Question:
Are the ethics of business a concern for the auditing function?Discuss the ethical requirements relating to the audit of a financial report as detailedwithin the current set of auditing standards.Define Audit quality and detail steps on how increasing audit quality can address the audit expectation gap.Management has responsibility for prep ing the financial statements albeit part of the auditor’s role is to ensure that they comply with generally acceptable accounting principles (GAAP). In light of the following pictures discuss GAAP and how these principles can and are audited.
The auditors and the professional accountants have to follow the sound code of ethics that have been established internationally by the International Ethics Standards Board for Accountants or IESBA. The conceptual framework of an audit is set on the following:
The code of ethics illustrates as to what is expected in the profession form the professionals. The existence of awareness sis just not enough. The audit firms and the setter of the standards are engaged continuously so as to expand the knowledge base of the professional staff.Accounting and auditing are the 2 most complex and technical processes. When compared with ethics, it is considered to be the simplest form. The main point in ethics is knowing what is required to be done and knowing how to needs to be done. For ethics to be persistent, there must be an existence of the following traits:
There is a need to attract decent people into the professional so the following of the ethics could be made sure of.The Accountants come across the times when face the conflicts of upholding the values that are central to their profession and demands that exits in this world. There are some competing demands that speaks of the profession in contrast to having a simple job or performing a function. The professional are expected to exercise their judgement and experience that they have gathered during their tenure to perform their roles so that when the ways and the road gets challenging, they do not resort to the ways that could lose their judgement and the faith of the public. This will only bring disrepute to the profession.
So that the faith in the profession is not lost. There are times when an auditor may be put under the pressure and face the difficult situations. These challenges may go on to revolve around the ethics, commercial pressures and the burden of regulation.
The code of ethics is applicable on both the entities as well as on the individuals that perform the function of auditing.In order to ensure that the requirements of the ethical standards are followed, there is an independent standard setting body that serves the public by setting the robust and internationally appropriate standards of the ethics and includes the independence of the auditor for the professional accountants worldwide. This is also known by the name of the Ethics board, The International Ethics Standards Board for Accountants.
The code of ethics revolve around the following principles:
As per the Auditing standard 102, Compliance with Ethical Requirements when Performing Audits, Reviews and Other Assurance Engagements too, the following are the fundamental principles of the professional ethics and the whole idea of professional ethics revolve around the same:
The auditor independence is defined as the following of the integrity and an objective approach in the process of audit.
The quality of an audit is defined as the meeting of the expectation of the investors of producing an independent and reliable audits and communicate robust communications on:
The expectation gap is defined as the difference that exists between the levels of the performance that is expected as has been visioned by the independent accountant and by the users of the financial statements.The expectation is said to have the following components:Reasonableness gap: this is the gap between to what the society expects the auditors to achieve and what the auditors reasonably expect the auditors to accomplishPerformance gap: this is the gap that exists between what the society reasonably expects the auditors to accomplish and what the auditors perceive to achieve.
An audit committee will go on play a very important role when helping the management so as to align the management and the board when it comes to mitigating the risks that are really important.This role has also gained momentum because some of the stakeholders of the company have elevated the expectations of the board so as to reduce or eliminate the risks that are most critical, fraud.The establishment of the audit committee is very important and will come into play when the management will fail to respond to the recommendations of the audit.
The following are the main reasons behind the failure of the auditor to identify the red flags:
The gap is expectation is usually driven by the variables such as the ability of the auditor to detect fraud and the ability of the efforts made by the auditor to detect frauds. An auditor does have the required skills and the experience that could help him in the detection of the fraud but he prefers to undertake the shortcuts in order to detect the fraud.Or in other cases, the auditor may have an access to the variety of the techniques that could help him in the uncovering of the red flags but he is unable to do so since he may lack the relevant experience.In such cases, the following are the ways that could help him in covering the expectation gap:
GAAP is the set of the broad and the specific guidelines that the companies must follow when the information has to be measured and reported in the financial statements and the related notes.It is the duty of the management to prepare the financial statements and it is the duty of the auditor to assess that the management has prepared the financial statements with the utmost reliability.SOX requires that the management must give in writing that they have prepared the financial statements.The following are few of the areas that could be examined:
Existence of the accounts and the information: this could include the information like as to what is included in the accounts and whether inventory exists in all the locations where the amounts have been indicated.
Whether the data is complete: it must be ascertained whether all the transactions have been recorded during the year. For example, whether all the legal expense that have been incurred have been duly recorded in the financial statements or has the firm forgotten to take the same into account.
Value that the company owns: what is the value of the assets and the liabilities that the company owns and owes to the outsiders? In order to illustrate this, the value of the real estate, buildings, loans that the company owns and owes to the outsiders.
The rights and the obligations of the company: the rights and the obligations of the company. This could include the title, the obligations that are owed to the outsiders at any given point of time. There are sometimes legal rights such as the rights of the leased assets that are required to be capitalised in the books of accounts of the lessee. This takes place even when the legal tile remains with the lessor.
Disclosure of the information: the balances in the books of accounts must not only be adequately measured but must be described and disclosed. For example, the trade receivables, the advances that are given to the employees, the loans that are given to them and the loans that are extended to the related parties. But the presentation of the individual characteristics of the transactions on the business are very different.The audit procedures that are usually followed by the management involve the testing of the system, the testing of the transactions, the reviewing of the confirmation, the observing of the physical inventory, making the inquiries as and when the questions arises. The audit report hen produced will indicate as to whether the financial statements have been prepared in accordance with the GAAP and whether they represent the true and a fair financial position of the company or not. In order to indicate the fairness of the financial statements, the auditors may include the qualified or a modified opinion that would state the aspects of the report when they are different from the requirements of GAAP.
References
Comlaw.gov.au, (2015). ASA 102 – Compliance with Ethical Requirements when Performing Audits, Reviews and Other Assurance Engagements – October 2009.
Highered.mheducation.com, (2015). The Development of Financial Accounting and Reporting Standards.
Icaew.com, (2015). Auditor independence | Ethics | Technical | ICAEW.
Ifac.org, (2015). IESBA | International Ethics Standards Board for Accountants
Ifac.org, (2015). Roles and Importance of Professional Accountants in Business
Nysscpa.org, (2015). Reducing the Expectation Gap.
Oag-bvg.gc.ca, (2012). 1031 Ethical Requirements Relating to an Assurance Engagement.
Oapen.org, (2015). Professional ethics.
pcaobus.org, (2015). DISCUSSION –AUDIT QUALITY INDICATORS.
Researchgate.net, (2015). Research Gate.
www.pli.edu, (2015). GAAP.
www.professionsforgood.com, (2015). Ethics, Trust and Auditing Conceptualizing a Tripartite Framework.
www.pwc.com, (2015). How to close the expectation gap related to fraud prevention? Try enhancing the IA brand.
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