Quality Audit and Governmental Policies - Essay Example

Quality Audit and Governmental Policies Name Course Lecturer Date Audit quality refers to the kind of standard that emanates from the overall outcome of the whole process of examining a quality organization. Rusell (2012 p.2) defines audit quality as the “systematic, independent and documented process for obtaining audit evidence and evaluating it objectively to determine the extent to which audit criteria are fulfilled.” It can be undertaken by members either within or without the organization or system. This means that it is a culmination of different processes that are involved and which are seen as the contributory partners focusing on one grand goal that fits the system as a whole. Some of these contributory partners include the observance of ethical measures related to accounting organizations, the quality of the auditors and the regulations, and any other partners pertinent in the accounting process. In this paper is a discussion of this process taking into account the various players responsible to quality auditing. Still, various examples will be employed to demonstrate the process better. The Australian Securities and Investment Commission (ASIC) is a body that inspects the performance, in terms of audit quality of various firms. It ensures that the various practices in these individual firms are in line with the defined standards of auditing, professional codes of conduct as well as the specified requirements. Rose (2012 p.5) calls this mandate as the “power to name and shame.” In other words this will make sure that it deals directly with those affected. It is also as Leung et al (2011) observe that audit quality involves setting of standards at various levels of auditing, a form of framework. Since it is observed above that audit quality involves various players, the Australian Securities and Investment Commission will be able to make suggestions for adjustments where needed by the various auditing firms. This is supposed to helpTo understand the task of the ASIC, it is important to give a description of various drivers that have been identified as necessary for the determining of audit quality. In determining the audit quality there are certain indicators that need to be called into place. These indicators include the following. The audit firm’s culture, the various skills combined with the qualities of each individual partner in auditing and staff and the successfulness of the process of auditing. Furthermore, the audit reporting should be reliable and useful as well, and finally the factors outside the controlling of the auditors are to be taken into account. Apart from the above drivers two more are identified in the Australian context. They include the Australia’s own audit regulation and the inspection program embodied in the ASIC (Financial Reporting Council 2010). The above indicators will be discussed in detail. The audit firm’s culture is the first driver. Audit culture refers to proliferation of the nature of auditing. It means the borrowing of business concepts used in the independent supervision to use them in evaluating public agencies’ performance as well as the employees. This touches a wide area of expertise ranging from civil servants, across school teachers to universities. It involves things like environmental audit, money value audit, management audit and so on. In short, very few areas are left untouched by this culture (Apple 2007). According to a report by the Audit Quality in Australia (2010), it brings about an environment suitable for the realization of high quality achievement such that investing in it there can emerge a reward. There is an emphasis on the acting and doing the most appropriate things that are guided by the interest of the public. Moreover, the outcome of acting in such manner gives a good impression to the firm and to the auditors. A good culture gives the staff as well as the partners enough resources together with time such that difficult matters can be handled as they come up. Financial considerations too are controlled such that harmful effects coming from them cannot have effect on the quality of audit. The benefits of consulting on hard matters are promoted and partners are supported to exercise judgement at personal level. Systems of reward and of appraisal are fostered for partners as well as staff as they enhance individual characteristics necessary in realizing a quality audit. The system for the acceptance and perpetuation of clients is ensured. Finally, the monitoring of the audit quality within the firms and that in different international networks is ensured with the resulting action rightly taken (Audit Quality in Australia 2010) The second is the various skills combined with the qualities of each individual partner in auditing and staff. These, according to the Financial Reporting Council (2010) may impact positively in on the partners as well as the staff in understanding the business of the clients together with sticking to the underpinning the principles of auditing and of the ethical standards(Auditing and Assurance Standards Board 2010). A professional scepticism is developed by the partners as well as staff while they work and they are eager to handle issues arising from the audit. Audit work that is done by the staff possesses enough experience with the supervision of partners and managers. The appropriate mentoring is provided by the managers to the junior staff which becomes a form of job training. Finally, the personnel working in audit acquire auditing skills, accounting and special issues on industry. The successfulness of the process of auditing is the other driver which contributes positively to the audit quality. It encourages the managers and the partners to have an active involvement as the audit is planned. It provides a basic structure as well as mechanisms that help in obtaining enough and appropriate evidence of audit that is effective and efficient. It also calls for the most relevant recording of audit (Torre & Anderson, 2003). It ensures a complementary relationship with the standards of auditing while restraining the judgment exercise and it ensures effective audit work review. Where the control procedures of auditing are controlled, well understood and implemented, there is a hope for a high level of support available for audit teams because they require it (Botha & Boon 2003). It can also be invoked in unfamiliar situations that may be encountered. An achievement of ethical standards is realized and it provides confidence towards the integrity of the auditor, objectivity as well as independence. If audit evidence is sufficient it cannot be limited by financial pressures (Financial Reporting Council 2010). The audit reporting should be reliable and useful. If applied well, it can ensure a clear and unambiguous writing of audit reports that show the auditor’s opinion which conveys the various needs of users who utilize financial statements relating to the regulations that are used. Auditors are also able to conclude properly on reports together with the fairness required of in financial statements. Communication between members of the audit committee may include the audit scope, inhibitors of auditor objectivity, possible main risks and judgments associated with coming up with opinion. Finally, discussions on the aspects of quality of a firm’s accounting as well as reporting accompanied with the possible ways of bettering the financial reporting are handled (Financial Reporting Council 2010). There are also factors outside the controlling of the auditors that need to be taken into account. The Financial Reporting Council (2010) names the following factors. Approaches towards corporate governance that is within reporting entity and that upholds the importance of corporate and financial reporting as well as the process of audit. Moreover, active and professional audit committees that are active and strong in dealing various issues are identified. Shareholders supporting auditors in appropriate areas helping to increase the possibility of complement by the top staff are likely to observe their duties regarding the production of financial statements that are reliable (Audit Quality in Australia 2010). However, Audit Quality in Australia (2010) observes that this will depend on some other circumstances. They include reporting deadlines permitting the chance of carrying out audit without relying on work that has already been performed before the reporting period ends. Still, pertinent arrangements for the liability limitation are to be considered and finally the regulatory environment of the audit has to be considered. The regulation framework of Australia on audit is the first additional driver that is considered as contextual. It is supposed to prepare financial reports encapsulating the financial statements of the entity, the declarations and notes of the directors. The report is supposed to comply with the standards of accounting and those of auditing. It should also reflect the standards of the ASIC (Audit Quality in Australia 2010). The organization is invigorated by the incorporation of independent auditors. It is also supposed to strengthen the standards of auditing and enforce the standards with provisions in law. Moreover, ASIC stands to be strengthened by the above framework in its surveillance duties of observing the processes of auditing and those of financial reporting. With this body in position, Australia incorporated itself with the International Financial Reporting Standards (IFRS). This strengthened further the ASIC because it entered the international arena making it capable of collaborating with foreign auditing firms. ASIC is the next driver it embodies the inspection program which began in the year 2005. The ASIC concentrates upon the quality of auditing and it promotes compliance of firms with the provisions of the Corporations Act, Australian Standards together with ensuring the observance of professional standards and the ethical ones. ASIC, in understanding the design of individual firms’ systems does the following (Audit Quality in Australia 2010). The quality of leadership responsibilities in a firm, mostly at the top, must observe the ethical requirements, and the acceptance as well as the perpetuation of relationships together with specific engagements (Rameesh 2003). It also considers the human resources, the performance in engaging the parties and monitoring of the firm. It tests the productivity and the implementing of the different firms’ systems in controlling and ensuring that firms comply with independent auditing defined in the corporations act. Secondly, it also tests the methodology of audit and facilitates in cases of poor performance. (Audit Quality in Australia 2010) Having seen the various drivers and their mechanisms it is also important to see the responses according to various regulatory and professional assessments. The above identified drivers are necessary in understanding the report by the Audit Quality of Australia. It is necessary to observe that on top of the five drivers identified by the Financial Reporting Council (2008) that there are two that are seen as adding value to Australia’s audit quality. These, as observed above include regulatory committee and the formation of the ASIC. ASIC, for example, is a good move as it was given thumbs up by various people for its wide focus. Some of its strong points included; the good control it exerted on policies together with procedures, the employing of technical resources that are dedicated; provision of services conducted by experts, regular change of auditors to suit the small number enlisted as audit clients and its attraction of partners to register on specific courses (Audit Results Report 2012). However, with its formation, there is a question as to how far will it be extended. Rose (2007) observes that it has been doubling as regulator. It acts as the federal securities regulator as well as the federal audit regulator. She says that despite the mixed reactions that met its launch the executive leader asserted that it was determined to see a fall in deficiencies that were manifest in audits come down. Some people chose to reserve their opinion towards this organization by citing a “wait” to see the functioning of the body. Improvement can be cited as mentioned by Institute of Certified Accountants Association (2012) release which they say it represents the interest of the public and those of government members, regulating officers, industrial sector, the academia, those setting standards and so on. What is emphasized is informing the public in the engagement of international bodies as well as the local. This enlivens the debate while updating the various members on the current improvements. In a report by the Audit Securities Investment and Commission (2012), the organization noted that they had been disappointed by the absence of improvement in the quality of audit for over eighteen months. The period mentioned here was from the end of December 2010 to the 2012. Risk-based reviews that were conducted showed that there was an increase in the instances citing auditors’ poor performances. The various procedures that were followed to provide a reasonable assurance in the audit of financial reports was accurate all failed. This statement by ASIC affirms the same position that there was a need for the change in the performance of audit institutions. The above sentiment is echoed by the Basel Committee on Banking Supervision (2008) when they announce that there has been an increased external auditing of banks because of lack of defined method of auditing that was in line with government policies. The report continues to claim that the instruments as well as banking transactions have become quite complex and these pose difficulties to the auditing personnel. The same can be seen in a statement by Cited from the International Forum of Independent Audit Regulators (IFIAR) by the ICAA Quality Review (2010) when they state that “the members of the international forum of Independent Audit Regulators share the common goal of serving the public interest and enhancing investor protection by improving audit quality globally, including through independent inspection of auditors...” In a common phrase, these are indications of a need for nationally as well as globally recognized audit quality. This therefore affirms the move by the Australian government to institute the ASIC which was incorporated to the international accounting firms (Audit Quality in Australia 2008). The Financial Reporting Council (2008) has stated that the quality of audit is a term that is dynamic. This implies that the above mentioned drivers can easily change in a given period of time. This means that there will be continuous revision of methods and means of its framework according to the various comments that are received. This is what is reported in the Basel Committee on Banking Supervision (2010) when it is claimed that there is a need for high quality audits to enhance the confidence in the market especially when there is a lot of stress in the market. This follows the crises that were experienced in 2008. New valuation methodologies are developed to counter the change in the market trends. External auditors have proved to be much helpful in such cases because shape the practice of reporting. The Australian management is business-like in its nature of finances (Hawke 2007), and It is also noted that a perceived deficit of transparency in banks and over the financial system in its entirety was instrumental in the advent of the current crisis in the market (Basel Committee on Banking Supervision 2010). This means that efforts to realise a quality audit among banks was debilitated by lack of quality training. The ASIC in its aim to move towards the making of a unified audit foresaw this. Rose (2007) is of this view and she comments on the bill saying that introduction of compulsory publications of transparency reports by various auditors as well as audit firms. This ensures that there is factual information is available for the public. This will indicate the best public entities that are listed like banks, insurance companies and so on. In conclusion, this paper has just presented the facts on the drivers for quality of audit and examples of applying them in the audit of financial reports. There is a need for a careful, well informed and transparent auditing if good results on the market are to be expected. These cannot just be realized alone. They can only come about when the ethical standards are put in place and emphasized for persistence. There is a call too for order emanating from both inside a firm and outside. However, to balance both, the formation of body that oversees both of these dimensions will be of unfailing necessity. Top of Form References Apple, M, W 2007, Education, markets, and an audit culture, International Journal of Education Policies, Vol.1. (1), 4-19 Audit Results Report 2012, Annual 2011-12 Assurance Audits, Western Australian Auditor General’s Report, 14 Nov 2012. Auditing and Assurance Standards Board 2010, Overview of the revised and redrafted Australian standards, June, 2010. Australian Securities & Investment Commission 2012, Audit inspection program report for 2011-12, December 2012. Basel Committee on Banking Supervision 2008, External audit quality and banking supervision. Bottom of Form Botha, H, Boon, J A 2003, The Information Audit: Principles and Guidelines,53, 23-38. Financial Reporting Council 2008, The audit quality framework, February, 2012. Hawke, L 2007, OECD Journal on Budgeting, Performance budgeting in Australia, 7(3), 1-15. Institute of Chartered Accountants in Australia 2010, Quality Review: past present and future getting the balance right, 1(ed), August 2010. Institute of Chartered Accountants in Australia 2012, Quality review report 2012, June 2012. Leung, P, Coram, P, Cooper, B 2011, Modern Auditing and Assurance Services in Australia, 5th ed, Wiley, Milton Qld. pp 131-144. Rameesh, K 2003, Best practices for internal audit in government departments, Centre for Good Governance. Rose, S 2012, The Australian Financial Review, 19 Jun 2012, P5. Russell, J P, & ASQ Quality Audit Division 2013. The ASQ auditing handbook: Principles, implementation, and use. Milwaukee, Wis: ASQ Quality Press. The Treasury 2010, Audit Quality in Australia, A strategic review, March 2010. Torre, J, Anderson, D 2003, Price Waterhouse Coopers: Building a strategic internal audit function. Read More