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BUACC3741 Business Auditing Assignment
An Audit is a procedure whereby a systematic, standard-oriented, strategic and detailed assessment of accounts, documents, statutory records, books and assets of an organization with the objective to establish the ingenuity and truthfulness of the financial statements and non-financial declarations published by it. Auditing is usually done internally within the organization to assess the records from within thereby mitigating risks. The internal audit is done by the Audit committee. Thus, they are an important and absolutely indispensable part of the company’s human resources.
However, the present times for the audit committee are more challenging than over. A variety of disruptive forces in technology, economical volatility, regulatory risks etc. impacts the very fundamental roles and responsibilities of an audit committee. The ever-increasing risk issues within the corporate world are threatening the committee and the risks are continuously filtering down to them in response to the unquenchable wave of advancements in the technological sector.
The concept of materiality encompasses the principles in accounting theory which states that all trivial details are to be omitted, and all indispensable matters are to be divulged (Abbasabadi & Saadat, 2014). In this regard, the Items or documents that are significant enough to matter are known as material items. Materiality most importantly addresses the following:
- The appropriate level of intricacy for a particular financial report
- The significance of errors. Some of these errors include:
- Reporting of equities, liabilities, expenses, assets or revenues in accounts that are deemed inappropriate for them or in periods that are not commensurate with them
- Concealing or failing to report financial information which is important
As such, a piece of financial information is material to the financial statements only if, when published; it changes the outlook or perception of a reasonable stakeholder. The concept is relative with respect to importance and size. Some information can be considered material to one company but might not be so, for another.
Almost always the materiality of information is adjudicated on qualitative and quantitative principles. Most managers and directors assess the matter on their own experience to analyses whether a certain matter is material or not (Baldauf, Steller & Steckel, 2015).
When making a decision whether to divulge information or withhold, the materiality concept can be applied. In business case analysis and accounting reports, misstatements can be avoided in this way. Sometimes, withholding information can be desirable as well as necessary:
A financial statement or report is meant to assist the stockholders in understanding the exact financial performance of the organisation. The stockholders are addressed so that they keep their confidence on the organisation and possibly invest more. A statement which has too much intricacy can confuse the stockholders who aren’t abreast with extensive financial knowledge (Filimon, 2016). Too much detailing can obscure the ultimate objectives and also involuntarily reveal some sensitive data that should ideally remain private. For instance, a detailed income statement can be difficult to read and also taxing to prepare for the board of directors and management.
A business case analysis, for instance, is a handy tool used by the management to implement strategic planning and decision support. The decision making process is based almost entirely on relevant information so that the managers, auditors etc. can concentrate on the germane points that affect the decisions. Therefore, it is advisable to keep out background details which can be pointless and might adversely affect the process.
The assessment of whether omission or misstatement of any information is material to a financial statement depends heavily on its nature and size within certain fixed situations of the entity. Therefore, application of both quantitative and qualitative factors is involved ardently in this assessment. Therefore, considering only quantitative factors like face value or carrying amount, rate of returns etc. is not enough for the assessment to succeed. It also depends on the qualitative aspects like the entity-specific considerations. Therefore, IFRS is unable to provide a uniform threshold of quantitative factor values for materiality using which one can determine whether or not to include a detail in the statements at a particular situation. However, although they are not independently determinative, they act as an indispensable tool in application of the concept i.e. it serves as the preliminary examination of the item and sets the stage for a more entity-centric and situation-specific qualitative assessment (Martin, Sanders & Scalan, 2014).
Materiality, as conceived by the IASB and several other regulatory bodies, has a couple of ‘thumb rules’ or specific legislations that are used by auditors and subsequently, courts to judge whether it is being enforced in a financial statement. These are:
- In an income statement within the financial report, any omission or misstatement ranging above 5% of Profit before tax or 0.5% of revenue from sales, is more probable to be considered as a breach of materiality
- Any contentious entry on a balance sheet ranging above 0.3-0.5% of the total acquired assets or above 1% of the total equity is more probable to be considered dubious.
The judgment whether the materiality concept has been compromised will be based on a number of factors apart from the magnitude of the misstatement or omission error. The Auditors will consider the following to judge whether an omission or misstatement is not following the materiality principles:
- The motivation or ulterior intent behind the error: If the company intends to inflate the stock prices by using artificial means including inappropriate reporting of earnings, prejudiced merger decisions etc. then it is more likely that an abuse judgement will be declared.
- Effect on the perceptions and judgments of users: For instance, if a financial statement attributes indirect labour expenses and overhead costs incurred at manufacture as direct costs, they might be exonerated from an abuse judgment since both the kinds of costs ultimately contribute to the gross profit margin and sales. Hence it produces the same result irrespective of the category in which the individual cost goes (Pizzini, Lin & Ziegenfuss, 2014). However, if say, a company adopts any fraudulent means to show large expenses below the level of gross profit since it is an attempt to artificially improve the profits profile. This case is much more likely to be seen as an abuse of materiality.
“Big Data” refers to the colossal portfolio of data acquired by an organization which follows exponential growth in time. Analytics is a collective term for the procedure and the techniques or tools associated with it that is aimed at analyzing a collection of data and thereby drawing significant inferences (Vasarhelyi, Kogan & Tuttle, 2015). Big data and analytics together provide a promise on enhancing profits, productivity and efficient risk management. Major organizations have promptly recognized the potential and invested heavily to better understand and apply these tools to augment their business. One department where it has a prodigious impact is the Audit (Kulkarni, Joshi & Brown, 2016).
Technological marvels like Big Data and Analytics provide a novel opportunity to rethink the entire process of Audit (Yoon, Hoogduin & Zhang, 2015). The transformed version of audit will no longer execute testing based on sampled data. The data relevant for auditing include the transaction activity as well as master data from other key business process etc. Using analytics, audit will now analyses huge populations of such data profile and thus, provide a higher accuracy of audit evidence and trenchant insights. However, there is an omnipresent dilemma on how to align the existing conventional standards of auditors with the marching modernization of data analysis (Cao, Chychyla & Stewart, 2015). These standards were not made with a futuristic ability of leveraging big data portfolios. Some issues where there is maximum conflict between conventional standards and analytics:
Substantive analytical procedures
Validating the data used for analytics
Defining audit evidence
End-to-end solution or end-to-end integration are exchangeable terms used to depict a modern technology where the provider of any software or application program will provide all the environmental software requirements, hardware requirements and other provisions so that the client or customer does not have to look to any other vendor for fulfillment of any extraneous demand. The process of implementation of end-to-end integration involves installation and integration followed by setup (Wan, Eigen & Fergus, 2015). These systems are installed and integrated ensuring that minimum cost is incurred in the process. Therefore the best materials are employed to produce top grade I.T infrastructure. End-to-end integration greatly reduces the required resources, time, hassles and overheads. Managers often prefer integration of software because if one vendor is associated with the entire IT resource acquisition then it becomes easy and accessible for the project to handle the changes in demand. The optimized solutions implementing end-to-end principles provides the internal auditors with highly dependable and accurate automation and thereby improved insurance against risks. The solution enhances the compliance strategies used by managers, creates new and improved opportunities for saving the overhead costs, augments existing efficiency of operation and ultimately produces a cogent and unbiased status of the company’s risk exposure.
However, auditors today face an issue regarding the software integration because integrated software can automate the need for internal audit in a company (Legoria, Melendrez & Reynolds, 2013). With a master database handling all the data and many application programs running trends on that data instantaneously for the entire duration of the project, there is no real need for analysis of data by auditors. The standards of conventional audit schemes do not tally with the database manipulation software present in the end to end solution.
In simple business ideals, disruption is regarded as a force, not very much unlike technological innovation, which is so different from the prevalent situation that it creates an unprecedented change in an existing standard model such that every relevant personnel related to the change is forced to adapt and catch up while keeping the fundamental advantages in place (Furnham & Gunter, 2015).
Strategic planning cannot possibly proceed without a team member being disruptive. The members can either be disruptive or quickly respond to the disruptive trends and markets that are ardently associated with advancements in technology. Therefore, the changing characteristics and responsibilities concerning the audit committee also need to be addressed by the organizations in light of the rapid innovations in technology. Disruptive forces keep on extending the current definition and new semantics develop along these lines. They are no longer linked solely to technology or business policies. Broader trends are now being associated with multiple other factors. This is evidenced by the demographic trends that apply to more areas than just technical. Disruption, by nature, is an evolved framework that is being used to qualitatively assess the various factors that challenge the existence and roles of the audit committee in an organization. As such, there are a plethora of audit trends that denote disruptive forces on account of the substantive changes that they can bring about. These trends will transform the performance variables and objectives of the audit committee (Zadek, Evans & Pruzan, 2013).
Disruption will possibly affect the audit committee in diverse ways depending upon the origin of the force. For instance, cyber security is a very dynamic field of advanced technology. The disruptive forces in this field are rapidly evolving and constantly innovating. Therefore, the audit committee must practice extreme vigilance and incorporate more peripheral knowledge than was previously required by the auditors. On the other hand, audit committee’s conventional roles, like the supervision of compliance reporting; do not have much potential for disruption from outside (Baldauf, Steller &Steckel, 2015). The internal change in their own outlook and approaches has rather changed over time owing to the global regulations and their intricate standards. Few of the more disruptive factors are:
Technological Risk: Cyber security risks regarding protection of data and confidential information, authentication issues, and the need for cyber insurance acutely threaten the audit committee. External or third party auditing is generally under a lot of pressure.
Socio-economic and political factors: With the refugee crisis and global market meltdowns happening in China and Middle East, there is considerable risks on the audit committee radar. Extreme volatility on the Geopolitical scenario are being conjured up by demographic shifts all over the world.
Trends in corporate reporting: Regulations now dictate the disclosure of various performance indicators thereby expanding the traditional limits of audit reports by incorporating strategic reporting.
Changing regulations and legislations: Legislations like anti-money laundering, and IFRS regulations on revenue and leases put considerable risk to the audit committee in globally renowned organisations.
The audit committee is tasked with the most critical of operations relating to the financial statements of an organization. Therefore, the threat to the committee poses a real problem for the organizations’ management as to how they can deal with risk management. The issues discussed by the learner are real world and are currently in full swing of action. Therefore, the mandates of the audit committee are increasingly being transformed. This change will be a priority for the audit committee and a challenge to the entire community of stakeholders in an organization.
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