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importance of professional skepticism
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1. Introduction
1.1 The objectives of audit
Under the regulatory, directors are required to produce financial statements annually which give a true and faire view of the affairs of the company and its profit and loss for the period and accountable to shareholders. Auditors have a responsibility to plan and perform the audit to obtain reasonable assurance to the shareholders and other stakeholders of a company on the financial statements.
The objective of an audit of financial statements is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial statements, and communicate as required by the HKSAs, in accordance with the auditor’s findings. (HKSA 200.11)
In order to maintain the auditor’s integrity, objectivity, and independence, auditing standards have been issued for measuring of the quality of the auditor’s performance. Auditing standards are general guidelines to aid auditors in fulfilling their professional responsibilities in the audit of financial statements. They include consideration of professional qualities such as competence and independence, reporting requirements and evidence. (Soltani, 2007)
1.2 Code of ethics for auditor independence
Audit independence is a very critical component if a business wishes to have an audit function that can add value to the organization. The audit report and opinion must be free of any bias or influence if the integrity of the audit process is to be valued and...
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...to aid auditors in fraud detection and increase emphasis on professional skepticism.
4. Recommendations
Since professional independence and skepticism are more important for an auditors on audit engagement. It is recommended that auditors should enhance professional skepticism to the financial statement audit. It includes increase the ability of auditor to detect fraud by training, enhancing ability through experience and paying more effort in audit plan. In order to enhance auditor independence, directors should disclose the audit and non-audit services fee to investors and let investors to evaluate the independence of the auditor. By separating of auditor duties for audit and non-audit services, it can be help to maintain auditor independence. By enhancing the internal control system and corporate governance, it can be help to reduce fraud risk.
The audit committee must certify that the company’s auditors are independent. The audit committee must approve all professional services provided to the company by its independent auditors and ensure that auditors do not provide to the company any of the specifically prohibited services identified by SOX, such as bookkeeping services. The audit committee must receive and analyze key items of information from the independent auditors. These items of information include auditors’ analysis of critical accounting policies adopted by the
According to PCAOB Ethics and Independence Rule 3520 a registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period. Independence is required for all audit engagements. The auditor must be independent of an entity when performing an engagement according to General Accepted Auditing Standards (GAAS). Independence is very significant to the audit profession, because the primary purpose of an audit is to provide financial statement users with reasonable assurance an on whether the financial statements are presented fairly. The auditor’s report gives credibility to an entity financial statement and without an auditor’s report the financial statement would be consider worthless. Reliance on management for the fair presentation of a financial statement would often result with a bias and impressive financial statements that doesn’t reflect a true picture of the entity’s financial position. An auditor’s independence should not in anyway be influenced by any relationship between their client and
"Audit Independence - Independence of Australian Company Auditors." Insert Name of Site in Italics. N.p., n.d. Web. 23 Apr. 2014 .
As quite data, we tend to use to assist and result in the acceptable call within the business ought to be consistent and dependable. On contrary, the knowledge that isn't reliable will result in injury and ineffective use for the resources of the corporate, unhealthy and damage result to the business and influence its higher cognitive process. To avoid unreliable data and wrong higher cognitive process and to confirm the accuracy within the work in step with the foundations and rules, there should be what's referred to as proof or (Audit), which is handled by freelance and qualified individuals. From all of this, we will acknowledge the importance of auditing method for all businesses. Within the corporations, the auditoris required to state clear opinion, if or not the annual accounts offer the truthful sight concerning the state of the corporate and its money position. To precise the opinion, the auditors shouldmeasure the register of the business, examine its assets and transactions. Altogether cases, the auditor ought to perform his job with due skilled care and high skil...
Marx ,B etail(2004) asserts that the audit quality is the basis of the credibility of the financial statements.According to De Angelo (1991) audit quality depends on the probability of auditor s ‘discovery of the unbiased truthful report of material errors, emission and misrepresentations from the clients’ financial statements. This ability of a truthful, unbiased report depends on the auditor s' professional conduct with the client, which are based on the objectivity of the auditor, such as professionalism and conflict of interest says Adenyi S and Mieseigha E.G (2013).
ABSTRACT: The paper provides a framework that describes how audit evidence combines with auditor (knowledge, traits & training, and specialization) characteristics and external environment (includes client) characteristics (e.g., client complexity, incentives, and accountability to reviewers) to produce judgments that reflect professional skepticism (hereafter PS) in auditing. The framework also describes how, given a judgment that reflects some level of PS, the judgment combines with auditor (independence) characteristics and external environment (includes client) characteristics (e.g., corporate governance, and legal liabilities) to produce actions that reflect relatively more or less PS. The framework highlights that auditors’ and external's pre-existing characteristics all combine (and potentially trade off or interact) to affect the amount of PS in audit judgment and audit actions, and thereby audit outcome (e.g., the quality of auditor's opinion professional judgment and financial reporting).
What exactly is accountant independence? I have determined that accountant independence is very similar to being an independent auditor. When it comes to auditor independence, it refers to the independence of the internal auditor or the external auditor from parties that may have a financial interest in the business being audited. The initial concept of auditor independence was developed in the 19th century, which primarily originated with the British. In that era, British investors didn’t allow auditors to work in the businesses that they audited. The initial concept began to change in the early 20th century due to the shift in capital from foreign to domestic sources in the railroad, mining industries and the inventions of the telegraph and telephone. As time passed to the 1970’s, FASB was established as the authoritative independent accounting standards setter. In the second half of the 20th century there were ongoing debates about accountant independence. Thomas A. Lee, in Company Auditing, 3rd ed. (Van Nostrand Reinhold, 1986, page 89), said, “An honest auditor will behave like someone who is independent, using independence to mean an attitude of mind which does not allow the viewpoints and conclusions of its possessor to become reliant on or subordinate to the influence and pressures of conflicting interests.” This statement was very admirable but didn’t include the auditor’s state of mind as they audited. On the other hand, P. Moizier, in “Independence” (in Current Issues in Auditing, Publishing Ltd., 1991), argued for an economic rationale for auditor independence. He said “There is an expectation that the auditor will have performed an audit that will have reduced the chances of a successful negligence lawsuit to a level ...
This section of the paper summarizes the relevant International Standards on Auditing (ISAs) that reflect the interrelation between the audit procedures and audit evidence. The aim of this chapter is to emphasize the importance of the evidence gathered by the auditor and the impact it might have on the audit opinion.
Kent has a misconception that auditors have no specific duties regarding fraud. Furthermore, Kent also mentions that auditor provides no assurances about fraud because that is management’s job. In fact, auditors do not have duty to detect fraud. However, it is an auditor responsibility to detect material misstatements in the financial statement. Auditors are required to identify and assess the risk of material misstatement due to fraud and design procedures to detect such misstatement.
...pendence, whether pro forma or substantially, the quality of professional assurance service of professional accountants will be doubted by public and that will probably lead to serious results. The factors affecting independence of external auditors are multiple. Market competition among external auditors and the imperfection of laws regulated the external auditing industry are tow of most important factors. In order to maintain and guarantee the independence of external auditors and try to avoid the scandals like Arthur Andersen, some research on how to improve and maintain the independence of external auditors are necessary. It is possible for researchers to put emphasis on how to control the market competition among auditing organizations and enhance the ability of accounting regulators to supervise and manage the professional accounting industry in the future.
The purpose of an audit (purpose). To provide financial statement users with an opinion by the auditor on whether the statements are presented fairly, in all material respects, in a manner that conforms to an applicable financial reporting framework. It’s important the audit does provide the ultimate user with financial statements needed to understand where their company is going and how it can and will succeed.
The fundamental duty of an external financial auditor is to form and express an opinion on whether the reporting entity’s financial statements are prepared in accordance with the relevant financial reporting framework. In discharging this duty, the auditor must exercise “reasonable skill, care and caution” (Lopes, J. in Kingston Cotton Mill Co 1896) as reflected in current legal and professional requirements.
The complete destruction of companies including Arthur Andersen, HealthSouth, and Enron, revealed a significant weakness in the United States audit system. The significant weakness is the failure to deliver true independence between the auditors and their clients. In each of these companies there was deviation from professional rules of conduct resulting from the pressures of clients placed upon their auditors (Goldman, and Barlev 857-859). Over the years, client and auditor relationships were intertwined tightly putting aside the unbiased function of auditors. Auditor careers depended on the success of their client (Kaplan 363-383). Auditors found themselves in situations that put their profession in a questionable time driving them to compromise their ethics, professionalism, objectivity, and their independence from the company. A vital trust relationship role for independent auditors has been woven in society and this role is essential for the effective functioning of the financial economic system (Guiral, Rogers, Ruiz, and Gonzalo 155-166). However, the financial world has lost confidence in the trustworthiness of auditor firms. There are three potential threats to auditor independence: executives hiring and firing auditors, auditors taking positions the client instead of the unbiased place, and auditors providing non audit services to clients (Moore, Tetlock, Tanlu, and Bazerman 10-29).
...e financial reports and statements are correct. This auditing will be conducted by auditing department of the organization, even may be done by an independent auditor who is not part of the organization, and sometimes public officials are elected. In case of unmatched consequences the organization need to give explanation on the misrepresentation of wrong statements. Auditors purpose is then to ensure that the misrepresentations are corrected, then maintain accurate, reliable financial documents and statements.
The evolution of auditing is a complicated history that has always been changing through historical events. Auditing always changed to meet the needs of the business environment of that day. Auditing has been around since the beginning of human civilization, focusing mainly, at first, on finding efraud. As the United States grew, the business world grew, and auditing began to play more important roles. In the late 1800’s and early 1900’s, people began to invest money into large corporations. The Stock Market crash of 1929 and various scandals made auditors realize that their roles in society were very important. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. The auditors’ job became more difficult as the accounting principles changed, and became easier with the use of internal controls. These controls introduced the need for testing; not an in-depth detailed audit. Auditing jobs would have to change to meet the changing business world. The invention of computers impacted the auditors’ world by making their job at times easier and at times making their job more difficult. Finally, the auditors’ job of certifying and testing companies’ financial statements is the backbone of the business world.