Discuss about the Principles of Auditing and Other Assurance Services.
Richard H. Walker, Director of Enforcement, the Securities and Exchange Commission had once opined that in pursuit of acquiring and retaining more clients in the competitive environment, the audit companies have constantly seen to explore the ever expanding market of non audit services for the large corporate and multi nationals. (Hay, 2015). Independence in context of auditing refers to a person power of judgment not being negatively affected by the wishes of the other person. This means that for an auditor to be unbiased he should not be affected by the undue influence of the clients. The credibility of the annual report is automatically enhanced whose auditor has been given an unquestionable independence to operate in his arena. (Bansal, 2013).
Independence of auditor has resulted in numerous benefits for the stakeholder and this is the primary reason behind the accounting standard bodies’ constant effort to promote independence globally. Independent Audit has helped the management to pinpoint on the causes of its poor performance and helps to overcome it. Adherence to the accounting standard in ensured through the independence of the auditor. Auditors are responsible to judge the fairness of the payouts made to the employees especially the CXO. Their vigilance, act as a deterrent to the dishonest employees on committing fraud. The banking industry globally is reeling under the problem of loan default by big names of the industries. A credible financial statement arising from independent audit not only helps the banks to judge the credit worthiness of the lenders but subsequent financial statements gives an idea about the recoverability of the loan during the repayment tenure. (ICAEW, 2017)
The corporate tax revenue of the government is highly dependent on the taxes, the computations of which are found in the financial statements which are verified by the auditor. (Wang., & Hay, 2013). Such instances have highlighted repeatedly the need of the independence of the auditors attached to the organization. (Bansal, 2013)
Issues on Auditors’ independence have gained importance in New Zealand, which has prompted the Institute of Chartered Accountants of New Zealand (called ICANZ) to conduct an enquiry in this issue, the stock exchange of New Zealand responded with change in listing requirements and the Security Commission to conduct a study on the issue. Although failures of company are not very common in New Zealand but the glaring examples of failure (Su, 2015) such as the scandal of Enron which had Anderson as is auditor, Australian company HIH Insurance and WorldCom have incited fear in the mind of the people. (Roy, 2015).
Disturbance in the minds of people of New Zealand about whether the true and fair view proclaimed by the auditor is genuine or not, dates back to period much before Enron when the increasing trend of non audit fees charged by the auditor has been noticed by many people. The practices of providing audit clients with non audit service including advices which help them to remain competitive have often widely been seen as a threat to the independence. This trend which has slowly been emerging among the good companies as they feel that the highly trained auditors who is having a good knowledge about the affairs of the company can easily relate them to the external environment for the success of the company. (Cheung, & Hay, 2004)
Companies Act and ethical requirements as determined by ICANZ define the requirements for auditor’s independence in New Zealand. The Companies Act explicitly bars an auditor from being the director, partner or employee of the company. In fact the act goes further in debarring an auditor to even become a liquidator or receiver of the company. (Stuart, 2012). This is because the essence of the Companies Act is that the relation between the company and the auditor should not be such that it might affect in his judgment about the company. Drawing inspiration from the International Federation of Accountants Code of Ethics, ICANZ formulated ICANZ code of ethics which was supplemented by addition of Code of Ethics: Independence. These drafts and additions were prepared considering the scandals of International Auditing and accommodating necessary safeguards from the same. (ICAEW, 2017)
The ICANZ code of ethics calls upon the accountant involved in this profession to maintain not only independence of mind while auditing but also to maintain independence in appearance. In order to maintain the independence of the auditor, every financial transaction taking place with the clients, should be reviewed for potential risk and loss of independence. This provision is also extended to cases where an auditor has a financial interest in the business operation of the client, a situation where the significant portion of the income of the auditor or his firm comes from a particular client or when a client has failed to pay a large portion of his fees. ICANZ to institute auditor’s independence called for continuous review of objectivity risk especially when there has been a personal dealing or any dealing with the family of the proprietors. (Cheung, & Hay, 2004)
According to New Zealand Shareholder’s association when auditors are entrusted with both the audit and non audit, the auditor actually is being compensated by the lucrative non audit work in comparison to the lowly paid audit work. Although the companies have been highlighting cost effectiveness and quality in support of the dual role, the association doesn’t rely on the fact that the mistakes occurred in none audit services by the auditor will be given an independent view by the same person during the audit. (Nzshareholders.co.nz, 2017)
Therefore in order to avoid compromise in both the roles, the association wants that payment for non audit work can exceed at the most by 25% of the audit work. The association further calls for disclosing the non audit work performed by the company so greater observation can be kept by the shareholders on the accuracy of the same. In fact it is suggested that any conflict in the non audit work should be documented well along with the impact of the conflict as suggested by the auditor. (Nzshareholders.co.nz, 2017)
Studies undertaken on auditor’s independence have often concluded without exact solution to make a person give independent views about a company who pays him. Therefore one of the solutions which could help auditors to shift their biased focus from the company to the shareholders is rotation of auditors. Since the auditor now knows that he has a limited term anyways, he will avoid spoiling his reputation by giving favorable reports under unfavorable situations. He will also now be concerned that is current corruption and errors could be taken up by the future auditor who will be coming in his place. So although a favorable relation between the auditor and the client firm is desirable, independent audit to know whether the company is actually in a “true” and “fair” situation cannot be compromises in the interest of the shareholders.
In several countries the accounting professionals themselves established the regulations and rules applicable to the professionals and members itself regulates compliance with these regulations. The accounting professionals mainly regulates its members in context to mater including monitoring, qualification, discipline and complaints entailing them to see appropriate rules and byelaws, such as accounting professionals code of ethics (Davis and Hay, 2012). Acquiescence with the regulations and rules and code of ethics and hence the codes associating to the independence it necessary. The main objective of the auditors are examining, comparing, gathering evidence, support comparison and examination, making an effective conclusion based on the analysis and evaluation and representing the conclusion and other comment. The independent governance audits in New Zealand are auditor regulation act 2011, public audit act 2001 and financial reporting act 2013 and so on. The purpose of theses regulatory bodies is to make sure that organization’s incorporating all norms and regulations in its financial statement in effective and successful manner. Moreover, these bodies also ensuring that the organization is incorporating the entire objective, functions and regulations in successful manner or not.
The controller and Auditor general is the responsible for mainlining and executing auditing functions in public bodies. The main roles and responsibilities of the controller and Auditor general are to set out the rules and regulations. The body also accountable to the public and the parliament for utilizes of public power and resources conferred by parliament. Under the public audit act 2001, the auditor general of New Zeeland is the auditor of all public entities that contains the government department, crown, statutory boards, local authorities and other public bodies. In executing the assurance work and audit the Auditor general seeks the assurance and audit work executes on the behalf of Auditor general enhances the performance of the public sectors and public’s trust (Griffin, Lont and Sun, 2014). Section 9 of the public audit act 2001 declares that the Auditor general and absolutely all those who employee for the Auditor general must act separately in the presentation of auditor general’s power, duties and functions. Independent in regards to contain the professionals independent of an Accounting auditor is determining the fundamental significant of independent. The auditor general offers independent assurance that individuals or public entities are performing, accounting and operating for their performance in observing with parliament’s purpose.
The statutory financial reporting framework objective is to establish the different type of the entities that have statutory financial reporting responsibility, audit, representation and filing needs. Moreover accounting standard framework also set out the accounting standards to be implemented by entities with statutory financial reporting reponsiblteis. The New Zealand framework outlines the concepts which strengthen information showed in general objective financial and non financial information which is contained in or attends the financial statement. It is utilized by the financial reporting standard board in working with the international accounting standard boards to develop IFRS or in developing local FRS.
The statutory framework reporting obligations includes the financial markets conduct ACT 2013, the financial reporting actc2013 and the financial reporting (amendments to other Enactments) Act 2013 (legislation, 2017). The financial markets conducts acts come into the focused on 1 April 2014. The act explains a new term of financial marketing conduct entities that includes issuers of the financial goods or products, buildings societies, as well as credit terms. This act includes the core financial reporting responsibilities on the audit, presentation and filing need for financial reporting marketing entities. The financial reporting act 2013 builds a framework for financial coverage by establishing out needs that are mainly applicable across a range of entities. Instead of this FMC act 2013 as well the FRA 2013 the financial reports (amendments to other enactment act) 2013, impacted changes to the applicable rules and regulations that govern the statutory framework of financial reporting needs of particular entity types. Under the public audit act 2001, the Auditor general is the inspector of all public bodies such as state own enterprises, crown entities, schools, statutory boards, local authorities and their subsidiaries, tertiary education institutions including polytechs, universities etc (Nethercott and Smith, 2014).
XRB also known as the external reporting boards that aims and objective is to accounting standards and standards for assurance partitions (xrb, 2017). In order to this the board ensuring the transparency and accountability for stakeholders. Moreover the auditor general’s standards are based upon the principles established by the XRB i.e. external reporting board that implement to assurance practitioners who executed audits in NZ.
|
Auditor’s general standards |
Name of standards or statements |
Performance audits |
Financial report audits |
Inquiries |
Other auditing services |
|
AG PES 1* |
The code of ethics for guarantee practitioners |
Yes |
Yes |
Yes |
Yes |
|
AG-5* |
Other auditing services, performance audits and other employment carried by on the behave of the Auditor general |
Yes |
Yes |
Yes |
Yes |
|
AG PES 3* |
Control related with the quality |
Yes |
Yes |
Yes |
Yes |
|
AG-6* |
Inquires executed by the Auditor General |
Yes |
Yes |
Yes |
Yes |
|
AG ISA(NZ) |
Overall purpose of the independent auditors and conduct of an audits in accordance with the New Zealand international standards on Auditing |
Yes |
Yes |
Yes |
Yes |
An independent audit might not be possible if the member of the audit team has a financial interest or a self interest attached with the firm. In other words any sought of financial interest in the client firm can create self interest threat. An auditor usually won’t like to lose a client even if it means thinking about the welfare of the shareholders. Therefore a certain degree of self interest is always attached but the level drastically increases with the size of the fee payable. However the biggest self threat is the ratio between the fees paid by a particular client and the total fees of the company. The higher is the dependence more is the self interest threat.
It is obvious that no one like to highlight one’s own mistake. That is obvious for the auditor’s who after charging hefty non audit fees would hardly like to showcase their mistakes during audit. In other words during self review it is very difficult to maintain objectivity. This problem can also arise when a decision which needs to be given in the current audit requires a review of the decisions given in the previous audit. Therefore for an independent audit self review threat also needs to be managed. Since independence is not only about external issues but also internal issues like self review.
Advocacy is the act of supporting one’s client firm by the auditor. While a certain level of advocacy comes with association, but unconditional support becomes a matter of concern. This can seriously then affects the independence of the auditor and goes against the audit reporting role of the company.
Auditor is suppose to give his judgment based on the material facts but sometimes he gets carried over by the good relation he has developed with the firm, its directors or the employees. The mere faith on them or the inherent culture of the firm often makes them feel that no mistake can be committed by them. (Glover, & Prawitt,2014). When such confidence creeps in the mind of the auditor about the client, he automatically starts taking lenient and soft views on the financial discrepancies of the firm and a simple explanation of the client is then taken on the face value. Auditors are always cautioned not to exceed the advisory role and to avoid developing any personal opinion about the company. (Ebrahim, 2001)
Auditors should constantly look out for threats and accordingly take step to reduce them to a level accepted by standards and avoid harming the shareholders. While accomplishing their task auditors should always consider each risk separately and see what steps they have taken to mitigate the same. The degree to which the safeguard will be applied will depend on the level of threat, the type of audit engagement, the organizational structure of the firm and the profile of the end users. Based on the above threats there are three broad heads for safeguard. (Islam, & Karim, 2005)
Accounting bodies, auditing committees, international organizations generally implement standards, guidelines, oversights, disclosure requirements and processes for monitoring the discipline and enforcement of the same.( Knechel, & Salterio, 2016).
This includes but not limited to having a streamlined procedure of appointment as auditor, good supervision by audit committee, a well explained disclosure of the role to be played by the auditor both in terms of audit and non audit activities and the corresponding payments from the process. The auditor or the audit firm should appoint personnel who are professionally well qualified and are well remunerated so that they are able to maintain their professional integrity. (Gay,& Simnett,2000).
It is absolutely necessary for the audit firm to have an own streamlined procedures and guidelines which will act as a safeguard for the firm. Safeguards should ideally be extended to the operations and procedures for client engagement. (Pitt,2014). The audit firm should have in place regulations which make way for the auditor’s independence, internal policies to adhere to the safeguards, a review of the quality of work done in the engagement, performance review of the partners and an open door policy where any staff of the auditing team are welcomed to meet the senior level authorities to discuss the problem faced by them during the audit. Such safeguards are instrumental not only for the auditor’s independence but will go a long way to promote objectivity and fair practices. (Islam, & Karim, 2005)
In order to ease out the pressure on the auditors to maintain integrity when playing dual roles, there are certain categories of services which are prohibited for an auditor while performing non audit activities.( Blay, & Geiger,2013).
The first two types of threats are not within the complete control of the audit firm. This means that is a role which the client company needs to play in extending the safeguard for the audit firm. However the last safeguard is totally in the hand of the audit firm. (Dobler, M. 2014). If an audit firm has the last safeguard implemented diligently in the firm, then the auditors of the firm are less likely to show interest to work with a firm whose threats are not minimized to an acceptable level with the help of the given safeguards.( Romney & Steinbart, 2012). A good audit firm will in fact never hesitate to turn down an engagement with the client who doesn’t allow sufficient independence and have threat which can affect the independent audit.( Ruhnke,& Schmidt,2014).
References
Bansal, S. (2013). Auditing and Assurance – CA (11th ed.). New Delhi: Best Word Publications.
Blay, A. D., & Geiger, M. A. (2013). Auditor fees and auditor independence: Evidence from going concern reporting decisions. Contemporary Accounting Research, 30(2), 579-606
Cheung, J., & Hay, D. (2004). Auditor Independence: The Voice of Shareholders. Auckland: The University of Auckland. Retrieved from https://www.uabr.auckland.ac.nz/files/articles/volume6/v6i2-auditor-independence.pdf
Davis, M. and Hay, D. (2012). An Analysis of Submissions on Proposed Regulations for Audit and Assurance in New Zealand. Australian Accounting Review, 22(3), pp.303-316.
Dobler, M. (2014). Auditor-provided non-audit services in listed and private family firms. Managerial Auditing Journal, 29(5), 427-454.
Ebrahim, A. (2001). Auditing quality, auditor tenure, client importance, and earnings management: An additional evidence. Rutgers University, 1-20.
Gay, G. E., & Simnett, R. (2000). Auditing and assurance services in Australia. Sydney: Mcgraw-hill.
Griffin, P., Lont, D. and Sun, Y. (2014). Governance Regulatory Changes, IFRS Adoption, and New Zealand Audit and Non-Audit Fees: Empirical Evidence. SSRN Electronic Journal.
Glover, S. M., & Prawitt, D. F. (2014). Enhancing auditor professional skepticism: The professional skepticism continuum. Current Issues in Auditing, 8(2), P1-P10.
Hay, D. (2015). The frontiers of auditing research. Meditari Accountancy Research, 23(2), 158-174.
ICAEW,. (2017). Provision of non- audit services to audit clients | Ethics | Technical | ICAEW. Icaew. Retrieved 6 April 2017, from https://www.icaew.com/en/technical/ethics/auditor-independence/provision-of-non-audit-services-to-audit-clients
Islam, A., & Karim, W. (2005). Auditors’ Independence and NAS. Wellington: Victoria University of Wellington. Retrieved from https://www.victoria.ac.nz/sacl/centres-and-institutes/cagtr/working-papers/WP36.pdf
Knechel, W. R., & Salterio, S. E. (2016). Auditing: assurance and risk. Routledge.
Knechel, W. R. (2016). Audit quality and regulation. International Journal of Auditing, 20(3), 215-223.
legislation. (2017). legislation. [online] Available at: https://www.legislation.govt.nz/ [Accessed 6 Apr. 2017].
Nethercott, L. and Smith, A. (2014). New Zealand’s Thin Capitalisation Rules and the Adoption of International Financial Reporting Standards in New Zealand. SSRN Electronic Journal.
Nzshareholders.co.nz,. (2017). New Zealand Shareholders’ Association Inc. | NZSA Best Practice Guidelines. Nzshareholders.co.nz. Retrieved 6 April 2017, from https://www.nzshareholders.co.nz/shareholders-best-practiceDetail.cfm?bestpracticeid=27
Oag.govt.nz,. (2017). About auditing — Office of the Auditor-General New Zealand. Oag.govt.nz. Retrieved 6 April 2017, from https://www.oag.govt.nz/our-work/about-auditing
Romney, M. B., & Steinbart, P. J. (2012). Accounting information systems. Boston: Pearson.
Roy, M. N. (2015). Statutory Auditors’ Independence in Corporate Accounting Scandals: A Case Study of Satyam Computer Services Ltd. Prabandhan: Indian Journal of Management, 8(2), 35-48.
Ruhnke, K., & Schmidt, M. (2014). The audit expectation gap: existence, causes, and the impact of changes. Accounting and Business Research, 44(5), 572-601.
Stuart, I. (2012). Auditing and assurance services: an applied approach. New York, NY: McGraw-Hill/Irwin.
Su, L. (2015). Do the auditors bear the consequences of corporate failures? The case of failed New Zealand finance companies (Doctoral dissertation, Auckland University of Technology).
Wang, S. W. S., & Hay, D. (2013). Auditor independence in New Zealand: Further evidence on
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