Investigating the Principles of Auditing: Guide towards Best Practices and Implementations - Essay Example

Investigating the principles of auditing: guide towards best practices and implementations. The art of auditing is one of the most pivotal elements in the field of accounting and dictates the criteria of embedding controls in an organization. Recent reports by ACFE state that almost 5% of global GDP, which translates to approximately $3 trillion (Office of Internal Audit - Auditing Best Practices). The nature of auditing might seem trivial, but actually contains intricate details that an accountant must embrace. With these ever-growing challenges, the governing bodies that define auditing principles so have become stringent in their regulation. The IRS, SEC, and AICPA all have collaborated within each other to create standards that can serve as a backbone for an alignment of best business practices. Hence, auditors who take the conventional aggressive position regarding liabilities for their clients must be very stern in giving their opinion regarding this issue. In order to mitigate this risk, it is recommendable to conduct audit cycles. The frequency of the audit itself is derived from risk assessments of the organization. High-risk areas such as funding, operations, and lending demand special attention that must accommodate compliance. The objective of this regulation is to not only accommodate SEC regulations but also to provision audit independence. Undoubtedly, the element of auditing cannot be completed without first examining the aspects that compromise the Sarbanes-Oxley Act. This act specifically addresses auditor independence and prohibits independent public auditor to also perform from performing these services. In many cases, the root cause of the flaw is present here as many internal auditors are close to upper management, which allows their bias convolute with their judgment. Again, the codification is clear in this aspect under Section 333, in which the auditor must be granted permission from management to perform the audit under GAAP(Office of Internal Audit - Auditing Best Practices). Since business owners spend majority of their time managing their company’s financial statements, external auditing can facilitate this particular process. Therefore, a clear line between internal and external audits must be accounted for (Roessing, 54). From an internal perspective, it is always crucial to acknowledge any risks and utilize the empowerment of the external team to bring any new insights to serve as contingency plan. The function of external audits itself is to provided key validity to business owners who do not possess the array in-depth understanding of accounting principles. Most owners often just prepare financial statements without having much insight on the accuracy of the content (Dennis, 36). Another key benefit of external auditing is that it discovers errors in the whole process itself. Errors in accounting information can prevent business owners from making keen decisions that can be favorable towards their entity (Watson, 29). Owners can also find it cumbersome and difficult to review past data. By reviewing past data, external auditors are in a better position to pick out trends that may occur. A common theme that is typically hidden in financial statements that is pre-dominant is inflating expenses or sales. As an auditor, it is crucial to take this into account and apply professional skepticism (Office of Internal Audit - Auditing Best Practices). The Banking and Mortgage Industry is renowned for commissioning these results, especially after the housing market dropped. With the new FDIC laws, internal committees in the banking industry make it a point to accumulate for any planned losses in their financial statement. This creates an aura of an efficient and a well-prepared organization that can take decisive action if it is to hit the loss. Moreover, these trends will enable business owners to plan future production and forecast sales for the upcoming months (Office of Internal Audit - Auditing Best Practices). Another key benefit of external auditing is that it limits legal and tax issues (Roessing, 25). Professional accountants must provide business owners with much needed knowledge on the legal and tax issues. Legal consequences no doubt surface when business owners provide inaccurate or erroneous information (Watson, 28). An example such as overstating income can have drastic consequences. Hence, external auditors can catch these errors and educate business owners. In any given organization, the governance framework dictates the foundation of a corporation running efficiently. Three types of audits should be conducted that consist of: Operational audits, financial audits, and compliance audits. The day-to-day business operations that consist of control activities, business level monitoring and operational process act as a first tier defense towards governance (Office of Internal Audit - Auditing Best Practices). These type of audits are known as operational audits and are labeled “Business as Usual” but still require audit checks. A clear example of this can be depicted in the following scenario. For instance, if an employee wishes to purchase corporate equipment must be approved by their manager to conduct a purchase. This type of security serves as a first-tier of simple defense mechanism that later is crucial towards harnessing the second tier level of defense known as corporate oversight (Roessing, 63). Surprisingly enough, a survey that was conducted by PwC regarding best practices depicted that only 63% believe it was necessary to auditors to consider operational risks as “high-risks” ("Key trends in internal audit (2009)”. This is truly an alarming fact of information considering that operational risks can be detrimental. As an auditor, it is pivotal to ensure that company’s assets are being safeguarded from the misuse of the employees as it would require a manager approval (Office of Internal Audit - Auditing Best Practices). Another way that operational audits are conducted are via inventory checks. The AICPA clearly outlines this in section 331, in which inventories must be accounted and reported. The definition of operational audits extends to corporate oversight is to endorse business planning and policies that are compliant according to statutory laws. In this conjunction, the audit and other sub-committees are the responsible parties that are reporting entities (Dennis, 30). Finally, the last and the final defense is the audit itself in which monitor compliance and assurance is provided. Hence, a complete analysis of auditing protocols will be discussed in different aspects (Office of Internal Audit - Auditing Best Practices). Auditing in its purest nature consist of the auditor to given an opinion, or provide objectivity via education, understanding, and past experiences. One of the critical aspects regarding auditing derives from sampling. Since the sample size is a huge variable, auditors pick a sample size to conduct their investigation (Office of Internal Audit - Auditing Best Practices). The goal for the Auditor is required to give an opinion as to a fair presentation of all financial statements that are presented to him One thing is to note that the auditor is not responsible for identifying fraud. In this scenario, the importance of financial audits becomes a pivotal factor (Association of Certified Fraud Examiners). Understanding financial auditing requires keen attention to detail in order for it to be streamlined to a process. As an auditor, looking at cash flows and income statements are traditional methods of conducting checks. The challenge is to remain independent during this audit cycle but define the scope of the work that adequately reflects the organization (Association of Certified Fraud Examiners). Within the realms of financial audits, the principles of GAAP are highly acclimated procedures that may serve as a link to conduct audits. AU Section 420 serves as a critical guideline towards following this process (Dennis, 62). One of the key objectives that can be attained from this smooth process is that it aligns the functions of audits with the strategic objectives. Identifying and exposing risks allows employees to interact with management and to process this focus in auditing tasks. This mutual symbiotic relationship allows a better communication flow between the hierarchy of organizations (Association of Certified Fraud Examiners). In order for this to be executed, best practices should be trickled from macro to micro level in all aspects. These key findings are then analyzed by the internal board that allows management to understand and analysis the current weaknesses in the system of the control and make key suggestions to improve these controls Moreover, one cannot diminish the fact that internal audits clearly give positive reassurance to management when controls are operating in an effective manner. Therefore, a written and well-documented set of procedures is another can also be beneficial to supplement a plan of attack is the first step to standardize the process The challenge for any auditor in a given scenario is to understand the complication of environmental matters that may affect the company. For instance, a company that fails to adhere to comply with the legal requirements such as waste disposal; they will face harsh complications that may require embedded compensation and legal costs. An auditor must understand and acknowledge and factor this in the decision making (Office of Internal Audit - Auditing Best Practices). Auditors must be weary to choose carefully where to obtain statistical or non-statistical sampling (Office of Internal Audit - Auditing Best Practices. A good method that auditors should utilize in order to select between these two methods should derive from the fact in which quantification is necessary for the selected sample size. In any case, auditors should determine the sample size based on factors that correlate with the organization audit procedures (Association of Certified Fraud Examiners).. In addition, the derivation of samples collected for testing can be critical to ensure effectiveness in the plan itself (Association of Certified Fraud Examiners). Another pivotal aspect of implementing best practices in an audit plan is to ensure that segregation of duties are being implemented in every level. The idea of governance, risk management, and compliance are fused together in a compound in which segregation of duties should be embedded in every letter (Watson, 30). From an enterprise-wide perspective, segregation of duties consist of ensuring that each user within an organization is not being indulged in misappropriation of assets, funds, and is not violating any improper use of data. A strong emphasis regarding this issue must include a system of checks and balances in which an auditor can put any discrepancies in perspective (Office of Internal Audit - Auditing Best Practices). This is conducted both vertically and horizontally to ensure that integrity within the ethics of the organization is maintained. The quality of an audit should implement methodologies that allow the organizations to develop a sound system of resolving risks before they develop. The key challenge that is pivotal in this practice is to ensure that audit reports are executable from macro to micro level (Ramos, 30). Timeliness of the report itself should be conducted and distributed in a reasonable amount of time that directly allow the management to understand Risks associated with both organization and its subsidiaries (Office of Internal Audit - Auditing Best Practices). Without a doubt, implementing best practices in auditing serves us a great measure and a benchmark to streamline the process. As discussed above, it will create a more effective approach towards auditing that can harness and integrate the goals of an organization to ensure that a complete audit has taken place. The objective of this approach is to implement a concise and clear method of conducting audits that identify root causes of flaws while keeping the work aligned with the scope. Forwarding reports that are specific to the scope is an approach that should be incorporated. Traditionally, operational, financial and compliance audits have been the cornerstones for auditing. However with the recent advent of technology, it is crucial for auditors to examine more complex scenarios that compromise of multiple systems and technology. More than ever, senior executives continue to pressure internal audit to deliver a robust method of auditing that can prioritize in key issues on operational, financial, and business risks management. A sound and effective auditing plan will ensure that these practices are implements, initiated and provide sound judgment for the purpose of organizational needs. References "Association of Certified Fraud Examiners - Fraud Training Education and Certification." Association of Certified Fraud Examiners - Fraud Training Education and Certification. N.p., n.d. Web. 14 Mar. 2013. . "Case Study for Stericycle." Moveo: Integrated Brand Study. N.p., n.d. Web. 11 Mar. 2013. Read More