The Public Company Accounting Oversight Board, by authority of the Sarbanes-Oxley Act of 2002, is responsible for the creation of auditing and the associated professional practice standards for registered public accounting firms to abide by when preparing and issuing audit reports. The auditing standards relating to audit risk, audit evidence, and the relationship of auditing standards to quality control are outlined in Auditing Standards 1101, 1105, and 1110. This block of standards enumerates the general concepts relating to auditing standards. AS 1101 defines the three types of risks faced during an audit: audit risk, the risk of material misstatement, and detection risk. Audit risk is the risk that an auditor expresses the wrong opinion …show more content…
At the statement level, any misstatements increase the likelihood of fraud. At the assertion level, there are two subcategories of risk, inherent and control. The assessment of such risks depends upon the totality of information acquired during the initial risk assessment procedures, examining the client's disclosures and statements, and during control testing. Detection risk is directly related to the risk of material misstatements. The higher the likelihood the financial statements are materially misstated, the lower the detection risk is. With the lower detection risk, it is less vital to scrutinize the financial statements. All auditors should perform due diligence when assessing these risks and adhere to the proper procedures used to conduct the audit. The purpose of an auditor's job is to make an assertion. In order to do so, evidence must be collected to authenticate said opinion. AS 1105 details the characteristics of audit evidence and the steps necessary to obtain an appropriate level of audit evidence. If the risk of material misstatement is high, the amount of required evidence collected also increases. Quality over quantity is another precept of audit evidence. The higher the quality, the less evidence is needed; whereas increasing the amount of substandard evidence collected does not bolster a position. The relevance and reliability are also two metrics used to evaluate audit evidence; both are required characteristics and must be
The utilization of the concept of materiality in auditing dates many years. Varying definitions of materiality during the preliminary stages of utilization prove that auditors recognized a need for this concept but did not have a standard for defining the term. The recognition by the Financial Accounting Standards Board (FASB) of the need for this concept prompted a decision to determine a universally recognized definition of materiality. In the book, Auditing Concepts for a Changing Environment, the FASB defines materiality as, “the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement” (Rittenberg and Schwieger 2001, 92). In essence, the concept helps auditors determine the financial information that...
Auditing is used to enhance the degree of confidence that users of financial statements have in those statements. This is achieved through gathering sufficient evidence to come to a conclusion on whether the financial statements are prepared “in all material respects, in accordance with the applicable financial reporting framework”. (IFAC, 2013). This usually refers to how true and fair the statements are when looking at the financial position of the company at the end of the period.
Auditing as a profession as evolved drastically over decades and as time has passed auditing activities has expanded from performing specific assurance activities for management, to assisting and advising management with their specific business activities. The Institute of Internal Auditors define internal auditing as ‘”…an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.’ (Institute of Internal Auditors, 2013) Through this definition it can be explained why auditors can be seen as the ‘eyes and ears’ of management. Concentrating specifically on the principles of Governance, the usage of Internal Auditing Standards, the Current Role of Internal Auditing in SA, reviewing current crisis, the importance of Internal Auditing to management is evident.
Auditors have an ethical responsibility to ensure that the financial statements are presented fairly. Auditors are also responsible for “detecting material fraud and reporting it to the board of directors.” (Mintz, p. 152) An assessment of business risk will help auditors to determine if there is confidence that they can trust management to provide the information to adequately complete the audit. If there is too much business risk, there is a good change that the auditor may not be able to meet their ethical obligations.
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)
It is important to gather audit evidence by an auditor so that he can verify the reliability of the accounting records. The accounts to be focused on are depreciation expense, repair expense, finance charges on financially leased asset and rent on operating leases. For verifying the summary of Property, Plant & Equipment an auditor shall require to carry following steps -:
The auditors with high professional skepticism are likely to bring more persuasive evidence in terms of quality and quality of information that leads to more accurate financial reporting with error free statements. So for conducting effective audits it is necessary for auditors to adopt professional skepticism. A model has been presented in the paper that is used for highlighting dependence of audit evidence on auditors’ knowledge and certain traits including incentives for producing making accurate judgments reflected through professional
A qualified financial statement contains fair representations of an organization 's financial result, condition, and cash flow which is structured to ensure the organization is in compliance with GAAP . In the standard format, an organization should follow accounting principles to comply with internal accounting systems, disclosure rules, auditor oversight, and ethics, in the event, the above-mentioned principle does not meet, an audit failure may occur. An auditor failure may result as the request of clients and senior partners did not stand firm to refuse an unethical request from the clients. I will discuss a case of audit failure due to incompliance in the internal accounting system 's disclosure rule and firms ' right to refuse risky clients
Auditors’ independence can be referred to as the ability of an auditor to behave honestly and impartially during his or her audit engagement (Ahmad & Abu Bakar, 2009). It helps to ensure the quality of the audit, while ensuring the users’ reliance on the financial statements. Auditors’ independence is usually divided into two categories, independence in facts and independence in appearance. Failure in both independence in fact and appearance is enough to cause a loss of confidence in audit and financial reporting (Feranley & Beattie, 2004).
Audit risk is a type of risk that takes place when an auditor fails to detect the error or fraud in the financial statement information and therefore issue an incorrect point of view on it. Audit risk basically consists of 3 components namely inherent, control and detection risk. Auditors design and implement methods to check risks associated with other components of audit risk to ensure they are within tolerable limit and company is able to meet its targeted goals.
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.
In general financial statements represent a formal record of an entity’s performance over a certain period of time which contains useful information to shareholders to assist them in making decisions (IFRS, 2014). In recent years, a wide range of users including shareholders and investors are interested in financial statements such as competitors, lenders and so on. Hence the audit report is prepared to provide an independent examination and the expression of opinion on financial statements (Millichamp and Taylor, 2012). However whether the information that auditors faithfully present or the users can totally rely on might still be the big question. Nonetheless under rules and regulations set by accounting boards, audit reports show the external opinion on true and fair view of the company’s financial statements and reduce the “Audit Expectation Gap” (AEG).
Auditors audit, rather than recreate, the records of clients. As such, trust is an inherent factor of the audit process (Schaub, 1996). An auditor also needs the information provided by management to be truthful to carry out the audit. Therefore, an auditor must trust the members of management to provide truthful information (Rennie, 2010). Auditors must also provide an overall evaluation of the client’s trustworthiness when planning the audit and evaluating the client’s control environment (Schaub, 1996). However, “The Independence Standards Board identifies auditors’ familiarity with the client as one of five threats to auditor independence. To foster auditor independence and objectivity, the Sarbanes-Oxley Act of 2002 bans auditors
Audits have the ability to improve a company’s profitability as well as its efficiency through aiding the management to understand their own financial systems and working plans. Each member inside the company starting from the management, suppliers , shareholders along with financers can be a assured that any possible risks in their organization are studied well & effective systems are applied in place to control them. Audits can also be used to identify areas in the financial structure of an organization that needs to be improved, it can also aid in the process of implementation of proper adjustments or changes. Although this is not the main purpose of audits, it can be used for internal fraud detection such that it can be considered as a part of a financial inaccuracy. It can be used to strengthen and reinforce the internal
As the first step, identify potential risks plays a crucial role in the risk management process. The core purpose of identifying risk is to figure out causes of risk and analyze result caused by the risks and its probability . Hence, risk identification can begin with the source of problem, or with the problem itself. The chosen method of identifying risk may depend on culture, industry practice and compliance. The identification