Audit Framework (Essay Sample)

AUDIT FRAMEWORK
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Audit report
Audit report is an annual report that an auditor provide examining whether a company’s, corporation’s or an organization’s financial statements complies with GAAP. This report consists of three parts and the first states the duties and responsibilities of the auditor and directors. The second parts is the scope that states the GAAP used in the audit. The last part is a paragraph that gives the auditor’s opinion (Arens 2014).
Audit report is the final product of an auditing process which involves formal examination of financial books, accounting books, vouchers and other related documents of the entity’s concern. Audit process ensures that profit and loss and the financial position of an organization are verified. Financial records are systematically checked and assessed to determine their accuracy, effectiveness and efficiency to the organization (Duska 2011).
The need for audit report
Audit report is important since the organization needs to check on their accuracy and correctness of all accounts. Audit report ascertain whether profit and loss account, financial statements and balance sheet prepared shows the summary of the organization and represents the true picture of organization financial position (Association of Chartered Certified Accountants 2006).Generally, audit report ensures that there is efficiency and accuracy, detection and prevention of errors. Audit is conducted to ensure that the organization follows the policies formulated thus considered an effective tool for organization or business management. Audit report also provides suggestions that are valuable for the improvement of organization important areas and also for the formulation of future policies.
Audit report is essential for reviewing organization policies from time to time (Arens 2014). This report also involves detailed verification of financial and accounting records and this is essential in discovering fraud and checking accountability of the employees. Audit reports may lead into motivation of the employees thus it is an important ingredient in maintaining their efficiency resulting into increased organizational performance (Plessis 2010). It identifies any manipulation of records or misappropriation thus enhancing organizational efficiency. Audit report is essential in enhancing investor’s confidence since audited financial and accounting records provides the need of whether to invest more in capital. The following can be argued as the need for audit report (David Hay 2014).
Need for accountability in businesses, organization and companies
It is notable that the basis of carrying out audit of organization financial system is the fact that people who run and prepare the financial statements are different from the entity owners. Audit report is necessary for larger companies compared to small owned companies where the owners have first knowledge of the financial and accounting records (Association of Chartered Certified Accountants 2006). In large companies directors are appointed by the shareholders to run the organization. Therefore the underlying separation of immediate control and ownership forms the basis of the need for audit report to ascertain accountability of the directors.
In any organization, business or corporation the source of accountability and management performance that shareholders seek is based on the financial statements. It is notable that the financial accounting statement is prepared by the management and because of this the shareholders depend on audit report regarding verification of these statements (Roberts 2005). The audit report gives shareholders assurance that the financial statements are kept properly free of misappropriation and (David Hay 2014). Therefore the provided financial statements by an audit report represent true and fair view of the financial position and affairs of the corporation.
Need to ascertain financial statements reliability
Owners and of corporations and other users of corporations financial statements need audit report so as to ascertain the extent in which corporations financial statements can be relied (Collings 2011). Audit report provides a reasonable and accountable means as well as the basis in which they can place reliance on the corporation financial statements. There are various stakeholders who need audit report of corporations for various specific purposes. Audit report on corporation’s financial statements is needed by tax authorities for the purpose of determining the accuracy of tax returns filed by corporations (Fearnley 2011).
It is also needed by financial institutions for the assessment of credit risk by potential borrowers. In an audit report this is provided in the analyzed liquidity and financial position of the corporation. The corporation management makes use of audit report in the re-evaluation of corporation risk management processes and internal control systems in place. The management achieves this by taking into consideration opinion and feedback provided in the audit report.
Need to determine the scope of corporation financial statements
Audit report is needed for the provision of a reasonable scope on accuracy assurance of the corporation’s financial statements. This scope does not necessarily provide absolute assurance of the financial statements being free of all misstatements. Audit report is basically confined in providing financial statements scope of a reasonable assurance to ensure that carrying out an audit has more focus on the benefit of achieving enhanced assurance while minimizing cost and time (Arens 2014). It is important to put in mind that audit report does not guarantee absolute assurance attributed to the inherent limitations of auditing processes.
Uses of audit report
Formulation and implementation of corporation objectives
Audit report provided is used by corporations to align, pursue and attain various business objectives. Corporations take into consideration opinion in audit report to establish effective internal control to detect and prevent irregular transactions, effective supervision, monitoring, efficient maintenance of corporation financial records, measuring performance and promoting corporation operational activities (Mirza 2011). Corporations use audit report review for designing effective internal controls and implementing the proposed areas needing improvements. Documented inconsistencies and irregularities in the audit report are used by corporations to conduct further investigations by the management (Collings 2011)
To assess risk material misstatement
It is notable that audit report provides an assessment overview in a corporation’s the risk material misstatements in the financial reports. Corporations with effective internal controls are able to create reliable financial statement reports to be used in coming up with an audit report. Therefore audit report is used by corporations to determine the best way in which they can allocate resources in profitable segments to ensure that they achieve maximum return on investments (Fearnley 2011). Audit report also enables corporations to effectively manage its affairs since they know the true status of its assets and liabilities (McLinden 2011). Therefore corporations can be able to invest in its segments that are dependable in the market place and can reliably produce goods and services. In regard to this audit report can be effectively used in the prevention of debilitating misstatements in the corporation’s financial records and reports.
To prevent fraud
Audit reports play a vital role in the prevention of fraud in corporations. It provides a detailed comprehensive report on corporation’s operations and effectiveness of internal controls and the auditor report opinion can be used to prevent various fraudulent activities and financial accounting irregularities (Collings 2011). Audit report assist the management in designing and modifying corporation internal control systems aimed to prevent fraud. Audit report is essential in providing deterrence since regular issuance of audit reports could prevent employees from the attempt to defraud the corporation.
To determine the cost of capital
Audit report can be used to reduce various forms of risk in a corporation. This include information risk, the risk of misappropriation and fraud of assets and the risk of suboptimal management attributed to the lack of sufficient information on its business operations. The information provided in the audit report can be used by investors to determine risks associated with the investment in a corporation.
Analysis of the current audit report version
The current version of the auditor report in the IAASB invitation to comment document focuses mainly on enhancing accountability and transparency as well as comparability on a global perspective. The version has a well layout framework that separates audit reporting requirements and the connection with the International Standards of Audit (ISA) taking into consideration the additional supplementary reporting responsibilities in various jurisdictions internationally.
This version of audit report is basically internationally visible and has a generally accepted guidance on the form and content. This feature is important since all the various stakeholders and auditors have a clear and precise understanding and acceptance of the underlying ISA. The ISAs in regard to the current audit report version has set out clear guiding procedure to the auditors in various circumstances carrying audit adopting ISAs and the auditing standards applicable in specific jurisdictions across the international borders. This is essential in particular to the preparation...