Auditing For Management Expressions Of Confidence – Case Study Discussion

Development of Accounting and Auditing

Discuss about the case study Auditing for Management Expressions of Confidence.

1. Accounting has been an essential element of finance since the ancient times. In the historic times accountants used to be called as bookkeepers who maintained the records of accounting transactions. However, with the constant development in the process of accounting, it has become professionally certified since the 19^th century. There has been development in accounting in many different ways that upgrades the nature of accounting, regulatory system, accounting standards and principles. Accounting is a set of records and recognition of financial transactions that helps in analysis of the performance of the organization or individual in an accounting or financial year. Accounting helps in assessment in assessment of profit and loss in a financial year as well as determines the value of assets and liabilities at the end of the accounting year (Mohammadi, 2015).

Though the basic concept of accounting has remained same since the ancient times, the methods, principles and standards have been developing for preparation of accounting statements. Preparation and recording of accounting transactions manually have been developed to that in a computerized manner. Several accounting software have been invented and updated over the period to make the process of recording transactions easy and accurate. Apart from that, conventional method developed to modern accounting method so that the desired results are more accurate. For example, computation of depreciation involved historical value of assets under the conventional method of accounting. But in case of modern accounting method, recent value of asset is considered that produces accurate and fair depreciation charges. In order to keep pace with the recent economic trend, accounting principles and standards are being developed to provide transparent and accurate results. Like standard on recording foreign exchange transaction according to the closing exchange rate on the recording day provides accurate profit and loss on foreign exchange deals (Soh, Leung & Leong, 2015).

Similarly, auditing has also been developed over the period to serve the users more efficiently and effectively. It is an organized form of scrutiny and verification of accounting records and statements to evaluate the authenticity of the same. Auditing is a concept, which is formed on the basis of accounting and revolves around the concept of examination of books of accounts and statements. Auditing is conducted to examine whether these statements and records depict a true and fair image of an organization’s books of accounts. Just like the accounting information, methods and standards that regulates the process of auditing also been developed from time to time. The accounting and auditing boards have specified the limits of capital and turnover of the assessees exceeding which requires mandatory auditing (Ezzamel & Xiao, 2015).

Importance of Unbiased Auditing

Auditing is conducted for both companies and individual assessees depending on their value of turnover. In case of companies, different types of auditing are considered as required by the Corporation laws and auditing standards. For example, internal audit, periodical audit, tax audit, bank audit, forensic audit and many more so that the users of the financial statement can get true picture of the company’s performance (Westermann, Bedard & Earley, 2015). Auditor is required to provide an opinion on the correctness and fairness of the financial statements through qualified, unqualified and adverse report. The process and requirements of stating such opinions and conclusions have been developed over the period so that it depicts a clear picture (Klychova et al., 2015).

As provided in the case of Whigarian view of history, it is true that continuous process of any act with a positive belief always generates progressive and developed results. Similarly, in accounting and auditing constant development and advancement has been made to serve the society in a better and fair way. Such advancement in both the components of finance has been made with respect to save the time in preparing the accounting statements without any error. Such advancement also helps to maintain the necessary records of accounting as well as of auditing in more concise manner. As the education system and industries in economy are increasing at high percentage, it is very important to develop the systems of managing the organizations that presents clear, unambiguous, accurate and authenticated information. At the same time recognition and measuring turnover, profits, losses, expected returns and other required information should not be time consuming (Bedford & Ziegler, 2016).

Therefore, it is important to develop the systems of different areas of finance that helps in analyzing the financial position and other relevant information. Accountants and auditors have to be keen on learning and practice the new, developed and advanced areas and techniques so that they can serve the company and society in the best possible manner (Soh, Leung & Leong, 2015).

2. Many nations have institutionalized the regulations and standards that govern the system of auditing under which auditor independence has become difficult. Auditors perform their work through analytical procedures to provide a conclusion for their clients’ business. However, some conflicts of interests occur among the professionals while performing their several jobs to serve one objective. In this regard, many authors have provided theories on moral seduction as well as strategic issue cycle. While some of the theories like Sarbanes Oxley Act does not reflect the true picture on independence of the professionals or auditors that is a consequence of incorrect understanding for the biasness of the auditors (Berman et al., 2015).

In presenting the opinion on auditing for the clients, the auditors have to be unbiased to perform their audit work. This is because auditing is conducted to provide reliability and authenticity of the books of accounts and financial statements of the organization. Hence, auditors need to examine the books of accounts independently to provide a reasonable opinion on the correctness and fairness of the accounting information. In delivering the examination and opinion on the books of accounts of the clients, auditors have to present their performance based on the intuition, analytical process, qualitative and quantitative measures. However, in analyzing the books of accounts, auditors have the reasonable responsibility while the absolute responsibility is that of the management of the organization (Guiral et al., 2015).

Challenges due to Structural Features of Auditing

There are several reasons based on structural features that create conflicts of interest between auditor- client relationships that affect the professional judgment of the auditors. The structural features of the profession of the auditors are appointing and removing the auditors by the organizations’ management. Another feature of the structural issue is undertaking of jobs with the clients. Under the first feature independence of auditors are affected by their appointment terms and conditions. Organizations have the freedom to appoint auditors of their choice based on their set criteria. Such appointment based on the different conditions affect the independence of performance of the auditors. In providing, the opinion of the auditors on the clients’ financial report might be biased for reasons like fear of being removed from the auditing position, increased audit fees and such other reasons. Such threats and weaknesses on the part of auditors’ appointment affect the independence on their unbiased performance and increase the conflicts of interest with the clients’ relationships. Besides, individual auditors or audit firms having brand name are perceived to be more independent in performing their audit work and delivering the critical opinion on the financial statements of the organizations (Rupp et al., 2015).

In case of second feature, undertaking of jobs with the clients also affects the independence of audit work because of the relationship between auditors and clients. Sometimes, the relationship between them builds a common identity and creates a favorable behavior among the fellow members of the group. Apart from that, auditors perform multiple works for their clients other than the audit work. This multiple work performance affects the efficiency and concentration on reviewing the accounting records and books of accounts to examine its fairness and transparency. Accepting of non-audit works by the auditors are also an essential reasons for conflicts of interest in the client and auditors relationship because of the fear of losing job by the auditors (Asare, Wright & Zimbelman, 2015).

Most of the nation’s legislative systems have allowed the interest conflicts that have become common in the recent years. Several theorists have raised the question on why do auditors or clients accepts such policies that create the conflicts in performance of the work as well as providing conclusion on the opinion. Accounting and auditing are the most important components that provide the opinion on the continuity of the organization. Accounting provides the information on the profitability, incomes, expenses, value of assets and liabilities, investments and other vital financial information (Downar, Ernstberger & Koch, 2016). On the other hand, auditing provides the authenticity, true and fairness of the books of accounts and financial statements of the company. Auditing stress upon the correctness of the recognition of accounting transactions according to the International Financial Reporting Standards as well as Generally Accepted Accounting Principles. At the same time, process of auditing also takes place following the International Auditing Standards that provides the auditors a proper direction for the better performance (Whittle, Mueller & Carter, 2016).

Compromise of Auditor Independence

 Hence, it is important to focus and perform the auditing without compromising on their independence so the users are able to get a clear and true picture of the organization. Stakeholders of the companies should be provided the correct information about the company that helps them in taking better and fair business decisions to achieve the goals (Hoos, Kochetovaâ€ÂKozloski & d’Arcy, 2015).

3. Independence is an essential factor every auditor is required to have while performing the auditing work. Management of companies might have interests in showing the accounting records and financial statements that favors the performance of the companies. However, it is the responsibility of the independent auditors to present the audit report free from falsification, unbiased on the analysis of the organization’s financial status. An auditor should follow the code of ethics and audit principles and standards to perform the auditing of a company to provide a clear understanding and fair work performance. In order to perform the auditing independently, it is important to have unbiased behavior for the client company and fellow member. In this context, most of the nations have developed the principles and standards of audit performance to regulate the performance of auditors effectively and efficiently (Gold et al., 2015).

However, sometimes auditors’ biased behavior whether knowingly or unknowingly affects the independence of the auditor. Auditors biased performance on the auditing of account statements and financial statements might present the conclusions and results in favor of the client company. But, the same does affect the reliability and competence on the performance of the fellow audit members. Since a financial statement of an organization presents the financial status and performance of business as a whole, it is very important to provide unbiased and credible opinion on the audit reports. Audit reports provide four types of opinion- unqualified opinion, qualified opinion, adverse opinion and disclaimer of opinion that should be form an unbiased appraisal from the company’s auditor (Hatfield & Mullis, 2015).

Unqualified opinion in the auditors’ report provides a clean opinion on the financial statement of the client company for which the audit was conducted. This type of report is presented when auditor determines each of the accounting records and statements are free from errors, misrepresentation and fraud (Westermann, Bedard & Earley, 2015).

Qualified opinion is provided when auditors find the account statements free from misrepresentations but do not harmonize with the International Financial Reporting Standards and Generally Accepted Accounting Principles (GAAP) (Westermann, Bedard & Earley, 2015).

Adverse opinion is presented when the financial statements of a company do not conform with the GAAP as well as it reflects gross misrepresentation of the accounting records. This type of opinion provides a negative impact on the company’s financial status and its continuity (Gold et al., 2015).

Disclaimer of opinion arises when auditor is not able to perform complete audit procedures to provide accurate report due to certain limitations on the scope from the management (Whittle, Mueller & Carter, 2016).

Since, auditors’ opinion on the financial statements of the organization helps the stakeholders to form opinion for various purposes, it is important to give unbiased and fair opinion.

“Ironic rebound effect” is portrays unforeseen problems that emerge when auditors strive to overcome certain thoughts, ideas, beliefs, attitudes while performing the audit procedures. Sometimes auditors being biased towards their clients on forming judgments and opinions on the financial statements of the organization. Such biasness does not reflect the true picture of the company’s performance and shows the auditor’s work against the code of ethics and principles of the audit regulations. Auditing is the examination of books of accounts and financial statements of a company to provide a true and fairness review on the performance of the company. Hence, auditors work in this respect is critical and significant as there are various accounting records that need to be examined by using sampling methods. This method of auditing is based on the probability and random selection. Therefore, ironic rebound effect in case of sampling test may provide false results because the selection should be according to value and number of transactions (Aghazadeh & Joe, 2015).

In order to form a true and fair opinion on the accounting records of the company the auditor is required to follow the necessary principles and standards that regulate the audit procedures. However, it is not possible to check and verify each of the data, evidence, ledger and documents for the purpose of crosscheck, the auditor should be very careful while selecting the data. Such selection of the data provides the overall opinion on the true and fair view of the organizations performance as well as the transparency in maintain the records. Auditors’ have to overcome with the rebound effect to provide the credible and clear opinion about the company to serve the stakeholders and other users of financial statements in a better way. The auditor should not form any opinion out of biasness or rebound effect on the company’s financial statements that is in favor of the client company (Aghazadeh & Joe, 2015).

Reference List:

Aghazadeh, S., & Joe, J. R. (2015). How Management’s Expressions of Confidence Influence Auditors’ Skeptical Response to Management’s Explanations. Available at SSRN 2623537.

Asare, S. K., Wright, A., & Zimbelman, M. F. (2015). Challenges Facing Auditors in Detecting Financial Statement Fraud: Insights from Fraud Investigations. Journal of Forensic & Investigative Accounting, 7(2).

Bedford, N. M., & Ziegler, R. E. (2016). The contributions of AC Littleton to accounting thought and practice. Memorial Articles for 20th Century American Accounting Leaders, 49, 219.

Berman, E. M., Bowman, J. S., West, J. P., & Van Wart, M. R. (2015).Human resource management in public service: Paradoxes, processes, and problems. Sage Publications.

Downar, B., Ernstberger, J., & Koch, C. W. (2016). Reviewing a Friend-The Role of Social Ties in Review Work in Auditing. Available at SSRN 2732480.

Ezzamel, M., & Xiao, J. Z. (2015). The development of accounting regulations for foreign invested firms in China: The role of Chinese characteristics. Accounting, Organizations and Society, 44, 60-84.

Gold, A., Klynsmit, P., Wallage, P., & Wright, A. (2015). The Impact of Auditor Selection Regime and Audit Committee Appointment Power on Investment Decisions. Available at SSRN 2484415.

Guiral, A., Rodgers, W., Ruiz, E., & Gonzalo-Angulo, J. A. (2015). Can expertise mitigate auditors’ unintentional biases?. Journal of International Accounting, Auditing and Taxation, 24, 105-117.

Hatfield, R. C., & Mullis, C. (2015). Negotiations between auditors and their clients regarding adjustments to the financial statements. Business Horizons, 58(2), 203-208.

Hoos, F., Kochetovaâ€ÂKozloski, N., & d’Arcy, A. C. (2015). The Importance of the Chief Audit Executive’s Communication: Experimental Evidence on Internal Auditors’ Judgments in a ‘Two Masters Setting’. International Journal of Auditing, 19(3), 166-181.

Klychova, G. S., Fakhretdinova, E. N., Klychova, A. S., & Antonova, N. V. (2015). Development of accounting and financial reporting for small and medium-sized businesses in accordance with international financial reporting standards. Asian Social Science, 11(11), 318.

Mohammadi, S. (2015). Full development of the theory of accounting and auditing. International Journal of Accounting and Economics Studies, 3(1), 7-9.

Rupp, D. E., Wright, P. M., Aryee, S., & Luo, Y. (2015). Organizational justice, behavioral ethics, and corporate social responsibility: Finally the three shall merge. Management and Organization Review, 11(01), 15-24.

Soh, D. S., Leung, P., & Leong, S. (2015). The development of integrated reporting and the role of the accounting and auditing profession. In Social Audit Regulation (pp. 33-57). Springer International Publishing.

Westermann, K. D., Bedard, J. C., & Earley, C. E. (2015). Learning the “Craft” of Auditing: A Dynamic View of Auditors’ Onâ€Âtheâ€ÂJob Learning.Contemporary Accounting Research, 32(3), 864-896.

Whittle, A., Mueller, F., & Carter, C. (2016). The ‘Big Four’in the spotlight: Accountability and professional legitimacy in the UK audit market. Journal of Professions and Organization, jow001.