The Impact of Information Technology on the Audit Process - Literature review Example

Auditing Introduction Salehi (2011) describes auditing as the process of assessing people, products, processes, systems, organizations and projects with the intention of ensuring validity and reliability of information and generating an evaluation of the internal controls of a system. The main objective of auditing is to offer a perspective about the systems in use or the organization under assessment. More often than not, auditing generate assurance of an organization’s compliance to industrial, market and regulatory prerequisites (Rittenberg, et al., 2011). Traditionally, auditing remained a simple managerial procedure mainly entailing looking for accuracy of transactions, verification and control of pre-payment, calculation of assets and reporting past financial activities to the relevant management departments. Nevertheless, owing to a mix of factors in modern times, auditing has revolutionized, where organizations are advancing towards greater levels of transparency to depict accountability in the utilization and allocation of resources and efficiency in meeting the needs, expectations and preferences of the end users as echoed by Verver (2009). Operations in organizations are now much complex and large thus demanding higher levels of competency and expertise from auditors in order to reduce and manage risks effectively. For this reasons, there is demand for effective use of technology and higher performance expectations. This informs the basis of this report which seeks to critically evaluate that demand for effective use of technology, higher performance expectations and potential liabilities in failing to meet these expectations, create barriers for effective audit performance. Critical Evaluation Rittenberg et al. (2011) highlights that although auditing has for the longest time been associated with acquiring information on financial records and systems of an organization, recent trends have seen auditing covering other non-financial aspects of the business such as occupational safety, performance of information systems, environmental considerations and security among others. According to Volosin (2008), auditing is no longer a forte for public and listed corporations alone, but also non-governmental and private institutions and organizations are implementing them with the view of preventing or detecting fraud and fraudulent activities. As auditors carry out their role, they are guided by generally accepted principles, which inform their practice in applying the elements of fairness, validity, reliability and transparency as highlighted by Shaikh & Talha (2003). Auditing is a systematic process and often auditors face many challenges in effectively executing this engagement. Among these challenges includes lack of trust and confidence from the public. Often, the trust the public or the population has about a profession is the engine of the profession and once trust is broken, the profession function is broken (Beasley et al. 2001). The confidence and the trust of the public about the auditing profession has been on the blink of being broken following massive auditing scandals and accounting frauds in the recent past, which have caused huge lose of billions of dollars in shareholder value and lifelong investments as indicated by Salehi (2011). Other than the deteriorating trust and confidence from the population, the other more common difficulty facing auditors is their inability to collect enough evidence to support their findings. Especially in areas such as asset valuation where auditors often do not gather evidence to reinforce key assumptions, in asset ownership where they do not gather evidence to show the organization own particular assets and in management representations, where they do not substantiate management responses to inquiries (Beasley, et al., 2001). Beasley et al. (2001) indicates that auditors fail to assess relevant supporting records and documentation such as assessing a draft instead of the final contract and in other instances, failing to carry out steps outlines in the audit program. The latter scenario leads to the success of the management in overstating assets, which is a form of fraud. More often than not auditors fail to practice due professional care in both enforcement cases and in sustaining professional cynicism during authorized audit engagements. In addition, there is the challenge of auditors failing to adhere to generally accepted accounting principles or applying them wrongly (Beasley, et al., 2001). Planning is an essential aspect in audit engagement and failure to plan generates into planning to fail where the auditor develops audit program designs and fails to correctly evaluate inherent risk and change the program design accordingly. To recognize the increased risk related to non-routine operations and more importantly, failing to effectively prepare the audit program to capture present auditing expectations and needs and instead, relying on one used in previous years (Verver, 2009). According to Beasley et al. (2001), another notable deficiency among auditors is the overdependence on inquiry as the preferred type of audit evidence coupled with the inability in some of them to challenge explanations given by the management, which are in conflict with the evidence collected by the auditor during the auditing process. Among strategies implemented in order for auditors to overcome majority of the challenges and deficiencies identified above is the demand for effective use of technology. Modern business environments are largely impacted by the effects of technology, which randomly changes to accommodate changing needs, preferences, and expectations (Shaikh & Talha, 2003). Technological systems and processes are altering business and financial reporting and as a result, the way audits are carried out is changing. Auditors in modern business environs are necessitated to enhance their technological skills and know how in order to develop new, effective and more innovative audit systems and approaches and more significantly capitalize on the benefits of technology and design varied forms of audit tests to accommodate changes and respond to new business systems and procedures (Moorthy et al. 2011). According to the author, auditors skilled and experienced in matters technology are becoming more fundamental and important members during audit engagements. Nevertheless, these trends towards integrating technology in auditing and effectively using it, is generating new challenges in terms of heightened risks in terms of protection of information from attack such as viruses and cyber attacks. These attacks can damage important information and at worse, allow sensitive information to fall into unauthorized hands respectively and as such making technology a barrier to effective audit performance (Volosin, 2008). Additional risks leads to additional costs being accrued in order to ensure such risks are prevented, minimized and they are effectively and efficiently managed when they do occur. This means that there is need for auditors to comprehend fully the risks related with new and superior business information systems and control systems and techniques that are required to counter these risks as depicted by Verver (2009). As mentioned earlier, auditors are in greater pressure to have superior technological know how in order to apply it in their auditing work. Since not so many of them are qualified to operate the new complex business information systems, services of qualified experts in the field have always been sought (Moorthy et al. 2011). This generates a challenge where attracting and retaining technology experts in the numbers needed for audit support is difficult, especially in present and future technology environment. This means that these experts need to work with the auditing personnel as a team failure to which auditing performance as a whole becomes severely compromised. Be it as it may, the solution to the challenge is easily acquired through effective training of auditors in technology and seeking expert resources for help (Volosin, 2008). Effective use of technology in auditing present numerous opportunities for success and enhanced performance in auditing as it will help enhance productivity of auditors and enhance the risk management processes of organizations. Technology will help automate processes, which include regular monitoring of various internal controls, and allow internal auditors time to offer their expertise to the firm within other high-impact divisions as supported by Rittenberg et al. (2011). Technological systems and software programs such as the Microsoft Office (MS Excel, MS PowerPoint and MS word) are useful tools usable in audit planning, audit programs and audit reporting and documentation. Verver (2009) notes that the internet has allowed auditors to retrieve and share information which includes information regarding current guiding principles and standards, auditing best practices and among other regulatory prerequisites. Among the most fundamental changes, is the degree to which the auditing profession has discovered the significance of data assessment, automation of audit and control testing processes by way of regular audit and monitoring. Moorthy et al. (2011) notes that even though the general-purpose software systems to facilitate audits have undeniably developed efficiencies, they have not altered the fundamental approach to the auditing process. Contrary, the data assessment technological systems have generated significant changes in the approach to auditing by permitting all stakeholders to financial and operational transactions to be fully tested and where suitable to be assessed on automatic basis in real time (James, et al., 2001). Rittenberg et al. (2011) notes that the expectations of the auditing fraternity has changed significantly in the recent past as auditors get engaged in other high-impact areas of the organization such as managing risks, detecting fraud, monitoring and establishing opportunities in improving operational processes in order to improve financial performance. Although the afore-mentioned high-impact areas do generate excitement and they challenge the role of auditors, volatile and unpredictable financial and economic crisis has created immense pressure on resources. Auditors cannot effectively meet expectations and carry out their role at new levels without altering the way they do things and the efficient and effective use of technology is crucial for auditors to thrive in their evolving mandate (Moorthy et al. 2011). Despite the challenges associated with integration of technology with auditing, technology affords the auditing team higher level of assurance and capacity to not only identify risks and to examine controls, but also, test the data evidence of all transactions in a comprehensive way compared to traditional auditing techniques (James et al. 2001). Success generated by effective use of technology and incorporation of data analysis and regular audit into the auditing process indicate that the auditing team is strategically positioned to comprehensively carry and complete designing audit plans which is often a challenge for majority of auditors (Verver, 2009). Utilization of audit specific data assessment technology by auditors enables them to acquire greater insights than anyone in the firm, which helps in informing their decisions that are crucial to efficient decision-making processes for the management in responding, and fixing problems identified thus, benefiting the organization. In regards to high performance expectations, the public exerts immense pressure on auditors to perform effectively and efficiently at all times with minimal or no room for making errors in order to ensure validity, truth, reliability, objectivity, relevance and feasibility of reports they develop (Rittenberg, et al., 2011). This is important because, the information and reports that auditors prepare are the basis of major decisions made by stakeholders such as shareholders and investors in relation to where to invest, when to invest, why to invest and how to invest among other issues (Verver, 2009). In addition, auditing findings and information generated also is essential for financial lending institutions such as banks in evaluating the credit worth of organizations. Government agencies are among other stakeholders who rely on audit to evaluate financial performance of firms and more importantly assessing allocation of resources and whether there are sufficient returns on investments in public corporations. High performance expectations are crucial in the auditing profession as it allows auditors to not only apply the auditing best practices but also ensures they apply relevant standards in order to detect and prevent misconduct and fraud within managements and they help enhance their commitment and accountability in executing their mandate (James, et al., 2001). There are times however, when auditors are unable to meet these expectations and they comprise, which has an adverse impact on the reputation of the individual and the auditing profession in general (Cascarino, 2012). Failure to meet these expectations generates into possible liabilities such as legal disputes and declining trust and confidence among the population, which has the effect of the public failing to seek the services of auditors. When they do, they are sceptical on the objectivity, fairness, truthfulness and reliability of the reports prepared by auditors, thus ruining the credibility and sustainability of the auditing profession in the long term as echoed by Rittenberg et al. (2011). However, these shortcomings should not hinder effective audit performance. According to James et al. (2001), to ensure that failure to achieve the expected performance does not in any way comprise effective audit performance, the auditors can as well comply with auditing standards and guiding principles and apply their professional standards in any audit engagement. Failure to achieve performance expectations should not hinder effective audit performance but instead motivate them to perform even better, be more innovative and creative in their service delivery in order to effectively and efficiently meet the needs, expectations and demands of both internal and external stakeholders. As previously mentioned, primarily, audit reports and findings are relied upon by stakeholders such as the shareholders and creditors in acquiring a perspective of the financial status of an organization, which guides their decisions while investing as supported by Volosin (2008). On the other hand, audited financial reports are essential for the management of the organization as they contain information, which guides the company owners, and the top management in company assessment and in compensating its workforce in terms of dividends and benefits (James, et al., 2001). Therefore, the auditor is hard pressed to ensure that both parties, the external and the internal environment, are fully represented and that neither of their interests is compromised. The difference of opinion among the external users’ use of information with those of the management generates an inbuilt divergence about financial information, which culminates into an inherent divergence about financial statement representations as discussed by Salehi (2011). This means that the demand for higher performance expectations from auditors is an essential prerequisite to ensure credible, reliable, and transparent and mutually accepted auditing processes and audit reports. In addition, their high performance ensures that the auditors do help in resolving the inbuilt divergence between the internal and external users of information contained in financial reports, thus bridging the expectations gap (Salehi & Nanjegowda, 2006). Failure to meet the expectations in regards to resolving the inherent conflict between internal and external users of financial information in financial statements can develop into deeper mistrust about the auditing profession and consequently act as a barrier to effective audit performance as supported by Salehi & Nanjegowda (2006). However, auditors upholding their ethical and moral standards and exercising professional care in their audit engagements can effectively solve the challenges. In addition, auditors ensuring that their personal opinions and perceptions do not interfere with their execution of duties. Applying auditing best practice and basing their audits on generally accepted accounting principles would help promote trust and confidence of the public and in so doing motivate auditors to enhance their performance (Cascarino, 2012). Conclusively, despite the challenges and deficiency that faces auditing professionals, demand for effective use of technology and higher performance expectations enhances audit performance and in fact help in eliminating barriers that would hinder effective performance audit. Conclusion Auditing encompasses offering reasonable assurance of the objectivity and truth of financial statements to help aid investors, the management, shareholders among other stakeholders on critical decisions making processes. Auditing is a systematic process and often auditors face many challenges in effectively executing this engagement. Associated with these challenges is their failure to amass enough evidence to support their findings especially in areas such as asset valuation, failure to assess relevant supporting records and documentation, failing to practice due professional care in audit engagements auditors failing to adhere to generally accepted accounting principles or applying them wrongly. Nevertheless, these challenges and deficiencies can effectively be addressed and ensure effective audit performance through effective use of technology and by meeting the high performance expectations placed on auditors by the public. Through technological knowhow acquired through effective training and education, seeking external technological expertise and by applying due professional care, auditors will be able to safeguard against poor audit performance as a result of technology use and potential liabilities of failing to meet the high performance expectations. Primarily, demand for effective use of technology and higher performance expectations are not barriers to effective audit performance but they are in fact, essential to eliminating barriers to effective audit performance. References Beasley, M.S., Carcello, J.V. & Hermanson, D.R. 2001. Top 10 audit deficiencies: Lessons from fraud-related SEC cases. Journal of Accountancy. Accessible from http://www.journalofaccountancy.com/Issues/2001/Apr/Top10AuditDeficiencies.htm Cascarino, R.E. 2012. Auditor's Guide to It Auditing. New York: John Wiley & Sons. http://www.protiviti.com/en-US/Documents/Featured-Articles/Improving-Internal-Audit-Through-Technology.pdf James, L., Bierstaker, J.L., Burnaby. P., & Thibodeau, J. 2001. The impact of information technology on the audit process: an assessment of the state of the art and implications for the future URL:http://www.emeraldinsight.com/Insight/Articles/0382201206.html Moorthy, M.K., Seetharaman, A., Mohamed, Z., Gopalan, M., &San, L.H. 2011. The impact of information technology on internal auditing. African Journal of Business Management, vol. 5, no. 9, pp. 3523-3539. Accessible from http://www.academicjournals.org/AJBM/PDF/pdf2011/4May/Moorthy%20et%20al.pdf Rittenberg, L.E., Johnstone, K., & Gramling, A. 2011. Auditing: A Business Risk Approach. London: Cengage Learning. Salehi, M. & Nanjegowda, K. 2006. Audit Expectation Gap: The Concept. Journal of Audit Practice, vol. 3, no. 4, pp. 69-73. Salehi, M. 2011. Audit expectation gap: Concept, nature and trace. African Journal of Business Management, vol. 5, no. 21, pp. 8376-8392. Accessible from http://www.academicjournals.org/AJBM/PDF/pdf2011/23Sept/Salehi.pdf Shaikh, J.M. & Talha, M. 2003. Credibility and Expectation Gap in Reporting on Uncertainties. Manage. Audit Journal, vol. 118, no. 6/7, pp. 517-529. Verver, J. 2009. Improving internal audit through technology. Protiviti, pp 1-4. Accessible from Volosin, E. 2008. The Theories of Audit Expectations and the Expectations Gap. Berlin: GRIN Verlag. Read More