Role of Audits and Effectiveness of the Auditing Process - Coursework Example

THE ROLE AND EFFECTIVENESS OF AUDITING AS IT APPLIES TO GPFR Student’s Name Course (Due Date) Introduction Auditing refers to the immediate process that involves the evaluation and review of financial information that has been prepared and presented by the management of a firm in order to establish whether or not they conform to the notions of certain standards, which are mainly availed as financial reporting framework 1. It is important to understand that the individual that conducts the aforementioned evaluation adheres to a given set of standards. They are mostly required to conduct the evaluation and ascertain whether or not a firm adopted the concepts of both fairness and completeness of the immediate decisions that were recorded by a firm in order to avail accurate information to potential end users for effective decision making purposes. Significantly, auditing allows the management to focus on information that has been provided for purposes of ensuring that their objectives are not set at an unreasonable level. Therefore, the purpose of this paper is to examine the role of audits and effectiveness of auditing process in relation to the management’s preparations and disclosure of general purpose financial reports. Body Under the principal-agent relationship, the principal, who are mostly owners of the firm, expect the agent or rather the hired management team to report substantively for purposes of easier verification by a hired auditor personnel 2. It is noted that since the principal would likely seek the services of an independent auditor, the management team is obligated to prepare and disclose financial reports in accordance with the set guidelines. This is mainly because the auditing personnel are tasked with the responsibility of establishing whether or not the management adhered or rather complied with the set requirements and standards. Potential end users of accounting information always benefit greatly whenever it is ascertained that the principal, indeed, allowed the auditing process to take place given that it serves to protect their respective interests within the firm 3. This is so because the accounting information that is presented to outsiders would more likely correspond to financial accounting requirements. The immediate corporate governance processes of a given firm should be formulated in a manner that is able to protect the external users of accounting information from possible misstated financial statements. It is important to realize that the auditing personnel conduct a crucial task in relation to the aspect of corporate governance given that their immediate roles as trained experts that are independent from the firm is distinctive in the course of executing corporate governance process 4. Notwithstanding, given that the auditing personnel is independent in most cases, they are placed in a fair position to avail an opinion on whether or not the financial statements that the management has been able to present financial reports in a manner that adheres to the applications set forth in the financial reporting framework. It is easier for external users to put trust on the opinion than one, which was given by an auditor that was not independent in any case. The evaluation and review process of independent auditing personnel does not necessary mean that it is not pessimistic at all however; it can as well be less likely be optimistic in nature as compared to that of the management 5. This is because an individual that have no form of relations with the company was the one that provided the opinion. The independent auditing personnel engage in an auditing process that will provide an unbiased picture of a company’s compliance or non-compliance with the applicable financial reporting guidelines. A perfect auditing process is able to ascertain certain issues that emanates from the management’s preparation and presentation of financial reports. It allows auditing personnel to comprehend the manner and reason behind management’s engagement in misstating particular transactions 6. It helps them to plan their respective auditing tasks so that more time is apportioned to reviewing those transactions that are deemed wrongly conducted as opposed to other transactions. Certain areas that management might use to misstate operations pose a much higher risk for the auditing personnel since failing to discern and correct the misstatements might lead to the issuing of a clean audit opinion on all financial statements that indeed misstated for that matter. This misdiagnosis of the financial statements might give the perception to external users that the reports are indeed prepared in accordance with the rules and guidelines of the financial reporting standards while in real sense they are not 7. For instance, it has been ascertained that most of the managers in public companies would in most cases resort to preparing reports in a manner that shows higher net income as opposed to lower net income. In this case, net income can be increased either by way of reducing the level of immediate expenses or increasing the true level of posted revenues within a given financial year. Numerous approaches like posting fictitious levels of revenues will likely catapult the immediate level of net income hence, allowing a firm to present a higher net income level. In this case, the management team would try so hard to postulate that revenues have increased from previous financial years even if the net income has failed to do so 8. It is crucial to point out that the desires of most businesses are directed towards ensuring that both revenues and net income increases in the same or higher rates in comparison to previous years. On the contrary, the expectations of the external users of financial reporting are that the growth should be positive in all cases hence, in case when a firm fails to meet the target, there is a likelihood of stock prices falling as potential investors sell their respective stocks and invest in completely newer ones for those companies that are able to meet the level of growth that is desired at all costs 9. In consequence, the reason behind misstating of financial statement rests on maintaining a firm’s immediate stock prices from dropping in the securities markets. Thus, before auditing personnel gives a clear and clean opinion on a given set of financial statements they should ensure that the evidence that has been gathered in the course of the auditing process is able to support the review and evaluations that the financial reports have been prepared and disclosed in accordance with the set guidelines of a financial reporting standards 10. The ability to comprehend the incentives of a firm to misstate the financial reports is a crucial part of the entire auditing process. Subsequently, it is important for the auditing personnel to establish the financial statements accounts that depict a higher level of potential misstatement and also, to designing the auditing process in order to ascertain that the aforementioned accounts are well disclosed and in accordance with the underlying applications of the financial reporting standards 11. Audits play a crucial role in both businesses and the entire society as a whole. A consequence of modern audit failures and misdiagnosis leads to loss of public image for accounting field. The auditing personnel conduct a strengthened bargained positioning with the management team 12. Notably, the resulting higher level of financial and social costs attributed to failed auditing processes depicts both a public level interest as well as business necessity. This means that the public cognition of auditing process can only be highly emphasized at all costs. Possible impacts of an immediate failed auditing process, which is associated with great loss of public confidence and potential investors trust levels, is an apparent notion of the auditing profession altogether. Accounting companies sell services hence they are expected to ensure that they avail top notch services for purposes of ensuring a positive outlook of the integrity is achieved 13. In the course of assessing the immediate risk associated with material misstatements, auditing personnel should evaluate the level of potential misstatements that might happen in the near future and also, they must analyze the magnitude and likelihood of potential misstatements. The auditing process might involve the designing and implementation of substantive procedures that would likely avail substantial evidence that would support the fairness of each of the management’s financial reports assumptions and expose any possible errors or misstatements in the course of recording of either transactions or balances. An audit should be conducted by a personnel that is able to exercise exception level of care and skills, they should be independent of the firm at hand and also, they should always comply with the numerous auditing standards as well as other professional guidelines put in place by different auditing and accounting agencies 14. For instance, the audit should conform to the ASIC conventions in order to report to ascertain whether or not auditing processes adheres to Corporation Act 15. Conclusion It can be seen that the audits provides an opinion on whether or not presented financial statements adhered to the applicable financial reporting standards. This, in turn, helps potential end users to make effective decisions on whether or not to invest with a company. The auditing process is a complicated procedure that requires all auditors to adhere to certain standards in order to make sure that accuracy and elements of trust is maintained at all times. In case auditors fail to discern possible material misstatements of financial statements then it means that the external users of the information would be provided with wrong information. Varying opinions have distinctive effects on the reputation images of companies hence management team make sure that they adhere to set guidelines while preparing accounting information in order to ensure that public trust is not loss. Bibliography 1, 2, 3, 5: Kachelmeier, Steven J., Tracie Majors, and Michael G. Williamson. 2014. "Does Intent Modify Risk-Based Auditing?" Accounting Review 89, no. 6: 2181-2201. 4, 6, 8, 10: Kusserow, Richard P. 2014. "Claims Processing Ongoing Monitoring and Auditing: Improves Revenue and Prevents Costly Errors." Journal of Health Care Compliance 16, no. 5: 45-48 7, 9, 11: Kuo, Chris. 2014. "An Economic Analysis on Overbilling Incentives and Auditing Programs." Journal of Business Ethics 121, no. 3: 441-449. 12, 13: Ramanan, Ram N. V. 2014. "Corporate Governance, Auditing, and Reporting Distortions." Journal of Accounting, Auditing & Finance 29, no. 3: 306-339. 14, 15: Ruelas, Frank. 2014. "Effective and Practical Auditing and Monitoring Can Validate Compliance within Our Organizations." Journal of Health Care Compliance 16, no. 3: 17-67 Read More