International Auditing and Assurance Assignment Sample
In this scenario, the student commented about the relationship between auditors and directors of the company which lead to fraud in the company. He made an argument that the whole audit process shall be improved if auditors approached to audit with total distrust on the directors. The auditors are not investigators, they approach with a view to provide their opinion that whether financial statements made by the company shows a true and fair view of the company. Audit failure occurs when the auditor provides a clean report and then stakeholders came to know that financial statements are grossly misstated (Newman and Comfort, 2018). There may be certain reasons for the same. Either auditor was not able to interpret Accounting Principles or may have known of this fact but hide the same with a mala fide intention. However, if fraud occurs in a business, the auditor can’t be directly blamed for all the deeds. The primary responsibility of detecting fraud lies with the top management. If the Top management cannot detect those frauds over a period of time, an auditor may not be expected to prevent or detect it. This is because frauds in any business are carefully done. The frauds done by management are difficult to detect than frauds done by employees working therein.
However, it does not mean that the auditors must not make any efforts or trust management blindly. The auditors must maintain professional skepticism throughout the audit ensuring that he must see everything with a sense of doubt. If anything, suspicious comes to his notice, then the auditor must deep dive. At many times there seems to be a close relationship between the auditor and the client which leads to interferences in the auditor’s work and also prevents him from giving an unbiased opinion. Thus, as per International Standards on Auditing – 200 issued by IAASB, the auditor should have Integrity, Objectivity, confidentially, professional behavior and professional competency and due care (follow page no 16 in FINAL PRONOUNCEMENT APRIL 2018 – 200 pages guide pdf already sent – file name 7279461) and Independence while conducting an audit. Independence should ensure that an auditor must not be influenced by the views of management and objectivity means the auditor’s objective must be clear in his mind. In addition to this, the concept of rotation of auditor is introduced whereby the auditor has to permanently retire after a fixed period and the auditor from the same firm or same network of firms cannot be reappointed before the lapse of the cooling period. There are various risks involved in an audit, as per ISA-315, there are Inherent Risk, Control Risk and Detection Risk (International Auditing and Assurance Standards Board., 2018).
Inherent risk refers to that risk that is inherent in the business which depends upon the type of business. It states that an assertion which may lead to a misstatement that can be material, if there were no internal controls present. The control risk refers to misstatement while calculating inventory values that risk a misstatement which was material could not be prevented, detected, or corrected on a timely basis by usage of Internal Control. The auditor does not have any control over the inherent risk and control risk since these risks are borne by the company which is under audit. To determine the depth of process to be performed, an auditor has to evaluate these risks (Gal and Asikis, 2020). Now when an auditor performs its extensive testing procedure and is still unable to detect material misstatement, it is called detection risk. Auditors generally set the overall level of audit risk to be accepted on a given audit assignment. The auditors in their audit also resort to Audit Sampling. It means rather than testing each and every item they check sample items and if the sample items correspond to their conclusion, they provide a report on all the items. The auditor cannot be held liable if he has taken sufficient care and proper and sufficient procedures are performed by him. As per Audit Documentation ISA-230, while carrying out an audit, the auditor has to properly document all the things related to audit such as audit program and audit planning which involves details of the work allocated to various persons there. Further, the various audit evidence which he comes across or obtains shall also be documented by him. Management Representation Letters obtained from management shall be a part of his Audit File. The working paper is the property of the auditor and it will enable him to prove that he has worked with utmost care.
The student has commented upon the role of Internal Auditors vis-à-vis External Auditors and according to him, there is no requirement of both the auditors and anyone shall suffice (International Auditing and Assurance Standards Board., 2018). Internal auditors are appointed by the management and they are more of employees of the organization. They are employed to strengthen the internal control and risk management processes of the organization. They are primarily expected to inform whether organization is in compliance with all rules, regulations and laws applicable thereto. They state that whether various Internal Controls exist and work successfully and the size and scope of the internal control systems are sufficient. If any loopholes are found in the system, then they recommend getting it rectified immediately. They report their observations to either Top Management or the Audit Committee. There are a lot of differences between both types of audits; hence both of these processes are required in any organization. External Auditors conduct an audit in compliance with the statutory requirement. Hence they provide their reports to shareholders. They are not expected to design the test of the efficiency of internal controls which are developed and implemented by management but rather testing it on a random basis. They are not expected to go minutely in every transaction rather they have to comment whether books of accounts present a true and fair view of the company.
Although there is duplication in some processes and many times external auditors rely on the internal auditor, but for any opinion expressed the external auditor shall be entirely responsible. As per ISA – 610, the statutory auditor has to check whether the Internal Auditor’s work can be used by him for his audit and it depends upon the extent to which there is an objectivity in Internal Audit function of Internal Auditors, the knowledge and competence level of Internal Auditor and where Internal Auditor implies a systemic and disciplined approach which includes quality control (International Auditing and Assurance Standards Board., 2018). However, in case of any negative affirmations in any of these points, he shall not use his work. While having reliance on the Internal Auditor’s work, the external auditor would have to perform audit procedures which are sufficient enough to determine its adequacy which also includes whether the planning was properly done while execution of audit work, etc. and whether they have obtained appropriate and sufficient audit evidence and whether conclusions presented in line with outcomes of the work done. At certain times, External Auditor is not allowed to use the help of internal auditors in their work. This is due to some regulation or law which prohibits this. Hence external auditor is bound to perform all the tasks considering the ability and competence of the internal auditors and even if they wish to use their work just to reduce their workload, it may be treated as a breach of duty and hence suitable action may be initiated against those auditors.
The student has also commented upon the lack of standardization in reporting of auditors. He stated that since all the audits are the same, there must be some required standard with minimum quality controls. The IAASB has developed various auditing and quality standards that are common to all the firms and must be followed by all. These standards are developed keeping in mind to align all the common processes. Since all these standards are technical in nature along with the scope of subjectivity, the auditors prepare reports which are not understandable by all. At times, the auditors take advantage of this situation and prepare their reports in such a way that stakeholders are unable to compare.
The student has also raised doubt over the purpose of the Audit Committee in an organization. An audit committee is basically a sub-committee of the Board of Directors which works on behalf of the Board. They are a group of financially literate persons who understands the technical of financial reporting and the effect of the same. The audit committee also consists of certain independent directors as prescribed by Law of that state (International Auditing and Assurance Standards Board., 2018). They monitor the integrity of the company’s financial statements and review financial controls. They recommend for appointment of auditors and also deciding their remuneration. In view of the various financial scams that happened around the world, while appointing auditors the Audit Committee must prescribe some minimum qualifications along with competency judgment. At these times, Audit Committee must mandatorily obtain assurance regarding the Quality Control system employed by the Auditor which involves adherence to professional ethics by Auditor’s Staff along with adequate rotation and whistleblower mechanism for team members. Auditors whose track records are doubtful must be avoided at all costs. Since the fees involved in the audit are very high along with the expectations of stakeholders, there should be a very proper selection of auditors.
The student has also commented upon the assertions made by external auditors which prove to be false. Basically, assertions are facts or statements which are included in the final accounts and which are conveyed by management. Auditors check these assertions and use them as a basis to collect audit evidence to express his opinion on the final accounts of the entity. The assertions which he checks are related to various classes of transactions, events and related disclosures which are relevant for the audit period and for account balances and related disclosures at end of the period. For checking assertions, auditors have to use Analytical procedures which can be used as evidence of completeness, accuracy, classification, etc. If these procedures are used effectively, they reduce dependence on other substantive procedures used while carrying out detailed checking of transactions. The evidence obtained by the auditor must be sufficient and appropriate. Sufficient audit evidence depends upon the seriousness of the matter involved technically known as materiality, risk of material statement involved therein, Deficiencies in Internal Control and auditor’s experience from earlier audits (Gal and Akisik, 2020). Appropriate audit evidence shows the reliability of audit evidence in supporting the auditor’s conclusions.
As per ISA- 500 – Audit Evidence, the following audit evidence may be obtained by the auditor for the conclusion of his report; audit evidence which is generally obtained by the auditor himself is easy to believe than that obtained from third parties (International Auditing and Assurance Standards Board., 2018). An auditor, while expressing his opinion, must try to obtain audit evidence from external parties instead of internal parties. This is due to the fact that the external parties generally are unbiased and are expected to give a correct view in comparison to internal parties which are generally biased towards management. If an auditor gets confirmation in writing instead of oral, it is more reliable. This is because if an auditor is getting audit evidence in writing, meaning that someone is certifying it and hence it has more probability of correctness. As regards to the documentary evidence about the existence of assets, purchase of high-value items, the existence of liability and repayment of debts the auditor must go for verification of original documents instead of photocopies (Oussii and Taktak, 2018). This is due to the fact that any alteration in original documents is clearly visible which may not be apparently visible in photocopies. Auditors should not only base their opinions upon vouchers and bills but instead must do certain other tasks such as Verification of Plant and Machinery and the existence of land and building by visiting them and checking their papers regarding ownership status and dispute status if any. The physical inspection of stocks is quite important.
Generally, an auditor resort to the observation of checking of stock as complete checking of the stock is not possible as it is time-consuming. Generally, observation includes looking at the process which is performed by someone else. It provides written audit evidence that the stock is being counted at certain intervals. At times, the auditor may resort to test checking of stock on a sampling basis. The Auditor may also prepare Bank Reconciliation Statement at period end to ascertain the correctness of the bank books of the client. The auditor will also need to carry out substantive analytical procedures (International Auditing and Assurance Standards Board., 2018). It consists of the evaluation of financial information through analysis of the relationship between various data. If some ratio is increasing or decreasing abnormally in comparison to its previous year’s data or in comparison to the other firms in the industry, then it may create a suspicion in the minds of the auditor and he may go into detailed checking of those abnormally fluctuating items.
The student has also stated that financial scams which took place around the globe have an adverse effect on the ongoing concern ability of the entity. While conducting an audit of an organization the auditor has to first determine whether the entity will operate for an infinite future or has certain risks which will enable them to cease in near future. As per IAS-1, the management of an entity has to assess the entity’s capacity to operate as a going concern and if not, the accounts of such entities as to be made on realizable value basis (International Auditing and Assurance Standards Board., 2018). The IAASB has laid down an ISA-570, it is the auditor’s responsibility to obtain proper audit evidence and reach to ac conclusion whether the management basis for going concern is valid or not. If the auditor is of the opinion that a material uncertainty exists, he shall disclose the primary conditions which doubts the ability of the firm to continue as a going concern and in such a scenario, the entity may go for liquidation which involves sale of assets and payment of all liabilities in the normal course of business.
In a nutshell, the auditors may only be appointed with proper external due diligence and that too for a definite time period and provisions should be in place for non-appointment of chiefs of audit firms to the Board of companies. If the management was indulged in fraud, it won’t be easy for the external auditor to prevent and detect (Ismael and Roberts, 2018). The auditors are not investigators, they approach with a view to express their opinion that whether financial statements made by the company represent a true and fair view of the company. If the auditor has taken proper care and maintained professional skepticism throughout the audit, he may not be treated as responsible for the actions of the company. The Inherent risk in the firm must be able to be controlled by Control Risk otherwise Detection risk will be high. The Auditor must maintain a working paper and it will enable him to prove that he has worked with utmost care. There are a lot of differences between Internal Audit and External Audit; hence both of these processes are required in any organization. The appointment of External Auditors is a statutory requirement that provides their reports to shareholders, while Internal Auditors are primarily expected to inform whether organization is in compliance with all rules, regulations and laws applicable thereto. They give their reports to directors of the company. They state that whether various Internal Controls are existing and working successfully and the size and scope of the internal control systems are sufficient. The auditing standards for reporting have been prepared by IAASB which are common to all the firms.
References
Gal, G. and Akisik, O., 2020. The impact of internal control, external assurance, and integrated reports on market value. Corporate Social Responsibility and Environmental Management, 27(3), pp.1227-1240.
International Auditing and Assurance Standards Board., 2018. Handbook of International quality control, auditing, review, other assurance, and related services pronouncements. Volume 1. New York. IAASB.
Newman, W. and Comfort, M., 2018. Investigating the value creation of internal audit and its impact on company performance. Academy of Entrepreneurship Journal, 24(3), pp.1-21.
Oussii, A.A. and Taktak, N.B., 2018. The impact of internal audit function characteristics on internal control quality. Managerial Auditing Journal.
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