Strategic Audit
Table of Contents
The interest of the general public towards the ethical representation of financial reports. 2
Usage of nine principles of audit for ensuring quality and reliability of the audit process. 4
Question 2
The interest of the general public towards the ethical representation of financial reports
The accurate and fair view is a fundamental principle of audit, which ensures that all the financial statements are free from any kind of material misstatements and represents a reliable and fair picture of the financial position of the company to the stakeholders and other customers. The general public is always interested in getting a fair and accurate picture of the financial performance of any company as it will further help them in deciding on investment or any other activity in the coming days (DeFond et al. 2016). The accurate view of financial information suggests that all the figures and data presented in the financial statements are factually correct and have been prepared following the IFRS guideline. This also ensures that these financial statements do not have any incorrect data or information that might mislead the end-users. The incorrect data and information may arise due to material errors or omission of transactions and balances from the financial statements.
A fair view of financial statements implies that the financial information presented in these statements are not elements of any biasness and are only prepared impartially by the financial statement makers. This feature also suggests that the financial information has been prepared in their economic substance of transactions and is solely not concentrated in its legal form. This principle of audit has been fundamental as it is the responsibility of every company to abide by the Companies Act and prepare their financial statements accordingly. This process should be checked and tallied by the auditors (Ajao et al. 2016).The auditors should ensure that the financial statements have been made truly and fairly by the directors of the company. According to the Company Law of certain jurisdictions, the auditors are supposed to specifically highlight in their audit reports about the representation of financial information by the organizations. The auditor’s report should also contain an unbiased opinion of the auditor about the accuracy of the financial information displayed in the company’s reports.
Through the process of fair and accurate representation of the financial statements, the interest of the common public can be protected up to a greater extent. The business environment in modern days is very complex and uncertain, as a result of which an extremely sophisticated financial engineering is required for setting up an accounting standard (Lehonoksa, 2016).The financial reports of the companies should be made following the principles of accounting and financial reporting, which should be read and understood by the end-users. The companies should understand and recognize the variety of users who would be interested in this financial information and financial acumen. A single size may not fit all the end-users that include sophisticated investors, analysts, and creditors versus the common public. The auditors can play a crucial role in this process and develop a comprehensive model of the financial report, which will add value to the financial information through independent assurances (Vandewal and Dijkman–TU, 2016). Additionally, the accounting and financial reporting standards must be accompanied by corporate governance, independent auditors, and regulatory oversight for achieving a favorable result.
Only following the regulations in setting up a financial report can be the minimum expectation of the common public. The common public expects the organizations to represent the economic substance of business transactions in their reports, which will be free from any kind of intentional errors or falsification. According to many accounting literature, it has been observed that the general public has a notion regarding the improper and unethical actions of the auditors (Kearns et al. 2017).The common people believe that the auditors are reluctant towards their duty of protecting the common investors. As a result, many investors have suffered tremendously in the past few decades. These beliefs have put on excessive liabilities to the auditors, and they have been working hard to reduce this “audit expectation gap.” The accounting profession has come up with many initiatives to improve the performance of the auditors and educate the general public regarding the audit regulations and guidelines such that their expectations can be reduced.
It has been thoroughly researched that these high expectations from the general public have enhanced auditor’s compliance with the standards of the audit. Another factor, which has contributed to the increased compliance of the auditors with the accounting standard can be the stringent policies of the legal system (Canziani, 2017). Ethical behavior is a vital instrument of an organization for maintaining a bond of trust and a profitable relationship with the customers. Every organization needs to develop protocols for measuring as well as quantifying compliance with the ethical standards of the organization. The accomplishment of ethics in the auditory functions is crucial for the well-being of the organization. The several elements required for ensuring ethical behavior within the audit activities can be independent of the audit teams, a written code of conduct, leadership commitment, and technical expertise.
Audit independence conveys the fact that all the audit teams must be independent in their functions and activities, and no department can interfere or impair any of their activities. There should not be any conflict of interest between the management, and the audit teams of the organization, and such cases should be handled unbiasedly (Mantelaers et al. 2019, December).Written code of conduct should be established within the organization that will address all the business practices of the organization and the ethical behavior that is expected from the employees. The auditors must ensure the proper communication and adherence to the code by all the employees.
Another important element of ethical behavior can be a commitment from the leaders belonging to the audit committee of the organizations. The leaders must enforce ethical behavior, starting from the top to the bottom level hierarchy within the organizations. The customers should be treated with dignity and integrity for creating a value of culture within the office premises (Sikka et al. 2018). The final element can be the technical expertise of the auditors. The auditors should be chosen through their technical competence and recognized certifications. According to the Sarbanes Oxley Act 2002, legal penalties can be imposed on organizations that recruit unqualified auditors for their auditing process.
Question 3
Usage of nine principles of audit for ensuring quality and reliability of the audit process
Auditing is a systematic and scientific process, through which the financial statements are inspected and scrutinized for any kind of material misstatement or errors. The audit system is also guided by certain basic rules and principles that set up a Pro-forma for carrying out the audit procedures. These principles are called Standards of Auditing or Auditing and Assurance Standards (AAS).
- Integrity, independence, and objectivity
This is the first principle which states about the honesty of the auditors in performing their activities. The auditors cannot favor the organization under any circumstances and should remain objective throughout the entire process (Swart, 2018).The auditors should not get involved in any kind of malpractice within the organization while carrying on with their duties and responsibilities. Independence is another important element in this context. The auditors cannot be moved or influenced by any activity of the organization and should remain impartial and independent throughout the whole procedure.
- Confidentiality
This is a fundamental attribute that should be possessed by the auditors, where they should maintain the secrecy and privacy of the financial data that are dealt with by them. In most situations, the auditors deal with sensitive and confidential financial information of the organizations. Therefore, they are not required to disclose this information to any third party unless it is required by law (Jenkins et al. 2019). The auditors should carefully handle any document or certificate that is given to them by the organizations.
- Skill and Competence
This is another important quality of the auditors, according to which they should be trained and experienced in the process of auditing. Through the necessary skills and qualifications, the auditors should be selected by the organizations. The auditor should have a professional attitude and should be equipped with the recent changes, announcements as well as regulations of the audit procedures (Bunn, 2017). Even after being qualified as an auditor, the organizations can implement necessary training and workshops for providing insights regarding current accounting and auditing regulations.
- Work performed by others
An auditor has many employees, people, and delegates who work under his supervision, and this increases the scope of audit massively. The auditor becomes completely responsible for ensuring the efficiency of work from these people working under him. He must carefully supervise and evaluate the performance of these people for reasonably assuring the accuracy and effectiveness of such tasks. In many cases, the auditor might step out of his zone and coordinate the functioning of these people to ensure the smooth flow of work within the business.
- Documentation
Another important principle governing the work of auditors is appropriate documentation of all the important statements provided by the organization. The auditor is required to carry an audit notebook, which will contain a formal written list of all the documents used by the auditor (Motubatse et al. 2018).The notebook can also contain an audit plan and a list of other auditing files. Keeping a written record would help the auditor in maintaining a track of all the documents handled by him, such that there is no misplacement of documents.
- Planning of activities
All the auditors are required to formulate a proper and relevant plan that will contain timelines for all the activities to be performed by him throughout the entire audit process. Through the help of this plan, the auditors can have a roadmap that will guide him throughout the process (Stephenson, 2016). This will enable the auditor to perform his tasks efficiently and timely. One audit plan may not match with another, as these plans are customized according to the type of business as well as organization, the scope of audit functions, and the internal controls of the organization.
- Evidence of audit
It is one of the responsibilities of the auditor to collect enough and sufficient pieces of evidence for supporting his opinions and thoughts provided in the statutory audit report. The collection of this evidence can be a cumbersome process, which would require both time and effort (Chen et al. 2018).The auditors are supposed to dedicate their time and effort in this process. In this process, two kinds of sources can be collected for supporting the facts of the audit report, that is, internal and external sources.
- Accounting systems and internal controls
The auditor must assure that all the financial accounts of the organisations are true and accurate up to their best possible interest. The auditor try to scrutinise each data and figure provided in the financial statements to judge their materiality and accuracy up to the maximum extent.
- Audit conclusions and reporting
After the collection of information and other evidences, the auditors must check their validity and form his opinions according to certain criteria. The auditor must ensure that the company has abided by the all the relevant accounting standards like GAAP or any other accounting standard for presenting figures of each section in their financial statements (Vik and Walter, 2017).The auditors should also check the compliance of the financial statements with all other relevant regulations and statutory requirements. Finally, the information should be investigated for their materiality.
These set of principles are useful in setting up an effective and efficient process of auditing such that the organisations cannot present any incorrect information to the end users of the financial report (Dunleavy et al. 2018). Sometimes, the organisations are engaged into many kinds of fraudulent activities throughout the course of their businesses, and they manipulate the figures of financial statements to conceal the evidences of such activities. All these principles of audit procedures help in revealing such incidents such that the financial statements of companies are free from any kind of material error. The auditors are required to adhere to the audit principles such that all the auditors can come to an objective and relevant conclusion and there is no biasness involved in the process. Auditing completely relies upon these set of principles such that audit activities can be reliable and the end users can trust auditors for these functions.
References
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Canziani, A., 2017. On the Accounting Regulation for the European Private Sector. Accounting, Economics, and Law: A Convivium, 7(2), pp.79-91.
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DeFond, M.L., Lennox, C. and Zhang, J., 2016. Some controversies in the auditing literature. Working paper, University of Southern California and The University of Texas at Dallas.
Dunleavy, P., Park, A. and Taylor, R., 2018. The UK’s changing democracy: the 2018 Democratic Audit. LSE Press.
Jenkins, J.G., Pyzoha, J. and Taylor, M.H., 2019. Insights from an Analysis of Audit Committee Governance Practices at US Registered Investment Companies and Public Operating Companies. Available at SSRN 3486312.
Kearns, M., Neel, S., Roth, A. and Wu, Z.S., 2017. Preventing fairness gerrymandering: Auditing and learning for subgroup fairness. arXiv preprint arXiv:1711.05144.
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