Financial Reporting Requirements - Literature review Example

Auditing Name Institution Name Date Introduction Auditors are required to determine whether financial control measures are operating effectively, and the records champion the requirements of the investors including other stakeholders. Auditors have to adhere to procedures and processes to produce quality financial reports. The paper defines and states the importance of reasonable assurance. The paper also explain strategies auditors employ to champion reasonable assurance and the paper also reviews the views of ASIC when it comes to auditing and auditors function based on the 2012-2013 findings. “Reasonable Assurance” and its Importance to Auditing Reasonable assurance is commonly used in auditing standards and forms the basis of the description of the financial reporting based on the auditors’ approaches and strategies (Christopher, Sarens & Leung, 2009). Reasonable assurance is obtained when auditors perform the auditing procedures appropriate, evaluation the evidence obtained, and expressing an opinion based on the available standards on the financial statements. The reporting and other fundamentals should champion the requirements and directions of ASIC (Schneider & Church, 2008). Therefore, reasonable assurance is the auditor’s level of satisfaction that the obtained evidence during auditing supports the assertions contained in the financial statements (Chung et al., 2010). Moreover, the auditor is required to state that the auditing process was achieved through fulfilling the requirements of professional standards (O’Donnell et al., 2015). Reasonable assurance is important to auditing because it ensures the auditing requirements and standards have been achieved. The financial statements and financial reporting are important and used to make informed decisions by the users (Hodge, Subramaniam & Stewart, 2009). The evidence collection method and critiquing the evidence improve the understanding of the information resulting in people “trusting” the reports. Without the aspect of reasonable assurance, it becomes difficult to the stakeholders to appreciate the financial records (Christopher, Sarens & Leung, 2009). Moreover, the auditor is protected against any litigation arising from the auditing function. For example, difference exists between absolute assurance and reasonable assurance (Chung et al., 2010). An auditor may argue that the appropriate methodologies and strategies were employed in obtaining the evidence, analyzing the evidence, and arriving at the desired conclusion (O’Donnell et al., 2015). Auditors Provision of Reasonable Assurance About A Client Auditors may employ different strategies, which incorporates numerous processes and procedures. The process includes planning the audit, using a top-down approach, testing controls, evaluating identified deficiencies, wrapping up, and reporting on internal control (Christensen, Glover & Wood, 2012). The auditor is supposed to plan effectively the auditing process and determine engagement team members (Christopher, Sarens & Leung, 2009). The auditor during the planning the audit should review numerous processes, which include internal control and company’s financial statements, and to determine whether the procedures affects the auditors work (Law, 2008). The auditor is supposed to have knowledge on previous internal control over financial reporting; understand the company’s industry matters, such as laws and regulations; the extent of recent changes; and control deficiencies, which were previously reported. In addition, the auditor has to know preliminary judgments about risk, materiality and other variables relating to material weaknesses; complexity of the auditing process, public information on the company and any other information, which affects the processes of the auditor (Hodge, Subramaniam & Stewart, 2009). Therefore, the auditor has to understand the following factors: the role of risk assessment, determination of use of the work of others, scaling the auditing depending on the size of the company, and information on materiality (Chung et al., 2010). Appreciation of the information allows the auditor to determine the appropriate strategy to proceed with the auditing process or seek for clarification. Utilization of top-down approach is important for an auditor in determining the controls to test (Chung et al., 2010). The process starts at the financial statement level where the auditor uses their respective understanding of the overall risks to the control measures. The auditor then continues checking other parts including disclosures, entry-level controls and other relevant assertions (Christopher, Sarens & Leung, 2009). Through the process, the auditor directs the operations to assertions, disclosures, accounts that contributes to material misstatement and may affect the financial statements (O’Donnell et al., 2015). After accomplishing this requirement, the auditor selects for testing any controls, which informs in assessing the risk of misstatement depending on the relevant assertion (Hodge, Subramaniam & Stewart, 2009). A top-down strategy is an approach, which allows the auditor to identify risks and does not define the approach in which the auditor will perform relevant procedures. Therefore, the auditor has to select controls to test, likely sources of misstatement, disclosures and relevant assertions, and identification of entity-level controls. The auditor is then required to test the controls (Chung et al., 2010). The auditor should test the design effectiveness through determining if the organization’s controls are operated appropriately. For example, is the person operating the control competent or has the necessary authority; or whether the processes satisfy control objectives of the company (Bell & Griffin, 2012). Moreover, the testing enables determination of chances of material misstatements, which lead to testing operating effectiveness. This can be achieved by determining when the system operates as designed and each individual involved played his or her roles effectively. The auditor then decides on the relationship between the risk and the evidence to be obtained (Christopher, Sarens & Leung, 2009). The auditor is required to obtain evidence for each assertion, but sufficient of the evidence is not compulsory. Therefore, if the risk associated with the risk tested increases, it means the auditor has to increase strategies to obtain more evidence regarding the issue (Houghton, Kend & Jubb, 2013). After analyzing the obtained information, the auditor proposes special considerations for future auditing requirements. Some of the factors incorporate include timing of previous audits, results of previous audits, and other factors influencing the quality of auditing and evidence (Hodge, Subramaniam & Stewart, 2009). The auditor has to evaluate identified deficiencies. The auditor is required to evaluate the deficient and determine its severity, and to determine whether the deficiencies are material weaknesses based on assessment period (Christopher, Sarens & Leung, 2009). It is integral to note that during planning and implementing the auditing process, the auditor is not needed to determine whether deficiencies exist (Houghton, Kend & Jubb, 2013). The severity is pegged on the magnitude and reasonable possibility of detecting a misstatement or disclosure problem. Other factors affecting severity include the interaction of the deficiencies, future consequences, complexity and subjectivity, susceptibility, and the nature of assertions, disclosures, and financial statement accounts. Furthermore, the auditor is required to check for indicators of material weaknesses (Hodge, Subramaniam & Stewart, 2009). The indicators include ineffective oversight of financial reporting, ineffective internal control, a material misstatement that may be seen difficult to detect, a restatement of the previous financial statement, and identification of fraud. Moreover, the auditor is required to determine the degree of assurance and level of detail in evaluating the severity. The auditor is then required to wrap up the auditing process (Houghton, Kend & Jubb, 2013). The auditor has to form an opinion on internal control effectiveness, and summary of the evidence obtained (O’Donnell et al., 2015). The sources of the evidence include identified control deficiencies, financial statement audit’s misstatement, and the testing of controls. The auditor will be required to review any internal control information including the internal audit reports (Manetti & Becatti, 2009). The auditor will then compare the control deficiencies identified and determine the appropriateness of the reports. The auditor will then have to review the auditing relative to the auditing rules and regulations. For example, rules and regulations as championed by ASIC (Christopher, Sarens & Leung, 2009). The audit will also be required to obtain written representations from the management. The auditor communicates certain matters with the audit committee and management of all material weaknesses identified during the auditing period. The written documentation should state the deficiency, misstatements, and other auditing process and recommend on some issues, if needed (Law, 2008). The auditor will then be required to report on internal control through writing a report (Fu, Carson & Simnett, 2015). ASIC Audit Inspection Report Relative to Auditors Processes in Obtaining Reasonable Assurance According to the ASIC report, the auditors did not obtain reasonable assurance in concluding that the financial report was free of material misstatement. ASIC was able to review 454 key audit areas across 107 audit files of companies of different sizes and found out that 20% did not fulfill the requirements of reasonable assurance (ASIC Report, 2014). Even though the percentage is high, there is also the 80% in which the auditors fulfilled the requirement of reasonable assurance. Therefore, it may be argued since the acceptance assurance was 80%, the auditors have to adjust their respective approaches in auditing requirements to address the challenges associated with the 20% (ASIC Report, 2014). The ASIC identified three areas in which improvement was integral and enable addressing the 20%. The areas are “level of professional skepticism,” “sufficiency and appropriateness of audit evidence,” and “reliance on the work of experts and other auditors” (ASIC Report, 2014). The ASIC report raised concerns about the sufficiency and appropriateness of evidence, which the auditors had obtained and used to arrive at conclusions on major areas of the audit. The report presents examples, such as going concern assessments, impairment testing, and fair value measurement (ASIC Report, 2014). These approaches are usually during the processes in which the auditor has to follow. For example, determining the tests is crucial before obtaining the evidence. The risk assessment and nature of the business environment in which the company operates gives an idea to the auditor on appropriate strategies to obtain information. Moreover, industry dynamics through measures, such as legislations and regulations guides an auditor in making decisions (Christopher, Sarens & Leung, 2009). However, missing of these important requirements questions the financial reporting requirements. The levels of professional skepticism are another issue highlighted on the report (ASIC Report, 2014). Professional skepticism is integral in quality audits, and professional skepticism means the auditor is required to be critical in assessment, questions where questionable, validation of the evidence obtained, and critique the management’s judgments on accounting treatments and estimates. Some examples presented include the readiness of the auditor to accept representations and explanations of the management and lack of seeking evidence to corroborate treatments or estimates in fulfilling the evidence gathering processes (Houghton, Kend & Jubb, 2013). The auditor, to fulfill the requirements of reasonable assurance, should have challenged the estimates or treatments, and query the key underlying assumptions of the representations and explanations of the management (Christopher, Sarens & Leung, 2009). The use of experts in certain auditing requirements is important (O’Donnell et al., 2015). Some tasks are complex in the view of an auditor, and the auditor has to seek assistance from other auditors and experts (ASIC Report, 2014). For example, clause 55 states, “inadequate work was performed on complex impairment calculations, and the auditor had not considered whether an expert might be required to assist the auditor with complex impairment calculations. In some cases, insufficient work was carried out by the firm’s expert valuation or corporate finance teams” (ASIC Report, 2014). The auditor is able to complete the specificities of the financial reporting, but some information can be obtained by other experts. For example, determining the value of some of the assets require experts. Buildings and land require asset/land value estimator but in the financial reporting, the experts were not used or the experts were ineffective in the respective works (ASIC Report, 2014). Through such processes, the obtained data and the conclusion may miss some important components, which integral to quality assurance on the financial reporting (Houghton, Kend & Jubb, 2013). Therefore, according to the processes championing reasonable assurance, some of the auditing firms and including the financial reports championed the requirements of auditing processes (Simnett, 2012). However, some areas require reviewing meaning that strengthening the view of auditing processes and involving different stakeholders enable an organization to arrive at appropriate conclusions (ASIC Report, 2014). Obtaining evidence, questioning the evidence, and querying the underlying assumptions of the management decisions result in improvement of the acceptable levels of reasonable assurance. Therefore, if the auditors employ the identified recommendations, the levels of reasonable assurance improve considerably (Carey, Monroe & Shailer, 2014). Other Criticisms and Importance of Identified Deficiencies Furthermore, auditors are required to champion quality assurance (ASIC Report, 2014). The auditors are required to adhere to the requirements of Corporations Act, review of audit engagements and appropriate supervision, and create a link between partner evaluation and audit quality, and related compensation. It furthers the requirements of auditor independence in fulfilling the financial reporting requirements (ASIC Report, 2014). Quality standards are important to the fulfillment of auditing requirements, and an effective auditing mechanism should incorporate aspects of independence. The lack of quality standards means that the evidence obtained may not be conclusive in addressing the requirements of the auditing process. ASIC advises the audit firms on the importance of maintaining audit quality, which can be achieved by embracing certain structures. The auditing firms are required to develop action plans to address the requirements of quality (ASIC Report, 2014). For example, the firms are required to invest in obtaining and sustaining experts and experienced staff to fulfill complex auditing requirements. In addition, the auditing firms should understand the importance of implementing the remedial action (ASIC Report, 2014). The deficiencies on the part of staff contribute to ineffective evidence collection and been skeptical of the management representations and views. It improves the quality of the auditing processes because experts and experience individuals are able to look at the appropriate places to obtain evidence to address some issues (O’Donnell et al., 2015). Conclusion Auditing is a profession of reviewing and obtaining evidence on financial reporting requirements. An auditor does an audit and in the operations, reasonable assurance is important in fulfilling the requirements of auditing. Reasonable assurance is stating by the auditor, that they have employed all necessary processes and procedures to fulfill the requirements of auditing. The auditor has to fulfill numerous processes in arriving at reasonable assurance. The process includes planning the audit, using a top-down approach, testing controls, evaluating identified deficiencies, wrapping up, and reporting on internal control. Each of the processes aims to ensure the evidence obtained, methodologies and other processes fulfill the requirements of auditing. According to the ASIC Report, challenges exist in audit firms and auditing profession, which can be avoided through corroboration of information and collaborating with other experts. It will improve the quality of the financial reporting, and reducing chances of misstatements and other auditing inefficiencies. References Asare, S. K., & Wright, A. M. (2012). Investors', auditors', and lenders' understanding of the message conveyed by the standard audit report on the financial statements. Accounting Horizons, 26(2), 193-217. ASIC. (27 June 2014). 14-140MR ASICs audit inspection findings for 2012-13. Retrieved from http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-140mr-asics-audit-inspection-findings-for-2012-13/ Bell, T. B., & Griffin, J. B. (2012). Commentary on auditing high-uncertainty fair value estimates. 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