Audit Report Improvement - Example

Running header: Audit Report Improvement Student’s name: Instructor’s name: Subject code: Date of submission: Audit Report Improvement Expectation gap in auditing Generally, expectation gap is the perceived difference between what a party is expected to accomplish by others and what the party believes it is supposed to accomplish. It should be noted that auditing has become increasingly challenging and difficult owing to the increasing new regulations which call on auditors to enhance their efforts towards detecting fraud during the audit. However, the increased regulations contain such terms as material, reasonable and professional skepticism which may be understood differently by different parties thus creating an expectation gap. As such, audit expectation gap is the gap between the auditors’ roles as they understand it as opposed to what the users of financial statements understand it to be. In other words, it is the difference between what the auditor does and what he is expected to do by the society (International federation of accountants, 2013). For instance, the traditional role of the auditor has been that of giving an opinion regarding whether the financial statements prepared by the firm’s management depict a true and fair value of the firm’s state of affairs at the period under review. However, the users of financial statements would expect the auditor to do more than that by providing a more detailed report that would be useful to them as they make financial decisions. This creates expectation gap between the auditor and the users of financial information. The existence of expectation gap also arises due to the fact that the users of financial statements expect auditors to undertake necessary steps to detect fraud during auditing. As such, the users may be disappointed when this goes undetected although the auditors may not be sure the extent to which they are expected to go in detecting fraud. In the course of auditing, the auditors get to understand whether the firm is a going concern or not. As such, the users of financial statements may expect that the auditor will provide information when the firm’s future is at stake as their watchdog. The auditors’ role however, does not necessitate him to communicate whether the firm is a going concern to the users. As such, there is an expectation gap that needs to be addressed. The current audit report format As stated above, there exists an expectation gap in auditing between what the auditor’s role is and what he is expected to do by the users of financial statements. This expectation gap stems from the role assigned to the auditor and the current format of the audit report given that the auditor’s report is an essential means of communication between the auditor and the firm’s stakeholders. Although the current audit report has been in use for a long time and has no specific shortcomings, it fails to provide enough information that would enable quality decision making in the contemporary business environment. The current audit report gives details on the auditor’s responsibility in the audit as well as those of the firm’s management. In this regard, a standard audit report states that the financial statements are the responsibility of the management while that of the auditor is to express an opinion on the financial statement based on the audit. This implies that the auditor is under no obligation to give further information outside this opinion. As such, a statement on the firm’s going concern would not be captured in the current audit report. In other words, the current audit report has limited the role of the auditor so much such that the users of financial information are not insured when they rely on the auditor’s opinion to make financial decisions. In other words, although the statements may show the true and fair position of the organization’s state of affairs as at that date, the auditor may gather a lot of knowledge during the audit that may affect the firm’s future but he is not obliged to share with the stakeholders. As such, the current audit report is lacking in this respect. The current audit report format also compels the auditor to disclose whether the audit was conducted in accordance with auditing standards generally accepted in the country where the audit is being carried out and the report is being issued. In this regard, the auditor describes what he does in the audit and what he is expected to do in using the audit to provide a reasonable basis of his opinion. This means that audit report formats may differ depending on the firm’s home country. Finally the report gives an opinion regarding the financial statement (Jabez, 2010). It should be noted that the report can be qualified or unqualified. It is only when the auditor is to issue a qualified report that he is expected to explain why he has issued a qualified report. This means that whenever the opinion is unqualified, the only information that the user gets is the statement that the financial reports reflect a true and fair view of the firm’s state of affairs during the period under review. This means that the ability of the user to fully rely on the financial statement is greatly reduced due to the limited amount of information provided. In addition, although a qualified report may warn someone against relying on the financial statements for decision making, the information provided in the report is not enough to form a basis of decision making. Based on the discussion above, it is clear that the current audit report format fails to give more pertinent information to the users of financial statements to enable them make quality financial decisions regarding the firm especially given that the contemporary business environment continues to experience more complex financial reporting requirements. For instance, given that the auditors are the users’ watchdogs, why didn’t they warn users on firm’s going concern status during the global financial crisis? This means that the audit report format should give more information regarding audits as well as more insights into the firm being audited and the financial statements. In other words, despite the fact that firms use a lot of money in the name of audit fees, the current audit report does not seem to deliver value to the stakeholders. Whether the audit report format should be changed It has been established that the current audit report format is lacking in terms of contents and hence the ability to help the user make quality decisions based on the audit report. As such, the current audit report format ought to be changed. This will ensure the auditor reports about critical audit matters encountered during the audit. The improved audit report will enable the auditor give information on matters that he/she deems most important to investors understanding of the financial statements he/she audits in the auditor commentary. The new audit report format should enable the auditor comment on the management’s use of the going concern assumption in their preparing the financial statements as well as an explicit statement on whether he has identified any uncertainties related to the firm’s going concern. Change in the current audit format is necessary to enable the auditor report on whether material inconsistencies between the audited financial statements and other information have been identified based on his audit. Finally, there is need for change of audit format in a bid to give the auditor a chance of giving suggestions on improving transparency about the performed audit while clarifying the respective responsibilities of the management, the auditor and other stakeholders in the audit. It should be noted that the need to change the current audit report format also stems from the fact that it fails to inform investors whether the auditor thinks that the information presented in the financial statement is accurate and only conveys very little that can be considered substantive useful information. In the contemporary business environment, investors should benefit by auditors sharing more information they gather in the course of the audit. Changing the audit report format will enable the auditor to provide greater transparency about significant matters in the financial statements and what he encounters during the audit. As such, the auditor should in addition to the current report format provide additional information that should highlight matters the auditor considers vital to helping the users understand the audited financial statements. The auditor should also highlight any issues that he thinks have a bearing on the company’s going concern and whether there any uncertainty regarding the company’s going concern. This way, the user will have been fully informed before placing reliance on the audited financial statements in making financial decisions. By modifying the current audit report format, the auditors report will serve its intended purpose of acting as the users’ watchdog and they will deliver value to the firm and to the users. Modification of the current audit report will hence enable the users place full reliance on the audited financial statements when making financial decisions. References: International federation of accountants, 2013, improving the auditor’s report, Retrieved on 2nd September 2013, from; http://www.google.co.ke/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCwQ FjAA&url=http%3A%2F%2Fwww.ifac.org%2Fsites%2Fdefault%2Ffiles%2Fpublication s%2Ffiles%2FAuditorReporting_Invitation_to_Comment0.pdf&ei=SOBLUvXPFoax4w TU54GYCg&usg=AFQjCNHAOWxkx_kjZhJ7QXLhRGhj6m4EVA&sig2=iswcX4A40 h6ZqmIci-iC6g&bvm=bv.53371865,d.bGE Jabez, B2010, The auditor’s report: time for change, International Journal of Accounting, vol.29, no.2, pp.19-25. Nasba.org, 2013, improving the Auditor’s report, Retrieved on 2nd September 2013, from http://www.google.co.ke/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCwQ FjAA&url=http%3A%2F%2Fwww.ifac.org%2Fsites%2Fdefault%2Ffiles%2Fpublication s%2Ffiles%2FAuditor_Reporting_Invitation_to_Commentfinal_0.pdf&ei=SOBLUvXPF oax4wTU54GYCg&usg=AFQjCNHAOWxkx_kjZhJ7QXLhRGhj6m4EVA&sig2=iswc X4A40h6ZqmIci-iC6g&bvm=bv.53371865,d.bGE Read More