Auditing Essay Example

One of the objectives of International Auditing and Assurance Standards board (IAASB) is that of serving the interest of public via setting high quality auditing , assurance as well as related standards while facilitating the convergence of international and national auditing and assurance standards in a bid to ensure quality and consistency of practice globally while strengthening public confidence in the global auditing and assurance profession. It is in this vein that IAASB has developed a framework aimed at enhancing audit quality (The institute of chartered accountants, 2014). Based on the framework, IAASB has three main goals including raising awareness of the key elements of audit quality, encouraging stakeholders to reflect on ways to improve audit quality and facilitating greater dialogue between stakeholders on the issue of audit quality. The framework has four elements that include inputs and outputs, interactions and context. In a bid to improve audit quality, IAASB encourages the following steps with regard to the above elements;

At the engagement level, IAASB encourages the audit team to realize that they perform audit in the interest of the public and thus they should exhibit integrity and objectivity. In performing audit, the team is encouraged too be independent while exhibiting professional competence, due care and professional skepticism. At the firm level, audit firms are encouraged to put in place governance arrangements for establishing independence. The firm is encouraged to promote personal qualities appropriate for audit quality, while ensuring that financial considerations do not have a bearing on actions and decisions likely to negatively affect audit quality. The firms should also provide partners and staff with high quality technical support while promoting a culture of consultation on difficult issues. In addition, firms are encouraged to put in place robust systems for client acceptance and continuance decisions. At the national level, an ethics guide has been put in place to ensure know of the ethical considerations they are expected to display in performing audit. Audit firms are encouraged to share acceptance decisions among themselves while regulators and accountancy bodies are encouraged to remain active in ensuring awareness and understanding of ethics principles and their consistent application in a bid to promote audit quality.

It is important for audit firms to have competent partners and staff. There is need to understand the client’s business while being able to make reasonable judgments. The audit engagement partners need to be fully and actively involved in assessing risk, planning, supervising and reviewing the audit work being performed. There is need for audit staff to have sufficient experience while their work should be appropriately directed, supervised and reviewed while ensuring sufficient degree of staff continuity. The audit firm should also allocate sufficient time for undertaking an effective audit. In essence, IAASB encourages audit firms to ensure full compliance to ethical and audit standards in performance of audits in a bid to ensure quality. Auditors are also encouraged to ensure timelines in production and deliverance of audit reports to the right persons and in the right manner and context. IAASB also encourages effective interactions between the various stakeholders in a bid to ensure that the right resources and information as well as understanding is obtained in the course of audit performance. The application of the relevant laws and regulations is also encouraged by IAASB in a bid to ensure audit quality. It is expected that application of these guidelines on audit quality by IAASB will help audit firms as well as other stakeholders in achieving high quality audit reports.

One of the functions of the Public Accounting Oversight Board (PCAOB) according to the Sarbanes-Oxley act of 2002 is that of conducting annual inspections of each registered public accounting firm that regularly provides audit reports for more than 100 issuers. This inspection is supposed to establish the firm’s adherence to quality control, independence, ethics as well as related auditing standards in carrying out their audit assignments. This helps in establishing whether the audit firm has obtained sufficient competent evidential matter that supports the opinion it gives on the issuer’s financial statements being audited as well as on its internal controls over financial reporting. Some of the important matters that PCAOB may investigate concerning auditing firms may touch on their exercise of due care and professional ethics in carrying out audits as well as whether the firms have put in place sufficient supervision and review activities in ensuring thoroughness and due care in performance of audits.

Based on PCAOB inspection of Ernst& Young in 2010, it was observed that the firm failed to obtain sufficient competent evidential matter necessary for supporting its opinion on the financial statements of the firms it was auditing since ;

  1. The firm failed to carry out sufficient procedures for testing assets for impairment (PCAOB, 2010).

  2. The firm failed to perform sufficient procedures for testing reasonableness of clients’ service lives

  3. Failure by the firm to perform adequate procedures in regard to utilization of specialists work

The board also made similar observations about inspection of Lake & Associates, CPA’s LLC in 2012. The board identified deficiencies in the firm’s failure to identify and address errors in its client’s application of GAAP which included errors likely to be material to the client’s statements. The firm was also accused of failing to sufficiently perform specific necessary audit procedures thus rendering the whole process inadequate. The firm’s deficiency according to PCAOB included the following;

  1. The firm failed to appropriately address departure from GAAP relating to material misstatement in the financial statements with regard to discontinued operations, cash flow statements minimum purchase commitments, and related party transactions (PCAOB, 2012).

  2. The firm failed to perform audit procedures related to investing activities in the cash flow statements as well as sufficient audit procedures relating to revenue, reverse merger, the existence, completeness and valuation of inventory, accounting for sale of subsidiary among other related audit procedures.

Based on the above findings by public company accounting oversight board (PCAOB) relate to similar matters. These matters include whether the audit firms being investigated have adhered and complied with relevant auditing standards including GAAP in conducting their auditing assignments by their clients. PCAOB also investigates whether the firm’s investigated appropriately their clients’ compliance with various accounting standards in preparing their financial statements. It is important for audit firms to ensure that the audit firms being investigated comply with various accounting standards including GAAP in a bit to ensure that the financial statements prepared are reliable and can be relied upon by decision makers. The board also investigates whether the audit firm in question fully adhered to professional ethical standards in performing their audit. This is because if professional ethics are not observed in carrying out audits, then the resultant reports may not be reliable. From the observations above, it is clear that PCAOB also investigates whether the firm has put in place quality control procedures in carrying out the audit (PCAOB, 2014). This is geared towards ensuring that quality standards are enforced throughout the audit. In the same vein, the board investigates whether the audit firm has thoroughly audited the client’s internal control procedures in a bid to determine the extent of auditing to take place. The board also investigates the sufficiency of the audit evidence and audit procedures carried out by the firm on the client’s financial statements in carrying out the audit. This is in a bid to ensure that the resultant audit reports are based on appropriate audit procedures and are based on sufficient evidential material. Bearing in mind that the audit reports are relied upon by a wide range of users, PCAOB investigates whether the audit firms observe due care in carrying out their audit of clients financial statements. This is aimed at safeguarding the investors’ interests in a bid to ensure they make quality decisions emerging from the audit reports. The board also investigates auditors’ independence in investigating the audit firms. This includes investigating the possibility of auditors’ independence being compromised. This includes investigating other services that the firm offers to the clients aside from the audit services in a bid to ensure that the audit firms remain independent. This is because if the audit firm is not sufficiently independent, they are likely to issue compromised reports that may not be helpful in decision making.

The premise behind auditing standards is that they will lead to uniform audit processes and thus lead to consistent outcomes. Whether auditors are consistent and accurate in their auditing practices is clearly of interest to regulators. Inconsistencies may arise out of either deficient application of the auditing standards by auditors or deficient standards with insufficient guidelines to ensure consistency in interpretation and in turn consistency in audit outcomes. Inconsistency in audit outcomes on the other hand is not a good indication of a firm’s going concern since a firm’s audit reports for different periods should be consistent if they relate to the same firm and are being conducted by the same audit firm. However, audit firms have been guilty of deficient application of auditing standards thus resulting in inconsistencies in their audit reporting. As observed above, PCAOB regularly finds audit firms guilty of deficient and inconsistent application of audit standards which in turn results in deficient and inconsistent audit reports. It has been established that most inconsistent and deficient audit reports arise out of deficient application of auditing standards. According to Joseph (2001), about 80% of deficient and inconsistent audit reports result from the auditors failing to apply auditing standards that require them to gather sufficient audit evidence in such areas as asset ownership, valuation as well as management representations. It has been alleged that audit firms and hence auditors fail to consistently apply GAAP pronouncements and where they are applied, they are applied incorrectly. When auditors fail to consistently and efficiently apply auditing standards, it will obviously result in inconsistent audit outcomes which points to a problem in the company’s going concern since audit reports of one period may differ significantly from those of another period since the audit standards applied may differ for different periods.

The accounting standards applied by the auditors have also been blamed for being deficient while failing to provide to provide useful guidelines for conducting an audit thus resulting in inconsistencies in audit outcomes. It should be noted that the standards are a very important tool for auditors work as they guide the auditors as they go about their auditing work. It should also be noted that the auditing standards serve to provide consistency in audit reports. Thus, when the standards are deficient and inconsistent, they are likely to result in deficient or inconsistent audit outcomes and thus affect the firm’s going concern (Mark, 2001). However, it is worth noting that the quality of audit can not be all about audit standards. It is all about the quality of people involved in the audit. Their training and application of professional standards as well as ethical standards. It is more about exercising of audit judgment in determining where mistakes are made rather than about audit standards. It should be noted that in very few circumstances will audit standards be deficient or inconsistent. Audit standards do not eliminate the need for auditors to consistently and efficiently apply them in their work. As such, most of the inconsistencies in audit outcomes tend to originate from auditors failing to apply judgment while deficiently and inconsistently applying accounting standards thus affecting the audit outcomes and hence going concern.

Nature and scope of forensic auditing and how it differs from the normal statutory audit of companies

Forensic audit may be viewed as a type of auditing that examines company or individual financial records as a way of investigating in a bid to derive evidence that can be used in litigation. As such, Forensic auditing will combine investigative procedures with those of accounting and auditing in a bid to determine whether suspicious practices exisit in the financial records in question. As such, unlike the statutory auditors, forensic auditors will have the role of presenting their findings in a legal proceeding where fraud, financial dispute or embezzlement of funds is proved to have occurred. In other words, the product of forensic auditing is enforceable in a court of law unlike statutory audits.

According to Biden (2010), Forensic auditing involves the entire process of investigating a financial matter while also acting as expert witness where fraud comes to trial. It involves taking practical steps which the auditor takes in gathering relevant evidence to alleged accounting fraud or embezzlement. Forensic auditing will also involve the specific procedures that are used in producing evidence. These are the steps used in identifying and gathering evidence that can prove such matters as for how long fraud has been taking place, how it was perpetrated and whether there was collusion to commit fraud and how the fraud was concealed. Forensic auditing will also gather evidence for supporting issues likely to be of relevance to the court of law. Such matters would include what the motive and opportunity for committing fraud were, whether there was collusion of many suspects, physical evidence present at the scene of fraud and that which is contained in documents, comments the suspects made during investigations and at time of arrest as well as whether there were any attempts to destroy evidence.

Forensic auditing involves investigation of various types of fraud which are grouped into three classes including corruption, financial statement fraud and asset misappropriation. Corruption may include bribery, extortion and conflict of interest. In conflict of interests, suspects exert influence in a bid to gain to the company’s detriment (Junet, 2012,). Asset misappropriation fraud includes theft of cash, fraudulent disbursements, inventory frauds and misuse of assets. Financial statement fraud on the other hand include materially misstating items in the financial statement or misapplying financial reporting standards in a bid to bias the financial statements.

It is worth noting that forensic auditing is aimed at legally determining whether fraud has actually been committed while also naming those involved with a view to taking legal action. As such, it should be focused on significant transactions both in the balance sheet and off balance sheet items. It makes use of such techniques as Critical point auditing and propriety auditing. Critical point auditing is geared towards filtering fraud symptoms from normal transactions in which the symptoms are concealed. As such, it aims at analyzing financial statements, records and books to determine trend analysis, unusual debts and credits, discrepancies in payable and receivable balances, accumulation of debts in loosely controlled accounts, false credits, cross credits and debits as well as inter account transfers as well as inadequacies in check systems as well as internal controls (Vasudevan, 2014). On the other hand, propriety audit involves reporting on whether government accounts are in compliance to the laid down procedures and that the government gets value for many for its various transactions with an aim of unearthing fraud (Janet, 2009). Forensic audit involves a number of examination methods including test of reasonableness aimed at checking weaknesses of internal controls, identifying questionable transactions and identifying peculiarities in a bid to identify fraud. Another examination procedure is that of historical comparisons with an aim of identifying questionable accounts and establishing variances.

As noted above, Forensic auditing differ from statutory audit in a number of ways including;

  1. While the objective of statutory auditing is that of expressing a true and fair opinion on the accounts being audited, forensic auditing is aimed at determining the correctness of accounts and whether fraud has been committed.

  2. While the techniques used in statutory auditing include compliance and substantive procedures, Forensic audit makes use of past trends analysis and substantive in-depth checking of specific accounts as its main investigative technique.

  3. While statutory auditing takes place for a particular period and involves all the period’s transactions, forensic audit has no periodic limitations and there is no limitation on the extent to which an account may be investigated.

  4. In verifying stock, estimating realizable value of current assets and provisions and estimating values of liabilities, statutory audit heavily relies on management representation or certificate while forensic audit does independent verification of suspected items.

  5. In statutory audit, off balance sheet items are used in vouching the arithmetic accuracy and compliance of transactions to procedures (Johansen, 2006). However, off balance sheet items are used in checking regularity and propriety of transactions being examined in the case of forensic audit.

  6. In statutory audit, adverse findings involve issuing a negative or qualified opinion without quantifying it while adverse findings in forensic auditing involve legal determination of frauds while exposing the suspects behind the fraud.

References;

Joseph, B2001, Major causes of audit failures, London, Rutledge.

Biden, B2010, The nature and scope of forensic auditing, London, Rutledge.

PCAOB, 2010, Inspection of Ernst & Young, Retrieved on 18th May 2014, from;

http://pcaobus.org/Inspections/Reports/Documents/2010_Ernst_Young.pdf

PCAOB, 2012, Inspection of Lake & Associates, CPA’s LLC, Retrieved on 18th May 2014, from;

http://pcaobus.org/Inspections/Reports/Documents/2012_Lake_Associates.pdf

PCAOB, 2014, PCAOB, Retrieved on 18th March 2014, from;

http://pcaobus.org/Pages/default.aspx

Johansen, B2006, Forensic Auditing, Oxford, Oxford University Press.

Janet, R2009, Emerging issues in modern auditing, Cambridge, Cambridge University Press.

Vasudevan, 2014, Forensic Auditing, Sydney, Prentice Hall.

The institute of chartered accountants, 2014, Audit quality, Retrieved on 18th March 2014, from;

https://www.icaew.com/~/media/Files/Technical/Ethics/audit-quality-fundamentals-principles-based-auditing-standards.pdf

Mark, S2001, Top 10 Audit deficiencies, Retrieved on 18th May 2014, from;

http://www.journalofaccountancy.com/Issues/2001/Apr/Top10AuditDeficiencies

Ifac.org, 2014, A framework for audit quality, Retrieved on 18th March 2014, from;

Junet, B, 2012, Forensic auditing and investigations, New York, John Wiley & Sons.