Report on the Quality Review Program for the Year Ended 30th June 2010, viewed 01/09/2011, Leung P., Coram p., and Cooper B. (2011) Modern Auditing and Assurance Services 5th ed. Wiley, Milton Qld. pp.131-144. The Treasury (2010) Audit Quality in Australia: A Strategic Review Commonwealth of Read More