Assessing Audit Quality - Essay Example

Name: .......................................................................................................xxxxx Institution: .............................................................................................xxxxx Title: ................................................................... Assessing Audit quality Course: ..................................................................................................xxxxx Tutor: ...................................................................................................xxxxx @2012 Assessing Audit quality Introduction Audit quality is about the preparation and delivery of quality financial statements which will reflect the effectiveness of the internal controls. In this report, a methodology will be adopted in order to identify the key drivers of audit quality in Australia and to access whether any measures should be taken to address any threats to these drivers of audit quality. From the 2010 paper entitled Audit quality in Australia a strategic review, audit quality is said to be a wide range of inter-related factors (The Treasury 2010). The quality of audit is therefore heavily dependent on these factors; otherwise if an auditor faces pressures from these factors, the audit quality will be compromised. Quality audits and those which are carried out in accordance to the auditing and ethics standards board are very helpful as they help in boosting the confidence of the market. Legal framework The audit quality framework is designed with the aim of supporting the effective communication between audit committees, investors, prepares, auditors and other stakeholders. The frame work has regulations which guides and promotes audit quality (Cooper et.al 2011). The framework is guided by the following drivers: The culture within the audit firm Skills and qualities of the staff and audit partners The effectiveness of the process of auditing Usefulness and reliability of the audit reporting Any factor outside the control of auditors affecting audit quality Culture within the firm Culture within the audit firm may provide positive contribution to audit quality (Louwers et.al, 2007). The culture provides an environment where the achievement of high quality is highly valued. Treasury provides evidence that Australian audit firms regard their internal culture as critically important in relation to audit quality. The culture emphasizes on doing the right thing as that would affect the reputation of the affected firm. The drivers ensure that staff and partners have the required resources and time to deal with difficult issues whenever they arise (Cooper et.al 2011). The culture within the organization also ensures the monitoring of the audit quality together with taking the appropriate actions. For example, Australian Securities and Investment Commission (ASIC), the files to be audited are based on whether the client industry identifies itself with the activities and culture of the commission. Treasury acknowledges the concerns raised that a more a more compliance based approach to auditing may affect audit quality, it considers that within the Australian audit regulation framework, there are strong incentives to ensure that audit firms strive for a culture of excellence in relation to audit quality (The Treasury 2010). Skills and qualities of staff and audit partners The personal qualities and skills of the staff and the audit partners determine the quality of audit evidence (Louwers et.al, 2007). These qualities contribute positively to the quality of audit evidence if only they can understand to the client’s principle and underlying auditing and ethical standards. With the required level of skills, this means that the auditor has sufficient training in audit, accounting and industry specialist issues. Treasury is has the view that stakeholders in Australia agree that the skills and personal qualities of audit partners and staff are very important drivers of audit quality (Cooper et.al 2011). The Australian auditing bodies agree that the use of value of industry expertise, business acumen and client knowledge as well as personal attributes of audit staff and the support and retention of staff should be considered by all audit firms and the professional accounting bodies. The effectiveness of auditing process The effectiveness of the audit process highly affects the quality of audit evidence hence affecting auditing quality. The tools of audit methodology used will provide procedures and a framework in which the auditor will obtain sufficient audit evidence efficiently and effectively. It will also provide the required audit documentation, ensure effective review of audit work and ensure all the audit control procedures used are effectively applied. Here the objectives of ethical standards are achieved, which provides confidence in the integrity, independence and objectivity of the auditor (Cooper et.al 2011). Institute of Chartered Accountants in Australia is a professional body which represents the Chartered accounts in Australia. This driver has highly been adopted by this body in conducting audit quality review. The chartered accountants in practice are able to deliver a quality audit if there is sufficient documentation to rely on. The legal framework adopted in the professional bodies and the Australian regulatory environments highly evaluates the client’s evidence to determine the quality of audit (The Treasury 2010). The principle of ‘true and fair view’ is a requirement for the financial report to comply with the accounting standards in accordance with the Corporations Act (Louwers et.al, 2007). Australian professional bodies advocate for a consistency in the quality of audits globally. The bodies have also advocated for the promotion of global consistency in the quality of audit whenever multilateral, bilateral and regional opportunities exist. The statement by Treasury considers that the exercise of professional judgment by auditors rather than the adoption of a tick a box approach to auditing is adequately provided for under the Australian regulation framework (Cooper et.al 2011). The approach used in the process of audit by the professional bodies will have a huge impact on the quality of audit in the country. Audit regulation framework The ASIC, the key corporate regulator and the Institute of Chartered Accountants in Australia conduct quality reviews on the documented reports of their clients to determine quality in the preparation of their financial statements. In this case, audit regulation framework is considered a key driver of audit quality as it can be considered to be in line with international best practice. This is done by obtaining audit evidence from the firms (Cooper et.al 2011). ASIC is a government regulation and scrutinizes all aspects of financial statements in listed and non listed public companies to ensure compliance with the accounting polices. ASIC has the roles of an independent oversight regulator with clear statutory powers in the Australian system. In Australia, professional bodies like ICAA and CPA continue to undertake independent quality assurance practice reviews as part of self regulation. An audit report by ASIC for the 2008-2009 financial year indicated that ASIC had identified improvements in audit quality like the use of experts to test asset valuations and this was during the global financial crisis. They also identified that the documentation part of audit evidence needed some improvements. The Institute Of Chartered Accountants in Australia was set up in order to access whether all companies are having the appropriate quality control polices and procedures in place which will make them comply with the professional standards and regulatory requirements (Cooper et.al 2011). It is therefore clearly evident that audit quality is highly dependent on the accounting and auditing legal frame work relating to the audit regulation as stated in the Treasury report. The professional bodies in Australia have acknowledged that financial reporting and audit requirements apply in a dynamic environment and will require refining from time to time to keep abreast of market developments and regulatory development in overseas jurisdictions (The Treasury 2010). The International Accounting Standards Board usually addresses any issue on global financial crisis which exposes problems in the reporting of financial statements. For example, The Australia audit regulation framework appears to be functioning effectively during the current uncertainty in economic conditions. In Australia, entities are required to prepare their financial statements inclusive of financial statements, notes and directors declaration under the Corporations Act. The reports must be accordance with ASIC and ASX both of which are professional bodies in the country. The independent audit process therefore will perform a critical and essential function in bestowing credibility and reliability on financial statements. High quality audits are recognized as being critical to the operation of well functioning markets. The Corporations Act established a comprehensive statutory regime on auditor regulation including auditor registration requirements, extensive auditor independence requirements and a strong disciplinary framework. Auditor’s independence in the Corporations Act 2001 The independence of the auditor is very important in ensuring quality in auditing (Louwers et.al, 2007). The auditor should be independent in mind, action and thoughts as lack of this would compromise the quality of audit evidence. That is, lack of independence of the auditors impairs an auditor’s ability to exercise objective audit judgments and affects confidence in the audit process (Cooper et.al 2011). The Corporations Act 2001 requires all audits to be conducted in accordance with the Australian accounting and auditing standards. ASA 500 requires the auditor to obtain sufficient audit evidence for him to draw reasonable conclusions on which to base his auditing opinion. Collection of the audit evidence should be performed in accordance with the Australian auditing standards and the applicable legal and regulatory requirements (The Treasury 2010). This is according to the Audit Inspection Program public report for 2009-10 financial years. A report by the Institute of Chartered Accounts on APES 110 on the code of ethics for professional bodies which deals with the independence of auditors indicated that there was no documentation or inadequate documentation when considering for threats to audit independence, a situation which compromised audit quality. The report also indicated that there were no appropriate safeguards applied in the client when carrying out the audit and accounting functions for the client (Cooper et.al 2011). The above situations compromised with audit quality since the auditor could not obtain sufficient audit evidence during the auditing. Auditor’s independence is one of the key drivers of audit quality (Louwers et.al, 2007). ASIC conducts audit reviews to determine the level of audit evidence as this helps in eliminating any duplicated effort. As a professional body, ASIC has developed a wide ranging audit inspection program which encompasses all aspects of audit quality and this includes auditor’s independence. The FRC’s annual auditor independence report is largely based on the annual report that ASIC prepares on its audit inspection program (The Treasury 2010). Ethical standards Ethical standards should be upheld in the duty of auditing of the clients business (Louwers et.al, 2007). The auditor’s decisions depend on their ability to identify and rank in importance various conflicting interest and duties while maintaining professional competence and independence. All members of the professional accounting bodies should be independent. Other factors outside the control of auditors affecting audit quality Corporate governance and the audit committee Audit committees play a key role in ensuring financial reporting integrity in a company and the process of auditing and this includes the objectivity and independence of external auditors (Louwers et.al, 2007). The committees also work to ensure that a company operates in a sound internal control system. The ASX corporate governance principles and recommendations in relation to the structure, responsibilities and composition of audit committee appear to be in line with the international best practice standards (Cooper et.al 2011). With strong corporate governance and auditing committee, the companies are able to examine whether integrity is upheld in financial reporting. Integrity in the financial statement reporting leads to high audit quality. Auditor liability Australia has introduced a number of measures to address the issue of auditor liability and terms of international best practice standards. The statement by Treasury proposes the monitoring of the impacts on auditor liability and the role of litigation funders by key stakeholders and audit profession. In this case, auditor liability will have an effect on audit quality in Australian companies (Cooper et.al 2011). References Catherine Anne Usoff, 1994. An examination of factors affecting audit planning across accounts. Ohio State University George Puttick, S.D Van Esch, Kana, 2007. The principles and practice of auditing. Lansdowne [South Africa] : Juta K. H. Spencer Pickett, 2006. Audit planning: A risk based approach. Hoboken: Wiley, Cop Larry E. Rittenberg, Karla M. Johnstone, Audrey A. Gramling, 2012. Auditing: A business risk Approach. Mason, OH: South-Western Cengage Learning Timothy J Louwers et.al, 2007. Auditing and assurance services. New York, NY:McGraw-Hil. Pg 140-400 Australian Securities and Investments Commission (2011) Audit Inspection Program Public Report for 2009–10, viewed 01/09/2011 published-29-June-2011.pdf>Bank For International Settlements (2008) External Audit Quality and Banking Supervision. Basel, viewed 01/09/2011 Financial Reporting Council *(2008) The Audit Quality Framework, viewed 01/09/2011 Institute of Chartered Accountants in Australia (2010a) Annual Report on the Quality Review Program for the Year Ended 30th June 2010, viewed 01/09/2011, Institute of Chartered Accountants in Australia (2010b) Quality Review: past, present and future: Getting the balance right, viewed 27/02/2012. 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 Australia (2009), viewed 01/09/2011 Read More