9 pages/≈2475 words
Accounting, Finance, SPSS
Accounting (Research Paper Sample)
Evaluate the role of the auditor in the detection of fraud and error and critically appraise the adequacy of the current system of regulation of the auditing profession.source..
The modern-day economies are replete with investors, corporate bankruptcies, and as a result, regulators demand that firms should provide financial reports that are accurate. The corporate accounting statements give an insight of the financial status of a company and how its operations are funded. The role of the auditors is to pore into the performance data of the company to ensure that there is regulatory compliancy and accuracy. This paper will analyze the social roles of auditors, their duties and roles. Equally, it will examine how information is perceived by professionals in various positions and the effect of the audit report in their decision making.
The role of the external auditors
The financial report is made up of methodologies, techniques and tools that a firm put in place so that the performance data of the company can be revealed to the rest of the world. In the modern economic world, reporting of financial activities depends of a variety of corporate resources. It includes the finance and accounting personnel, financial accountant, reporting and analysis software. The law requires that listed public companies publish their financial results at the end of the financial year. External auditors should be certified accountants with practical experience in accounting, tax and financial matters. Auditors play an important role in ensuring that companies abide by the laws and regulations. In this case, auditors review and certify the financial statements of a company hence giving a clean bill of a company that is financial health.
The auditor should inform the statutory entity on the purpose and subject matter of the audit. He/ she should present the audit findings report in a complete, true and justifiable manner. The auditor is mainly appointed during the annual general meeting of the shareholders, and as a result, the auditor works for shareholders and is directly answerable to them. This notwithstanding, however, the user group or target group of audit groups can be much broader. Bank loan officers, external investors, financial analysts and authorities can all be users of audit reports. The effects of audit reports on users have been researched by many papers over along period of time
It should be noted that external auditors have the mandate of disclosing information to the investors whenever they doubt that the firm may not be having the ability of meeting its obligations. This means that the auditor could serve a warning of bankruptcy. This notwithstanding, however, auditors have in some occasions failed to report the serious threats facing a firm. In this case, investors who rely on auditors to detect any problem in the company get surprised by the problems. It is believed that the opinion of an auditor provides information that is useful to auditors (Bundura, 1986, p.,132).
Controversies in auditing
The auditing of big firms relies on the professional self-regulation system with the public oversight sector. Notably, the professional auditors are sustained by fundamental principles of independency and objectivity. These participles are essential in the professional code of conduct of any auditor. Nonetheless, the current regulation system demands that auditors should directly depend on the management of the auditee’s client for their economic survival. In the recent past, a number of organizations have collapsed and this has provoked the media and public ire. The ability of auditors of remaining independent and objective when working for economically powerful firms has been questioned for along time. In some occasions, auditors get implicated in fraud activities. For instance, Arthur Andersen was brought down by Enron scandal while a scandal uncovered in 2003 at Italy’s Parmalat threatens Deloitte & Touche. Notably, the two companies are global giants, and it’s alleged that new scandals continue to emerge every day. When the public lose confidence in the ability of the independent auditor, the government should introduce more regulations, whereby the audit professionals are forced to renounce tyheir self regulation status. Indeed, it is the mandate of professional auditors to maintain objective and independent “state of mind”. In this case, it is the obligation of an auditor to provide opinions that are not biased on the financial status of an organization.
According to Mautz and Sharaf (1961), the objective judgments of auditors need to be similar to the decisions of a judge in the court of law. In this case, the independence of the auditor relies on the individual unobservable process of decision making. Auditors need to be objective, and free from bias, conflict of interest and prejudice. Objectivity is fundamental to the independence of an auditor. Objectivity can be defined as a combination of intellectual interest, impartiality and free from conflict of interest. This notwithstanding, however, auditors are also human with full range of thoughts, feelings, personal weaknesses and interests, as well as beliefs and values imbued from the different experiences of life.
In the modern professional practices, audit risks can also include the internal audit failure. For instance, risks can occur because auditors are working on wrong projects or they are completing their project work in improper manner (Federal Bureau of Investigation, 1984).
On the other hand, the intention of an auditor is to focus on the nature, timing and procedures of audit in areas that are regarded to contain material misstatements in the organizational financial report. In the risk-based audit approach, auditors first need to understand the organization and its environments before identifying risks that are likely to result from material misstatement of financial reports. The auditor then performs risk assessment both on assertion levels and financial reports. In this case, the assessment should involve a number of factors such as the relevant internal control, nature of risks and levels of audit evidence that is required.
The assessment result classifies the audit into:
Areas of major risks of material misstatements which demands for specific response
The normal risk areas which requires standard audit programs.
After assessing the risks, the auditor should design a suitable audit response to the given risks. This would enable him obtain appropriate, sufficient audit evidence on which to work on. The risk assessments continue in the entire audit procedures and plans, and procedures are amended whenever a reassessment needs to be done.
The internal auditing plans needs to be driven by relative business risks. This means that auditing resources should be applied generally to the fields with the highest business risks. It should be noted that internal auditors perform their own business risk assessments. However, internal auditing is mandated to control the assessment process of management’s risk when the management formally puts in place the ERM programs. In essence, internal auditing is more efficient when the ERM process is relied upon, hence it can manage its own audit risks.
Business risks tend to be of diverse nature, and are mainly caused by various factors. Business risks can be classified into two major categories. The first category is the kind of risks that occur within the organization. These kinds of risks arise in the normal course of businesses. Notably, these risks can be pre-determined and their occurrences determined. The second category of business risks are those which arise from the outside events. These kinds of risks cannot generally be controlled by the entrepreneurs, and as a result, it is difficult to forecast the resulting risks (Frank, 1997, p., 321).
Business risks are related to the organizational objectives and goals. Essentially, business risk is the potential costs which the business will incur if it doesnot realize its strategic plans. It should be noted that the management and assessment of business risks have in most organizations changed into formal enterprise risk management.
On the other hand, audit risks mainly relate to external and internal efforts of a company that are aimed at achieving given objects. The objectives may include providing timely, effective consulting and assurance support to the board and management. Generally, audit risks are strictly seen as risks of incorrect audit conclusion. This notwithstanding, however, the contemporary views of audit risk include a bigger picture of audit risk. It specifically includes the assertion that the internal audit function are not working in the proper manner or are not doing right things (Goldman, Barlev, 1974 p., 54).
Some companies such as Deloitte Company have developed a unique approach in auditing. This is aimed at combating any risks that might arise in due course. The auditing is based on international auditing standards which are issued by IFAC. In the company’s audit approach, supporting and methodology technologies form the benchmarks for the auditing profession. The company performs a systematic analysis of the risks that are specific to business processes. The company derives acute focus on transactions, events and areas that are material to the credibility and quality of the financial report. Most important, however, is the determination of key risks by assessing carefully the activities and industry of the client that distinguishes it. It should be noted that the complexity of the clients’ business and challenges posed by the regulation environment demands that professionals with diverse experience and skills be employed to perform certain auditing procedures. Deloitte achieves target orientation and high efficient of its audit through five major phases:
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