Governments Concerns about the Auditing Standards - Essay Example

Audit Summary of KPMG Monograph Chapter This is the introductory chapter and defines why the government's concerns about the auditing standards and aspects rose suddenly. The situation was alarmed by the downfall of Enron and other such companies who were audited by world-renowned auditing firm such as Arthur Andersen LLP. The fraud, which was caught by the authorities, had been involved in window dressing the accounts, which led to the bubble, boom in NASDAQ in the year 2000. the auditing firm, which was famous for its competency and honesty was charged for this fraud and its reputation went down taking it along with it. Thus the government authorities passed under the Bush administration to have a strict watch over all the companies and auditing firms formed new standards. These standards require all the auditing firms to abide by the standard procedures defined within their scriptures and have also expanded the horizon of the minimum requirement for an auditor about having the knowledge of operation of its clients and /or companies. These standards include ; International auditing standards by international auditing and assurance board Assessment of Risk of material misstatement Audit risk Detection risk The bill passed by president bush is known as the corporate and auditing accountability and transparency act of 2002 also known as Sarbanes-Oxley (SOX) act. SOX is an effective measure taken towards restoring investors interest in the public limited companies. SOX also made another governing body known as public company accounting oversight board. Within two years this body PCAOB placed three major auditing standards. The question that how well these standards can clear the overall view is still unanswered. However, the introduction of these new standards and policies will surely increase the quality of auditing performed. The one additional thing that matters to the auditors now is the identification of the methodology of implementing these standards in their auditing practices in a foolproof and transparent manner. Feedback: The introduction chapter gives a brief over view of the concerns of the government and its new policies regarding them. However, to what extent will the policies and standard be successful in making sure that every thing goes legal and legitimate is yet to be determined Chapter 2: Auditing standards have been facing many changes due to the changing business environment. Right from the time of simple book keeping till the time the financial statements are made, the techniques of auditing were being required to adapt to certain changes for the sake of such events. Companies had been growing large; large enough to stop any auditing firm from doing the detailed evaluation of the entire book keeping stuff. Thus, now the emphasis is on monitoring the internal controls of a company. As per the SOX section 404, internal auditing by public limited companies is a common standard procedure carried out by all within as well as outside U.S. The auditing now also includes checking on the inventories declared and the accounts receivables identified in the balance sheet(s). The most significant step was the introduction of audit risk model (ARM). The risk auditing includes completeness, obligations, correct valuation, presentation and disclosure of certain elements. If any deviation is found by the risk test, the internal auditor is supposed to take the required corrective action to bring the level of risk to the tolerable level or considerable range. While performing disclosure of certain events, a couple of evidences are acquired to support each n' every element. EBS is the minimum requirement set to act as a source of evidence. Auditors need to base their assessments on a couple of evidence and standards. Feedback: This chapter is about controlling the risk factor by internal auditing practices and controls. This requires a honest internal auditing department to implement policies avoiding any risks, as implied by regulations. Thus this is easier for the auditing firms to have a check on the company's accounts by only evaluating their financial statements against the set standards. The problem is that not all internal auditors abide by it and may allow risky steps to be taken without considering the consequences; the reason why, is that because they are being paid by the company and also they have to listen plus they also get some additional rewards by the management for making their unofficial actions sound legitimate. Chapter 3: The companies need to assure their investors of the sound operation by disclosing their financial statements in the very foolproof manner. The auditors here need to be and act professionally to provide the requisite quality of checks on the company. Professional judgment is the one connecting point where evidence and risk assessments meet. It can show the auditor the true picture of the company. Given the auditor has the experience and pre-requisite professional exposure he will surely get to catch any fraudulent activities that might be practiced in the companies' accounts. This might be explained either in terms of personal judgment or audit evidence. Personal judgment is based on the expertise of the auditor; that he has acquired over a period of a considerable time evaluating and doing the assessment of the accounts of several other companies many a times. The expert being a human being might make a mistake but at the end of the day an expert is an expert and therefore, he is supposed to have relatively more knowledge than others. Feedback: Another way is to analysis the financial statements of the company. The financial statements provide a tangible evidence for the audit. However, there is intangible evidence as well, such as the attitudes and behavior towards the finances and related details buy the finance officers and internal auditing department. The level of compliance with the rules and regulations and defined standards of the auditing are also a solid evidence. But then rules and regulations should be strictly implemented and monitored as well. A second argument might be that the auditor's expertise is not a divine rule of thumb to be followed. As said in the chapter the auditors make out a mental picture of their beliefs. This is very much likely to effect the reports due to a biased rather having an impartial feedback by the author. Chapter 4: This chapter is based on the concept of triangulation. The triangulation effect is based upon taking three elements from the finances and accounts of the company as resources of information to actually use them in the verification of accounts for the audit purpose. The three elements used in triangulation might be not necessarily mutually exclusive. The common elements being the EBS-, MII-, and MBR, the auditors can now have a better picture of the whole scenario. This approach helps the auditors in two ways. It can either give the comparison grounds to match against the three standards. Normally the auditor through his procedures and experience can do the verification from only one source, but then the audit objective should be assessed against another standard so that it can be observed that the results yielded remain the same. It helps the auditors to observe what the management have doing the whole year to analysis their activities and the risk level they have been exposed to. Secondly the auditors can analyze any window dressings and/or bad accounting practices by the internal management because standards such as EBS can't be condoned and do actually give the true picture because they can't be mutated. Feedback: The risk mitigation seems to be the main idea, of the chapter, by any means. The checks and double checks are a proof of the conservative approach being employed in practicing the audit by these auditors. Chapter 5: This chapter discusses the KPMG integration strategy which unifies its operations on a world wide platform. The audit procedures may be described in terms of (1) planning, (2) control evaluation, (3) substantive testing, and (4) completion. "If planning phase of the assessment of risk were not adequate, undesirable effects potentially could cascade through the other elements of the audit workflow". This means that the correct assessment of risk is vital while performing the audit to have sound work flows in the financial operations of the company. The other procedures are also subject to the compliance with the global strategy of the KPMG audit practices. Feedback: The chapter merely discusses the global strategy of KPMG and it's the unified procedures of performing all the audit operations that are practiced in all the regions of the world. It is always recommended to have a standard and well defined platform to carry out any type of activity so that to minimize and/or resolve any issues involved in integration. Chapter 6: All the planning regarding the risk evaluation of the company is done in the first and /or second quarter of the fiscal year. Here the strategies for the control are formulated. The planning stage might involve recruiting more specialized personnel, and experts and also includes obtaining more information regarding the evidence(s) for each n' every transaction. Pervasive (FST-level) risks emanate from conditions and events that are likely to cause a threat to the entity's ability to continue as a going concern; it may also indicate the presence of significant incentives and pressures bearing down on the management that may lessen the risk of significant misstatement of accounts which might be due to any type of fraudulent activity. A pervasive risk also arises from the situation and events within the entity's span of control (controlled environment). The auditors are here likely to have close observation of the internal auditing department and given that a lot of people from that department end up leaving the company, the auditors would never trust the reporting done by the internal audit and this will be thus a red light for any internal audit department of an entity. Feedback: Planning is very important s far as any situation is concerned. It gives you an opportunity to design the policies to have the most achievable level of efficiency. This phase is therefore very vital while designing the procedures of the audit practices. Chapter 7: The control evaluation part makes use of the three elements of the concept of triangulation approach. It is very much likely that the entity's internal control over its financial standards of reporting the statements will have the capacity to ensure that information is transformed into a proper and reliable estimation of any contingent liabilities that, if appropriate, are accrued. Thus for this purpose the auditor will examine the accounting practices and will place the checks on the internal control policies; he won't rely on the assertions of the staff or the audit evidence that might be very obvious. The "implementation of controls for significant routine classes of transactions, the auditor considers how the control is designed, performed, and documented, how often it is applied, the nature and significance of misstatements it is likely to prevent or detect, and the competence and experience of the person(s) who perform the controls." This means that the controls are different fro different categories of transactions. It is the auditors' job to actually design and implement certain controls. Feedback: Controls are an important area when handling especially the finances of any activity. The company might have the best planning done, the best formulated and well define d strategy and the most optimal procedures to carry out the activities but then we need to have control of those activities to make sure that they comply with the objective, in this case, to disclose the accounts in the most transparent manner. Chapter 8: This chapter concludes the process of auditing procedures by discussing the testing and implementation. Once the plans are made, the strategy defined, the controls are set to monitor the activities, and we need to first do the testing of all our procedures against some real data on an experimentation basis. This is because auditing is a very sensitive matter as far as the integrity and performance level of any entity is concerned. Therefore we need to develop model according to the designed procedures to work upon before actually going for those practices. After this is done we do the implementation which entails actually embedding those procedures into the auditing policy of the company so as to ensure maximum compliance by against the international standards of accounting. Feedback: This chapter sums up all the activities into the final phase of testing and implementation. However, this not the end of the story because keeping a check on the internal financial transactions is an on going process. Reference Bell, T. B., Peecher, M. E., & Solomon, I. (2005). Audit, The 21st Century Public Company. KPMG. Read More