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ACC707 Auditing Assurance and Services Individual Assignment Help
Audit is the systematic and independent examination of books, accounts, statutory records, documents and vouchers prepared by the organisation in the form of financial statements to make the financial as well as non-financial disclosures in fair and true view. With the help of the audit it get evaluated that organisation follows the set rules and guidelines set by the law. Auditor is the individual or firm that get appointed by the organisation in order to execute the audit. Individual must get certified with the regulatory authority of accounting and auditing or having qualified degree in the profession. Auditors can be internal or external as internal auditors are the employees of the organisation that perform internal audits whereas External auditors are independent firms and perform audit program in order to express their opinion such as organisational financial statements are free from material misstatements and there is no such fraud or error in their financial statements.
Auditor's plan their work, they collect and assess audit evidence related to the financial statements, as they need to consider the risk of material misstatement with the effect of fraud or error. It is the responsibility of the auditor in order to reduce the chances of the material misstatement of their financial statements due to fraud and error. It is auditors responsibility to attain reasonable assurance in order to observe the material misstatements.
Management become responsible for the purpose of preparing the financial statements on behalf of the organisation by following the set financial standards.
Financial crisis and auditor liability
The salient feature of current financial crisis is make inclusion of the financialisation of Western Economy mostly US economy as it create such environment that encourage abundance of credit and excessive risk taking with the help of complex instruments, corporate structures and ineffective regulatory mechanisms. Banks and insurance companies become the key persons in the financialisation of economy and with this effect they lost around US$2.8 trillion. It is difficult to estimate the unfolding crisis but huge share of public money get utilised for the purpose of prop-up distressed financial enterprises. This financial crisis results in closer of 22 banks including Lehman Brothers by the US government (Arens, 2010).
Regulators and investors traditionally relied upon the prepared financial statements in order to sense the bank liabilities, risks and financial position but this become highly problematic. Lehman brothers attain unqualified audit report over their annual accounts on 28th Jan 2008 along with they get clean bill of health on their quarterly accounts on 10th July, 2008. But in August from starting they start facing financial problems that results they filed for bankruptcy on the date 14th September 2008. Along with this the fifth largest investment bank Bear Streams also attain unqualified audit opinion on 28th Jan 2008. By the date 10th March 2008 they also facing financial problems and on the date 14th March it get sold to JP Morgan Chase with the state support. Like this there are many of them attain the unqualified audit reports and results into bankruptcy or sale out to some other agency or business unit (Leung, 2011).
The auditing standards of UK get aligned closely to the international auditing standards that shows that auditors get involved in effective manner in order to consider the business entity ability to continue the business operations for a period of foreseeable future. Along with this they make inclusion of the current and possible future circumstances related to the business and the market in which they operates (Leung, et. al., 2015). On the basis of the auditing standards auditors need to perform the audit program in effective manner so that they attain appropriate audit evidence that get included in their reports for the purpose of making adjustments or disclosures related to the financial statements (Leung, et. al., 2015).
There are various errors get occurred in the financial statements that get classified into two risk factors such as: -
a.) Risk factors get derived from fraudulent financial reporting
b.) risk factors on the basis of the errors from misappropriation of assets (Botica Redmayne, 2012).
Such errors get raised due to the fraudulent financial reporting considered as the intentional errors or missing of amounts or disclosures within the prepared financial statements in order to deceive the users of financial statements. Such errors get raised due to the errors of misappropriation of assets considered the theft of asset and other factors. Each type of fraud risk factors get further classified as per the three conditions such as Bonuses (pressures), opportunities and attitudes (rationalisations) (Botica Redmayne, 2012).
It is auditor's liability to detect the errors along with this they also deduct the fraud. In context to errors and fraud auditors must required to make effective review of the financial statements in order to identify the inaccurate information. It is not easy to detect the fraud when the errors are made by the managers and employees unintentionally and when they try to conceal the fraud. This kind of difficulty doesn't make any changes in the auditor's responsibility in relation to the successful financial audit engagement (Botica Redmayne, 2012).
The another liability of auditor is associated with the corrections and adjustments made within the financial statements. Audit is conducted over the financial statements in order to make adequate modification in it. So it become an direct liability and compliance over the auditor in context to report the accounts even it get prepared by the management (Woodland, 2011). It is greater responsibility of management as compare to the auditor in order to prepare the correct financial statements along with this maintain the compliance level and then present it to the auditors. It also become necessary to declare the confirmation that they provide all the set of information requested by the auditor. In the financial crisis period it become very difficult to realise the fair value of the assets and with this effect auditor is no longer shows reliability over the estimations made by the management. In this case there are various sections shows by the auditor's reports that include the areas of responsibility of management and auditor (Woodland, 2011). Audited financial statement get prepared by the organisational management and they are responsible for it. Their responsibility make inclusion of various things such as: -
a.) They need to maintain internal controls, implements and design in order to prevent the material misstatements due to the fraud or errors.
b.) Select and apply relevant accounting policies in context to the regulations.
c.) Design and make use of appropriate estimated circumstances (William, 2011).
Now the auditor's responsibility to render an opinion over the prepared and provided financial statements during the audit program. Now it's auditor's liability to verify the accuracy of the recorded transactions and comment in their report within their audit report.
The foremost liability of auditor is to render an opinion over the financial statement in order to confirm that the financial statements are reflecting correctly, fairly, include all the material aspects and get prepared by following the financial standards. It is managers responsibility to consider the materiality of events before deciding as it become necessary to adjust the prepared financial statements (Donnelly, 2011). This create problematic situation as they not able to describe whether the represented value shows fair value of items shown in financial statements. Managers are also responsible in order to make ensure the quality control of work and audit work. In order to emphasis over the quality control auditor follows the standards of the IFAC that helps in ensuring the quality work. In order to ensure the quality work financial audit is conducted such as: -
1. Complete and sign all the relevant sections of the audit program
2. Sign and date all the working documents by the authorised person only.
3. Analyse and synthesis each and every balance
4. make analysis of the all significant losses and profits (Donnelly, 2011).
It become auditor's liability to make evaluation and usage of internal control system. In the absence of internal control system it lower down the liability of auditor as auditor didn't identify much fraud or error in their financial statements. As per the IAS (International Auditing Standards) there are two types of misleading information such as fraud and error (Cohen & Simnett, 2015). As per IAS fraud is intentional act performed by one or more individuals in order to attain the financial benefits, and many more such as: -
1. Counterfeiting counting, documents,
3. theft of assets
4. Inadequate allocation of assets (influenced due to work continuations)
5. Removal or omissions of transactions to financial statements (Cohen & Simnett, 2015)
The errors are the unintentional mistakes that get occurred within the financial statements. Errors are made accidentally and there is no such personal gain is associated with it. It is auditors liability to find out the errors and fraud within the financial statement and make a proper communication to the management in the written form within their audit report (Knapp, 2011). Errors get occurred due to the various facts such as: -
1. Wrong calculation (wrong mathematical calculations)
2. Misapplication of accounting policies.
3. Misinterpretation of the facts due to the significant influence over the financial statements (Knapp, 2011).
As per the ISA 240 it is auditors liability to consider the fraud in their audit program of the financial statements. In order to prevent the fraud or error organisational management need to implement some control system such as accounting or internal control system. Auditor is not held responsible for preventing fraud and error but it become their liability to identify these in their financial statements that lower down the risk of getting bankrupt (Knapp, 2011).
The key issue related with the audit is liability. Like other professional advisers they also attain some kind of duty in order to take care of entities they audit. Their prime responsibility is to carry out their work as per their skill and full competence in order to execute the activities in adequate manner according to the desire of the end users. They need to follow the set standards and end users took legal actions against them if they attain any loss because their negligence results into it. It is necessary to impose the liability as it results into performing the activities in effective manner as they put adequate concentration over the quality. It is necessary to impose adequate level of liability over the auditors so that they perform their duties in effective manner and avoid doing mistakes or remove negligence from their work (Thomas, 2011).
If the auditors are feared with the constraints such as threat of being sued they get involved in innovative work so that they perform their activities in more effective manner and render real benefits to their respective stakeholders. Auditing process is not new as this profession is works over the years and they renders conservative and couching reports in order to avoid legal litigation. As the competition get increased there is effective increase in the demand of the stakeholders and regulatory bodies as they demand for effectiveness among companies risk management, they demand for expanding their scope of work in order to remove available risk. It get realised that countries with some statutory restriction of liability attain success in the area of audit firms. It is necessary to remove unnecessary liability from the auditors head for the purpose of getting better and effective results as they perform their activities freely and without any unnecessary pressure (Payne, 2011).
Auditor's face biggest issue in the form of "going concern" during the financial crisis. As per this concept their financial statements get prepared that business entity perform their business activities for a defined period after the reporting date. And due to the financial crisis the business entity intends to close down their business processing soon after the reporting date it put an invariably effect over the value of the entities assets and liabilities and there is requirement of alternative procedure of preparing the accounts at that time. As per the accounting standards auditors are required in order to assess whether the organisation is using going concern in appropriate manner for the purpose of presenting their financial statements that fulfil the requirements of accounting framework. In audit program the issue of going concern is completely misunderstood by the accountants and the auditors and it has close link with the expectations gaps (Ruhnke & Lubitzsch, 2010).
In context to the going concern concept the liability of auditor is to render guarantee that their company will survive for a long duration or for foreseeable future. For this purpose auditors assess the going concern assumption appropriately on the basis of prepared current financial statements. They also consider the events or liabilities threaten the company's solvency but they didn't make assessment of the financial health beyond the company's prospects. For stakeholders it become an key concern as any changes made in the audit function structure results into making some modification within the responsibilities of auditors related to the "going concern" concept (Weirich, 2012).
There are few recommendations are made to the auditors in context to their liability such as: -
1. Auditor need to cross check the followed the accounting standards with the financial statements.
2. They need to demand all the information related to their financial statements, amendments or modifications made into it and others.
3. They need to record and mention all the errors or mistakes found in the financial statements in their audit report.
4. They have to make proper communication of the errors and fraud to the management in order to make proper rectification (Pedro Figueiredo Marques, et. al., 2013).
5. They need to disclose all the findings within their audit report so that adequate information get communicate.
6. Remain updated with the amendments made in the IAS as well as accounting standards so that they review the statements accordingly.
7. Need to maintain adequate level of professionalism with the client and avoid familiarity.
8. It is very important to follow the professional judgement in order to perform work related to the audits and reviews.
9. They need to take care of their quality work even after the leaders engagement.
10. Need to follow the quality control policies and procedures in order to perform high quality engagements and decrease the chances of having legal liabilities.
11. Need to disclose the supplementary information that helps in reducing the undesirable liability (Millichamp & Taylor, 2012).
From the above discussion it get concluded that during the process of auditing of accounting data there is need of determining the recorded information in effective manner that reflects the economic events happened during the accounting year. While auditing financial statements it is necessary to check out whether the rules are followed effectively or not. As it is necessary to follow the set standards or guidelines or accounting principles while preparing the financial statements. Auditor must attain adequate level of experience as it is essentially required for the purpose of collecting and interpretation of the audit evidences. It is auditors liability to take care of these activities that helps in analysing the reports, financial statements and others in adequate manner so that it avoid the consequences and build an strong relationship with their respective stakeholders. Auditors need to check the rules of International Auditing Standards as after these there are only few elements remain that questions the auditors liability.
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