Audit and Assurance Essay Example

Published: 2022-03-23 17:22:33
Audit and Assurance Essay Example
Type of paper:  Critical thinking
Categories: Audit
Pages: 7
Wordcount: 1679 words
14 min read
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Companies, and other large businesses, generate financial reports that provide crucial information regarding their financial performance as per a specified period of time. Consequently, the information produced is utilised by different stakeholders, including shareholders and investors, in making important economic decisions. Through audit and assurance services, auditors are able to offer comfort or assurance to different parties with ventured interest on a certain company that their accounts have been examined by an independent party and as such they can be relied upon. In the UK, for instance, the law requires all companies that earn PS10.5million and over in revenue to complete an audit. To understand further the importance of audit and assurance in the business context, the current paper explores critically what the functions of audit and assurance are, and how they attempt to improve communication channels and visibility where confidence in the audit report is expected.

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Functions of Audit and Assurance

Examining the Published Financial Information

The role to assess the integrity of a client's financial statements, and all other formal publications related to the financial performance, forms one of the core functions of audit and assurance. Through this function, auditors undertake a detailed examination of a series of company accounts in order to establish whether they represent a true and fair position of the company's affairs (Cosserat & Rodda, 2009; Glover, Prawitt, & Taylor, 2009). This implies that auditors should scrutinise, in detail, all the financial information published by their client. Subsequently, the auditors should be in a position to challenge or question the audit client, particularly the finance manager, on any contentious issue that may arise from the examination (Sobel, 2005; Knechel & Salterio, 2016).

Monitoring the Internal Control Systems

To effectively map out different areas which pose a risk to a business, audit and assurance require auditors to review their client's internal control systems, including the risk detection and prevention systems. According to Al-Shaer, Salama and Toms (2017), this review should also include monitoring the effectiveness of the internal audit function where such function exists. Where the internal audit department does not exist, auditors should determine whether the function should be instituted, and offer appropriate recommendations to the board of directors and the owners of the business annually (Spira & Page 2003; Knechel et al., 2012). To demonstrate how significant this function is, both the EU 8th Directive and ISAs regulations require auditors to report material issues identified on the internal control system to the audit committees (Samsonova-Taddei & Siddiqui, 2016). Other regulations, such as the Sarbanes-Oxley Act (SOX), state that auditors should provide a separate report regarding the effectiveness or weakness of the internal control system (Abdioglu et al., 2015). Collectively, these regulations demonstrate how crucial the function of reviewing the internal control systems is.

Monitoring the External Auditing

Audit and assurance has specific duties in regard to external auditing exercise, including evaluating and recommending the removal, appointment or reappointment of the external auditors. One key duty associated with this function is that audit and assurance must assess the objectivity, effectiveness and independence of the external auditors and the auditing process itself in order to align the auditing exercise with the applicable ethical framework in consideration of the jurisdiction in which the business is operating (Cohen, Krishnamoorthy, & Wright, 2002; Manetti & Becatti, 2009). The UK Governance Code requires all the FTSE 350 companies to contract new external auditors through a tendering process after every ten years. Other duties related to this function include overseeing the terms of engagement between an audit client and the external auditor, and approving all fees related to an audit and other non-audit services (Smieliauskas, Bewley, & Robertson, 2004).

How Audit and Assurance Functions Help in Improving Communication Channels, Visibility and Confidence in the Audit Report

Audit and assurance functions allow auditors to act as trusted intermediary between the users of business information and the providers of such information. Notably, information sharing amongst the different parties interested in a company's account consummates the entire process of audit and assurance. Ideally, all the stakeholders, including the actual and potential shareholders, apply their judgement towards the firm on the basis of the information they receive; a significant portion of which emanates from the financial report (Dando & Swift, 2003). As William, Glover, and Prawitt (2016) observed, without the proper flow of information from the providers to the users, the overall value of the audit and assurance process remains held up in the firm.

Beattie, Fearnley, and Hines (2015) also noted that without the availability of a timely and reasonable communication of the affairs of a business and the corporate risks associated with such a business, there will be no rational investor interested in investing in the firm. By acting as the trusted intermediary between a business and all the stakeholders interested in the business, audit and assurance firms clearly have the responsibility for creating proper channels of direct and indirect communication. Therefore, auditors should assess, review and approve the communication channels and processes of their clients, particularly the public relations and shareholders relations processes. As a result, the availability of effective communication channels will allow the auditing and assurance process to flow smoothly. It also enables the auditors to produce an audit report that satisfies the need of various users.

Likely Impact of these Changes in Relation to Ethical Standards, Practicality of Cost Effective Compliance and Likely Out-turns

A direct impact that may occur to many firms as a result of ineffective corporate governance is that they would suffer significant losses, since poor governance would give room to the occurrence of fraudulent activities (Cohen, Krishnamoorthy, & Wright, 2002; Lenz & Sarens, 2012). As a result of ineffective corporate governance, some companies could be rendered bankrupt and others would be severely impacted due to fraudulent activities, such as insider trading, leading to a devastating drop in the market value of their stock (Hayes, Wallage, & Gortemaker, 2014). Serco, for instance, has been accused of fraudulently inflating its profits by recording its expenses as assets, a scenario that has led to customers and potential investors losing confidence in the company (Samsonova-Taddei & Siddiqui, 2016).

As such, it is essential for firms' management to insist on effective corporate governance and transparency in their operations, as outlined by the UK Corporate Governance Code. Further, changes in specific responsibilities and increase in the amount of audit services that one is allowed to offer to the audit clients increases the risk of auditors engaging in restricted services, a phenomenon that may lead to increased litigations (Ge, Koester, & McVay, 2017). In 2014, for instance, the Financial Services Authority accused KPMG of loaning its staff to one of its audit clients in a manner that led to the staff acting as real employees of that company (Gottschalk, 2017).

Conclusion

From the discussion above, it is clear that audit and assurance play a significant role in the business context, particularly in creating and enhancing stakeholders' confidence as well as unlocking critical insights into a business. Audit and assurance allow auditors to review the integrity of a client's financial statements, review their internal control systems and assess the entire process of external auditing. One must, nonetheless, understand that failure to comprehend or undertake the specified functions effectively may lead to devastating business impacts, including huge financial losses and a deterioration in stakeholders' confidence.

References

Abdioglu, N., Bamiatzi, V., Cavusgil, S. T., Khurshed, A., & Stathopoulos, K. (2015). Information asymmetry, disclosure and foreign institutional investment: An empirical investigation of the impact of the Sarbanes-Oxley Act. International Business Review, 24(5), 902-915.

Al-Shaer, H., Salama, A., & Toms, S. (2017). Audit committees and financial reporting quality: Evidence from uk environmental accounting disclosures. Journal of Applied Accounting Research, 18(1), 2-21.

Beattie, V., Fearnley, S., & Hines, T. (2015). Auditor-client interactions in the changed UK regulatory environment-a revised grounded theory model. International Journal of Auditing, 19(1), 15-36.

Cohen, J., Krishnamoorthy, G., & Wright, A. M. (2002). Corporate governance and the audit process. Contemporary accounting research, 19(4), pp.573-594.

Cosserat, G. W., & Rodda, N. (2009). Modern auditing. Wiley.

Dando, N., & Swift, T. (2003). Transparency and assurance minding the credibility gap. Journal of Business Ethics, 44(2-3), 195-200.

Eilifsen, A., Messier, W. F., Glover, S. M., & Prawitt, D. F. (2013). Auditing and assurance services. McGraw-Hill.

Ge, W., Koester, A., & McVay, S. (2017). Benefits and costs of Sarbanes-Oxley Section 404 (b) exemption: Evidence from small firms' internal control disclosures. Journal of Accounting and Economics, 63(2-3), 358-384.

Glover, S. M., Prawitt, D. F., & Taylor, M. H. (2009). Audit standard setting and inspection for US public companies: A critical assessment and recommendations for fundamental change. Accounting Horizons, 23(2), pp.221-237.

Gottschalk, P. (2017). Evaluation of Fraud Examinations: A Contingent Approach to Private Internal Investigations. Policing: A Journal of Policy and Practice.

Hayes, R., Wallage, P., & Gortemaker, H. (2014). Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.

Knechel, W. R., Krishnan, G. V., Pevzner, M., Shefchik, L. B., & Velury, U. K. (2012). Audit quality: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 32(sp1), 385-421.

Lenz, R., & Sarens, G. (2012). Reflections on the internal auditing profession: what might have gone wrong?. Managerial Auditing Journal, 27(6), 532-549..

Manetti, G., & Becatti, L. (2009). Assurance services for sustainability reports: Standards and empirical evidence. Journal of Business Ethics, 87(1), 289-298.

Samsonova-Taddei, A., & Siddiqui, J. (2016). Regulation and the Promotion of Audit Ethics: Analysis of the Content of the EU's Policy. Journal of business ethics, 139(1), 183-195.

Smieliauskas, W., Bewley, K., & Robertson, J. C. (2004). Auditing: An international approach. McGraw-Hill Ryerson.

Sobel, P. J. (2005). Auditor's Risk Management Guide: Integrating Auditing and Erm (2005). CCH Tax and Accounting.

Spira, L. F., & Page, M. (2003). Risk management: The reinvention of internal control and the changing role of internal audit. Accounting, Auditing & Accountability Journal, 16(4), pp.640-661.

William, J. r., Glover, S. & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.

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