International Auditing - Case Study Example

International Auditing Introduction The corporate world is experiencing rapid revolution that exposes organizations to extreme consequences depending on their activities within the global market. Such far reaching global competition has prompted various considerations within companies that include improvement of quality as well as risk management initiatives. Subsequently, there is elaborate consideration on reengineering of structures and processes leading to greater accountability. Such processes require timely, reliable and up-to-date information for ultimate decision making process. There is need for adequate and efficient structures within organization governance and processes and this requires involvement of qualified professionals capable of reviewing such processes. Internal audit function is considered as the preferable tool for monitoring of controls, evaluation of operational activities within management strategies and initiatives (Owusu and Frimpong, 2012). Need for social and environmental audits External and internal auditing are considered crucial means of independent verification that enables reduction in errors associated with record-keeping, mishandling of business assets as well as fraudulent activities within organizations. Internal auditing is an independent activity within an organization that examines and evaluates effectiveness of other control measures. The result of the audit provides necessary assistance towards effective execution of individual responsibilities, therefore, promoting effective control of costs. In this study, the focus is on social and environmental auditing, which ensures that all organizations give report on their activities and associated impact on social and natural environments (Campel, 2009). Social and environmental reporting is considered part of corporate financial report for the purposes of creating and maintaining societal legitimacy of organizations (Uwuigbe and Olayinke, 2011). Subsequently, the report ensures that organizations remain socially responsible besides gaining competitive advantage. There exist three theories that safeguards perspective on the study of social and environmental accounting and auditing which include legitimacy theory, stakeholder theory as well as institutional theory. Legitimacy theory focuses on the social contact between the society and organization which emphasizes organization establishment based on market forces and community expectations. Stakeholder theory focuses on the knowledge of stakeholders concerning organizations level of consumption of social resources, while institutional theory focuses on the level to which organizations utilize operation policies accepted to influential stakeholders (Owusu and Frimpong, 2012). Examples of recent Catastrophes These involves the Arctic oil and gas exploration, which have provided unique challenges to the oil exploration industry. The challenge involves two companies Gazprom and Rosneft’s which according to audit reports lack experience in offshore projects at an advanced level. Additionally, the companies are known to have a record of poor environmental, health and safety alongside lack of transparency within the company’s reporting process all of which are a characteristic of poor corporate practices. There is also current political turmoil and regime within Russia that appears divided over the future of the energy sector within Russia. Rosneft is reported as responsible for 75 % of oil spills within Russia’s Yugra province in the year 2011. Gazprom is reported to have had lack of clarity over fiscal conditions that led to unfeasible extraction process in the year 2012, of which this is attributed to the company’s inability to address offshore drilling expertise within their board. The company’s Kolskaya rig sank leaving a total of 53 crewmembers dead due to poor assessment procedures that the company used (Mennicken, 2008). Implications of social and environmental audits There are several risks and costs associated with non-compliance to laws and regulatory rules that corporate entities incur. However, contracting auditors assist in the review of social and environmental disclosures. Principal auditor’s places responsibility with regard to environmental laws and regulations, they assert on the fact that laws governing environment should be equally considered important as other laws and regulations governing the organization. Non-compliance with regulatory laws can adversely affect a company’s financial statements. This in particular, places responsibility on statutory auditors since they are required to make reports on any potential negative impact on environment from any of the organization’s activities. Such responsibility is imposed by International Standard on Auditing 200, which gives various objectives of independent auditors alongside the conduct of an audit in compliance with ISAs. The auditor is required to carry out substantive procedures on financial statement with focus on items incurred by the organization such as provisions for restoration of sites, provisions on fines imposed as well as payments made as compensations. Secondary Auditors are required to thoroughly review, check, plan and perform audit on mentioned items on the basis of professional skepticism that identifies environmental issues as crucial in causing financial statements to be negatively stated materially (Owusu and Frimpong, 2012). Statutory audits demand that auditors should be alert concerning potentially harmful environment impacts in an entity presently, in the past and future (ACCA, 2009). Joint auditors on the other hand are under no obligation to forward reports to stakeholders of organizations concerning the level of impact of social and environmental issues such as safety, health and climate change. However, corporate auditors are under obligation to prepare social audits for the purposes of analyzing consumer trends. Possible impediments Consistency is considered an important element incorporating quality and standards within audit process and reporting. The aspect also considers audit firm culture alongside skills and personal qualities of auditors. Therefore, for the purposes of achieving audit quality application of standards is a necessity but not a sufficient condition for the process. However, other significant steps have been taken by audit practitioners for the purposes of enhancing confidence in the quality of audits (Owusu and Frimpong, 2012). Initiatives taken are of international scope owing to perceived audit failures and are focused on promoting consistency across countries. Some of the initiatives include encouraging firms to adopt international Standards on Quality Control (ISQCs) as well as International Standards on Auditing (ISAs), establishment of independent audit oversight bodies amongst other initiatives. Despite the nature of consistence and initiatives undertaken, audits encounter some significant impediments across regions. For instance, there is growing limit to harmonization on the basis of development, adoption, implementation as well as enforcement of International Financial Reporting Standards (IFRS). The quality of audits is affected by features of political, economic and business environment. Such features involve effects of corruption and bribery within public and private sectors; there are also associated business ethics such as accountability and transparency of firms. Quality of governance within different aspects of economy also presents potential impediment alongside rights of foreign investors and complexity within capital markets. Such environments affect the smooth flow of the audit processes since they affect the motivations of those preparing information. This threatens adequate establishment of the concepts of accountability and transparency within national institutions. Existing legal framework also act as an impediment since there is significant variance of laws between countries. This has significant impact on the application of international auditing standards since everything is subject to threat of litigation and legal liability. Such environment provides difficulty in achieving full transparency in audit quality. The level of education standards prevailing within a country, degree of global connectivity affects the level of skills and experience that enables cross-border communications and relationships. The background of the auditor also influences implementation of auditing standards (Knechel, 2009). Evaluation on the benefits that companies derive from submitting to social and environmental audits Organization’s good performance in social and environmental aspects creates some level of good business sense. The level of risk and uncertainty that an organization is exposed have an impact on investment decisions, consumer behavior as well as government policy. Companies that adhere to social and environmental audits through appropriate measurement, management and communication are considered to be inherently better placed. This is since the procedures undertaken by audits enable such companies to gain understanding on how to improve existing processes and reduce costs. Further, such companies obtain knowledge on regulatory and stakeholder requirements hence taking advantage of existing new market opportunities. Application of Key Performance Indicators (KPIs) enables companies to engage in elaborate management that reinforces links between environmental as well as financial performance. Reduction in environmental and social impacts significantly reduces the rate of taxes and levies making the company avoid paying cost of compliance (Owusu and Frimpong, 2012). Types of internal audit, internal audit objectives and the interface or otherwise between internal audit and external audit There are a number of internal audits that assist in the performance of wide range of audit activities. These include financial audits, compliance audits, special investigations, information technology audits and operational audits. In the first case, financial audits focus on questions surrounding internal controls and propriety of financial transactions. Secondly, compliance audits focuses on the determination of the degree of adherence to laws, regulations and policies of an organization. Thirdly, operational audits assists in reviewing use of resources as well as practices within various organization departments with the aim of determining efficiency in meeting goals and objectives. The process helps in mitigating inherent risks within an organization. Subsequently, Information Technology audits ensures that system processing controls, data and physical security, systems requirements and development procedures are in good place. Finally special investigations respond to allegations from either external or internal sources based on exposure to potential risk (Knechel, 2009). The objective of internal auditing is to independently and objectively offer assurance and consulting activities for the purposes of adding value and improving performance of various organizations. Internal auditing offer assistance to organizations by ensuring that they accomplish the process of ensuring systematic and disciplined approach towards improvement of processes involving governance, risk management and control. The differences between internal and external audit is summarized in the table below. External audit Internal audit Reports to shareholders or consumers associated with the organization but outside organizations structure of governance Reports to the board and senior management comprising organization’s governance structure External audits are responsible for reinforcing credibility of organization’s financial reports to stakeholders Internal audits assists in evaluation and improvement of governance through risk management and control processes. External audits covers financial reports as well as associated financial reporting risks Internal audits reports all categories of risks and provides their management processes. External audits have got no responsibility for improvement despite being obliged to report problems Internal audits have the responsibility for improvement through advises, coaching and facilitations geared towards scrutinizing management responsibilities Relevance of internal audit’s role of risk management to ensuring corporate responsibility and compliance with social and environmental audit commitments Internal audit risk assessment is critical in the identification and filter of activities that could provide measurable benefit to an organization. However, there are a number of mandatory activities that internal audit functions must support that includes regulatory compliance and assistance from external auditors. Internal audits delivers reports on increased risk coverage, measurable values and points of cost savings through audits on organization’s value chain. Internal audits enhance the image of the organization by conferring external legitimacy of the company to external stakeholders. This audit exposes organizations to investors who eventually are capable of analyzing the nature of responsibilities that the organization undertakes with regard to environment. Good utilization of environmental audits increases attractiveness of organizations to customers as well as financiers. Additionally, the audit provides sufficient information that enables management to make decisions concerning social programs that the organization sponsors as part of corporate social responsibility. Social audits reveal the nature of consumers associated with the company alongside quality of services provided (Hegarty et al., 2004). Conclusion Generally, environmental and social auditing provides good incentives for companies enabling improved performances over years. The concept on environment and social auditing is embraced by company management for the purposes of ensuring that they meet regulatory requirements alongside perceived benefits that directly affect stakeholders. This calls for regulators to set dedicated standards concerning issues surrounding social and environmental needs and makes them available for auditors in the process of conducting an audit. There is general necessity of ensuring that organizations comply with social and environmental auditing for the purposes of fruitful outcome in implementation. References ACCA .2009. Advanced Auditing. London: Kaplan Publishing. Campbell, D. 2009. Risk and environmental auditing. ACCA student accountant. Hegarty, J., Gielen, F., & Barros, A. 2004. Implementation of International Accounting and Auditing Standards. Lessons Learned from the World Bank’s Accounting and Auditing ROSC Program Knechel, W. R. 2009. Audit lessons from the economic crisis: rethinking audit quality. Inaugural lecture at Maastricht University Mennicken, A. 2008. Connecting worlds: the translation of international auditing standards into post-Soviet practice, Accounting Organizations and Society, 33, pp 384-414 Owusu, C., & Frimpong, S. 2012. Corporate Social and Environmental Auditing: Perceived Responsibility or Regulatory Requirement? Research Journal of Finance and Accounting, 3 (4), Uwuigbe, U. & Olayinka M. U. 2011. Corporate Social and Environmental Disclosure in Nigeria: A Comparative Study of the Building Material and Brewery Industry. International Journal of Business and Management, 6(2) Appendix 1: Selected ISAs ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing In paragraph 15 of ISA 200 there is an indication that all audits should be planned and done with professional skepticism. ISA 315 Identifying and Assessing the Risks of Material Misstatements through Understanding the Entity and its Environment In paragraph 5 of ISA 315 there is a requirement that auditors should perform risk assessment procedures for the purposes of providing elaborate assessment on risks associated with material misstatement at the financial statement. ISA 330 The Auditor’s Responses to Assessed Risk This covers auditors’ responses to reported risks, which includes tests of control. ISA 500 Provides Audit evidence Read More