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Importance of ethics in auditing
Auditor professionalism
The importance of ethics in auditing
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Definition of Audit Professional Scepticism
According to International Standards on Auditing (ISAs) 200, “The auditor shall plan and perform an audit with professional scepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated.” In other words, an auditor must have a questioning mind and be sceptical to any circumstances that may be a sign of possible misstatement due to error and fraud, and critically assess audit evidence. It does not mean that they should assume the management is totally dishonest but instead, they should bear in mind that the management is neither honest nor dishonest.
Professional scepticism is actually a sceptical mind-set that cause auditors to apply a questioning
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Therefore, it helps to ensure the audit works performed are of good quality.
Personal behavioural traits such as an auditor’s attitude and ethical values, and his level of competence which is his knowledge do affect his professional scepticism. This means that education, training and experience will influence professional scepticism. Therefore, audit firms are responsible to develop and polish their auditors to have a sceptical mind by planning and enforce policies that stress on the importance of professional scepticism in performing audit works.
Apart from personal behavioural traits, an auditor’s integrity also affects his professional scepticism. The justification will be discussed
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If the answer is no, they must perform more audit procedures to gather more audit evidence.
• Reliability of audit evidence
Auditors cannot straight away rely on the information from documents and responses to inquiries received from the clients. They must be sceptical about the reliability of those information before they use them as audit evidence. If they are doubtful about the reliability, for instance, they believe that the clients may have falsified the documents, they must investigate further and maybe modify or add additional audit procedures such as collecting more audit evidence from third parties.
• Risks of material misstatements due to fraud
Sometimes fraud may be created and concealed in a way that is so well-organized that it might be overlooked if auditors fail to perform reasonable care and skills. This always happens in entities that have knowledgeable people in accounting, finance and so on. Therefore, every auditor must maintain a questioning mind throughout the audit and set in his mind that material misstatement due to fraud may exist even though his past experience with the clients shows that the clients are indeed
Overall, the work performed to test the relevant financial statement assertions and the evidence gathered has led our audit team to conclude that the confirmation issues encountered may signify that a potential for material misstatement exists. For example, the existence of a line of credit in one of the Financial institutions indicates that we need to perform further investigation to assess the reliability of the findings.
Auditors do not provide audit opinions for different levels of assurance. Therefore, auditors consider providing more or less assurance when modifying evidence for engagement risk to be unnecessary. However, auditors should be professionally responsible to accumulate additional evidence, assign more experienced personnel, and review the audit more thoroughly, particularly when a client poses a higher than normal degree of engagement risk. The auditor should also modify evidence for engagement risk when high legal exposure and other potential actions affecting the auditor
There can only be so many changes to the audit process to prevent fraud. Regardless of the regulations that one may enforce, the audit process still comes down to human opinion. In a case like Satyam, an auditor performing their job to the highest standard would have most likely caught Satyam eventually. As stated in the case, misstatement of cash is one of the easiest fraudulent activities to catch. Simply requesting bank statements verifies the cash that the company actually owns.
With every business activity come opportunities for fraudulent behavior which leads to a greater demand for auditors with unscathed ethics. Nowadays, auditors are faced with a multitude of ethical issues, and it is even more problematic when the auditors fail to adhere to the standards of professional conducts as prescribed by the American Institute of Certified Public Accountants (AICPA). The objective of this paper is to analyze the auditors’ compliance with the code of professional conduct in the way it relates to the effectiveness of their audits.
In fraud investigations, the need to maintain professional skepticism is in accordance with professional due care. Furthermore, professional skepticism is when an auditor or a forensic accountant begins an investigation with the attitude that fraud is possible despite prior connections with the company. As I proceed through my WorldCom fraud investigation, I need to keep my mind open to the idea that I may find evidence of material misstatements. Any previous dispositions or biases prior to starting the investigation cannot create bias. WorldCom’s integrity and honesty are no longer relevant as I am required to focus on the compelling evidence found during my investigation. “… the auditor should not be satisfied with less-than-persuasive evidence because of a belief that management is honest” (Consideration of Fraud in a Financial Statement Audit
The first problem poses many deficiencies in the audit process. To start off with, it is not sufficient enough to take a sample size of only four test documents when over 1,100 vendors exist. If an error was able to be detected in only four test documents, than the auditor should have expanded their sample size to ensure that no actual material misstatements existed. The auditors claim that the amount was not material, but because the sample size was so small they could not make an accurate judgement. The second problem occurred when the auditor accepted phone confirmations and internally generated documents such as cash receipts to confirm that the sample material was correct. This evidence should not be accepted, because the reliability of the evidence is flawed. The best type of confirmation that the auditor could have received would have been written confirmations from the external parties. Looking at this situation, the auditor should have made a professional judgement call to determine if the evidence received was persuasive enough for him to make an accurate determination on the accuracy of the Accounts Payable. With such a small sample size, the auditor is taking on too much audit risk, and ...
in arriving at audit opinion. Obtain audit evidence that is sufficient and appropriate is one of the most important steps that auditors should make and that is crucial in shaping the overall standard governing audit evidence. Audit evidence should be properly documented to ensure that the objective of the audit was achieved. If the objectives were not achieves, the working papers must contain documentation of failure. Also, the use of experts could be considered as audit evidence and auditors must know when their expertise is exceeded. This study therefore suggested that further empirical work should be done on the impact of evidence on audit
One of the foremost problems facing the accounting profession today is the loss of respect that faces accountants in light of recent accounting scandals. In order to regain lost respect in the accounting profession an accountant must have integrity and ethics that are above and beyond the norm. This fact is true whether the accountant works for a business entity or for a government entity. In either situation the accountant is responsible for remaining steadfast, not only in professional behavior, but in personal behavior as well. In recent years, accountants have come under fire by the general public for unethical decisions, a reputation that, although only a few individual accountants were guilty, the entire profession was found guilty of, in the court of public opinion. Now, the accounting profession must be far more diligent in governing themselves, and in assuring those dependent upon their decisions, that they are above reproach. This is especially true of those accountants responsible for government funds, which can be scrutinized by the public. The public seem to have set more rigorous standards than business investors, of what is proper use of the funds available. They will not tolerate waste or misappropriation of funds and demand complete accountability. Accountants must stand ready, willing, and able to answer any and all questions that may be put forth, and be able to prove that the decisions that have been made were correct and proper. This includes not only following the letter of the law, but avoiding any decisions that, while being legal, would not be totally ethical and above board. An accountant is trusted with confidential information which must remain confidential, unless it has led or could possibly lead to illegal activity, in which case, of course, the information, must be reported immediately to the proper authority.
Auditing plays a vital role in business, government and economy. The key value of auditing is its ability to provide an independent assurance on the integrity and fairness of financial information produced by companies and other entities. An auditor is under a statutory duty to report to members on the company’s financial statements for an accounting period and on the accounting records relating to those financial statements (s.308). Auditors are required to provide an auditor’s report to the members (i.e. shareholders with voting rights) of the company concerning the financial statement audit. The auditor must express an opinion on whether the financial statements are in accordance with the Corporations Act, comply with accounting standards (s.296) and give a true and fair view (s. 297).
So the first question that should be asked is why should an audit be done in the first place? According to the Clarified auditing standards on the AccountingWEB website they have determined the following information as critical in defining what an audit is and why it’s important.
Audit Risk is the risk that an auditor has stated an incorrect audit opinion on the financial statements. It may cause the auditors fail to alter the opinion when the financial statements contain material misstatement. The auditor should perform the audit to lower the audit risk to a sufficiently low level. In the auditor’s professional judgement, the auditor should appropriately state a correct opinion on the financial statement
As per ISA (NZ) 200-A17, this ethical requirement includes the auditors integrity, objectivity, professional competence and due care, confidentiality, & professional behaviour. Integrity is an ethical attitude which includes the auditor’s honesty, accuracy, and fair practice. Objectivity is a mental attitude while carrying out the audit wherein the auditor is fair and just with all his/her work. Professional competence is the knowledge and skill of the auditor, gained through education, training and experience, while due care is a degree of care of an auditor on certain situations wherein an he/she must act diligently. Confidentiality is the commitment of the auditor not to disclose any information regarding his/her client, unless required by law. Professional behaviour means the auditor must act in accordance to the law and set of standard as a manifestation of respect to the
The importance of internal audit has certainly raised up along with the transforming business environment. Nowadays internal audit standards and theories have been actively discussed, yet there are still many debates on the ambiguity of internal audit professions’ foothold and their duties. Moreover, the internal audit scandals have never been out of sight: FIFA (2015), Toshiba (2015), Libor (2012), Olympus (2012). Practitioners and scholars study the audit methods, the effectiveness, the factors, etc. that impact the internal audit, but it is only useful once the outputs of internal auditors are realised to outcome.
Auditing has been the backbone of the complicated business world and has always changed with the times. As the business world grew strong, auditors’ roles grew more important. The auditors’ job became more difficult as the accounting principles changed. It also became easier with the use of internal controls, which introduced the need for testing, not a complete audit. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. Computers played an important role of changing the way audits were performed and also brought along some difficulties.
The major characters of the tradition audit are all information what is needed by auditors are on the paper and the manual calculators and without high communication technology. Auditors usually were limited by the place in the paper time. When a several people are working on the same auditing project for a client with offices in cities across the country, even worldwide, it takes a lots all time those auditors get the information which they need from the client, even there is risk paper information disappear for many reasons. on the another hand, mail paper information increase the auditing cost. The mistake caused by the manual calculators inevitably, no matter how fixed auditors concentrate on recalculate is, after all auditors are human. The global business become major in the modern business world, some example, several auditors who are in different locations are working a same auditing project, or auditors are in different city even country with the client, when there is issue among these auditors or between auditors and client, they only can communicate with each other by phone or be together and have meeting. Phone call can not make sure information been watched in the same time when the voice is talking about the issue, but having a meeting takes time and money make all people together, it increases auditing cost.