The Standard of Australian Audit - Case Study Example

A Report on Audit Transparency and Quality Improvement Name Institution Date Introduction In June 2012, the Federal Government’s Corporations Legislation Amendment (Audit Enhancement) Act 2012 received assent and introduced into the House of Representatives by David Bradbury, the parliamentary secretary. The legislation’s main aim was to improve the quality and transparency of the auditing process in order to ensure that the Australia’s audit quality and supporting regulatory framework remains in line with international best practice. The Act encompassed several reforms that will be essential in improving the standard of Australian audit that comes immediately after the treasury review on audit superiority and broad stakeholder consultation. During the treasury review in 2011, it stimulated discussion that lead in adopting of the reforms into the bill. The bill contains changes to the law relating to auditing industry. This paper reviews legislation of the auditing process to ensure attainment of quality and transparency in the course of action. Audit Transparency The Corporations Legislation Amendment (Audit Enhancement) Bill 2012 is fundamentally in support of the audit industry. Duska et al (2011) explains that the annual transparency report requires that audit firm publish their report of auditing on all the activities the company engages in, if they provide services for 10 or more listed companies, listed registered schemes, authorized deposit-taking institutions and insurance companies. The overall goal for this bill is to improve transparency of the audit activities of larger inspection firms. Most big companies are capable to operate with the aid of partners and thus shielded by their business structure protecting them from discoursing information about their activities to the public. In any auditing firm transparency is very essential for both the future and existing customers as they are more knowledgeable about the operations of the auditor. In addition, the reforms are instrumental in identification of potential conflicts of interest that may arise from one firm being dominant in one business sector. However, the actual disclosure requirement were not included in the bill rather were left open to be dealt with by the way of regulation (Rittenberg et al 2011). This bill is more beneficial to small number of larger auditors as provision of information adds cost to the firm and the information required opt to be readily accessible by anyone indeed. Besides, the bill having many regulations the costs of auditors is said to be low and warranted by the benefits to the industry and to clients. Issuing of an audit deficiency report The Australian Security and Investment Commission (ASIC) has received more power to enforce the quality of auditing by yielding new authority to issue audit deficiency reports on specific auditors. According to Campbell (2012), the Australian Security and Investment Commission (ASIC) usually issue audit deficiency reports after the inspection where specific failures are identifiable. In the past, the audit deficiency reports were confidential and only issued after an inspection by the ASIC and the identification of specific failures are multiple. However, the new bill gives the Australian Security and Investment Commission the right to report publicly; on the other hand, it does not force the firm but rather gives it the authority to do so at its discretion. In cases where the ASIC founds numerous weaknesses in the activities of the firm below the quality audit, then it may release the deficiency report after six months of the auditors being aware of the deficiency and the auditor has failed to undertake remedial (Duska et al, 2011) Duplication of ASIC and Financial Reporting Council (FRC) audit inspection Duplication of Australian Security and Investment Commission (ASIC) and Financial Reporting Council (FRC) audit inspection emphasis on the removal of power from the FRC that results in audit independence in return allowing it to gain greater responsibilities. The Financial Reporting Council (FRC) main role is to advice ministers and professional accounting bodies in relation to audit practice (Duska, 2012). This part of the bill consist strategic policy advice and reports in relation to the quality of audits. The change that involves removal of the duplication allows eliminating the old operations that existed giving room for the audit independence. Audit independence gives the Australian Security and Investment Commission (ASIC) authority under the new regulation. The transformation in the operation also increases quality of the audit at the same time identifying the main function of the Financial Reporting Council (FRC) especially in the provision of advice to the minister and accounting bodies. Removing of duplications and overlaps within businesses functioning under the federal government that is essential and it is very important especially in cases of a partnership. Allowing ASIC to communicate directly with an audit body The Corporations Legislation Amendment (Audit Enhancement) Bill 2012 gives the power to the Australian Security and Investment Commission (ASIC) to communicate directly with company directors, management or the audit committee during instance of significant matters regarding the quality of the audit. Mostly it happens when the conduct of the audit are identified during an audit inspection. The communication responsibilities given to the Australian Security and Investment Commission enables it to communicate directly the audit report to clients increasing the confidentially that already existed in the past (Campbell, 2012). Allowing a two-year extension to five-year auditor rotation requirement In this part of the Corporations Legislation Amendment (Audit Enhancement) Bill 2012, it deals with auditor rotation in the sense that it retains the current mandatory five-year auditor rotation but also allows a two-year extension of the terms under definite conditions. An auditing firm gets the additional room only when the company’s auditing committee recommends so mostly when they feel that the conservatory is reliable with maintaining the quality of the appraisal and there is lack conflict of interest (Rittenberg et al, 2011). In such case where the recommendation has to be made by the audit committee, then it has to be formal and thus should be in written form. However, CEOs of most companies do not have to accept extension recommendation over the auditors’ term made by the auditing committee. The auditor rotation is advantageous as the business has an opportunity to retain expertise and audit for a longer period. Big companies engaging in complex business venture stand to benefit more from auditor rotation because it allows acquisition of in-house knowledge. This is important for both the workers and clients comprehend the business venture as well as monitor business activities. The firm also benefits from inspector revolution as it reduces cost burden incurred in during regular rotating between clients. According to Champlain (2012), there exists danger when a company retains an auditing firm for a client for a longer period as it becomes difficult to separate between the interest of the client and that of the auditing firm. An industry that has the option of extending the time allowing the auditor to remain with a client from five to a maximum of seven years will preserve the chief objective of the rotation rule, which is to maintain the independence of auditors and prevents them from captured by clients. The Corporations Legislation Amendment (Audit Enhancement) Bill 2012 is important, as the bill’s main aim is to improve the quality of auditing in Australia's firms. Auditing is complex thus efforts to adopt strategies to improve the transparency and quality of the audit is very essential and needs the support of the corporate governance. The process is necessary especially during the current era where businesses are vast and auditors are well informed which helps avoid a conflict-of interest situation. The corporations Legislation Amendment (Audit Enhancement) Bill 2012 had a great potential of ensuring improvement towards the Australia's audit regulation framework that ensures that it continues to foster high-quality audits that strengthen market confidence and also to ensure that the framework remains in line with international best practice. References Champlain, J. (2010). Auditing information systems. Canada: John Wiley & Sons. Campbell, T. (2005). Ethics and auditing. New York: ANU E Press. Duska, R. Ragatz, J. & Shag, B. (2011). Accounting Ethics. Foundations of business ethics. Canada: John Wiley & Sons. Rittenberg, L. Johnson, K. & Gramling. (2011). Auditing: a business risk approach. Washington: Cengage Learning Read More